Value Added Tax (VAT) basic provisions under the MVAT Act, 2002:

1. Background:

In mid 1960’s, Value Added Tax (VAT) was first initiated in Brazil, in 1970’s it was introduced in European Countries and subsequently introduced in about 130 countries. In Asia, it has been introduced by large number of countries from China to Sri Lanka.

2.VAT in India:

In India, an Empowered Committee of the Finance Ministers of the States has been constituted for the purpose of implementing a nationwide State-level VAT. VAT is a state subject and therefore states will have freedom for appropriate variations consistent with the basic design as agreed upon by the empowered committee. It is a move towards efficient taxation system in India. The government of Maharashtra has implemented VAT from 1st April, 2005 along with other 20 states. We shall now discuss the basic provisions and the scheme of VAT in the state of Maharashtra. 

3.VAT Impact:

• Central Sales Tax is going to be phased out in couple of years.

• Other taxes such as turnover tax, surcharge on sales tax etc. are abolished

• On introduction of the Maharashtra Value Added Tax Act, 2002 following Acts will be repealed:

1. The Bombay Sales of Motor Spirit Taxation Act, 1958

2. The Bombay Sales Tax Act, 1959

3. The Maharashtra Sales Tax on the Transfer of the Right to use any Goods for any Purpose (Lease Act) Act, 1985 and

4. The Maharashtra Sales Tax on Transfer of Property in Goods involved in the Execution of Works Contract (Re-enacted) Act, 1989.

4.What is VAT?

VAT is a multistage tax levied at different stages of production till distribution, on value added, of goods and services. In VAT regime tax is levied at each point of sale and set off or input credit is granted for tax paid on purchases. A following simple example can be considered for understanding the concept of VAT.

5.Some important changes in definitions:

5.1 Dealer:

The scope of dealer is enlarged – any person who buys or sales goods in the State for the purposes of or consequential to his engagement in or in connection with or incidental to or in the course of his business is a dealer.

The scope of a factor, broker, commission agent and auctioneer and non-resident dealer is widened.

The certain class of persons, bodies and entities who sell any goods would be deemed dealer, earlier they were liable for their disposal of discarded material or waste etc. but now they are liable if they sell any goods. In the list of deemed dealer Public Charitable Trusts and port Trusts are included.

5.2 Sale:

The definition of `Sale’ is widened to include

1. the transfer of property in goods (whether as goods or in some other forms) involved in the execution of a Works Contract;

2. the transfer of the right to use any goods for any purpose (whether or not for a specific period) for cash deferred payments or other valuable consideration

3. supply of goods by any association or body of person incorporated or not to a member thereof for cash deferred payment or other valuable consideration.

5.3 Tax:

Tax now means only sales tax (not purchase tax, turnover tax, additional tax or retail sale tax) It also includes amount payable by way of composition. Now, in case of URD purchases, purchase tax shall not be attracted but tax shall be levied at the time of sale of such goods.

6. Incidence of Tax:

6.1 Existing dealer as on 31st March 2005

The existing dealer holding valid or effective Registration Certificate or license under the earlier laws viz. (i) The BST Act, 1959 or (ii) The Bombay Sales of Motor Spirit Taxation Act, 1958 or (iii) Right To Use Act and or (iv) The works Contract Act and who is liable to pay tax under any of the earlier laws and turnover of sale or purchases has exceeded Rs. 5 Lakhs except Importer whose turnover of sales or purchases has exceeded Rs. 1 Lakh in F. Y. 2004-05 would be liable to pay tax under the MVAT Act, 2002 w. e. f. 1st April, 2005. 

6.2 New Dealers

In the case of dealer other than above i. e. a new dealer who starts business on or after 1st April, 2005 following turnover limits would be applicable.

Above turnover limit does not apply in the case of transferor or transferee of business or who has obtained voluntary Registration under this Act.

