Vat credit for tax paid in construction of windmill

[Guest]

Dear members,

The facts of the case are as below:

A Ltd. has given the contact for construction of wind mills to B Ltd.

B Ltd. supplies materials on which it has charged local VAT.

The elctricity generated is intially sold to electricity distribution company and this company inturn gives the credit of electricity generated to A ltd. in its monthly bill. A ltd. consumes this electricity in generation of taxable products. 

Can A ltd. claim the credit for input VAT paid against its output tax liability.

Two things are to be noted here:

 As the input VAT is paid for geneartion of electricity which is not taxable output under VAT, input VAT credit shall not be allowed.

However, as the A ltd. is using this in manufacture of final taxable product as a captive, Credit can be allowed.

 Please guide whether input VAT credit can be allowed to A ltd.

[CA Rachit Agarwal]

Unlike Cenvat Credit Rules 2004. input credit is not be allowed even though the power is used for captive purposes which is taxable product. As the power is exempted from vat, hence the inputs used for the purpose of generation of power would not be eligible for the input credit tax.

The above opinion is applicable in case of Orissa Vat and Jharkhand Vat. As regarding the other states, it depends upon the Vat Act prevailing on that state.

Conclusion: A will not be eligible for the ITC

AI Summary

Input VAT credit denial when inputs generate VAT-exempt electricity, even if electricity is used in manufacture of taxable goods. Where electricity is VAT-exempt, inputs used to generate that electricity are not eligible for input VAT credit even if the electricity is consumed as captive power in manufacturing taxable products; this approach is applied under Orissa and Jharkhand VAT, while other states depend on their VAT statutes.