Delhi VAT Amendments ON INPUT TAX CREDIT w.e.f. 01.04.2010

WELCOME Delhi VAT AmendmentsONINPUT TAX CREDITw.e.f. 01.04.2010 Rakesh Garg, FCA

Amendments in Rate of Tax Four Entries – If the goods cost more than the specified amount – higher rate of tax is attracted. • Readymade Garments costing more than 5000/- • Mobile Phone costing more than 10000/- • Writing Instruments costing more than 1000/- • Watches costing more than 10000/- • Meaning of the term “costing” • What will happen if goods are sold inclusive of tax, at a lump-sum price.

Amendments in ITC – A Glance • No input tax credit on closing stock held at the end of the tax period – Section 9(1) read with Rule 6A(1) • No input tax credit if output tax has not been paid by the selling dealer – Obligation casted upon the purchasing dealer and duty of verification upon the A.A. – Section 9(2)(g) read with Rule 6A(2) and 34(9) • Restrictions on input tax credit if goods are sold below purchase price, otherwise than in normal circumstances – Section 10(5) read with Rule 6A(3) & (4)

Scheme of DVAT 1. Buy materials against tax Invoice. 2. Claim ITC as per un-amended Section 9 without any requirement of sale or put up for sale. 3. Refund u/s 38 is possible whether goods are sold or not. 4. Carry forward of input tax is permitted u/s 11. 5. No condition that ITC will be restricted to the extent of goods sold. 6. Simpler returns. Opening Stock and Closing stock details not required to be given, no one to one reconciliation to be done.

Scheme of DVAT 7. No responsibility on purchasing dealers to ensure tax payment by the selling dealer. 8. No condition that ITC will not be allowed unless selling dealer deposits the tax or law fully adjusts by filing the correct return. 10. No stoppage of refund if selling did not deposit the tax if tax invoice was available. 11. Goods can be sold at a price lower than the purchase price – no questions asked.

Input Tax Credit – 9(1) Amendment in Section 9(1) “Subject to sub-section (2) of this section and such conditions, restrictions and limitation as may be prescribed, a dealer who is registered or is required to be registered under the Act shall be entitled to a tax credit in respect of the turnover of purchases occurring during the tax period to the extent of proportion of the goods which have been put to sale in the course of his activities as a dealer and the goods are to be used by him directly or indirectly for the purpose of making…………..” Substituted for “where purchases arises”

Input Tax Credit – 9(1) • Rule 6A (1) For the purpose of working out the entitlement of tax credit under sub-section (1) of section 9 of the Act of the extent of proportion of the goods which have been put to sale during the tax period, the input tax credit on the closing stock available with the dealer at the end of every tax period shall be carried forward to the next tax period or the following tax period or periods, as the case may be, till such stock is sold by the dealer;

Input Tax Credit – 9(1) • Proviso to Rule 6A(1) Provided that this sub-rule shall not prevent the claim of refund of a dealer - for sales already effected during the relevant tax period or - to a dealer who makes sales in the course of exports out of India, - or in the course of inter-state trade and commerce, or, - in such cases where the dealer being a manufacturer is required to make purchases of raw materials taxable at a higher rate of tax, while the sales of goods manufactured by him (not being goods exempt under section 6 as specified in the first Schedule to the Act) are taxable at the lower rate under the Act.

Input Tax Credit – 9(1) NO Adverse Impact on: • Dealers making Stock Inwards; • Dealers making Central Purchases; • Dealers making Imports; and • Dealers procuring goods on the basis of confirmed orders. Implications In general, if the dealer is selling goods locally only, and at a profit, he needs to pay some tax to the Government every tax period. That is, a tax on value addition.

Input Tax Credit – 9(1) • IMPLICATIONS • Meaning of the terms : • Put to sale • Proportionate • Significance of the Proviso to Rule 6A(1) • Do we require one-to-one correlation and proper maintenance of tax rate wise stock records mandatorily • Investment in closing stock goes up to the extent of tax paid on such stock • Litigation might go up – Default assessment • Trading A/C of dealer will finalised by next 28th April - Adjustments

Input Tax Credit – 9(1) • Maintenance of Stock Records: • Maintain comprehensive Stock Records showing: • Tax – Rate wise • Local Purchases, • Central Purchases, • Transfer Inwards, • Local Sales, • Central Sale, • Transfer Out. • Make calculation and valuation of stock at the end of every tax period

Input Tax Credit – 9(1) • Practical Solution (Alternative Method) • It is practically impossible to value tax-rate wise stock every month/quarter even if stock records are maintained practically • Therefore, calculate the purchase price of Sales and input tax credit on closing stock on proportionate basis – G.P. Ratio Method

Input Tax Credit – 9(1)

Input Tax Credit – 9(1) • Proportionate Method - Complexities • Traders : To ascertain the tax rate wise cost of goods sold In case of stock transfers- Separate Transfer Note to be prepared – Rate wise goods • Manufacturers :To ascertain the tax rate wise cost of goods consumed. Difficulty will further increase if number of products with different sale price are manufactured by the dealer. Requires a fair and reasonable guess work, which is also acceptable to the Department.