7. Registration:

7.1 Existing dealer under the Bombay Sales Tax Act, 1959

The registration Certificate issued under the Bombay Sales Tax Act, 1959 and which is in force on 31st March, 2005 shall be deemed to be the Registration Certificate issued on 1st April, 2005 under the MVAT Act and the holder thereof shall be deemed to be a Registered Dealer under the MVAT Act till such Certificate is cancelled.

7.2 Existing dealer under the earlier law (other than the BST Act, 1959)

The dealer who does not hold registration under the Bombay Sales Tax Act,1959 on 31st March,2005 but holds registration under any other laws enumerated above such as Works Contract Act or Lease Act, his registration under that law shall cease to be effective on 1st April, 2005. He will have to apply for registration under the MVAT Act within prescribed period.

7.3 New dealers

In the case of dealer other than above i. e. a new dealer who starts business on or after 1st April, 2005 shall require to obtain registration within 30 days from the date on which the turnover exceeds the prescribed limits. The application for registration shall be filed in Form No. 101 with the registering authority along with necessary documents.

A dealer may apply voluntarily without attending the prescribed turnover limit. In such case a Sales Tax Practitioner or a Chartered Accountant or a Cost Accountant or an Advocate or dealer holding registration for not less then five years shall introduce him. A dealer applying for voluntary registration shall be required to pay fees of Rs. 5000/- and Rs. 25000/- as adjustable deposit.

7.4 Change in constitution or succession to business or Shifting of business premises

In case of succession to business is due to death of dealer the application for fresh registration shall be filed within in 60 days from the date of death of a dealer.

In other case of Succession to business or change in Constitution application for fresh registration shall be filed within 30 days from the date of specific event.

No fresh registration required in case of shifting of business, however an intimation of such change shall be made to sales tax authorities within 30 days.

8. Tax Liability:

As per Section 6 of the MVAT Act, 2002 every dealer including a Factor, Broker, Commission Agent, Del- Credere Agent, Mercantile Agent, Auctioneer, Non – Resident Dealer or his Agent are liable to pay tax on the turnover of Sales of goods specified in the Schedule at the rate set out against each of them in the schedule. The Schedule rates are as follows:

9. Returns:

a. Complete and self-consistent return:

Every registered dealer has to file correct, complete and self-consistent return. Its form, its date and periodicity are prescribed by rules.

If the return is not complete and self consistent the commissioner may serve notice within four months of the date of filing return, serve the notice showing defect and the registered dealer has to correct the defect and submit fresh complete and self consistent return within one month of such notice.

 In case a registered dealer fails to submit complete and self-consistent fresh returns within one month it would be presumed that no return is filed.

If any omission or incorrect statement is discovered by the person/dealer he may furnish revised return any time before notice of assessment is served or before expiry of a period of six months from the end of the year to which return relates whichever is earlier.

b. A periodicity of the filing of returns is as follows:  

Note:

1. In case where return is not filed, Assessing Officer may pass Best Judgment Assessment Order under section 23 without issuing any notice.

2. Tax liability should be computed after considering CST and Set off.  

Details of Form to be filed by various dealers 

10. Tax Invoice:

a. A dealer registered under VAT may issue to the purchaser a `Tax Invoice’. It should contain following particulars.

• The words “ Tax Invoice” in bold letters at the top or at any prominent place.

• The name, address and registration certificate number of the selling dealers.

• The name and address of the purchasing dealer.

• Invoice number and date.

• Description of the goods, the quantity or as the case may be, number and price of the goods sold and the amount of tax charged thereon indicated separately.

• signed by the selling dealer, or his servant, manager or agent duly authorised by him.

• The Tax Invoice shall contain Certificate as prescribed by Rule 77.

b. (i) A Dealer registered under VAT may issue Bill/Cash-memo instead of Tax Invoice. A Bill or Cash-memo should contain Sr. No., Date, Signature, Name, address and registration certificate number, description of goods, quantity and price of the goods. It should also contain prescribed Certificate as per Rules.

