Input tax credit restriction under Tamil Nadu VAT Act construed as inapplicable to manufacturers making inter-State sales.

Input tax credit under the Tamil Nadu VAT Act was considered available for inputs used in manufacture or processing in the State, and the proviso to Section 19(2)(v), inserted on 08.11.2013, was read as applying only to dealers purchasing goods for inter-State trade under Section 8 of the CST Act. On that construction, the three per cent restriction was not intended for manufacturers whose credit arose from manufacturing inputs, and the later deletion of the proviso supported that interpretation. The reversal order was therefore treated as based on an incorrect application of the provision and was remanded for fresh consideration and a speaking order.

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Issues: Whether the reversal of input tax credit under the proviso to Section 19(2)(v) of the Tamil Nadu Value Added Tax Act, 2006 was applicable to a manufacturer effecting inter-State sales during the relevant period, and whether the impugned reversal order was sustainable.

Analysis: Input tax credit under Section 19(1) of the Tamil Nadu Value Added Tax Act, 2006 was available for purchases used in manufacture or processing of goods in the State. The proviso restricting credit to the extent of three per cent, inserted on 08.11.2013, was construed as operating only in the context of dealers purchasing goods and selling them in inter-State trade under Section 8 of the Central Sales Tax Act, 1956. The restriction was held not to be intended for manufacturers whose credit arose from inputs used in manufacture or processing, and the subsequent deletion of the proviso reinforced that the impugned reversal was founded on an incorrect application of the provision.

Conclusion: The impugned reversal of input tax credit was held unsustainable as against the petitioner. The matter was remanded to the respondent for fresh consideration and a speaking order.

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