PRESENTATION FOR TRADE AND TAX DEPARTMENT, DELHI BY SUSHIL VERMA, ADVOCATE

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SEMINAR ON VALUE ADDED TAX By NIRC of ICAI
18th April 2009
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Input Tax Credit
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Input Tax Credit
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Input Tax Credit
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Input Tax Credit
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Input Tax Credit

• ITC u/s 9 is available on making the eligible
  purchases Holding of tax invoice without making
  the purchase is not enough
• If, under some circumstances, the local purchases
  are assessed as central purchases, Input Tax
  Credit would be denied To illustrate K.G.
  Khoslas case and DCM case
• Therefore, first ensure that goods are actually
  been purchased and, second, this is a local
  purchase

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Input Tax Credit
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Input Tax Credit
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Input Tax Credit
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Input Tax Credit

• INPUT TAX CREDIT ON CAPITAL GOODS
• Capital goods means plant, machinery and
  equipments used directly or indirectly in the
  process of trade, manufacturing or works
  contracts in Delhi.
• But, ITC is not available on goods specified in
  Sch.VII.
• Goods must be purchased within Delhi from a
  registered dealer, supported by a valid tax
  invoice.
• ITC is available in three equal instalments and
  first installment is in the tax period when it is
  purchased.
• If capital goods are transferred out of Delhi
  within three years, than 2 of the purchase price
  will be reversed. When the goods are received
  back in Delhi, ITC could not be reclaimed since
  rule 7(2) refers to non-capital goods and sec.
  9(6) of the Act. A big issue for works
  contractors.

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Input Tax Credit

• INPUT TAX CREDIT ON CAPITAL GOODS
• Depreciation will not be claimed on the amount of
  ITC availed by the dealer, i.e., on the principal
  amount.
• Tax credit in respect of capital goods shall also
  not be allowed if such capital goods are used
  exclusively for the purpose of making sale of
  exempted goods specified in the first schedule.
• If capital goods are used partly for the purposes
  of manufacturing and/or trading taxable goods or
  making exports and partly for other purposes, the
  amount of the tax credit in relation to such
  capital goods shall be reduced proportionately.

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Input Tax Credit

• ADJUSTMENT IN INPUT TAX CREDIT
• If the invoice raised by the seller/contractor is
  passed by buyer/contractee for a lesser amount,
  and the amount is subsequently adjusted in output
  tax by contractor u/s 8, the seller must issue to
  the buyer a debit note, issuance of which is
  mandatory.
• The buyer/contractee shall adjust his ITC on the
  basis of such debit note
• Where goods are returned/rejected by the buyer,
  he will reduce his ITC in relation to those
  goods, in the T.P. when goods are returned/
  rejected. Double taxation if goods are returned
  after 6 month

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Input Tax Credit

• PROPORTIONATE REDUCTION IN INPUT TAX CREDIT
• Where a dealer has purchased goods, which are to
  be used partly for the purpose of making sales
  referred to u/s 9(1) and partly for other
  purposes, then amount of tax credit shall be
  reduced proportionately.
• To illustrate, X purchased raw material for Rs.
  1,00,000 plus tax of Rs. 12500/- for manufacture
  of taxable as well as exempted goods. At that
  time, he estimated that the raw material would
  produce 80 taxable goods. In such case, his
  input tax credit will be restricted only to 80
  of Rs. 12500/, i.e., Rs. 10000/-.

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Input Tax Credit

• PROPORTIONATE REDUCTION IN INPUT TAX CREDIT
• If goods are subsequently used for different
  purposes, then the reduction shall be made in the
  tax period when so used.
• What is the difference between 9(4) and 10(2)
• Method of reduction should be fair and
  reasonable otherwise the Commissioner is
  empowered to reject the method or prescribe
  another method.

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Input Tax Credit

• PROPORTIONATE REDUCTION IN INPUT TAX CREDIT
• Valuation
• If commodity wise register maintained At the
  purchase price
• Otherwise On the basis of the purchase price of
  such goods immediately preceding their use for
  other purposes or their FMV, w.e.i. higher

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Input Tax Credit

• STOCK TRANSFER TO OTHER STATES
• The amount of the tax credit shall be reduced by
  2 of the purchase price (1 in case of bullion)
  if the goods or goods manufactured out of such
  goods are to be exported from Delhi by way of
  transfer to a 
• (i) non-resident consignment agent or
• (ii) non-resident branch of the dealer
• ITC will be reduced only in relation to those
  goods where it is claimed or is claimable, i.e.,
  no reduction shall be made in respect of those
  goods which are purchased from local unregistered
  dealers or in the course of inter-State trade.

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Input Tax Credit

• STOCK TRANSFER TO OTHER STATES
• What is the difference between 9(6) and 10(3)
• At what value goods to be transferred At cost
  or at FMV? It should be the cost since reversal
  to be made on the basis of purchase price
• Valuation of stock transfer
• If commodity wise register maintained At the
  purchase price
• Otherwise On the basis of the purchase price of
  such goods immediately preceding their use for
  stock transfer or their FMV, w.e.i. higher

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Input Tax Credit

• STOCK TRANSFER TO OTHER STATES
• In addition, Form F shall also be obtained
• Where the goods so transferred are received back
  in Delhi either in the original form or in some
  other form, tax credit already reduced can be
  reclaimed in the tax period when goods are so
  received.