(ii) In case of Bill/Cash-memo VAT cannot be charged separately. There is no bar on issue of Bill or Cash-memo to other registered dealer but, in such a case said dealer will not be entitled to claim set-off of VAT paid by him on his purchases.

c. The copies of Tax Invoice, Bill or Cash-memo are required to be retained for the period of three years.

11. Calculation of tax liability where tax is not collected separately

As per Rule57 (1) in a case where dealer has not charged VAT separately in the Invoice/Bill, It will be presumed that sales amount is inclusive of VAT and accordingly tax amount will be worked out. This can be easily understood with the example.

For example:

Sale price

(Inclusive of VAT):  Rs. 100/-

Rate of tax: 4%

Tax amount would be worked out as follows:

Rs.100  * 4/104  = Rs. 3.85

As explained earlier, in such a case purchasing dealer will not get set-off of tax paid by him on his purchases.

12. Set-off Rules:

a. Set-off can be claimed of tax paid on purchases effected on or after 1st April, 2005 as follows:

1. Set-off can be claimed only by registered dealers. However w.e.f. 08.09.2006, it is provided that purchases of capital assets after 01^st April of the relevant year in which registration is obtained then setoff will be available on such purchases though at the time of such purchases the dealer was not registered. Similarly on purchase of other goods also setoff will be available if they are not sold/consumed etc till date of registration.

2. Set-off can be claimed in respect of taxes paid on goods purchased for trading, manufacturing, works contract or leasing.

3. Set-off can be claimed only in respect of goods purchased under Tax-Invoice and only of the tax charged separately in tax invoice.

4. Set-off can be claimed in respect of Entry tax paid if any.

5. No set-off can be claimed in respect of CST paid on purchases i. e. Set-off can not be claimed in respect of OMS purchases.

b. Set-off can be claimed in respect of following purchases made in the state of Maharashtra:

1. Raw material purchased for production

2. Fuel

3. Goods purchased for trading

4. Other purchases debited to profit and loss account such as printing and stationery etc.

5. Capital goods and it’s spare parts, components and accessories (However no set-off can be claimed in respect of taxes paid on purchases of Jewellery, Office equipment and Furniture & Fixture). However w.e.f. 08.09.2006 setoff on office equipments and  furniture & fixtures shall be available after retention at prescribed percentage.

Set-off can be claimed immediately on purchase of the goods as listed above.

c. Reduction in set-off in respect of certain purchases:

e. No set-off can be claimed in respect of following purchases of goods (Negative List):

1. Motor Vehicles, treated as capital asset and their parts, components and accessories. (Dealers in Motor Vehicles or Leasing of Motor Vehicles entitled to setoff)

2. Motor Spirits unless resold or stock transferred.

3. Crude oil, if used by Refinery for refining.

4. Dealer principally engaged in job-work or labour work and not engaged in manufacturing of goods for sale by him and obtained waste/scrap goods, which is sold, then no setoff.

5. Incorporeal or intangible goods like Trademark, Patents, Copyrights, and Simcards etc. not eligible for setoff. However, Import licences, Exim scrips, export permit/Licence/Quota and DEPB and Software purchased for resale are eligible for setoff. The copyrights will be eligible for setoff if they are resold within 12 months from the date of purchase.

6. Purchases effected by way of Works Contract (WC) where the contract is for erection of immovable property.

7. Purchases of Building Materials, which are not resold but are used in the construction activity.

8. Purchases of Indian made foreign liquor or country liquor if the dealer has opted for composition.

f. Other conditions to claim setoff:

1. Only VAT charged separately under Tax Invoice would be allowed to setoff.

2. Setoff shall not exceed the amount of tax actually paid on purchases.

3. Setoff to be adjusted against VAT/ CST payable for same period. Excess setoff in a particular period in same Year shall be carried forward to next period in same year.

4. In case where turnover of sale is less than 50% of the Total receipt, setoff would be allowed only on purchases of those goods and packing material which are sold and not on entire purchases.