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

1. SEMINAR ON VALUE ADDED TAX By NIRC of ICAI 18th April 2009 Rakesh Garg, FCA

2. Input Tax Credit Rakesh Garg, FCA

3. Input Tax Credit Rakesh Garg, FCA

4. Input Tax Credit Rakesh Garg, FCA

5. Input Tax Credit Rakesh Garg, FCA

6. 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. Khosla’s case and DCM case • Therefore, first ensure that goods are actually been purchased and, second, this is a local purchase Rakesh Garg, FCA

7. Input Tax Credit Rakesh Garg, FCA

8. Input Tax Credit Rakesh Garg, FCA

9. Input Tax Credit Rakesh Garg, FCA

10. 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. Rakesh Garg, FCA

11. 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. Rakesh Garg, FCA

12. 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 Rakesh Garg, FCA

13. 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/-. Rakesh Garg, FCA

14. 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. Rakesh Garg, FCA

15. 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 Rakesh Garg, FCA

16. 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. Rakesh Garg, FCA

17. 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 Rakesh Garg, FCA

18. 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. Rakesh Garg, FCA

19. 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. Rakesh Garg, FCA

20. 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. Rakesh Garg, FCA

21. 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. Rakesh Garg, FCA

22. 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 Rakesh Garg, FCA

23. 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 ? Rakesh Garg, FCA

24. 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 – 2+1 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 Rakesh Garg, FCA

25. 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) Rakesh Garg, FCA

26. 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 P&H 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 Rakesh Garg, FCA

27. 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. Rakesh Garg, FCA

28. 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) Rakesh Garg, FCA

29. 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. Rakesh Garg, FCA

30. 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. Rakesh Garg, FCA

31. 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. Rakesh Garg, FCA

32. 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 Rakesh Garg, FCA

33. 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. Rakesh Garg, FCA

34. 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 Rakesh Garg, FCA

35. 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. Rakesh Garg, FCA

36. 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). Rakesh Garg, FCA

37. Input Tax Credit - Records Rakesh Garg, FCA

38. Input Tax Credit - Records Rakesh Garg, FCA

39. Input Tax Credit - Records Rakesh Garg, FCA

40. Input Tax Credit - Records Rakesh Garg, FCA

41. Input Tax Credit - Records Rakesh Garg, FCA

42. Input Tax Credit - Records Rakesh Garg, FCA

43. Input Tax Credit - Records Rakesh Garg, FCA

44. 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. Rakesh Garg, FCA

45. THANK YOU Rakesh Garg, FCA Rakesh Garg, FCA 45