An Analysis of Latest Amendments in DVAT

An Analysis ofLatest Amendments

in DVATby

CA, Virander Chauhan98101-37128

At Shastri Nagar CPE Study CircleOf NIRC of ICAI

Dated: 16-Apr-10

DVAT Experience-5 years

• Rate of growth in revenue 25%-it is highest in India.

• Highest Compliance Rate in Delhi.• 60% Growth in KCS.• Bogus ITC/Refund scam of more than 500

crores by about 220 dealers.• All dealers are at payoff due to fraud by

some dealers.• DVAT is simple or difficult-you decide.

Latest Amendments

• On 16-Dec-09, DVAT (Amnd.) Bill was introduced-sections 4,9,10,74,74A and 103 were proposed to be amended.

• This bill became an Act on 06-Jan-10.• Sections 4, 74, 74A and 103 were made

effective from 13-Jan-10.• Sections 9 and 10 were made effective from 01-

Apr-10.• New Rule 6A and 34(9) were also introduced

w.e.f. 1-Apr-10.

Latest Amendments

• Section 4: made Sch-III items to be taxable @ 5% (except declared goods).

• Section 74(10): Now pending DST cases shall be disposed off in six years.

• Section 74A: Revision-made effective with retrospective effect from 01-Apr-05.

• Section 103: Commissioner given more powers to amend Schedule-VI.

Latest Amendments-in Ratesw.e.f. 01-Apr-10

From 0% to 5%

• Bio-inputs like bio-fertilizers, micro-nutrients and Plant Growth Promoters.

• Kerosene-Stoves, Lanterns and Petromax and their spares.


From 5% to 12.5% -Sch./Entry• Fertilizers -III/20 • Plastic and Tin Containers -III/118• House-Hold Plastic Items -III/165• Fittings for doors -III/166• Paints Brushes -III/168• Wood, Timber -III/169• Tractor Tyres and tubes -III/171• Wire mesh and Metal Mesh -III/179


From 5% to 12.5%-Cond… -Sch./Entry• Desi Ghee -III/181 • Glucose-D -III/182• Locks-III/184• Weights and Measures -III/185• Fibre board and particle board made out of

agricultural wastes like Bagasse -III/186• Cutlery items -III/6


From 5% to 12.5%-Cond…• Mobile phone and all mobile accessories costing

above rupees ten thousand -III/41 • Inverters and their parts -III/41A(7)• Readymade garments costing above rupees five

thousand -III/57• Writing instruments costing above rupees one

thousand per piece -III/76• Dry fruits and kesar and magaj -III/81


From 12.5% to 20% -Sch./Entry

• Diesel -IV/1(v)

• Aerated Drinks -IV/11

• Watches costing above rupees five thousand -IV/12


From 12.5% to 0% -Sch/Entry• Oral Iron Chelator Defarasirox -I/76 From 4% to 0%• Liquefied Petroleum Gas (LPG) for

domestic use -I/77

Issue: Cut off point for Mobile phones, pens, watches, readymade garments may be at the selling price.

ESSENTIALS of DVAT

• Tax on Value Addition• Prevalent World Over• Easy to Administer• Self Enforcing Mechanism• No Cascading of Taxes• Invoice Method of accounting-Cash or

Mercantile• Admn. Machinery failed-hence amendments

Amendments a Bird Eye

• No ITC on Closing Stock• Invest more in working capital• Pay tax on each tax period• No ITC on goods sold at lower price• Purchaser to get verified the seller’s affairs• Section 9 & 10 amended whereas section 8 not

got amended• DVAT 30/31 to be filed with each return• To declare ITC in Opening and Closing Stock• Admn. failure hence amendments

Bird eye on some sections

• Sec 2(1)(zd): “sale price”/”purchase price”- means the amount paid or payable as valuable consideration for any sale, including- (i) to (vii); less- any sum allowed as discount…

• Sec 3: Imposition of tax-charging section.• Sec 4: Rates of tax.• Sec 5: Taxable Turnover.• Sec 6: Sale exempt from tax.• Sec 7: Certain sales not liable to tax.

