TAX PAYABILITY AND TREATMENT OF INPUT TAX CREDIT UNDER VAT By : Rakesh Gupta, Advocate ( Agra) M. No. : 9897930048 Recently a circular has been issued by CTT, U.P. VAT/Prachar Prashar/ 07-08 No. 666/Commercial Tax dated 10.03.2008 in respect of purchase tax payable on purchases made from unregistered dealers and application of Input Tax Credit as well: But before drawing any conclusion on the very issues i.e. (i) Purchase tax on purchases from unregistered dealers and (ii) Treatment of I.T.C. It will be imperative to go through the various definitions, sections and rules of the VAT. As such the first and foremost ingredient to be understood is “Input Tax”. Section 2(p). “Input Tax”, in relation to a registered dealer who has purchased any goods from within the State, means the aggregate of the amounts of tax(i)
paid or payable by such registered dealer to the registered selling dealer of such goods in respect of purchase of such goods; and
(ii)
paid directly to the State Government by the purchasing dealer himself in respect of purchase of such goods where such purchasing dealer is liable to pay tax under this Ordinance on the turnover of purchase of such goods; Before the Computation of this “Input tax”, some section’s definitions i.e. 4, 5 & sub-section 4 of 13, 15 and rule 26 are to be understood first.
Section 4. Levy of tax on turnover of sale: (1)
The tax, payable on sale of goods under this Ordinance, shall be levied and paid on the taxable turnover of sale of-
Section 5. Levy of Tax turnover of purchase: (1)
Every dealer, who in the course of business, makes purchase of any taxable goods-
(i)
other than non-vat goods from a person other than a registered dealer; or
(ii)
………………………………………………………………………….
(2)
Tax on the turnover of purchase of taxable goods referred to in Clause (i) or Clause (ii) of sub-section (1) shall be levied at the same rate at which turnover of sale of such goods is liable to tax in accordance with the provisions of Section 4.
Sub-section 4 of Section 13 Except as provided otherwise in any provision of this Ordinance or the rules framed thereunder, in respect of purchase of any goods in respect of which facility of input tax credit is admissible, input tax credit of the full amount of 1
input tax can provisionally be claimed on the date on which tax invoice related to such goods is received by the dealer and where dealer himself is liable to pay tax in respect of purchase of any goods, on the date on which amount of tax payable is accounted for by the dealer in the account of tax payable by him. Here it is imperative to mention that in Section 4 the words “shall be levied and paid” and under Section 5 tax shall be levied only incorporated. By which it is clearly apparent that the tax shall be levied and paid on sales while the tax will be levied on purchase amount under Section 5, if the word “levied” had not been so incorporated then an ambiguity might have arisen where the dealer could have said that only value addition in sales amount is taxable as no tax on purchases has been levied. As such to avoid such probability, tax on purchase amount is only to be levied and paid at the time of sales under Section 4. In which purchase amount has also been included in sales amount. Section 15 Net amount of tax payable and treatment of input tax credit exceeding tax liability: (1)
For any tax period, net amount of tax payable shall be computed using the following equation: Net amount of tax payable for any period = Gross amount of tax payable for such period – Gross amount of admissible input tax credit for the period.
Where – (a)
gross amount of tax payable for the period is the aggregate of amounts of –
(i)
tax payable on the turnover of sale of goods made during the tax period;
(ii)
tax payable on turnover of purchase of goods made during the tax period;
(iii)
……………………………………………………………………….
(b)
gross amount of admissible input tax credit for the period is the aggregate of amounts of –
(i)
input tax credit claimed in respect of purchase of goods made during the period less amount of reverse input tax credit, if any;
(ii)
input tax credit carried forward from the immediately preceding tax period;
(iii)
………………………………………………………………..
Sub-section 2: If, for any tax period, gross amount of admissible input tax credit under subsection (1) exceeds the differential amount of gross amount of tax payable under that sub-section and the aggregate of amounts of tax paid by the dealer towards tax for such tax period, the excess amount of admissible input tax credit may be adjusted by the dealer against amount of tax payable in the tax return of the corresponding tax period under the Central Sales Tax Act, 1956 and where gross amount of such admissible input tax credit is a negative 2
figure, the dealer, while computing net amount of tax payable under subsection (1), shall add such amount to gross amount of tax payable by the dealer. As Section 15 specifies the manner by which net amount of tax would be payable. From above it is evident the gross amount of tax payable and gross admissible ITC should have been equal. In the absence of such equality, differential amount if ITC being in excess will be carried forward for next tax return or if differential amount being in less i.e. (-) figure will be deposited as net tax payable as per sub-section 2 of Section 15. Rule 26: Computation of admissible amount of input tax credit for a tax period: (i)
For the purpose of tax return of any tax period, amount of input tax credit earned by the dealer for such tax period, shall be obtained by deducting aggregate of all amounts of reverse input tax credit computed for the tax period from aggregate of amounts of credit of input tax computed for the same tax period.
