(1) Subject to the other provisions of this section, any registered dealer, liable to tax under sub-section (1) of section 6, shall be eligible for input tax credit.

(2) In respect of capital goods purchased by a dealer the value of which exceeds such limit as may be prescribed, input tax credit will be allowed over a period of three years from the date of commencement of commercial production or from the date from which the capital goods are put to use, whichever is latter, in such manner and subject to such conditions as may be prescribed.

Provided that input tax credit on capital goods for industrial units including those which have undertaken expansion, diversification or modernisation shall be allowed over a period twelve months from the date of commencement of commercial production or from the date from which the capital goods are put to use, whichever is earlier from 1st day of April, 2006.

Provided further that no input tax credit shall be allowed with respect to capital goods used exclusively for the manufacture of goods having no taxable consequence under this Act or the Central Sales Tax Act, other than zero rated sales and in cases where it is only partly used for such purposes, input tax credit shall be proportionately disallowed to that extent.

(3) Subject to the provisions of sub- section (4) to (13), Input Tax credit shall be allowed to a registered dealer in respect of a return period against the Output Tax payable by him for such period and the dealer shall pay to Government, the balance of the Output tax in excess of the input tax credited in the manner prescribed.

Provided that no input tax credit shall be allowed to any amount illegally collected by way of tax as specified in sub-section (3) (a) of Section 30 of the Act:

Provided also that where any goods purchased in the state are subsequently sold at subsidized price, the input tax allowable under the sub-section in respect of such goods shall not exceed the output tax payable on such goods.

Provided also that where any goods purchased in the State are subsequently sent to outside the State or used in the manufacture of goods and the same are sent out side the State otherwise than by way of sale in the course of inter-State trade or export or where the sale in the course of inter-State trade is exempted from tax, input tax credit under this section shall be limited to the amount of input tax paid in excess of five per cent, on the purchase turnover of such goods sent outside the State:

Provided also that where it is found that the dealer claiming input tax credit under this section has charged tax under section 6 on the turnover of goods, without making any deduction in respect of the tax paid under this Act, for which input tax credit is allowed to him under this section, the input tax credit availed of by him shall be disallowed:

Provided also that input tax credit shall not be available in respect of the tax paid on the turnover subsequently allowed as discount, and shall be disallowed where it is found that the dealer has claimed input tax credit under this section on such turnover or of such goods used in the manufacture of goods sent outside. But the amount covered under credit notes issued by a supplier that do not affect the input tax credit already availed of or on account of reimbursement of any expenses incurred by the dealer shall not be reckoned for the purpose of assessment under this Act.

Provided also that no input tax credit shall be allowed where any dealer, with a view to evade payment of tax or in order to claim any inflated input tax credit or refunds under this Act, purchases goods from a sister concern of the dealer and where the sale consideration in respect of which has been influenced by such relationship, and there has been no physical transfer of the goods covered by the invoice:

Provided also that the purchase in respect of which input tax credit availed is made from a sister concern of the dealer and there is actual physical transfer of the goods involved, and the dealer availing input tax credit sells such goods at a price lower than the price for which it was purchased, the input tax credit allowable in respect of such goods shall not exceed the output tax due on such goods.

Explanation.- For the purpose of above provisos, 'sister concern' means a business run by a proprietorship or partnership, association of persons or a company which is controlled by the dealer, or by a person whom the dealer controls, or by a person who is controlled by the same person who controls the dealer:

Provided also that notwithstanding anything contained elsewhere in this Act, planters including companies or firms or society, including a co-operative society or association of individuals, whether incorporated or not, shall not be entitled to input tax credit on purchases of fertilizers, pesticides etc.

(3A) Notwithstanding anything contained in this Act, the tax collected by registered dealers under this Act at four percent on the sales of coconut oil, copra and coconut oil cake for the return periods of May, 2007 and June, 2007 shall be deemed to have been validly collected.

(4) Unregistered dealers or dealers paying presumptive tax under sub-section (5) of section 6 or dealers paying compounded tax under section 8 or dealers who transfer the right to use goods under clause (c) of sub-section (1) of section 6 shall not be eligible for Input Tax credit.

Provided that where a dealer has opted to pay tax under section 8 in respect of certain transactions and is liable to pay tax under sub-section (1) of section 6 in respect of others, he shall be eligible for input tax credit only on the purchases of taxable goods made in relation to the sales in respect of which he pays tax under sub-section (1) of section 6:

Provided further that notwithstanding anything contained elsewhere in the Act, manufacturers of medicine who have opted for payment of compounded tax under clause (e) of section 8 shall be eligible with effect from 1st April, 2005 for input tax credit, for the tax paid under this Act, under the Kerala Tax on Entry of Goods into Local Areas Act, 1994, on purchase of raw materials, packing materials and capital goods used exclusively for the manufacture of own taxable goods.

(5) No Input Tax credit shall be allowed for the purchases, -

(a) from an unregistered dealer or from a dealer not liable to tax under section 6 or from a dealer whose registration has been cancelled;

(b) from a dealer paying presumptive tax under sub-section (5) of section 6;

(c ) from a dealer paying compounded tax under section 8;

(d) of goods from outside the State in the course of inter State trade or commerce or otherwise in respect of tax paid on such purchase;

(e) of goods which are used in the manufacture, processing or packing of goods specified in the First Schedule and Fourth schedule;

(f) of goods specified in Fourth Schedule;

(g) of goods which are used as fuel in motor vehicles or vessels, or stores;

(h) of motor vehicles where such motor vehicle is sold as a used motor vehicle except where such motor vehicle is purchased as a used motor vehicle.

