(1) Subject to the provisions of the Act, for the purpose of calculating the net tax payable by a registered dealer for any tax period after being registered, an input tax credit as determined under this section shall be allowed to such registered dealer for the tax paid or payable in respect of all taxable sales other than the sales as may be prescribed, or purchases under section 14 during that period.

(2) The input tax credit to which the registered dealer is entitled to shall be the amount of tax paid by the registered dealer to the seller, on his turnover of purchases made during the tax period, intended to be used for the purposes and subject to the conditions as specified in sub- section (3), sub- section (4) and sub-section (5) and calculated in such manner as may be prescribed.

(3) Subject to such conditions and restrictions as may be prescribed, partial input tax credit may be allowed in such cases as may be notified by the Government.

(4) Input Tax credit shall be allowed for purchase of goods made within the State from a registered dealer holding a valid certificate of registration and which are intended for the purpose of -

(a) sale or resale by him in the State ;

(b) use as raw material or as capital goods in the manufacturing and processing of goods other than those exempt from tax under the Act intended for sale in the State ;

(c) sale in the course of inter-state trade and commerce;

(d) sale in the course of export out of the territory of India; or

(e) for use as containers for packing of goods other than those exempt from tax under the Act for sale or resale in the State:

Provided that in respect of transactions falling under clause (c) input tax credit may be allowed on the tax paid in excess of 4% on the raw materials used directly in the manufacture of the finished products:

Provided further that if purchases are used partially for the purposes specified in this sub -section, input tax credit shall be allowed proportionate to the extent they are used for the purposes specified in this sub-section:

Provided also that partial rebating shall be allowed where inputs are used in the following circumstances:

(i) sales consisting of both taxable and exempted goods;

(ii) sales consisting of sale and despatches in the form of consignment and stock transfer to other States; and

(iii) inputs are used for any other purpose in addition to use in the course of business.

(5) Input Tax credit on capital goods shall be limited to plant and machinery directly connected with the manufacturing or processing of the finished products and input tax credit as admissible under this section shall commence from the date of commencement of commercial production or sale of taxable goods and shall be adjusted against tax payable on output over a period of three years in equal instalments with rebating allowed in every tax period:

Provided that in case of closure of business before the period specified in this sub-section, no further input tax credit shall be allowed and input tax credit carried forward, if any, shall be forfeited.

(6) Input tax credit shall be allowed in respect of inputs used in both taxable and non-taxable goods sent on stock or consignment transfer subject to the condition that tax paid in excess of 4% only shall be rebated.

(7) Input tax credit shall not be claimed by the dealer until the tax period in which he receives from the registered dealer from whom he has purchased the goods a tax invoice in the prescribed form (in original) evidencing the amount of tax (Input tax):

Provided that for good and sufficient reasons to be recorded in writing and in the prescribed manner the Assessing Authority may allow such credit subject to such conditions and restrictions as may be specified. The set off, however, shall not be carried beyond the end of the second financial year.

(8) A registered dealer who intends to claim input tax credit under sub- section (1) shall, for the purpose of determining the amount of input tax credit, maintain accounts, and such other records as may be prescribed in respect of the purchases and sales made by him in the State.

(9) No input tax credit under sub-section (1) shall be claimed or be allowed to a registered dealer -

(i) in respect of any taxable goods under the Act purchased by him from another registered dealer for resale but given away by way of free sample or gift;

(ii) who is liable to turnover tax at a percentage of the turnover of sales, in lieu of tax, as provided under section 25 ;

(iii) in respect of capital goods as specified in Schedule 'E ';

(iv) in respect of goods brought from outside the State against the tax paid in other States;

(v) in respect of stock of goods remaining unsold at the time of closure of business;

(vi) in respect of goods purchased on payment of tax, if such goods are not sold because of any theft or if such goods get destroyed ;

(vii) where the tax invoice is not available with the dealer, or there is evidence that the same has not been issued by the selling dealer from whom the goods are purported to have been purchased;

(viii) in respect of goods purchased by him for the period his certificate of registration is under suspension ; and

(ix) in respect of sale of goods exempt from tax as specified in Schedule 'A' ;

(x) who gets the benefit of tax remission.

(10) Reverse Tax Credit : If goods purchased are intended for the use specified under sub-section (4) but are subsequently used, fully or partly, for purposes other than those specified under the said sub-section, or there is loss of goods arising out of theft or destruction for any reason or stock of goods remaining unsold at the time of closure of business, the input tax credit availed at the time of such purchase shall be reduced from the tax credit for the period during which the said utilization has taken place :

Provided that if part of the goods purchased are utilized otherwise, the amount of reverse tax credit shall be proportionately calculated in a manner that is just and reasonable.

(11) Net Tax Credit- The Net Tax Credit to which a registered dealer is entitled shall be determined by the following formula:

Net Tax Credit = A + B - C

Where-

"A" represents the amount of Input Tax Credit the dealer is entitled to under sub-section (2) of section 21.

"B" represents the outstanding credit brought forward as determined under sub-section (2) of section 22.

"C" represents the Reverse Tax Credit as determined under sub-section (10) of section 21.

(12) The methods that are used by a registered dealer in a year to determine the extent to which goods are used, consumed or supplied or intended to be used, consumed or supplied, in the course of making taxable sales, shall be fair and reasonable in the circumstances. The Assessing Authority may, after giving sufficient reason in writing, reject the method adopted by the registered dealer and calculate the amount of input tax credit after giving the registered dealer concerned, an opportunity of being heard.