(ii)
Amount of input tax credit that can be claimed by a dealer in tax return of any tax period shall be computed using the expression: ITC earned + ITC carried forward + ITC installment due
Where expression: (a)
“ITC earned” represents aggregate of input tax net of aggregate of amounts of reverse input tax credit for the tax period;
(b)
……………………………………………………………
In regard to the circular No. VAT-Anubhag-Prachar-Parashar/07-08 Nos. 666/Commercial Tax dated 10.03.2008 issued by CTT, U.P. having given solutions of examples claiming ITC are not proper in the eye of law as discussed below: Example No. 1- If any dealer purchases timber of Rs. 1.00 Lac in Jan. 2008 from un-regd. dealer then the tax payable on such purchase will be @ 12.5% amounting to Rs. 12,500/- while when such timber is sold against C Form under CST Act for Rs. 1,50,000/- then the tax payable @ 3% amounting to Rs. 4,500/-. As if Rs. 12,500/- are deposited with the tax return as purchase tax. Then the net tax payable will be computed as: Month Jan. 2008 Total Tax Liability
:
Rs. 12,500/- + 4,500/- = Rs. 17,000/-
ITC
:
Rs. 12,500/-
Net Tax Payable
:
Rs. 4,500/-
Deposited Amount :
Rs. 12,500/-
Less: Net Tax Payable
:
Rs. 4,500/-
Excess deposit
:
Rs. 8,000/-
But above computation in my opinion is not according to law the computation of net tax payable will be as under: 3
Ans. According to sub-section 4 of Section 13 of VAT ITC claimed on purchases from un-regd. dealer
Rs. 12,500/-
After it sub-section (1) of 15 will operate: According to which Net amount of tax payable = Gross amount of tax payable – Gross amount of admissible ITC As the gross amount of tax payable will be Rs. 12,500/- under Section 5 purchases made from un-regd. dealer. As no sales are made in U.P. – Hence tax payable on sales
-
NIL.
And Gross amount of admissible ITC will be Rs. 12,500/- as per sub-section 4 of Section 13. Hence : Net amount of tax payable = 12500-12500 =
NIL.
And as such CST @ 3% on Rs. 1,50,000/- will amount to Rs. 4,500/- which will separately be deposited under CST Act, 1956. Feb. 2008 A dealer purchases timber from un-regd. dealer of Rs. 2,00,000/- on which tax payable will be 25,000/- which is sold against C Form for Rs. 3,00,000/on which @ 3% C.S.T. amount to Rs. 9,000/-. As such gross tax payable will be Rs. 25,000/- + Rs. 9,000/- = Rs. 34,000/-. As such if dealer deposits Rs. 17,000/- then gross tax will be Rs. 25,000/- as such he can get benefit of ITC. Gross Tax payable :
Rs. 34,000/-
Deduct ITC
:
Rs. 25,000/-
Net Tax payable
:
Rs. 9,000/-
Total Deposit
:
Rs. 17,000/- + Rs. 8,000/- = Rs. 25,000/-
Deduct
:
Rs. 9,000/-
Excess Deposit
:
Rs. 16,000/-
As such Rs. 16,000/- excess ITC may be adjusted in next tax period. This computation is also not correct. The correct solution is as under: Purchases from unregd. Dealer
:
Rs. 2,00,000/-
:
Rs. 25,000/-
:
Rs. 25,000/-
Under sub-section 4 of 13 Claimed ITC As per Section 1 of 15 (a) Gross Amount of tax payable (i) Tax payable on sale
:
Nil
:
Rs. 25,000/-
(As no U.P. Sale) (ii) Tax payable on purchases
4
(b) Gross Amount of admissible ITC (i) ITC claimed in respect of purchases
:
Rs. 25,000/-
Hence Net tax payable = Gross amount of tax payable – gross ITC Net tax payable = 25,000/- – 25,000/- = Nil Hence no VAT is payable in U.P. But the same goods are sold against “C” Form in Central for Rs. 3,00,000/- @ 3%. As such 9,000/- C.S.T. accrues which is to be separately deposited in CST Act, 1956. As such there occurs neither adjustment nor any amount as ITC to be carried forward from previous past return as mentioned in CTT’s example. But for example assume Rs. 10,000/- had been carried forward from past tax return as ITC in the above example or earned from “tax invoices” Then the claimed ITC – Rs. 25,000/- (under sub-section 4 of 13) + Rs. 10,000/- from Past Tax Return Gross admissible