Input Tax Credit – 9(1) TRANSITION PROVISIONS AS ON 1.4.2010: • Provisions came into force w.e.f. 1.4.2010 • Eligible for refund or carry forward, as the case may be, on stock as on 31.3.2010 • Returns for tax period commencing 1.4.2010 – Show Opening Stock as NIL • Value tax-rate wise stock (at cost or market value w.e.i. less) as at 31.03.2010 – Which should also match with your Balance Sheet – If wants to take benefit of carry forward on such stock (held on 31.03.2010)

Input Tax Credit – 9(1) PROCUREMENT POLICY: • Segregate the purchases into fast moving goods and slow moving goods • Make cost benefit analysis – CST burden vs. Interest on ITC • If beneficial, make purchases from neighboring States • In many cases, the dealer procures raw material locally and transfers the majority of manufactured goods from Delhi and reverses ITC u/s 9(6) – Procure raw material from NOIDA – neither section 9(1) [closing stock] nor section 9(6) will be invoked – No hassles

Input Tax Credit – 9(2)(g) Amendment in Section 9(2)(g) – New Clause: No tax credit shall be allowed - • (g) to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period.

Input Tax Credit – 9(2)(g) Rule 6A(2) Before allowing the claim of input tax credit to a dealer, the assessing authority may satisfy himself that the conditions laid down in clauses (g) of sub-section (2) of section 9 of the Act are also satisfied. Rule 34 (9) Before allowing the claim for refund to a dealer under section 38 of the Act, the Authority concerned shall satisfy himself that the conditions laid down in the clause (g) of sub-section (2) of section 9 of the Act are fulfilled.

Input Tax Credit – 9(2)(g) IMPLICATIONS: • Burden of ensuring tax is paid shifted from selling dealer to the purchasing dealer. • Implement issues - When seller and buyer are having different tax periods • Not the responsibility of buyer to ensure the above conditions but he has to face the consequences. No control over the activity of selling dealer • Perhaps ultra vires the powers of the State Government as it changes the basic fabric the VAT Legislations and also changes the concept of sales tax as such, and moreover, impractical.

Input Tax Credit – 10(5) Amendment in Section 10(5) – New Clause (5)Where the goods which have been purchased by dealer are sold at a price lower than the price at which it was purchased by the dealer, the tax credit on such purchases shall be reduced proportionately in the tax period during which the goods are sold. Explanation – the credit claimed on a particular purchase shall not exceed the amount of tax payable on its sale.

Input Tax Credit – 10(5) To reduce the rigour of Section 10(5) : - Rule 6A(3): The provisions of sub-section (5) of section 10 of the Act relating to proportionate reduction of tax credit on purchases of goods sold at a price lower than the purchase price shall apply to the cases where, during the tax period, the dealer receives credit note or notes from the selling dealer on account of discount, commission, rebate, remission in price or incentive, or by whatever name called.

Input Tax Credit – 10(5) Rule 6A(3)- contd..: Explanation- For the removal of doubt, it is hereby clarified that the provisions of sub-section (5) of section 10 of the Act shall not apply to a case where in the ordinary course of business the goods are sold by a dealer at a loss. Rule 6A(4): In the cases where the sale has been made at price lower than the purchase price in Pursuance of the administered prices of the oil companies, that is to say, Indian Oil Corporation, Hindustan Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd. the provisions of section 10(5) shall not apply.

Input Tax Credit – Form 16 (I) Break-up of purchases in Column R6.2: • In the revised Form DVAT-16, the dealer shall give the break-up of all local purchases (tax-rate-wise). • These details might facilitate the assessing authority to compare the tax-rate wise purchases vis-à-vis sales from the return form itself.

Input Tax Credit – Form 16 Annexure-2A & 2B of Form DVAT-16: • The dealer shall also attach copy of month wise summary of Sale and Purchase registers maintained in Form DVAT-30 & 31 in Annexure-2A & 2B of the Return Form DVAT-16. • This should be reported dealer wise instead of bill & date wise. Sale/purchase made from un-registered dealers may be reported in one row for a month.

Input Tax Credit – Form 16 Annexure-2A & 2B of Form DVAT-16: • It may be noted that the dealer has to furnish the details of all local and central purchases and sales, stock transfers inwards and outwards and exports and imports in these Annexures. • A special care is required, particularly to the purchasing dealer while providing this information since a wrong TIN of selling dealer might deprive him from the benefit of input tax credit.

Input Tax Credit – Form 16 Annexure-2A & 2B of Form DVAT-16: • Moreover, the purchasing dealer must enter his purchases in the month of purchase itself (i.e. in the month in which, the selling dealer has shown his sales in his DVAT-31on the basis of date of invoice), to avoid any variance. • Since dealers are providing summary only, it will be difficult for the purchasing dealer to reconcile in case of any discrepancy.

Amendments OVERALL – TO CONCLUDE Although the purpose of these amendments is to plug the loop-holes and ensure the better compliance of Law, but the manner in which these have been brought, is certainly impractical for the trade as well as professionals, and moreover, is against the basic scheme of VAT.

THANK YOU Rakesh Garg, FCA Ph: (011) 65960912-13, 9810216270

Delhi VAT Amendments ON INPUT TAX CREDIT w.e.f. 01.04.2010