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VAT issue: HC rules that reduction cannot exceed tax credit
February, 01st 2013

The Gujarat high court has rejected an appeal filed by the state government challenging a tribunal's order granting relief in Value Added Tax (VAT) to the Reliance Industries Ltd.

While interpreting section 11(3)(b)(ii) and (iii) of the Gujarat Value Added Tax Act, 2003, the HC bench of justice Akil Kureshi and justice Sonia Gokani observed that reduction cannot exceed the available tax credit to a dealer RIL had purchased furnace oil, natural gas and light diesel oil from registered dealers for its business of manufacturing and selling polymers and chemicals. Such fuel was used in manufacturing.

Furnace oil is chargeable to value added tax at the rate of 4 per cent while natural gas and light diesel oil invite tax at the rate of 12.5 per cent.

As per section 11 of the VAT Act, it pertains to credit and permits a registered dealer who has purchased taxable goods to take credit on the tax paid under certain circumstances.

Clause (b) of sub-section (3) of section 11, however, limits availing of such credit under certain circumstances.

The court had to decide if a particular item falls in multiple sub-clauses, tax credit can be denied more than once.

Reliance's counsel Saurabh Soparkar and Megha Jani submitted that limitation of availing of tax credit as provided under section 11(3)((b) could be applied only once irrespective of the fact that whether a particular commodity purchased falls in more than sub-clauses of clause (b) of sub-section (3) of section 11.

The state government, however, contended that if such goods satisfy the descriptions of sub-clause (ii) and (iii) of clause (b) of sub-section (3) of section 11, denial of tax credit would operate twice.

After hearing the parties, the high court said, "If the tax credit available to a dealer is less than four per cent, the reduction should be limited to such credit and not more."

The court noted that the legislature envisaged that the reduction of tax credit under section 11(3)(b) would in no case exceed four per cent.

It further said, "If the interpretation put forth by the State is accepted, a dealer who has availed of tax credit of 4 per cent would end up surrendering credit by 8 per cent or may be in a given case by 12 per cent. Surely, the legislature could never have intended the reduction to exceed the tax credit itself. In the present case, this is precisely what would happen if the interpretation of the State is accepted."

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