By G. G. Goyal | Chartered Accountant
C. B. Thakar | Advocate
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Introduction
Input Tax Credit (Set-off) is the back bone of an efficient VAT system. Therefore, an unambiguous mechanism of input tax credit is necessary to avoid cascading effect of taxes. The Maharashtra Value Added Tax Act, 2002 (MVAT Act) contains a well-codified scheme of set-off by way of section 48 and Rules.
As per section 48(2) of the MVAT Act, a purchasing dealer is entitled to claim set-off subject to production of valid tax invoice containing declaration as specified in Rule 77. The declaration, amongst others, specifies that the vendor has paid tax or shall pay tax on the sale of goods described in the said tax invoice. However, there is section 48(5) and its interpretation is a subject-matter of dispute. The Sales Tax Department has taken a view that set-off will be granted to the extent of tax actually received in the Government treasury on the same goods in spite of production of tax invoice. Section 48(5) reads as under:
“48. Set-off, refund, etc.
(5) For the removal of doubt it is hereby declared that, in no case the amount of set-off or refund on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government treasury except to the extent where purchase tax is payable by the claimant dealer on the purchase of the said goods effected by him:
Provided that, where tax levied or leviable under this Act or any earlier law is deferred or is deferrable under any Package Scheme of Incentives implemented by the State Government, then the tax shall be deemed to have been received in the Government Treasury for the purposes of this sub-section.”
Similar provision existed under the BST Act also [section 42(3)] and the said section was interpreted by the Larger Bench of the Tribunal in the case of Saujesh Chemicals (S.A. No. 1109 of 2007 and 1701 of 2003, dated 15-12-2007). In this judgment the Larger Bench held that the set-off will be governed by the said section and the setoff will be available to the extent of tax actually paid in the treasury. The arguments about constitutional validity of such provision could not be made before the Appellate Tribunal as the same cannot be entertained by the Tribunal. However, the Tribunal has held that the responsibility of determining tax actually paid in the Government treasury is on the Department.
Recently the Sales Tax Department has come out with information that many dealers under VAT have not paid taxes. Therefore, they are contemplating disallowance of set-off to the purchasers. There is also allegation that these transactions are hawala transactions.
In light of the above scenario, certain writ petitions were filed before the Bombay High Court. The said writ petitions came up for hearing and they have been now decided. These writ petitions can be divided in two parts:
One set of writ petitions
In one set of writ petitions the Department made allegation about purchases being hawala purchases. The High Court, therefore, held that unless the fate of set-off is decided by way of verification and assessment, no challenge to validity of section 48(5) can be maintained. In other words, the writ petitions were held to be premature and hence were disposed of as dismissed. For this purpose reference may be made to the judgments in the case of Premium Paper and Board Industries Ltd. v. The Joint Commissioner of Sales Tax, Investigation-A & Ors. (W.P. No. 347 of 2012 dated 30-4-2012) and other matters.
Other set — Validity of section 48(5) on merits
The other set of writ petitions was in the case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur v. The State of Maharashtra & Ors., (W.P. No. 33 of 2012, dated 11-5-2012) and others.
In these cases there was no allegation of hawala transactions. The dealer had purchased goods from a registered dealer supported by tax invoice and claimed refund. However, refund was disallowed on the ground that the vendors had not paid the tax.
In this case the High Court heard the matter about constitutional validity of section 48(5) on merits. The gist of submission of the petitioners can be noted as under:
(a) Section 48(5) is in connection with rate of tax or amount of sale price, but not about non-payment of tax by vendor.
(b) If interpreted in the manner done by the Department, it will be a burden impossible of performance.
(c) The provision of section 48(2) will be nugatory.
(d) The collection of VAT by vendor is as agent of the Government and hence payment to him amounts to payment to the Government.
(e) It will create discrimination and two purchasing dealer will not be getting equal protection under the law. For example, if two buyers have purchased from the same seller and the said seller pays tax in relation to one buyer only, then such buyer will get set-off whereas the other will not get the same, since no tax is paid on his sale. Thus, though both the buyers are similarly situated from purchaser’s point of view, still there is no equal protection. This is ultra vires Article 14.
(f) There is no system/mechanism for finding out actual tax paid by vendors, which is also to be paid in future and not at the time of sale. Therefore, there will always be a hanging sword on the buyer and this will be unreasonable condition, that is why the provision is ultra vires Article 19(1)(g).
(g) VAT is an indirect tax and it is to be passed on to the consumer. If the set-off is disallowed after goods are already sold, then there will not be an opportunity to recover the same from the buyer/consumer. Thus, this will bring unexpected burden and will also be against the principles of VAT, that there should not be a cascading effect.
(h) A number of judgments were also relied upon to show importance of registration certificate as well as effect of declaration.
On the other hand the Department’s contentions were as under:
(a) The set-off is concession and the Government can put conditions as may be deemed fit.
(b) Set-off contemplates something to be given from the amount already received.
(c) Though the vendor collects tax, it is as a part of the sale price and is not under obligation to collect the same as tax.