(j) which relates to goods sold by a principal through his agent in respect of which the principal has claimed Input tax credit or vice versa;

(k) of goods remaining unsold at the time of closure of business;

(l) of goods which are used in the manufacture, processing or packing of goods, where such manufactured, processed or packed goods remain unsold at the time of closure of business;

(m) of goods where tax invoice in the prescribed form is not available with the dealer or there is evidence that the same has not been issued by the selling dealer;

(n) by a dealer who is exempted from payment of tax;

(o) of goods notified under clause (x) of section 2;

Explanation:- For the purpose of clause (g) "stores" shall not include spare parts or tools in relation to any goods to which the provisions of this section applies.

Provided that where a dealer remits differential tax in accordance with the provisions of the Act, he may, issue debit note for the tax amount subsequently remitted, to the purchasing dealer to claim input tax credit to the extent of the tax covered in the debit note subject to such condition as may be prescribed.

(6) If the Input Tax of a dealer for a return period is more than the out put tax of that return period, the difference between the Input Tax and the out put tax shall be first adjusted against any interest, tax or any other amount due or demanded under this Act, from the dealer for any previous return period(s) and then to the tax payable by the dealer on the sales in the course of interstate trade and the balance, if any, shall be carried forward to the next return period for the purpose of allowing Input tax credit in the succeeding return period.

Provided that where the excess input tax so carried forward cannot be fully adjusted during the last return period of that year, the excess input tax credit so remaining inadjusted shall be refunded to the dealer as if it were a refund accrued under section 13.

(7) If goods in respect of which input tax credit has been availed of are subsequently used, fully or partly, for purposes in relation to which no input tax credit is allowable under the section, the input tax credit availed of in respect of such goods shall be reverse tax.

(8) The reverse tax as determined under sub-section (7), shall be deemed to be an amount due under this Act.

(9) Any dealer who claims input tax credit under this section in respect of any purchase shall keep the original tax invoice for such purchase (duly filled in and signed and issued by the selling dealer) wherein the input tax has been separately charged, and produce for verification as and when required by any authority empowered under this Act.

(10) Notwithstanding anything contained in any other provisions of this Act, a dealer who purchases goods from another dealer whose Certificate of Registration is suspended, shall not be eligible for Input tax credit on such purchases of goods, made during the period of suspension of the Certificate of Registration.

(11) Notwithstanding anything contained in any other provisions of this Act, a dealer whose Certificate of Registration is suspended shall not be entitled to claim any Input tax credit during the period of suspension of the Certificate of Registration.

(12) A registered dealer who intends to claim Input tax credit under this section shall, for the purpose of determining the amount of Input Tax credit, maintain the accounts and such other records as may be prescribed, in respect of purchases, supplies and sales effected by him in the State.

(13) Subject to the provisions of sub-sections (4) to (7) and sub-sections (9) to (12), input tax credit shall be allowed to a registered dealer in respect of the tax paid under the Kerala General Sales Tax Act, 1963 (15 of 1963) where the tax paid by the dealer who sold the goods to such registered dealer or by any previous seller, or the Kerala Tax on Entry of Goods into Local Areas Act, 1994 (15 of 1994), in respect of goods purchased by him during a period of one year immediately preceding the date of commencement of this Act, subject to such conditions and restrictions as may be prescribed, where such goods are-

(i) held as opening stock on such date and sold or used in the manufacture of taxable goods or used in the execution of works contract or used as containers or packing materials for the packing of taxable goods in the state for sale thereafter; or

(ii) used in the manufacture of taxable goods or as packing materials for the packing of taxable goods and such manufactured or packed goods are held as opening stock on such date; or

(iii) used in the manufacture of taxable goods and are held as opening stock on such date as work in process:

Provided that the assessing authority may adjust any amount accruing to a dealer as input tax credit under this sub-section towards any tax or other amount due from the dealer, under this Act or under the provisions of the Kerala General Sales Tax Act, 1963 (15 of 1963) or the Central Sales Tax Act, 1956 (Central Act 74 of 1956 or the Kerala Tax on Entry of Goods into Local Areas Act, 1994 (15 of 1994.)

Provided further that where it is found on audit that the dealer claiming input tax credit under this sub-section has charged tax under section 6 on the turnover of such goods without making any deduction in respect of the tax paid under the KGST Act, 1963 (15 of 1963) for which input tax credit is allowed to him under this sub-section, the input tax credit availed of by him shall be liable to be disallowed to that extent and the input tax credit so disallowed shall be deemed to be reverse tax due under sub-section (7).

Explanation: For the purposes of this sub-section "input tax" means tax paid by one registered dealer under the Kerala General Sales Tax Act, 1963(15 of 1963) to another such dealer or, where the goods are liable to tax under the Kerala General Sales Tax Act, 1963 (15 of 1963) at the point of first purchase or last purchase or under Section 5A, as the case may be, the tax paid by the dealer claiming input tax credit under this sub-section of the purchase or tax paid by such dealer under the Kerala Tax on Entry of Goods into Local Areas Act, 1994 (15 of 1994).

Provided also that no input tax credit under this sub-section shall be allowed in respect of tax paid under the Kerala General Sales Tax Act, 1963 (15 of 1963) on medicines and drugs falling under the Third Schedule to this Act and turnover of sale of such medicines and drugs shall not be included in the taxable turnover of any dealer effecting sales of such medicines and drugs, subject to such conditions and restrictions as may be prescribed.