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Input Tax Credit

• GOODS INCORPORATED IN OWN STRUCTURE
• If goods are used for construction of or
  incorporation in civil structures and immovable
  goods or properties not constituting part of the
  works contracts, ITC shall be denied on such
  goods, e.g., cement, bricks, tiles, etc.
• If goods which have been purchased by a dealer
  were intended to be used for the purposes
  specified u/s 9(1) but are subsequently
  incorporated into the structure of a building
  owned or occupied by that person, the tax credit
  claimed in respect of such purchases shall be
  reduced in the tax period during which such
  incorporation takes place.

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Input Tax Credit

• GOODS LOST OR DESTROYED
• Where any goods or goods manufactured out of such
  goods are lost or destroyed, the credit taken in
  any earlier tax period shall be reversed in the
  tax period in which goods are claimed to have
  been lost or destroyed.
• However, input tax credit should not be denied on
  normal loss arising during the course of
  manufacture.

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Input Tax Credit

• Can ITC be claimed on the strength of Retail
  Invoice instead of Tax Invoice if all other
  conditions are satisfied
• The answer depends whether the provisions of
  section 50(2) are directory or mandatory.
• If mandatory, ITC could be claimed only on the
  basis of tax invoice.

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Input Tax Credit

• Can ITC be claimed in the tax period subsequent
  to the tax period when goods were actually
  purchased, without filing an objection, on the
  ground
• He do not have in procession the Original Tax
  Invoice when goods were purchased Should state
  the amount of purchase and claim ITC in
  subsequent months
• He forgot to claim ITC in the original tax period
  Since it is an error or mistake Objection is
  required

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Input Tax Credit-Traders

• Input Tax Credit can be claimed in respect of
• Purchases meant for local taxable sales, ISS and
  Exports out of India
• Capital goods used in the process of trade such
  as weighing machines, computers, delivery
  rickshaws, etc.
• Not available in respect of furniture/furnishing
  of office
• Schemes, distribution Gift articles, etc.?
• Reversal of input tax credit on account of credit
  notes?
• Evaporation Loss?
• Stock transfers to agents within Delhi ?

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Input Tax Credit-Traders

• Free Offers to the Customers ITC on Purchases
• Deter. u/s 84 dt. 31.10.2005 L.G. Electronics
  Gifts (T-shirts, TV, AC, Phone, etc.) to
  customers through scratch cards debited to
  sales promotion No ITC
• However, in our opinion, where gifts are given
  along with the main product - Necessary for
  completion of sale contracts 21 shirt (or)
  Bucket with detergent (or) Mosquito machine with
  mats (or) Car Accessories Supply of free
  items is part of sale contract ITC should be
  available
• To be debited to purchases instead sale
  promotion
• Post sale gifts No ITC/benefit of Form C
  available

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Input Tax Credit-Traders

• Credit Note resulting in reduction of purchases
  Need reversal of ITC by the purchaser even if
  output tax has not been reversed by the seller
  u/s 8 Circular No. 2 dated 7.8.2008
• However, Judgments to be referred for contrary
  answer
• Andhra Agencies vs. State of A.P. (2009) 19 VST 1
  (SC)
• Priya Agencies vs. CTO (2008) 14 VST 293 (Ker)

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Input Tax Credit-Traders

• Goods Lost ITC on Purchases
• Evaporation of oil No ITC on oil evaporation
  Commissioner Ruling u/s 85 Same opinion by PH
  High Court recently Bharat Petroleum Ltd.
• The same analogy might be applied to all trading
  losses. For example
• loss of cement in transit
• Waste/scrap generated at the end, e.g.
  confectionery powder, vegetable/fruit waste at
  the end of the day
• Measurement/weighment difference in purchase
  vis-a-vis sale

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Input Tax Credit-Traders

• STOCK TRANSFER WITHIN DELHI
• In accordance with Notification No.
  F.4(3)/P-II/Noti/ VAT/2005/1158 dated 2nd
  December 2005 -
• The principal in Delhi will raise tax invoice on
  agent
• The agent will claim ITC on the basis of such tax
  invoice.
• However, if that is so, even without substantial
  provisions
• Tax will have to be paid by the principal even
  without affecting sale and adjustments to be made
  at the time of return of unsold stock by the
  agent
• ITC will be claimed by agent without making
  purchases.

