Court clarifies that post-amendment Section 19(5) of Punjab VAT Act restricts ITC on Schedule `H' goods and their manufactured products sold inter-State to the extent of Central Sales Tax; factual determination required for pre-amendment cases
In a significant ruling delivered on October 13, 2026, the Punjab and Haryana High Court (Division Bench) adjudicated a batch of appeals concerning the entitlement to Input Tax Credit (ITC) under the Punjab Value Added Tax Act, 2005 ("Act of 2005"), specifically addressing the interplay between the general ITC provision under Section 13 and the restrictive provision under Section 19(5) related to Schedule `H' goods. The appeals, filed by several manufacturers including M/s Fertichem Cotspin Ltd., M/s Grospinz Fab Ltd., and others, arose from disputes over ITC claims on VAT and entry tax paid on cotton and paddy used in manufacturing yarn and rice subsequently sold in the course of inter-State trade.
The crux of the dispute revolved around whether ITC on such goods purchased within Punjab and used in manufacturing products sold inter-State should be governed by the general provisions of Section 13 or restricted under Section 19(5). The latter imposes a statutory limitation, allowing ITC only to the extent of Central Sales Tax (CST) chargeable under the Central Sales Tax Act, 1956, on such sales.
The Court observed that while Section 13 confers a general entitlement to ITC, this entitlement is expressly made subject to conditions, including the restrictions under Section 19. Section 19 begins with a non-obstante clause that overrides Sections 13 and 13A wherever applicable, especially concerning goods listed in Schedule `H', which includes cotton and paddy.
A pivotal aspect of the judgment was the amendment to Section 19(5), effective from March 28, 2008, which expanded the scope of the ITC restriction to include not only the Schedule `H' goods but also the products manufactured therefrom when sold inter-State. Post-amendment, the nature of tax paid at the purchase stage-whether VAT or purchase tax-and whether the purchase was the first or subsequent within the State, is not determinative. The restriction applies uniformly to ITC claims on such goods or their manufactured products sold in inter-State commerce.
Consequently, the Court dismissed appeals (VATAP Nos.118, 119, and 124 of 2017) where appellants claimed full ITC despite selling yarn or rice made from Schedule `H' goods in inter-State trade. The Court held that ITC is restricted to the extent of CST chargeable and cannot be circumvented merely because VAT was paid on purchase or goods were bought from subsequent dealers.
However, in VATAP No.122 of 2017, involving ITC claimed on yarn (not a Schedule `H' item), the Court remanded the matter to the Tribunal for factual determination of the nature of goods in respect of which ITC was claimed and reversed, to decide applicability of Section 19(5).
For appeals arising from the pre-amendment period (VATAP Nos.60 of 2018 and 117 of 2017), the Court held that determining whether the restriction applies depends on whether the purchase attracting ITC was the first liable to purchase tax under Section 19(1) or a subsequent purchase liable to VAT under Section 19(2). This necessitates factual examination by the competent authority. These appeals were accordingly disposed of with directions for fact-finding.
The judgment provides clarity on the statutory scheme governing ITC on Schedule `H' goods in Punjab and emphasizes the overriding effect of Section 19(5) post-amendment, ensuring that manufacturers selling products inter-State cannot claim unrestricted ITC on such goods. It also highlights the necessity of a fact-based approach for cases predating the amendment.
Bottom Line:
Punjab Value Added Tax Act, 2005 - Interplay of Sections 13, 13A and 19(5) - In post-amendment cases, ITC on Schedule 'H' goods or products manufactured therefrom, when sold in the course of inter-State trade or commerce, is restricted to the extent of Central Sales Tax chargeable, even if VAT was paid on purchase from a subsequent dealer - In pre-amendment cases, applicability of Section 19(5) depends on whether the purchase attracting ITC was the first purchase liable to purchase tax under Section 19(1) read with Section 19(2), requiring factual determination.
Statutory provision(s):
Punjab Value Added Tax Act, 2005: Sections 13, 13A, 19(1), 19(2), 19(5), 60(1); Punjab Tax on Entry of Goods into Local Areas Act, 2000; Central Sales Tax Act, 1956
