Setoff as per maharasthra value added tax

Querist : Anonymous (Querist) 16 November 2011 This query is : Resolved
Sir,

Ours is a manufacturing company. we are doing merchant export also.

The material purchased by paying input tax and exported can we claim setoff and utlise the same against other vat sales? or there is only one alternative to purchase the said material under Form H.

Kindly advice.

Regards

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Sankaranarayanan (Expert) 16 November 2011

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The Department administrates the following Acts -

� The Maharashtra Value Added Tax, 2002.

1.1 Why VAT? In the pre - VAT state tax structure, there were problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the pre - VAT structure, before a commodity is produced, inputs are first taxed and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. In the VAT, a set-off is given for input tax as well as tax paid on previous purchases. In the pre - VAT sales tax structure, several States also had multiplicity of taxes, such as turnover tax, surcharge on sales tax, additional surcharge, etc. With introduction of VAT, these other taxes are abolished. In addition, Central Sales Tax is also going to be phased out. As a result, overall tax burden will be rationalised and prices in general will also fall. Moreover, VAT will replace the system of inspection by a system of built-in self-assessment by the dealers and auditing. The tax structure will become simple and more transparent. That will improve tax compliance and also augment revenue growth. Thus, to repeat, with the introduction of VAT, benefits are as follows :

� a set-off will be given for input tax as well as tax paid on previous purchases.

� other taxes, such as turnover tax, surcharge, additional surcharge, etc. will be abolished.

� overall burden will be rationalised.

� prices will in general fall.

� there will be self-assessment by dealers.

� transparency will increase.

� there will higher revenue growth.

1.2 The essence of VAT is in providing set-off for the tax paid earlier and this is given effect through the concept of input tax credit / rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. The Value Added Tax (VAT) is based on the value addition to the goods and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month).

If, for example, input worth Rs. 1,00,000/- is purchased and sales are worth Rs. 2,00,000/- in a month and input tax rate and output tax rate are 4% and 10% respectively then input tax credit / set-off and calculation of VAT will be as shown below :

(a) Input purchased within the month : Rs. 1,00,000/-

(b) Output sold in the month : Rs. 2,00,000/-

(c) Input tax paid : Rs. 4,000/-

(d) Output tax payable : Rs. 20,000/-

(e) VAT payable during the month after set-

off / input tax credit [ (d) & (c) ] : Rs. 16,000/-

1.3 This input tax credit will be given for both manufacturers and traders for purchases of inputs / supplies meant for both sale within the State as well as to other States, irrespective of when these will be unutilised / sold. This also reduces immediate tax liability.

Even for stock transfer / consignment sale of goods out of the State, input tax paid in excess of 4% will be eligible for tax credit.

1.4 For all exports made out of the country, tax paid within the State will be refunded in full and this refund will be made within three months. Units located in SEZ and EOU will be ganged either exemption from payment of input tax or refund of the input tax paid within three months.

1.5 This entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, shall issue to the purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice will be signed and dated by the dealer or his regular employee, showing the required particulars. The dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. Failure to comply with the above will attract penalty.

1.6 Registration of dealers with gross annual turnover above Rs. 5 lakh will be compulsory. There will be provision for voluntary registration. Small dealers with gross annual turnover not exceeding Rs.5 lakh will not be liable to pay VAT.

Small dealers with annual gross turnover not exceeding Rs. 50 lakh who are otherwise liable to pay VAT, shall however have the option for a composition scheme with payment of tax at a small percentage of gross turnover. The dealers opting for this composition scheme will not be entitled to input tax credit.

1.7 The Tax Payer�s Identification Number will consist of 11 digit numerals throughout the country. First two characters will represent the State Code as used by the Union Ministry of Home Affairs. The set-up of the next nine characters may, however, be different in different States.

1.8 Correctness of self-assessment will be checked through a system of Department Audit. A certain percentage of the dealers will be taken up for audit every year on a scientific basis. If, however, evasion is detected on audit, the concerned dealer may be taken up for audit for previous periods. This Audit Wing sill remains delinked from tax collection wing to remove any bias. The audit team will conduct its work in a time bound manner.

Simultaneously, a cross-checking, computerised system is being worked out on the basis of coordination between various tax authorities within the Department and also outside the Department. This comprehensive cross-checking system will help reduce tax evasion and also lead to significant growth of tax revenue. At the same time, by protecting transparently the interests of tax-complying dealers against the unfair practices of tax-evaders, the system will also bring in more equal competition in the sphere of trade and industry.

1.9 Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4% and 12.5%, plus a specific category of tax-exempted goods and a special VAT rate of 1% only for gold and silver ornaments, etc. Thus, the multiplicity of rates in the old structure will be done away with under the VAT system.

Under exempted category there will be about 46 comprising of natural and unprocessed products in unorganised sector, items which are legally barred from taxation and items which have social implications. The rest of the commodities in the list will be common for all the States. Under 4% VAT rate category there will be the largest number of goods (about 270), common for all the States, comprising of items of basic necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods. The schedule of commodities is attached to the VAT Act. The remaining commodities, common for all the States, will fall under the general VAT rate of 12.5%.

