Vat: resolve inter-state transactions

Font Size

Print

Feedback

Email

Discuss

: We manufacture products for the defence ministry, and supply to ordnance factories in our state, Maharashtra. We pay 4% tax against Form-H, plus the turnover tax and a surcharge. The state has abolished Form-H under the new Vat regime from April 1, and imposed 12.5% Vat on our products. Our competitors in other states could supply to the ordnance factories by charging 4% tax on Form-D, while being in the same state we will have to charge 12.5%. As the orders placed by the factories are on the basis of landed cost inclusive of taxes, we have become un-competitive in our state.

— Shanti Arms-Tech Pvt Ltd; Miltech Industries, Dhruv Containers, Priya Preci Comp; Shanti Metal Feb: Nagpur

The anomaly is not just Maharashtra specific, but prevails in most Vat states. This has arisen because of non-clarity on inter state tax / central sales tax. The first problem, as described by you, occurs when a unit, if supplying an item imposed with 12.5% Vat to infrastructure utilities and government agencies in its own state, would be at a disadvantage with units in other states, as the these consumers could buy the product at 4% CST. It would have trade diversions across the states with repercussions for large number of industries.

Second, the present CST rates in the Vat regime are set to increase the divide between the poorer, in particular, the Bimaru states and industrialised states. Most units in poor states buy their inputs from industrialised states and sell their output to them. With no set-off available for their input tax, they are likely to become un-competitive by 4-8%. Unfortunately, Vat has been implemented without resolving the complex issues of inter state transactions. Each state defines products differently. Convergence of Vat rates is still far away. The recent clarification that states have agreed to put same Vat rate on industrial input will not solve the problem because any product can be an input for another industry. It would start another debate as to what constitutes ‘input’, and what ‘output’. And, for the CST phase out, the central government has indicated a road map of two years. Two years could prove too long a period, for small industries to withstand the adverse inter- state trade flows.

The solution of the problem requires three steps to be taken urgently. One, the classification of products should be same in all states (based on ITC-HS). Two, Vat rates on the products should be uniform. Three, CST should be made zero without delay.

We would appreciate if our following concerns could be addressed. 1)Section 145A (Finance {No.2} Act 1998 w.e.f.1.4.1999) mandates that for the purpose of computing profit and taxable income of any manufacturing concern, the value of closing stocks/inventory should be adjusted to include the amount of excise duty applicable. Income Tax is being levied on excise duty, and worse, on deemed excise duty on goods still to be sold. Even if the modvatable excise duty on inputs is considered, the deemed excise duty on the remaining amount of value addition due to processing and manufacturing costs is not set-off until products are sold, duty collected from the customer and then paid as per the statutory rules. Excise duty, in our perception is only a statutory levy, passed on to the government. No income tax should be charged on this, as it is not the assessee’s income.

2) The commerce minister recently stated that the proceeds of sale of DEPB licences do not form part of the taxable income and that CBDT/concerned departments would issue a formal circular. We have not found any formal statement, so far. We hope this will hold good with retrospective effect.

—NC Vaish, Kanpur Metal Products

Both the issues raised by you are under active consideration of relevant Excise and Income Tax authorities. Final clarification is expected soon.

Do I need to get registered in the service tax department, as I am planning to start my own placement training and consultancy and do not have preceding year record? Do I get registered next year after seeing the performance this year?

—RK Dhanvada, Hyderabad

If you think that the value of your services are likely to exceed the stipulated threshold of Rs 4 lakh in one year, it is better to get yourself registered from the start. First, you could charge the service tax from the customer from day one. Second, you could also claim set-off of the service tax you would have paid on other services, which you would have used as inputs while providing the service such as on telephone, internet etc. In case you fail to envisage that in the beginning, you are liable to pay service tax on the entire amount (4 lakh+) of services even if you have not collected it from the consumers.