Sri Rajsekhar Bandyopadhyay
Senior Joint Commissioner
24.07.2014
Input Tax Credit under WBVAT Act, 2003
The single most significant feature of Value Added Tax System is the concept of Input Tax Credit.
In this session we shall try to have a brief overview of the concept of ITC and related aspects. For this
purpose let us have a scrutiny of the relevant definitions under the WB VAT Act, 2003.
“Input’ refers to the raw materials, capital goods (plant and machinery etc) and packing materials
and also includes items meant for resale or for use in works contracts. Though "Input " has not been
defined under the VAT Act, the concept comes from the eligibility conditions of Sec. 22 (4).
“Input Tax” is the amount of the VAT paid by a registered dealer at the time of purchase of inputs
within the State from another registered dealer (other than dealers paying tax at compounded rate) or a
dealer who applied for registration within 30 days of being liable to pay tax, unless such application is
cancelled.
“Input Tax Credit” refers to setting off of the Input Tax paid only in respect of the purchases of
inputs –– such credit is not available for the VAT paid in respect of purchases of goods which cannot be
treated as "input" for any dealer. Surely the concept of input varies from one dealer to another.
Input Tax Credit is available only when the purchased inputs are sold or are used in execution of
works contracts or in manufacturing taxable goods within the State. The benefit of Input Tax Credit is
available to manufacturers of non-taxable goods only when such goods are for export outside India. The
conditions relating to use of goods determining eligibility of availing input tax credit by a dealer are
detailed in section 22(4) of the West Bengal VAT Act and Rule 19 and Rule 20 of WBVAT Rules, 2005
are relevant for the purpose of entitlement and disentitlement of ITC. Certain goods are put in Negative
List on which ITC is not available unless such goods are meant for sale by the purchasing dealer or used
under conditions specified in the said List. For purchase of goods for sale through transfer of right to use
such goods, ITC is available in instalments throughout the period of such transfer.
There are other restrictions and conditions to be fulfilled for claiming Input Tax Credit.
If purchased goods are used partially for the specified purposes, the input tax credit shall be
proportional to the eligible use for the specified purposes. [Apportionment of ITC]
It is also to be noted that in terms of section 22(5) ITC can be availed only upon receipt of original
tax invoice from the selling registered dealer. So in the absence of tax invoice no question of allowing any
ITC arises and if a dealer has availed ITC without receipt of such tax invoice then such ITC availed earlier
by the dealer should have been reduced during the relevant tax period in which the ITC was wrongly
availed –– net tax should be calculated accordingly.
In case of stock transfer of goods outside West Bengal, ITC is available in excess of the amount
calculated @3% on purchase price of input [Section 22 (7)] .
In the case of transfer of business either in full or in part by a registered dealer, the transferee, lessee
or licensee is entitled to avail the unutilised ITC of the transferor or lesser or licensor and such ITC will be
available only after adjustment by way of reversal of credit arising out of such transfer. [S.22(15)]
If per unit sale price of goods is less than per unit purchase price then ITC will be restricted to the
amount of output tax on sale.
If purchased goods are sold at subsidised rate then ITC will be restricted to the amount output tax.
Excess Input Tax Credit of a year may be carried forward to the next accounting year. If the nature
of business of the dealer is such that there is always an excess Input Tax Credit and if the dealer intends to
get refund of such excess amount, then such excess input tax credit of a year should not be carried forward
to the next year.
Tax collected in excess or in short of what is actually chargeable under the Act may be adjusted in
computing net tax payable through exchange of credit notes and debit notes.
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Cases of disentitlement of ITC :
(1) On purchase of goods from dealers enjoying composition scheme of taxation.
(2) On purchases by a dealer paying tax under composition scheme.
(3) Purchase of goods mentioned in Negative List subject to conditions specified therein.
(4) Goods purchased on MRP under section 16(4), e.g. drugs and medicine, fertiliser etc.
(5) Purchased goods are lost or stolen or damaged and could not be sold.
(6) Purchase of goods not directly used in business (of buying and selling goods etc).
(7) Purchased goods used in manufacture of Schedule A goods (except for export).
(8) On capital goods if such goods are transferred within three years from the date of purchase.
(9) On goods remaining unsold and the time of closure of business.
(10) For agents / auctioneers selling goods in West Bengal on behalf of principal.
(11) A shipper of raw jute is not entitled to claim ITC.
(12) If there is no tax invoice in respect of the purchase or if VAT is not separately charged therein.
For issue of tax invoice which is not genuine, the benefit of ITC for the full tax period may be denied
to a dealer. If tax invoice is issued without making any valid sales transaction, ITC may be denied to the
dealer under Sec. 22(3) upon hearing both the selling and purchasing dealers.
For claim of ITC without entering into a valid transaction of purchase of goods penalty may be
imposed @25% to 150% of the claim.
Reversal of Input Tax Credit :
“Reverse Credit” is the reversal by a dealer of input tax credit availed earlier when the purchased
goods have been used in such a way that input tax credit is not available in respect of the same. Examples
of occasions requiring reverse credit are situations when the purchased goods are disposed off without
making a sale ( e.g. free gifts, own consumption, stocks transferred to other States, etc.) or when the
purchased goods, or goods manufactured from them, have been destroyed or stolen. In such cases the
dealer is not eligible for availing input tax credit in respect of such goods and so the credit availed earlier
should be added back to the amount of tax payable. Adjustment on account of reverse credit is to be made
on the last day of the relevant month.
Reverse Credit may be required to be done for sale of goods at a price lower than the purchase price
in terms of section 22 (13)/(13A).
A further case of reversal of ITC arises in terms of section 22 (7) for despatches of goods to outside
West Bengal otherwise than by way of sale. In this case ITC is available to the extent it exceeds input tax
calculated @ 3% –– if the dealer had already availed ITC then ITC calculated @ 3% shall be reversed.
If a registered dealer is unable to ascertain the amount of reverse credit from his books of accounts
then such amount of reversal of ITC shall be ascertained on the basis of the formula given in Rule 23(4).
If reversal of ITC is done only at the end of the quarter/year instead of at the end of month [S. 31A],
there may be occasion of short payment of monthly tax. Non-reversal of ITC attracts interest [S. 33(3)].
Occasion of reversal of ITC arises only when ITC was availed earlier and there is a subsequent
situation which requires reversal of ITC. For example, a dealer manufacturing only Schedule A goods
cannot avail ITC on the relevant raw materials at first instance which may require reversal of ITC at
subsequent date, since at the very outset the relevant goods were purchased for use in manufacturing
Schedule A goods not meant for export. If however the dealer is capable of manufacturing both taxable and
non-taxable goods and if the raw materials are the same, then only a case of reversal of ITC may arise
when the dealer subsequently manufactures non-taxable goods. Since claim of excess input tax credit may
lead to penal consequences, proper care should be taken for making claim of input tax credit at the time of
submission of returns or otherwise.
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