INPUT TAX CREDIT (ITC) (SET OFF):– [Sec. 48, Rules 51 to 56]

INPUT TAX CREDIT (ITC) (SET OFF):– [Sec. 48, Rules 51 to 56]

Eligibility: – All registered dealers, whether manufacturer or traders, are eligible to take full set off of the taxes paid on inputs; i.e., Value Added Tax paid, within the State of Maharashtra, on purchases of Raw Material, Finished Goods and Packing Material, or any goods debited to profit and loss account.

Entry Tax: – The amount of entry tax, paid by a registered dealer on the goods the sale of which is liable for VAT under MVAT, will be eligible for full set off.

ITC on Capital Goods: – Tax paid on certain items of capital goods (defined) such as machinery, components, parts and spares etc. are also eligible for full set off. (On certain other items of capital assets such as furniture and fixtures, office equipments, etc. set off is admissible, subject to retention @ 3%, w.e.f. 8-9-2006)

ITC on Miscellaneous Goods: – The amount of Vat paid on purchase of miscellaneous goods, debited to Profit & Loss A/c. (such as printing and stationery, repairs, sales promotion etc.) also eligible for full set off.

ITC on Fuel: – Tax paid on purchase of goods, which is used as fuel, shall be eligible for set off, in excess of 3%.

Reduction in set off: The amount of set off, available to a registered dealer, shall be reduced to the extent as provided, under the following circumstances: -

1. 3% of the purchase price of respective goods, if taxable goods used as fuel.
2. 2% of the purchase price of respective goods, if taxable goods used in manufacture of tax-free goods. [No such reduction, if tax free goods so manufactured (covered by Schedule 'A’) are exported out of India].
3. 2% of the purchase price of respective packing material used in the packing of tax-free goods.
   
   (No such reduction, if such tax free goods is covered by Schedule 'A’ and the same are exported out of India.)
4. 2% of the purchase price of respective goods, if taxable goods sent to any other State in India as Branch Transfer or on Consignment.
   
   (No such reduction if such branch transferred goods is received back in the State within a period of 6 months whether after processing or otherwise).
5. Specified percentage of set off, if taxable goods used in Works Contract for which the dealer has chosen to pay tax under the Composition Scheme. (Reduction @ 4% of purchase price in respect of goods used in notified construction contracts, and, @ 36% of eligible amount of set off in case of other contracts).
6. In case of Liquor, sold by dealers holding Liquor Vendor Licence in Form FL-II, CL-III, and CL/FL/TOD/III, as per formula, if the actual sale price is less than MRP.
7. In case of dealers, whose total receipts on account of sale are less than 50% of total gross receipts of business then set off restricted to corresponding purchases, which are sold within 6 months from the date of purchase. In case of Hotels and clubs covered by this Rule, in addition to set off on goods sold as above, the set off will be available on capital assets and consumables pertaining to kitchen and service of foods and drinks. In case of Manufacturer of goods (not a job worker) covered by this Rule, set off can be claimed on plant and machinery & its PCA & packing materials only in respect of period of first 3 years from effective date of certificate of registration.
8. In case of closure of business, the set off on goods held in stock (other than capital assets), on the date of closure, to be disallowed and accordingly be reduced fully.
9. 3% of the purchase price of office equipment, furniture & fixture treated by the claimant dealer as capital assets. This is not applicable to dealer who leases these goods.
10. 2% of purchase price of goods which are used in the distribution or transmission of electricity (including the goods treated as capital assets), if the claimant dealer is holding a licence for transmission or distribution of electricity under the Electricity Act, 2003.

Wherever such reduction in set off is required to be done, it shall be done in the tax period in which such contingency arises.

If, for the purpose of reduction of set off, wherever required, it is not possible to identify the corresponding purchases then proportionate reduction on FIFO basis.

Condition for grant of set off

1. Set off to be allowed only to a registered dealer.
2. A valid Tax Invoice is must to claim set off.
3. Proper maintenance of account of all the purchases in a chronological order stating therein the date on which the goods so purchased, the name and registration number of the selling dealer, tax invoice number & date, the amount of purchase price paid and the amount of tax paid separately.
4. The set off on eligible goods, purchased on or after 1st April 2005, has to be claimed in the tax period in which the goods has been purchased (entered in the books of account).
5. In case of newly registered dealers, set off can be claimed on the goods (including capital assets) purchased before the date of registration, within the same financial year, provided that the goods so purchased is not sold or disposed of before the date of registration. (Effective from 8-9-2006)
6. Tax on earlier transaction is received in Government Treasury.