ITC Rs. 35,000/And then Net amount of tax payable = Gross amount of tax payable – Gross admissible ITC. Net amount of tax payable = Rs. 25,000/- – Rs. 35,000/As such here gross admissible ITC being excess in Rs. 10,000/- is to be adjustable as per sub-section 2 of Section 15 against CST. Rs. 10,000/- – Rs. 9,000/- = Rs. 1,000/After adjusting Rs. 1,000/- remains in excess ITC to be carried forward again to next succeeding “tax return”. Example No. 3- Where a dealer purchases of Rs. 50,000/- Timber from unregd. dealer and sells the same for Rs. 1,00,000/- @ 12.5% in a tax period in U.P. The computation of tax will be as under: (i) 6,250/- Under sub-section 4 of Section 13 claimed ITC as admissible ITC. Gross amount of tax payable = Rs. 12,500/- tax on sales. + Rs. 6,250/- tax on purchases as ITC claimed. Net amount of tax payable = gross amount of tax payable – admissible ITC = 18,750/- – 6,250/- = 12,500/From it is apparently clear that Rs. 12,500/- are to be deposited with the tax return on sales under Section 4 only and no purchase tax is to be deposited as per Section 5 of VAT. Example 4 – Where a dealer purchases timber of Rs. 2,00,000/- from unregd. dealer taxable @ 12.5% and sells of Rs. 80,000/- in U.P. and sells in Central for Rs. 1,50,000/- @ 3% against “C” Form. In this tax return Rs. 25,000/- ITC is also brought from past previous return. 5
As such on purchases from unregd. dealer ITC claimed u/sub-section 4 of Section 13
=
25,000/-
ITC brought from past return
=
25,000/-
As such Gross admissible ITC
=
50,000/-
While the Gross tax payable u/sub-section 1 of 15 will be 35,000/- as 10,000/ - tax payable on sales u/s 4 25,000/- tax payable on purchases from unregd. dealer u/s 5. Gross amount of tax paid for such period
-
NIL
Net amount of tax payable = Gross amount of tax payable – Gross admissible ITC Net amount of tax payable = 35,000-50,000 Here excess ITC is 15,000/- which is differential amount as per s/section 2 of 15 as the gross admissible ITC is exceeded from Rs. 15,000/- as such from this excess ITC i.e. Rs. 15,000/-, CST Rs. 4,500/- will be adjusted as such remaining Rs. 10,500/- will be carried forward for succeeding tax return. But where gross amount of tax payable exceeds as if the sales had been in above problem of Rs. 2,00,000/- instead of Rs. 80,000/- in U.P. and ITC had been carried forward from proceeding tax return Rs. 10,000/- instead of Rs. 25,000/- and Central Sales had been of Rs. 50,000/- taxable @ 3%. Then gross amount of tax payable u/sub-section (i) of 15 will be Rs. 25,000/ - tax on sales u/s 4 and Rs. 25,000/- tax on purchases u/s 5. 25,000/- + 25,000/- = 50,000/Gross Admissible ITC
35,000/-
(1) b of 15 (1) Input Tax claimed 1(b)(1) of 15
25,000/-
(2) ITC carried forward from preceding tax return
10,000/-
Now Net Tax payable = Gross amount of tax payable – gross admissible ITC Net Tax Payable = 50,000/- – 35,000/As such the differential amount i.e. Rs. 15,000/- being negative figure will be added to gross amount of tax payable by the dealer. In other words Rs. 15,000/- will be net tax payable u/sub-section (2) of 15 when this (–) figure i.e. ITC Rs. 15,000/- would have been deposited will amount to tax. As such moreover the CST on Central Sales would be payable separately i.e. Rs. 1,500/- on sales of Rs. 50,000/- under CST Act. From above discussion it is crystal clear that ITC claimed u/sub-section (4) of 13 will be taken into account and net amount of tax payable will be as per sub-section (1) of Section 15 and the adjustment of ITC will be computed according to sub-section (2) of Section 15. 6
As such tax will be deposited on sales not on purchases as no where “purchase tax” has been levied in the VAT but only the tax on purchases has been levied u/s 5. --------------------------------
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