U.P. VAT: RECENT CHANGE IN ITC POLICY
By Keshav Dayal
Ex Member Tribunal, U.P. Trade Tax
Certain provisions of the U.P. Vat Act, 2008 have been amended by the Uttar Pradesh Mulya Samvardhit Kar (Sanshodhan) Adhiniam 2010 (U.P. Act 19 of 2010). Apart from amendments in certain other sections of the Act, section 13 of the U.P. Vat Act, 2008 which relates to admissibility of input tax credit (herein after in this article referred to as ITC) has also been amended. Sub-section (1) of section 13 of the Act, provides the circumstances in which and the extent to which ITC shall be claimed and allowed. Prior to enactment of Amendment Act, sub-section (1) had 5 clauses (a), (b), (c), (d) and (e). By the amending Act, after clause (e), a new clause (f) has been added as under:-
"(f) Notwithstanding anything to the contrary contained in this sub-section where goods purchased are resold or goods manufactured or processed by using or utilizing such purchased goods are sold, at the price which is lower than –
(i) purchase price where purchased goods are resold; and
(ii) cost price of manufactured goods where purchased goods are used in manufacture of such goods,
the amount of input tax credit shall be claimed and be allowed to the extent of tax payable on the sale value of goods or manufactured goods:"
The newly added clause provides that where a trader or manufacturer suffers loss on resale of purchased goods or on sale of goods manufactured by using purchased goods, amount of ITC computed shall be the amount of tax payable on sale of goods where goods are resold and the amount of tax payable on manufactured or processed goods where purchased goods have been used in manufacture of goods sold.
For the purpose of analysis, we take an example of a trader who makes purchase of goods taxable @13.5% (inclusive of additional tax) for Rs.1,00,000/- and sells such goods against Form-C in the course of inter-state trade or commerce for Rs.98,000/-, then amount of tax –
(1) paid on purchase will be = 13,500.00; and
(2) payable on sale will be = 1,960.00.
Here we see that before, addition of clause (f), the trader was entitled for claiming ITC of Rs.13,500.00. But after addition of clause (f), since he has resold goods at a price lower than the purchase price, he will be entitled for claiming ITC of only Rs.1,960.00. Therefore, he will have to pay Rs.11,540.00 from its own pocket.
Also there may be cases in which rate of tax on sale of manufactured goods may be higher than the rate of tax applicable to raw materials fuels, etc. for example, sale of machinery made of Iron-steel attracts Vat rate of 13.5% where as its raw material attracts Vat rate of 4%. In such cases, even if manufactured goods are sold at a price which is lower than the cost price, amount of tax on sale of manufactured goods may be much higher than tax on purchase of goods used. For such a case, limit of input tax credit could not be related to amount of tax on sale price of manufactured goods.
In trade of bullion, we all know that there is day to day fluctuation in rates. In other trades, where there is fall in price, trader is bound to sell its earlier purchased goods at a price lower than the purchase price. In all such cases traders will have to pay tax from their profit or out of their capital where there is net loss.
In cases of manufacture of goods, sometimes, the goods produced are of inferior quality and then they are sold at a price lower than the cost price. In those cases also, the manufacturer will have to pay differential amount of tax from its pocket.
Resale of goods in the course of export of the goods out of the territory of India also has not been kept outside the restriction imposed. In that case ITC will be reduced to Zero.
Used machinery is always sold at a price lower than the purchase price. Old stocks are sold at a price lower than the purchase price or cost of manufacture. In industries, under modernization, machines being used earlier are replaced by new and more efficient machines. In such cases earlier machines are sold at a price lower than their purchase price.
Fertilizer manufacturers, under the policy of Central Government, sell fertilizer manufactured by them at a price lower than the cost of manufacture of such fertilizer. Where food grains are sold to BPL people through Public Distribution System, they are sold at a price which is less than their purchase price. Where a rice manufacturer supplies rice under levy scheme, sale price of rice remains less than the cost of manufacture of such rice.
A careful reading, of sub-section (1) of section 13 of the Act, reveals that word “resold” used in clause (f) covers all types of re-sales viz. resale inside the State, resale in the course of inter-state trade or commerce and resale in the course of export of the goods out of the territory of India. In the table of sub-section (1), against Entry 1, all three types of re-sales have been covered.
Assuming that provision has been made to prevent tax evasion by dealers who, in order to evade payment of tax, declare sale at lower price, then it equally punishes the honest or bonafide dealers. In the process, innocent dealers will also be punished. If intention behind enactment of the clause has been prevention of evasion of tax, then the Act has sufficient provisions for determination of sale price of goods and amount of tax payable. The U.P. Vat law already contains suitable provisions for this.
Also newly added provision presents practical difficulty in working out the amount of ITC, especially in cases where purchased goods are used in manufacture of other goods. It will be difficult to compute the amount of ITC admissible.
So far as it is related to construction of the newly added clause one can notice that main sub-section (1) of section 13 of the Act, requires –
1. the class or classes of dealers to whom input tax credit be available;
2. specification of taxable goods in respect of which input tax credit will be available;
3. extent of input tax to which credit of input tax will be available; and
4. conditions and restrictions subject to which input tax credit will be available.
Amount of input tax credit is in terms of amount of input tax. Term “input tax” has been defined in clause (p) of section 2 of the Act. Opening paragraph of sub-section (1) does not differentiate in between Vat Goods and Non Vat Goods.
On examination of clause (f), one can find that –
1. the clause does not specify the dealer; therefore it will apply to all dealers.
2. the clause does not speak that input tax credit will be allowed only in respect of Vat goods, therefore, it also apply in case of non Vat goods.
3. where in case of manufactured goods, tax payable on sale price of goods will exceed the amount of input tax on purchase of goods used in manufacture of goods due to higher rate of tax on sale of manufactured goods than the rate of tax on purchased goods, the clause permits input tax credit of amount greater than the amount of input tax.
In my opinion, intention behind enactment of the said clause had been to curtail the extent of amount of input tax credit admissible under clause (a) of sub-section (1) of section 13. Enacted clause does not provide new category of goods. It provides circumstances and in the given circumstances puts a restriction on extent of amount of input tax credit. The object could have been achieved in a valid manner by adding a proviso in clause (a) of sub-section (1) of section 13 providing restriction on extent of input tax credit or by adding a new sub-section providing restriction in reference to clause (a) of sub-section (1). Cases of export of goods should have been excluded.
The object which had been targeted could have been achieved by reducing the amount of input tax credit, in case of resale of goods, in the ratio of sale price to purchase price of goods and in case of manufactured goods, in the ratio of sale price to cost price of manufactured goods.
On comparison of English version and Hindi version, we find that there is minor difference in language used. English version speaks of “goods are sold at a price” where as Hindi version speaks about “kar ki dar par vikray”.
In my opinion, apart from legal controversies, the added clause takes away the basic nature of Vat as indirect tax. In specified cases, dealers have been denied benefit of amount of tax paid by them. The provision is against the objects of Vat.