Opening stock input tax credit under Kerala VAT was denied and recovered as reverse tax for failure to pass on tax benefit.

Input tax credit on opening stock under the Kerala VAT regime was disallowed where the benefit of sales tax paid on purchases was not passed on to customers. On the factual findings from the accounts, audit statement and gross profit pattern, the tax element was found embedded in the sale price, showing that the assessee had recovered the purchase tax along with VAT without the required set-off. The matter therefore fell within the second proviso to section 11(13) of the Kerala Value Added Tax Act, and the credit could be demanded back as reverse tax.

---

---

Issues: Whether input tax credit on opening stock held on the first day of the VAT year was rightly disallowed and treated as reverse tax because the assessee did not pass on the benefit of sales tax paid on purchases to the customers.

Analysis: The value added tax regime permitted input tax credit, but the benefit on opening stock was conditional upon the sales tax paid on such purchases being passed on in the sale price. On the factual finding drawn from the accounts and audit statement, the assessee had recovered the purchase tax along with VAT from buyers without giving the required set-off. The assessment record showed that the gross profit pattern supported the conclusion that the tax element on opening stock was embedded in the sale price. The case therefore fell within the second proviso to section 11(13) of the Kerala Value Added Tax Act, under which the credit could be demanded back as reverse tax.

Conclusion: The disallowance of input tax credit on opening stock and the demand of the amount as reverse tax were upheld.

---