No set off:- No set off, under any Rule shall be admissible in respect of;

1. Purchase of passenger motor vehicles and parts components and accessories thereof unless the dealer is engaged in the business of trading in motor vehicles or transferring the Right to Use (Leasing).
2. Purchase of motor spirit by any dealer other than a dealer in motor spirit.
3. Purchase of Crude Oil, used by an oil refinery for refining.
4. Any purchase of consumables or capital assets by a job worker (pure labour job), whose only sales are waste or scrap of goods obtained from such labour job.
5. Any purchase made by a dealer holding Entitlement Certificate under a Package Scheme of Incentives. (Such units are entitled for refund of tax paid on purchases).
6. Any purchase of goods of incorporeal or intangible nature other than:

1. Import Licences, Export Permits/licences or Quota, DEPB, SIM Cards and DFRC.
2. Soft wares in the hands of a trader in Soft wares.
3. Copyrights, if resold within 12 months from the date of purchase.

Except above, all other intangible goods are debarred from set off.

7. Tax paid by way of works contracts in the erection of immovable property (other than plant & machinery).
    
8. Purchases of building material used in the erection of immovable property (other than plant & machinery). However, a contractor, who undertakes construction of immovable property by way of works contracts, is eligible to claim setoff on purchase of such goods.
    
9. Office Equipments, Furniture & Fixtures, Electric Installations, etc., (treated as capital assets), purchased during the period from 1-4-2005 to 7-9-2006. (Such assets, if purchased on or after 8-9-2006, are eligible for set off subject to retention @ 4% or 3% as the case may be).
   
   It may further be noted that
    
10. Small dealers/retailers, hoteliers, caterers, bakers, mandap decorators etc., opting for Composition Scheme, u/ss. 42(1), 42(2) and 42(4) of MVAT Act, are not entitled for any set off.
     
11. There is no set off of CST paid on inter-state purchases.
     
12. There is no set off for any other taxes paid such as excise duty, import duty, service tax, octroi or such other levy or levies.
     
13. In case of hotelier, the set off on capital assets is prohibited where such capital assets are not pertaining to sale or service of food/drinks.

Credit C/f and Credit B/f: – If during a tax period (month/quarter/six months) the tax on total turnover of sales is less than the amount of input tax credit, then such excess amount of credit may either be adjusted by the dealer against his tax liability under the CST Act for the same period or may be c/f to the next period. The unadjusted credit c/f of one period shall become the credit b/f for the next period. The excess credit may be carried forward in this manner till the end of the accounting year. The balance, if any, thereafter shall be claimed as a refund in Form 501 from the department, within a period of three years from the end of the year for which it relates.

Goods Return, Debit/Credit Notes: – Section 63(5) and (6) of the MVAT Act provides that the amount of goods returned during any period shall be reduced from the total turnover of sales/purchase of that period in which the goods returned, provided that the goods has been returned within a period of six months from the date of sale or purchase thereof as the case my be. Similarly other debit and credit notes, which are in the nature of increasing or reducing the sale price and/or the purchase price shall be given effect in the month in which such debit/credit note has been entered in the books of account of the dealer. Thus the amount of set off, for that period, shall get increased or reduced to the extent it related to purchase return and debit/credit notes having impact on the purchase price of goods.

Exports: – Exports are treated as zero-rated. Thus no tax is payable on export of goods out of India. However full set off is available of input tax paid on purchases, from within the state of Maharashtra, used in such exports. As there are no concessional forms under MVAT, the exporters may have to claim refund of the VAT paid on their purchases (inputs).

However, the trading exporters (who were earlier purchasing goods against Form 14B), may purchase such goods against Form H of CST Act, provided all other conditions of section 5(3) of CST Act are fulfilled.

Inter-State Sales: – The transactions of inter-state sales and inter-state movement of goods are governed by the CST Act. Thus the tax on such sale is levied according to the provisions of CST Act. Such transactions are not liable for VAT. However full input tax credit is available for the value added tax paid in Maharashtra. (Except in case of branch transfers/consignments, where there will be retention @ 4% or 3% or 2% as the case may be).