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NOTE ON INPUT TAX CREDIT AVAILMENT UNDER TNVAT ACT

(As amended with effect from 29/01/2016)
by STVAT Consulting Team

The amendments relating to availment of Input Tax Credit by the Tamil Nadu Value Added Tax (Second Amendment) Act, 2015, is presented in this note.

A. Obligation to ensure that the selling dealer has paid the tax charged in the Invoice

Hitherto Section 19(1) provided for availment of Input Tax Credit ( ITC) on purchase of eligible goods of the tax “paid or payable”. This is amended deleting the expression “payable”.

Further the proviso has been amended stipulating that the dealer availing ITC shall establish that the tax due on purchase of goods has actually been paid by the registered dealer who sold such goods and that the goods have actually been delivered.

The amended Section 19(1) reads as follows:

Section 19(1)

There shall be input tax credit of the amount of tax paid under this Act, by the registered dealer to the seller on his purchases of taxable goods specified in the First Schedule:

Provided that the registered dealer, who claims input tax credit, shall establish that the tax due on purchase of goods has actually been paid in the manner prescribed by the registered dealer who sold such goods and that the goods have actually been delivered;

Two conditions specified are

(i) The dealer availing ITC shall establish payment of tax by the selling dealer and

(ii) The goods should have been received by / delivered to the dealer availing ITC

This applies to procurement of capital goods as well.

The amendment providing for ITC of only “tax paid” gives an impression that ITC can be availed only after the value of goods procured and tax thereon has been paid.

We are of the view that ITC may be continued to be availed as at present on accounting of the invoice and we understand that the accounting would happen only after the goods have been received. i.e ITC cannot be availed based on the Tax Invoice before the receipt of the goods.

We are of the view that intention of the amendment is only to ensure that ITC is not availed on bogus invoices and that the selling dealer has declared the sales in his return and has also paid the tax thereon.

This view is based on

a) Clause (d) of the statement of objects and reasons of the TNVAT Act Amendment Bill which states that the amendment is to provide for allowing input tax credit only to the extent of the tax paid to the exchequer by a registered dealer to another registered dealer on the purchase of goods including capital goods in the course of his business, only when such tax actually been paid by the registered dealer who sold such goods, so as to curb undue claims towards input tax credit resulting in tax evasion; and

b) Newly inserted sub rule 2-A of Rule 10 only casts an obligation on the dealer availing ITC to establish, whenever it is deemed necessary by the assessing authority that the tax due on such purchase of goods has actually been remitted into the Government account.

Rule 10(2-A) reads as follows:

“(2-A) Every registered dealer who claims input tax credit to the extent of the tax paid on purchases of taxable goods specified in the First Schedule to the Act from the other registered dealers inside the State, shall establish, whenever it is deemed necessary by the assessing authority, that the tax due on such purchase of goods has actually been remitted into the Government account.

Though we have to await the clarification of the CT Department on whether the intention of the amendment is to provide for availment of ITC only after the value of goods invoiced and tax thereon is paid, for the reasons stated hereinabove, it appears to us that ITC may be availed on receipt of the goods and accounting in the books of accounts, though the payment may happen in a later month.

In the event of any stipulation of availment of ITC only on the payment of the bill of the vendor, the possible exposure could be liability to pay interest from the month of availment to the month of payment of the invoice of the vendor.

We shall update as and when the issue is clarified.

B. Penalty for wrong availment of ITC increased to 300% of ITC wrongly availed (Section 27(4))

Hitherto the penalty for wrong availment of ITC is 50% of ITC wrongly availed in the case of first detection and 100% of ITC wrongly availed for subsequent detection.

Extract of Section 27(4) of the TNVAT Act, as substituted reads as follows:

"(4) In addition to the tax determined under sub-section (2), the assessing authority shall direct the dealer to pay as penalty a sum which shall be three hundred per cent of the tax due in respect of such claim:

It is to be noted that incorrect reversal of ITC with reference to Stock transfer and omission to reverse other ineligible credit would also be construed as wrong availment of ITC.

Safeguards

We are sure proper internal control on availment of ITC is in place but still we thought it appropriate to highlight the following safeguards:

1. Purchase function to ensure proper due diligence on the regulatory compliance culture of the vendor.

2. To exercise greater care on availment of ITC on cash purchase for any immediate requirement and preferably to have an approved list of vendors for cash purchase.

3. Accounts function to ensure that ITC is availed only on eligible purchase and that reversal of ineligible ITC is correct month on month. To verify that the vendor’s TIN (validated from the CT department website), particularly for cash purchase and your TIN is correctly noted in the Tax Invoice.

4. To download every month diligently the Report of Purchases/Sales mismatches from the commercial taxes portal and reconcile.

       
       

 

   

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