Bird eye on some sections

• Sec 8: Adjustment to tax on account of variance in sales-like sales returns, bed debts etc., change in consideration etc. /Rule 7A

• Sec 9: Tax Credit/Rules 6 & 7• Sec 10: Adjustment to tax credit/Rule 6 & 7• Sec 11: Net Tax• Sec 12: Time at which turnover, turnover of

purchases and adjustment arise• Sec 38: Refund of excess tax

Section 9(1)Rule 6A(1)

Section 9(1)-Subject to sub-section (2) of this section and such conditions…….. as may be prescribed, a dealer who is registered…….. 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 used by him directly or indirectly for the purpose of making-sales u/ss. 3 or 7.


Rule 6A(1): For the purpose of working out the entitlement of tax credit under sub-section (1) of section 9 of the Act to 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:


PROVIDED that this sub-rule shall not prevent the claim of refund of a dealer-

• who makes sales in the course of exports out of India, or

• in the course of inter-State trade, 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 are taxable at the lower rate under the Act


Contentious Issues:• ‘put to sale’ not defined in any Act, except ‘put

to use’ in IT Act. [Siv Indust. 187 Taxman 442 (Mad)/Nahar Exports 163 Taxman 518 P&H)]

• meaning of ‘put to sales’ cannot be restricted to goods other than goods for self consumption, donation, gifts, goods destroyed, obsolete etc, since such goods are already denied for ITC under the erstwhile Act.

• ‘put to manufacture’ not considered.


Contentious Issues:• WC, RTU like leasing companies are also

applicable.• In HP ITC is not allowed until goods are

sold.• In HAR refund of ITC is not allowed until

goods are sold.• The words “who makes sales” are not free

from litigation


Contentious Issues:• One to one correlation not possible• Working capital will go up• ITC only when goods are sold• To deposit tax every tax period• Prepare rate wise trading a/cs• Claiming refund may be history• No ITC even to dealers in exception category

Section 9(2)(g)/Rule 6A(2)

Section 9(2)(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.


Rule 6A(2): Before allowing the claim of input tax credit to a dealer, the assessing authority may satisfy itself that the conditions laid down in clause (g) of sub-section (2) of section 9 of the Act are also satisfied.


Contentious Issues:• No corresponding duty imposed on the

selling dealer to provide information to the purchasing dealer.

• No procedure laid down in rules how to verify the ITC being deposited by the selling dealer. Chunnilal Parshadilal SC 62 STC is worth noting.

• Impossible to do when there is a chain.


Contentious Issues:• The word ‘adjustment’ should be ‘included’• Fraud made legal like in section 68 of the

IT Act. Source of source can not be verified. Similarly only sellers affairs need to be verified. Seller’s seller affairs need not be verified

• Bogus ITC billing in Non-refund cases still cannot be caught


Contentious Issues:• What to do when the chain is not

defaulter but the first dealer in the chain is defaulter. Whether the ITC of all subsequent dealers will be denied and their entire sales will be liable to tax.

• When diff tax period-how to reconcile.• VATO will contravene either 38(3) or 9(2)

(g).


Contentious Issues:

• First the purchasing dealer will pay-then the selling dealer will deposit-dual responsibility.

• Difficult to know that the supplier is dubious.

• Paper Work will increase.

• No opportunity of being heard.


Contentious Issues:

• Principles of natural justice violated-No opportunity and not liable to get verified the affairs of the seller.

• Provision Prone to more corruption.

• The provision must be challenged through a writ.


Contentious Issues:• No such provisions exist in any other State.• In HAR Sec 8(3) provides for obtaining a

certificate from the selling dealer-and the onus is on the revenue to very the seller’s affairs at the time of any proceedings.

• WB-Section 22(3) is there but the responsibility is on the revenue.


Section 8(3) of HAR VAT: Where any claim of ITC in respect of any goods sold to a dealer is called into question in any proceeding under this Act, the authority conducting such proceedings may require such dealer to produce before it in addition to the tax invoice …, a certificate furnished to him in the prescribed form by the selling dealer; and such authority shall allow the claim only if it is satisfied after making such enquiry as it may deem necessary that the particulars contained in the certificate produced before it are true and correct.


Section 22(3) of WB VAT: Where a regd. dealer, without entering into a transaction of sale, issues to another dealer tax invoice with the intention to defraud the Govt. revenue, the Commissioner may, after making such enquiry as he thinks fit and after giving the dealers a reasonable opportunity of being heard, deny the benefit of ITC to such dealers issuing or accepting such tax invoices, either prospectively or retrospectively, for the full tax period from such date as he may deem fit and proper.