(d) There are number of transactions where taxes are not collected like hawala and allowing set-off will be unjustified.
(e) The judgments cited were distinguished on the ground that there was no provision like section 48(5) in those cases.
The High Court, after hearing both the sides, felt that there is no doubt hardship to buyers, but at the same time it is not in favour of striking down the constitutional validity. However, the High Court suggested for bringing some balance between the two sides. At this juncture the Department gave stepwise action in relation to vendors. The said stepwise action is reproduced in para 51 of the judgment which is reproduced below for ready reference. “51. The Learned Advocate General appearing on behalf of the State has tendered a statement of the steps that would be pursued against defaulting selling dealers:
(1) The Sales Tax Department will identify the defaulters, namely, registered selling dealers who have not paid the full amount of tax due in the Government Treasury either by not filling their returns at all or by filing returns but not paying the full tax due (i.e., ‘short filing’) or where returns are filed but sales to the concerned dealers are not shown (i.e. ‘undisclosed sales’).
(2) Set-off will be denied to dealers where at any stage in the chain of sales a tax invoice/ certificate by a defaulter is or has been relied on:
(a) In the event of no returns having been filed by the defaulter, the dealers will be denied the corresponding set-off;
(b) In the case of short filing, dealers who have purchased from the defaulter will be granted set-off pro rata to the tax paid;
(c) In the case of undisclosed sales, the dealers will be denied the entire amount being claimed as set-off in relation to the undisclosed sale;
(d) To prevent a cascading effect, the tax will be recovered only once. As far as possible, the Sales Tax Department will recover the tax from the dealer who purchases from the defaulter.
However, the Sales Tax Department will retain the option of denying a set-off and of pursuing all selling dealers in the chain until recovery is ultimately made from any one of them.
(3) The full machinery of the Act will be invoked by the Sales Tax Department wherever possible against defaulters with a view to recover the amount of tax due from them, notwithstanding the above. Once there is final recovery (after exhaustion of all legal proceedings) from the defaulter, in whole or part, a refund will be given (after the end of that financial year) to the dealer(s) claiming set-off to the extent of the recovery. This refund will be made pro rata if there is more than one dealer who was denied set-off;
(4) Refund will be given by the Sales Tax Department even without any refund application having been filed by the dealers, since the Sales Tax Department will reconcile the payments, inform the dealer of the recovery from the defaulter concerned and grant the refund;
(5) Details of defaulters will be uploaded on the website of the Sales Tax Department and dealers denied set-off will also be given the names of the concerned defaulter(s);
(6) The above does not apply to transactions by dealers where the certificate/invoice issued is not genuine (including hawala transactions). In such cases, no set-off will be granted to the dealer claiming to be a purchaser;
(7) The above should not prevent dealers from adopting such remedies as are available to them in law against the defaulters.”
The High Court has upheld enactment of section 48(5). The Bombay High Court distinguished the judgment of the Punjab and Haryana High Court in the case of Gheru Lal Bal Chand (45 VST 195) (P&H) on the ground that in that case provision like section 48(5) was not available, though petitioner had tried to explain that the provisions in that case were almost similar as under the MVAT Act, 2002. The High Court, while upholding the validity of section 48(5) has expected the Department to follow action plan scrupulously.
From the action plan given by the Department it transpires that the following course of action will be followed by the Department.
(a) The Department will identify the vendors who are defaulters like non-filer of returns, short filer of returns and non-disclosure of sales. This requires assessment of the defaulting vendor. Therefore, unless such assessment of vendor is carried out, no demand can be made on the buyer. The letters issued, as on today, are issued based on mismatch on the computer. However, in light of the above action plan this cannot be the correct position. The buyer can be approached only after assessment of the vendor.
(b) The Department has also to bifurcate Input Tax Credit based on pro rata theory. This also requires assessment of the defaulting vendor.
(c) Refunds to be given subject to the recovery from the vendors. Therefore, the Department has to assess buyers also and keep the record including pro rata allowance of set-off, so as to tally with subsequent refund.
(d) If there is allegation of hawala no set-off will be allowed. However as noted above in the case of Premium Paper and Board Industries Ltd. v. The Joint Commissioner of Sales Tax, Investigation-A & Ors. (W.P. No. 347 of 2012, dated 30-4-2012), for deciding hawala transactions assessment of the buyer will be necessary.
Conclusion
The judgment as on today may bring unexpected liability on purchasers without having any mechanism to protect themselves from defaulting vendors.
We hope that the innocent buyers will get justice from higher forum in due course of time.
We can also understand the anxiety of the Department to collect legitimate revenue of the State. However, it is also necessary to note that the individual buyer cannot bear unexpected burden because of fault on part of the third person i.e., vendor. Therefore, it is necessary to apply the law, keeping best interest of both the sides and it is better that the action plan as given in the judgment is followed in true spirit. The Government can also think of bringing other suitable modalities for giving protection to the innocent buyers, while safe guarding interest of the Revenue.
