As per the Karnataka VAT provisions, input tax in relation to any registered dealer means the tax collected or payable under this Act on the sale to him of any goods for use in the course of his business, and includes the tax on the sale of goods to his agent who purchases such goods on his behalf subject to the manner as may be prescribed to claim input tax in such cases. The input set off would be subject to restrictions provided in Section 11, 12, 14 and 17.
There are scenarios wherein the dealer would be processing the goods on behalf of the principal manufacturer. After job work, the dealer would collect the job charges for processing undertaken. In course of job work, the dealer could use consumables or machineries. The question arises as to whether such dealer would be eligible for VAT input set-off on such consumables or capital goods used. The answer to this question would be yes as there is no restriction on such credit availment.
Based on the definition of input tax along with restrictions as per Section 10 and Section 11 of KVAT Act 2003, it is clear that the output tax is calculated on the basis of taxable turnover on sale of goods made in the course of business. However, the benefit of input tax setoff is available when the goods which have suffered the input tax are used in the course of business of the dealer. It has no nexus between the manufacturing of the goods and sale of goods. In the course of a job work, consumables or capital goods could be used.
Undertaking the processing of goods under job work by a dealer would be in course of his business. Therefore, the dealer shall be eligible for input tax benefit.
View affirmed by Karnataka High court
This view has also been affirmed by the Karnataka High Court in case of The State Of Karnataka vs Ashok Iron Works Private Limited. In this case the department took an argument that as no output tax is payable on job work turnover and therefore, the assessee is not entitled to the benefit of input tax rebate.
However, the High Court did not accept this view. The Court held that the assessee is entitled to benefit of input tax rebate on the total taxable turnover of his business. It was also held that approach of tax authorities that the assessee is not entitled to the benefit of input tax rebate in respect of consumables used in relation to the job work in respect of which no output tax is paid by the assessee is erroneous.
Conclusion: Many of the dealers may be unaware of this development and still continuing to lose input set-off on goods used in job work transactions. As there is a recent decision of the Karnataka High Court, it is high time for the dealers who are also undertaking job work to claim input set-off. However, it is ideal to intimate the department about the same and also take professional advice. Please note that few job work activities could be liable for output VAT also depending on case to case basis.