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Input Tax Credit-Manufacturers

• Input Tax Credit can be claimed in respect of -
• Purchases meant for manufacture of goods meant
  local taxable sales, ISS and Exports out of India
  including raw material and consumables
• Facilities, such as bulbs, exhaust fans, shoes,
  etc. used in the manufacturing plant
• Status of goods manufactured at Third Party Unit
  (i) With material (some material supplied
  by Mfr. and (ii) without material (purely labor)

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Input Tax Credit-Manufacturers

• Input Tax Credit can be claimed in respect of
• Capital goods used in the process of manufacture
  such as plant, machinery, tools, equipments,
  weighing machines, etc. Judgments applicable to
  purchase against form C squarely applies except
  goods listed in Sch. VII
• Normal Manufacturing Loss
• As per the Advance Ruling by the Commissioner,
  where scrap generated out of goods manufactured
  is exempt, then tax credit on the raw material
  shall be reduced proportionately.

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Input Tax Credit-Manufacturers

• STOCK TRANSFER TO OTHER STATES
• Where the goods so transferred are received back
  in Delhi either in the original form or in some
  other form, tax credit already reduced can be
  reclaimed in the tax period when goods are so
  received.
• Where a dealer, who is engaged in manufacturing
  of taxable as well as exempt goods, transfers
  certain goods to other States, then
• He will first reduce the ITC proportionately in
  relation to the exempted goods then
• He will further reduce the amount of ITC as
  calculated in (i), in relation to stock transfer
  to other States.

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Input Tax Credit-Job Workers

• A person, who is exclusively engaged in the
  business of labour/job work (other than a
  manufacturer), is not eligible for ITC on
  purchase of consumables or capital goods, merely
  because he is liable to pay tax on sale of any
  waste/ scrap goods generated during the process
  of labour job.
• To illustrate, a job worker is exclusively
  engaged in the business of labour job of cutting
  iron sheets (supplied by the customer) into
  circles. He sells scrap, generated in this
  process, and pays VAT due to the Govt. Even than
  he is not eligible for tax credit on purchase of
  any consumable or capital goods used for carrying
  his labour job.

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Input Tax Credit-Contractors

• Works contractors can claim ITC on following
  purchases-
• Raw Material
• Consumables which do not get destroyed
• Packing Material
• Capital Goods other than those specified in Sch.
  VII
• Contractors are deemed either as trader or as
  manufacturer
• VAT paid on hire charges and consumable which get
  destroyed can not be claimed as ITC since these
  are allowable deductions as labour and services
  and are exempted sales.
• ITC on temporary shed/yard/office?
• Relations between contractor sub-contractor
  (a) If pro-perty is tfd. directly on principle of
  accretion (b) Otherwise

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Input Tax Credit-Service Sector

• SERVICE SECTOR ALSO ENGAGED IN SALE LIKE HOTELS
• Input tax is available on those purchases
  (including rent) which are relatable for making
  sale by the dealer.
• Where goods (including capital goods) are used
  partly for making sale and partly for providing
  service, ITC will be available proportionately,
  e.g., common generator used in the restaurant as
  well as rooms.
• Capital goods used exclusively for providing
  services is not available for ITC, e.g.,
  equipments used in Jim, Swimming Pools etc.

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Input Tax Credit-Right to Use

• LESSER (Transfer Of Right To Use Goods)
• As per Determination by Commissioner u/s 84 in
  Digitech - Benefit of Input tax credit is not
  available to leasing company on its purchases
  even if its sales are taxable in Delhi VAT
• Matter is pending before DVAT Tribunal
• If that is so purchase from other States against
  Form C, paying 2 CST

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Input Tax Credit-Right to Use

• LESSER (Transfer Of Right To Use Goods)
• Right to use goods, i.e., leasing is covered
  under the DVAT/CST and is covered in the
  definition of sale
• Whenever, goods are purchased by the hirer for
  the purpose of leasing, the local tax paid on
  purchases should be eligible for ITC against
  output tax payable on lease rent
• Goods which are purchased and hired by the hirer
  shall be treated as stock in trade and not
  non-capital goods.

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Input Tax Credit-Right to Use

• LESSEE (Transfer Of Right To Use Goods)
• The lessee can also claim the benefit of input
  tax credit if the goods are delivered at Delhi
  and used by him for the purpose of use in trade,
  manufacture or execution of works contract in
  Delhi
• The lessee will claim in installments on the
  basis of periodical tax invoices raised by the
  lesser Refer Section 105(2)(b).

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Input Tax Credit - Records
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Input Tax Credit - Records
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Input Tax Credit - Records
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Input Tax Credit - Records
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Input Tax Credit - Records
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Input Tax Credit - Records
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Input Tax Credit - Records
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Input Tax Credit

• TO CONCLUDE
• Input Tax Credit can be claimed by the dealers
  for their eligible purchases of creditable goods
  (other than those listed in Sch. VII) for the
  specified purposes made from local registered
  dealers on the basis of a valid tax invoice.
• No one to one correlation of purchase and sale is
  required.
• Unclaimed amount of ITC at the end of the tax
  period can be carried forward indefinitely or
  claimed as refund.
• To hold a valid Tax invoice at the time of filing
  of return for claiming ITC is a mandatory
  requirement.
• Input Tax Credit is the essence of VAT Regime and
  legitimate claim thereof is a true saving.

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THANK YOU
Rakesh Garg, FCA
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