� Central Sales Tax Act, 1956

Before the Constitution, as is well known, each State tried to subject under its law the same transaction to tax on the nexus doctrine. A sale of goods consists of various elements; goods, agreement to sell, transfer of property in the goods, the consideration for the sale and delivery of goods. It is possible that the elements in a concluded sale may be distributed over more than one State. Each State relied on one or more of such elements as having a territorial nexus and brought the sale to tax, with the result that the same transaction had to suffer tax in different States with the concomitant hardship to trade and consumers in the same or different States. The makers of the Constitution being fully alive to the problem sought to check the phenomenon. Accordingly, Article 286 of the Constitution forged out the checks and said that no law of a State could bring to tax sale taking place outside the State or a sale taking place in the course of import of goods into or export of goods out of the territory of India. A similar ban was put on taxation of inter-state sale or purchase, except as authoritised by Parliament by law.

An explanation with reference to an outside sale stated that a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State, notwithstanding the fact that under the general law relating to sale of goods the property in the goods has by reason of such sale or purchase passed in another State.

The interpretation of the Article led to certain difficulties for the trade and to the assessment and collection of tax from non-resident dealers. The taxing authorities of the State in which goods were delivered for consumption started calling upon the non-resident dealers to file returns, produce accounts, get themselves registered and comply with the demands of tax. But the view as to the scope of Article 286 as expressed in State of Bombay V/s. United Motors (India) Ltd. was reversed by a majority opinion of a Fuller Bench of the Supreme Court in Bengal Immunity Co. Ltd. V/s. State of Bihar. Accounting to the majority opinion : (it was held that)

'Until Parliament by law made in exercise of the powers vested in it by clause (2) provides otherwise, no State can impose or authorise the imposition of any tax on sales or purchases of goods when such sales or purchases take place in the course of inter-state trade or commerce.'

It was held that the ban imposed against taxation under each of the clauses in Article 286 was a separate and independent limitation and each of them had to be got over before the State law could impose tax on inter-state sale or purchase of goods. The Supreme Court considered that each of the bans was imposed from a different view point, as for instance the explanation looked at the market from the view point of what was an outside sale, clause (2) of the Article had in mind the character of the transaction as an inter-state one and clause (3) then dealt with essentiality of certain goods to the country. If it was an outside sale to the State, it could not tax it. If a sale resulted in delivery of goods for consumption in the taxing State, the tax thereon would be attracted by the explanation. If that transaction were of an inter-state character, the ban under clause (2) of the Article should have to be got over before a State imposed a tax thereon. This led to further difficulties and some of the States had perforce to refund taxes which they had already collected, Bengal Immunity Co. Ltd. V/s. State of Bihar was decided on 6th September, 1955. On 30th January, 1956, the Sales Tax Laws Validation Ordinance and the Validation Act was to legalize the taxes collected by the various States during the period from 1st April, 1951 to 6th September, 1955. The validity of the Ordinance and the Validation Act was attacked with the result that different views were expressed by different High Courts on their scope and validity.

The position by this time was that there was a great deal of uncertainty because of conflicting decisions of various High Courts as to the scope and nature of the sales in the course of inter-state trade and commerce or in the course of import or export. It was in this background that the Sixth Amendment to the Constitution was made in 1956 which radically amended Article 286, separated the power to tax inter-state sales from the State List and put it in the Union List. Article 269 (1) (g) was also amended assigning to the States taxes on the sale or purchase of goods other than newspapers where such sale or purchase took place in the course of inter-state trade or commerce. A new clause to Article 269 provided that Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in the course of inter-state trade or commerce. So far as Article 286 was concerned, the explanation to clause (1) (a) was omitted and clause (2) was amended so as to read. Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1), namely, outside sales, or sales which took place in the course of import into or export out of the territory of India. Clause (3) as amended is to the effect that any law of a State shall, in so far as it imposes, or authorises the imposition of, a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-state trade or commerce be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify. In exercise of the powers conferred on Parliament by the Sixty Amendment to the Constitution, it enacted the Central Sales Tax Act, 1956, which received the assent of the President on 21st December, 1956. It is in this historical background that we must approach and interpret the provisions of the Central Act.

The act was enacted by the Central Government in 1956 and for all practical purposes such as levy, collection the powers are being delegated to the State Governments. The act formulates the principles for determining when a sale or purchase of goods takes place in the course of inter-state trade or commerce or outside a state or in the course of import into or export from India. The act provides for the levy of tax by the appropriate state on the inter-state sale of goods. The act also declares certain goods to be of special importance in inter-state trade which are taxed subject to certain restrictions and conditions. It is also provides rate of tax on inter-state sales.

The tax is levied on inter-state sales by the exporting state generally at the rate of 4% subject to production of declaration. It is proposed to reduce the mentioned rate to 0% in a phased manner and thereby avoiding export of tax.