Input-Tax Credit under Indian VAT Regimes: Constitutional Dimensions, Statutory Mechanics and Judicial Trends

Input-Tax Credit under Indian VAT Regimes: Constitutional Dimensions, Statutory Mechanics and Judicial Trends

1. Introduction

Value Added Tax (“VAT”) statutes introduced across Indian States between 2003-2005 replaced the single-point sales-tax model with a multi-stage tax on value addition. The linchpin of this design is the Input-Tax Credit (“ITC”), which permits a registered dealer to deduct tax paid on inputs from the output-tax liability, thereby eliminating cascading. While the conceptual simplicity of ITC furthers neutrality and competitiveness, its practical operation has generated intense litigation on (i) the juridical character of ITC—concession versus vested right; (ii) constitutional limitations on legislative or administrative curtailment; and (iii) evidentiary burdens when malpractices of counterparties surface. This article critically analyses these issues through the prism of leading authorities, with emphasis on the decisions enumerated in the reference materials.

2. Statutory Framework

  • Delhi VAT Act, 2004: s.9(1) grants ITC; s.9(2)(g) (inserted 2009) mandated reversal where the selling dealer defaulted in tax payment.
  • Karnataka VAT Act, 2003: s.70 places the burden of proof upon the purchasing dealer to establish entitlement to ITC.
  • Gujarat VAT Act, 2003: s.11 establishes ITC and s.11(3)(b) requires 4 % reduction in specified circumstances, controversially applied cumulatively.
  • Tamil Nadu VAT Act, 2006: s.19 confers ITC subject to multiple conditions; sub-s.(20) (inserted 2010 with retrospective effect from 01-01-2007) requires reversal when resale is below purchase price.
  • Parallel provisions exist in Rajasthan (s.18), Maharashtra, Uttar Pradesh and other State Acts.

3. Jurisprudential Evolution

3.1 ITC: Concession or Vested Right?

Early High-Court jurisprudence viewed ITC as a “creature of statute” and hence a conditional concession (e.g., Usa Agencies, Madras HC 2013)[1]. The Supreme Court in Jayam & Co. v. Assistant Commissioner (2016)[2] endorsed this characterisation, holding that the legislature may impose “stringent pre-conditions” including quantitative ceilings and temporal restrictions because ITC “does not enure as an indefeasible right.” Nevertheless, the Court cautioned that retrospective amendments upsetting settled positions must satisfy tests of reasonableness and non-confiscatory effect—a nuance often overlooked in excessive fiscal experimentation.

3.2 Constitutional Challenges on Equality and Freedom of Trade

The most potent Article 14 attack succeeded in Arise India Ltd. v. Commissioner of Trade & Taxes (Delhi HC 2017)[3]. Section 9(2)(g) DVAT made an innocent purchaser suffer for a seller’s default, without furnishing any mechanism for prior verification. The Court struck down the clause as manifestly arbitrary, emphasising that identical treatment of unequal classes (bona-fide and mala-fide purchasers) offends the doctrine of reasonable classification. While the High Court relied on the revived “arbitrariness” ground post-Krishnan v. Union of India, revenue authorities continue to invoke similar provisions elsewhere, keeping the constitutional debate alive. Notably, the Supreme Court has not conclusively settled the validity of such “dealer-oriented” reversal clauses; therefore, Arise India remains persuasive but not nationally binding.

3.3 Burden of Proof and Evidentiary Threshold

In The State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd. (2023)[4], the Supreme Court revitalised s.70 KVAT by ruling that production of invoices and cheque payments, simpliciter, does not satisfy the statutory burden. Purchasers must demonstrate (a) actual movement of goods, (b) identity and registration of suppliers, and (c) evidence that suppliers have discharged VAT. The ruling narrows the protective ambit carved out in earlier Delhi decisions such as Shanti Kiran (2013)[5], signifying a judicial shift towards stricter due-diligence expectations under pre-GST VAT regimes.

3.4 Quantification Disputes: Double Reduction Controversy

In State of Gujarat v. Reliance Industries Ltd. (2017)[6], the apex Court adopted a literal-cum-contextual interpretation of s.11(3)(b) Gujarat VAT Act, holding that where inputs satisfy multiple sub-clauses, successive 4 % reductions may be applied cumulatively, subject to the ceiling of available credit. The Court’s reliance on punctuation and absence of the word “or” underlines the primacy of textual parameters in fiscal statutes, notwithstanding equitable considerations advanced by the taxpayer. Subsequent High-Court rulings (JTC Ltd. 2018; Atlas Pharmachem 2015) have grappled with the precedential impact of Reliance, generally following its ratio while distinguishing on factual matrices.