Section 10(5)/Rule 6A(3) & 6A(4)

Section 10(5): where the goods which have been purchased by a 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 tax credit claimed on a particular purchase shall not exceed the amount of tax payable on its sale.


Rule 6A(3): The provision of sub-section 5 of section 10 of the Act relating to proportionate reduction of tax credit on purchases of goods sold at a lower price 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.


Rule 6A(3) Cond…

Explanation-For the removable 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 Ltd. and Bharat Petroleum Corporation Ltd. the provisions of section 10(5) shall not apply.


Contentious Issues:• One to one reconcile not possible.• Deptt should not guide us how to do biz.-like

bullion, hi-tech goods, electronic, mobile traders.• Sale/Purchase price already defined in the Act.

Sec 2(1)(zd).• Provisions are against revenue.• Old litigations reg. incentives may be positively

effected.• Credit note means notice for audit.


Contentious Issues:• Sec 8(1)(c): adjustment to tax credit-the

previously agreed consideration for that sale has been altered by agreement with the recipient, whether due to the offer of a discount or for any other reason.

• It is against the principle of basic invoice method.

• The words ‘during the period’ is important in rule 6A(3) whereas adjustment is to be made when goods are sold in section 10(5). Both are contradictory.

Section 38/Insertion of Rule 34(9):

Section 38:

Subject to the other provisions of this section and the rules, the commissioner shall refund to a person the amount of tax, penalty and interest, if any, paid by such person in excess of the amount due from him.

Section 38/Insertion of Rule 34(9):

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 clause (g) of sub-section (2) of section 9 of the Act are satisfied.

Amendment in Form DVAT-16

R.5.2.1: Goods Taxable at 5%.

R.5.7: Exempted Sales/Other deductions claimed.

Notes: -

Section 5: Taxable Turnover-Labour Charges

Section 6: Exempted Sales-Sch. I

Section 7: Central/Exports Sales


R.6.2.1 to R.6.2.8: [To give Rate wise details of purchases]

• 1%, 4%, 5%, 12.5%, 20%,• *WC 4%, WC 12.5% and **exempted

purchases.

Note: -

*sub-contractor’s work

**all non-creditable purchases


R.9.0: To give positive figures only

Note: It is only a technical correction. This figure is excess of tax paid/ITC over output tax liability.


R.11.7(1): While giving details of Central/Exports Sales and Purchases-

now separately

to give Exempted Sales/Purchases and High Seas Sales etc.


New Instructions for filling of DVAT-16:

6. Month-wise DVAT-30/31 in Annex 2A/2B. Exempted purchases to be given in one row.

7. Dealer-wise and month-wise details to be given.

8. WC-dealers-Gross Receipts-Expenses on a/c of labour etc.


Annexure A.3: Adjustment to Tax Credits:

A.3.15: Reduction in ITC-Sales at lower rate.

A.3.16: Increase-2nd and 3rd Installment of Capital Goods.

A.3.17: Increase-ITC in Opening Stock.

A.3.18: Decrease-ITC in Closing Stock.


Contentious Issues:• Annexure 2A/2B yet not defined/notified.• One to one correlation needed to fill A.3.17 and

A.3.18.• March-10 return is not covered/How to file it.• Whether transitional stock is covered-No.• It is advised to claim refund as on 31-3-10.• ITC/Op Stock/Cl Stock should match with the

audited BS.


Contentious Issues:• There is no option in A.3.15, A.3.17 and A.3.18

to give and not to give data in cases of classes of dealers where the provisions are not applicable.

• Revenue while calling for detailed purchases data may not still correlate the same with the sale in cases of Central Sales, having goods in stock and in the cases of mfrs.

Form DVAT-16

How to file Form DVAT-16• Find stock of the first tax period• Then adjust sale/purchase of the next tax

periods with GP rate.• Some estimate work is necessary.• Difficult to reconcile with physical stock• Small dealers are at great risk• Impossible for some class of dealers

T H A N K S

CA, Virander Chauhan

98101-37128

[email protected]

An Analysis of Latest Amendments in DVAT

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