Input Tax Credit on Capital Goods under Punjab VAT Act, 2005.

I have received a querry relating to admissibility of ITC on capital goods. I have replied to it and considering the matter of concern for dealers at large in Punjab. I am sharing herebelow the full conversation.

Question: Dear Mr Bajaj,

As per our telephonic talk today I am submitting my query to you for your comments :
" A  'generator'  has been purchased wherein the Vat has been charged @ 12.5%  by the seller and paid to him accordingly . Now while filing the return we have claimed ITC @ 12.5% i.e. what had been charged in the bill. The case pertains to the year 2009-10. The assessing Authority is proposing to only allow  the ITC @ 4%  only as according to him the goods bought being Schedule “B” goods i.e. “ Capital goods” the rate of tax is 4% and not 12.5%. It is not in doubt that the selling dealer has charged 12.5% in the sale bill and has accordingly reflected the same in his returns filed in the department. Kindly advise whether the action of the Assessing Authority is justified and cite any case law on this subject if any."

Looking forward to your comments . I am a keen reader of your blog and I sincerely appreciate the effort you are putting in. It is a source of abundant information and inspiration to others.

I had previously sent you another e-mail on 12-4-2011 on a different matter  which you may have overlooked somehow. I am  forwarding it again for your comments. 

Warm Regards,


Answer: This issue always arises due to the vague entry of capital goods as existing in the schedule B which runs as under:

“Capital goods i.e. Plant and Machinery and parts thereof but excluding the goods on the sale of which a taxable person is not entitled for input tax credit under Sub Section 5 of Section 13 of the Act.”

As a result of which dealers are unsure about which goods are  capital goods and which are not.

Before proceeding to reply the above querry, first of all I would like to bring the attention to the definition of capital goods as contained in section 2(d) of PVAT Act which defines it to “mean as any plant and machinery or equipment including equipment for pollution control, quality control, laboratory and cold storage, used in manufacturing, processing and packing of taxable goods for sale.”

If Generator purchased is used for the above purposes then it would be termed as capital goods and will be eligible for ITC as capital goods. As we know Capital goods i.e plant and machinery is a schedule B item i.e taxable @ 5%(earlier it was 4%). Now the question is if the Generator is to be used as capital goods why the selling dealer has charged tax @12.5% instead of 5%. The plain reason for it is that the selling dealer does not know for what purpose purchasing dealer is purchasing it so as to know whether it’s a capital goods or not.

There should be a mechanism or a declaration form in such cases for purchasing dealers to be furnished by them to the selling dealers stating therein that the goods purchased are meant to be used as capital goods and tax @ 5% should be charged.

However in the absence of such mechanism if the tax @ 12.5% has been charged on capital goods the question to be asked is why the purchasing dealer should be allowed only 5% of tax paid by him as ITC, whereas he has paid 12.5% tax on it.

It is to be noted hereby that the ITC @ 5% in the above case is allowed by the revenue on the ground that since capital goods is a 5% item and purchaser has paid excess tax on generator which is being used by him as capital goods.

But I would like to make it clear that If selling dealer makes unauthorized collection of tax then penalty on him has been prescribed u/s 55 of PVAT Act. But there is no express provision in either the Punjab VAT Act or Punjab VAT Rules which provides for disallowance of ITC on the ground of excess tax paid/charged.

As we know the golden rule of interpretation of taxing statues is that they have to be interpreted strictly and nothing can be drawn by implication. Merely because a selling dealer has charged excess tax (although mistakenly) on some goods, the question is, in the absence of express provision to this effect in the Act or Rules, whether it should  imply  that ITC of such excess paid tax should be disallowed to purchasing dealer when he has duly paid the tax and has compiled with all requirements for claiming ITC? In my view the answer to it is a big no. The revenue in my view is bound to refund the excess tax paid to it.

 Section 13(1) of PVAT Act 2005 provides that ITC on capital goods shall be admissible as per the rules prescribed. Rule 18 prescribes conditions for claiming Input Tax credit which are as follows:

1. The taxable person must be in possession of VAT invoice, issued to him by a taxable person, wherein tax charged has separately been shown
2. Proper record of all purchases of Goods, eligible for input tax credit, is maintained.

Thus concluding in my view if all above conditions for claiming ITC are satisfied, full ITC on capital goods should be allowed to the purchaser.

Please note that views expressed in the answer are my personal views only. 

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