Pro rata rule

The pro rata rule is a principle used in Value Added Tax (VAT) systems to determine the portion of input tax that a business can claim as a credit. It applies when goods or services are used for both taxable and exempt transactions. Key Features Input Tax Credit Input tax refers to the VAT paid on purchases of goods or services used in business activities. Businesses can typically claim a credit for VAT paid on goods or services used to make taxable supplies. Partial Credit for Mixed Use When goods or services are used for both taxable and exempt activities, the business can claim only a proportionate (pro rata) input tax credit. This ensures fair allocation of VAT recovery between taxable and exempt transactions. Calculation Basis The credit is usually calculated on the ratio of taxable supplies to total supplies over a calendar year. Formula (simplified): Recoverable VAT = Total VAT Paid × Taxable Supplies Total Supplies Recoverable VAT=Total VAT Paid× Total Supplies Taxable Supplies ​ Purpose Prevents businesses from claiming full VAT credit on mixed-use inputs, which would create tax revenue loss for the government. Ensures equitable taxation in line with the VAT system. Example A company pays ₹1,00,000 VAT on electricity for its offices. 60% of electricity usage is for taxable activities, and 40% for exempt activities.