Input tax credit reduction required where purchased inputs produce both taxable sales and exempt sales under VAT rules. Input tax credit must be proportionately reduced where purchased goods are used partly to make taxable local, inter state or export sales and partly to make sales exempt under the First Schedule (such as scrap). Entitlement to input tax credit is limited to purchases related to taxable or export sales; where inputs produce both taxable and exempt outputs the credit is apportioned by the mechanism in sub section (4) read with sub sections (1) and (3).