Businesses can claim input tax adjustments on destroyed goods, ensuring compliance with the Sales Tax Act, 1990, and protecting their financial interests.
Legal Position on Input Tax Adjustment
The sales tax department cannot deny adjustment against raw materials that have not been used during the same tax period after paying the input tax. According to sources, the department had challenged the deduction of input tax on goods destroyed by fire, arguing that such goods did not remain available for making taxable supplies.
Tax Authority’s Contention
The tax authority contended that input tax adjustments or refunds apply only when goods, on which input tax was paid, are used in taxable activities to produce taxable supplies. They argued that if the goods are consumed or destroyed before being used for taxable supplies, the right to claim input tax deduction should not be available.
Conditions for Input Tax Adjustment
To avail input tax adjustment against output tax, three conditions must be met:
- The input tax paid on purchases must be intended for making taxable supplies.
- The input tax must be for producing taxable supplies, whether immediately or in the future.
- The input tax paid in a tax period must be deducted from the output tax due for the same period and not carried forward to future tax periods.
Interpretation Supporting Taxpayer’s Rights
The taxpayer argued that the phrase “taxable supplies made or to be made” broadens the scope of input tax adjustment, including future supplies. Therefore, taxpayers need not wait for raw materials, on which input tax has been paid, to be consumed before claiming the adjustment.
Decision and Commercial Reasoning
The competent authority agreed with the taxpayer, affirming that there is no express requirement mandating raw material consumption within the same tax period for input tax adjustment. Denying adjustment solely based on non-consumption contradicts legislative intent and commercial practicality. The relevant section of the Sales Tax Act, 1990, does not restrict input tax deduction in cases where raw materials have been lost due to unforeseen circumstances, such as fire.