3.5 Retrospectivity and Confiscatory Effect

The constitutional permissibility of retrospective ITC reversals resurfaced in Jayam & Co. (supra). Although the Court ultimately upheld the amendment on facts, it reaffirmed the test in CIT v. Vatika Township that a retrospective fiscal law must be neither unduly oppressive nor confiscatory. In application, dealers have successfully resisted retroactive diminution where the statute lacked clear legislative intent or compromised legitimate expectations, a theme echoing in transitional-credit GST litigation (Merchem India, Kerala HC 2021)[7].

3.6 Documentation, Audit and Procedural Compliance

The functional efficacy of ITC is documentation-centric. Decisions such as ABB India Ltd. v. State of Karnataka (2016)[8] underscore that assessment orders passed without reasonable opportunity to produce records violate principles of natural justice. Conversely, Durgeshwari Food (Rajasthan HC 2011)[9] and Arya Lumbers (Gujarat HC 2016)[10] illustrate that where statutory forms are properly maintained, credit cannot be proportionally disallowed merely because exempt by-products emerge during manufacturing. Thus, procedural default by the dealer invokes strict consequences, yet procedural laxity by the department equally invites judicial correction.

4. Normative Assessment

4.1 Reconciling Revenue Protection with Commercial Certainty

A coherent ITC regime must balance the State’s legitimate interest in curbing evasion against traders’ need for transactional certainty. Arise India exposes the constitutional fragility of provisions that mechanically penalise purchasers for suppliers’ delinquency, especially absent a real-time verification portal under pre-GST conditions. Conversely, Ecom Gill Coffee embodies the Supreme Court’s resolve to prevent bogus billing through heightened due-diligence duties. The doctrinal reconciliation lies in reasonable compliance obligations: obligations that dealers can practically discharge, backed by transparent electronic ecosystems, and proportionate sanctions calibrated to culpability.

4.2 Lessons for the GST Era

Although VAT has been subsumed by GST, legacy disputes persist and the underlying principles inform GST credit architecture (ss.16–18 CGST Act 2017). High-Court rulings on TRAN-1 glitches (Adfert Technologies, P&H HC 2019; C.P. Marble, P&H HC 2020) reiterate that procedural infirmities cannot extinguish substantive credit absent express statutory authority, echoing VAT precedents on confiscatory prohibitions. The trajectory suggests courts will increasingly scrutinise credit-blocking measures—whether under VAT or GST—through a rights-based constitutional lens, despite recognising ITC as a conditional statutory entitlement.

5. Conclusion

The judicial journey of input-tax credit under State VAT laws demonstrates an oscillation between two poles: (i) ITC as a conditional concession legitimately subjected to rigorous safeguards; and (ii) ITC as an economic right whose arbitrary curtailment offends constitutional guarantees of equality and freedom of trade. Recent Supreme Court pronouncements incline towards stricter compliance obligations while stopping short of endorsing vicarious liability unsupported by verification mechanisms. For future fiscal legislation, the key takeaways are: clarity of statutory language, proportionality of restrictions, technological facilitation of due diligence, and preservation of bona-fide commercial expectations. Only through such calibrated measures can the promise of a non-cascading, neutral consumption tax be fully realised.

Footnotes

  1. Usa Agencies v. Commercial Tax Officer, Madras HC 2013.
  2. Jayam & Co. v. Assistant Commissioner, (2016) 15 SCC 125.
  3. Arise India Ltd. v. Commissioner of Trade & Taxes, Delhi HC 2017.
  4. The State of Karnataka v. Ecom Gill Coffee Trading (P) Ltd., 2023 INSC 248.
  5. Shanti Kiran India Pvt. Ltd. v. Commissioner, Delhi HC 2013.
  6. State of Gujarat v. Reliance Industries Ltd., 2017 INSC 982.
  7. Union of India v. Merchem India Pvt. Ltd., Kerala HC 2021.
  8. ABB India Ltd. v. State of Karnataka, Karnataka HC 2016.
  9. CTO v. Durgeshwari Food Ltd., Rajasthan HC 2011.
  10. Arya Lumbers Pvt. Ltd. v. State of Gujarat, Gujarat HC 2016.