Discussion on Value Added Tax, Karnataka

Introduction

The White Paper is a policy document indicating basic policies of State Sales Tax VAT. Haryana was the only State to introduce VAT w.e.f. 1-4-2003. About 21 States have introduced VAT (though in diluted form) w.e.f. 1-4-2005. These include Assam, Andhra Pradesh, Bihar, Delhi, Goa, Karnataka, Kerala, Maharashtra, Punjab and West Bengal. 

Karnataka Value Added Tax is a tax on sale of goods. The KVAT law provides for setting off of the tax paid on inputs (goods purchased) against the tax payable on sale of goods. This has been done in order to avoid the cascading effect of taxes.

This concept was earlier used in Central Excise as Modvat and subsequently as Cenvat Credit scheme.

Example VAT avoids cascading effect of tax :

System of VAT works on tax credit method. In Tax Credit Method of VAT, the tax is levied on full sale price, but credit is given for tax paid on purchases. Thus, effectively, tax is levied only on ‘Value Added’. Most of the countries have adopted ‘tax credit’ method for implementation of VAT.

The aforesaid illustration will work out as follows under VAT system

‘B’ will purchase goods from ‘A’ @ Rs. 115, which is inclusive of duty of Rs. 14.5. Since ‘B’ is going to get credit of duty of Rs. 14.5, he will not consider this amount for his costing. He will charge conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge 14.5% tax and raise invoice of Rs. 160.30 to ‘C’. (140 plus tax @ 14.5%). In the Invoice prepared by ‘B’, the duty shown will be Rs. 20.30. However, ‘B’ will get credit of Rs. 14.5 paid on the raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’ will be only Rs. 5.80. ‘C’ will get the goods at Rs. 160.30 and not at Rs. 182.63  which he would have got in absence of VAT. Thus, in effect, ‘B’ has to pay duty only on value added by him.

Following example will illustrate the tax credit method of VAT.

Advantages of State Level VAT

i. Rationalisation of tax burden, which is expected to bring down price level.

ii. Unhealthy tax-rate ‘war’ among States.

iii. Trade diversion among States, which affects all States.

iv. Simplicity and transparency.

Under this law, the concept of sale, dealer and goods assume importance.

Goods:

Goods generally include movable property with the exception of newspaper, actionable claims,stocks and shares and securities. It includes articles involved in the execution of works contract as well.

Sale:

As per Section 2 (29) of the VAT Act, "Sale" with all its grammatical variations and cognate expressions means every transfer of the property in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration. This includes

i. transfer of rights to use goods as well as delivery of goods on hire purchase basis.

ii. Even where goods are transferred during the execution of works contract the same would be      covered under this definition

iii. Transfer of property in goods by Government/Local Authorities/Statutory Bodies would be  covered even if such transfers are not in course of business. Even distribution of  goods by  clubs or associations to members would be covered.

Dealer:

“Dealer” means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration. Even a casual trader would be covered.

The definition also covers.

i. Government undertaking whether of Central or state  government , HUF, Clubs/Associations/Societies  would be dealers if they distribute goods to members (whether or not in course of business) ,

ii. Nonresident dealer or agent of nonresident dealer (a local branch of firm or company or association situated outside state.

iii. Casual Trader

iv. A person who sells the goods manufactured by him or others.

v. A  person engaged in

i. Business of transfer otherwise than pursuance of contract of property in any goods for cash deferred payment or other valuable consideration

ii. Business of delivery of goods on hire purchases or any system of payment

iii. Business of transfer of right to use any goods for any purposes

iv. Cash deferred payment or other valuable consideration

Once the dealer ascertains as to whether the transaction amounts to a sale or not as aforesaid, he has to find out whether it is a sale within the state of Karnataka. Where the transfer of right to use goods is involved, sale is said to be within the state if the goods are for use within the state. Sale is also deemed to be within the state in case of contract of sale or purchase where in case of specific or ascertained goods, the goods are within the state at the time when such contract is made. In case of unascertained goods, sale will be within the state if the goods are within the state at the time of their appropriation to the contract of sale or purchase.

The sale is normally said to have taken place at the time of transfer of title or possession or incorporation of goods in the course of execution of works contract whether or not there is receipt of payment.

Liability to tax and rates

Every dealer who is or is required to be registered as specified in Sections 22 and 24, shall be liable to pay tax, on his taxable turnover,

a. in respect of goods mentioned in,-

1. Second Schedule, at the rate of 1%
2. Third Schedule, at the rate of 5.5%
3. Fourth Schedule, at the rate of  12%
4. other goods at the rate of  14.5%          

Export :

As per Section 2(14), "Export" means a sale of goods taking place in the course of the export of the goods out of the territory of India only if the sale either occasions such export or is effected  by a transfer of the documents of title to the goods after the goods have crossed the customs frontiers of India and includes the last sale of any goods preceding the sale occasioning the export of those goods out of the territory of India, if such last sale took place after, and was for the purpose of complying with the agreement or order or in relation to such export.

The dealer will have to pay applicable taxes on sales to 100% EOU or to a SEZ unit. SEZ unit or  a  developer of SEZ would be entitled to refund of tax paid by them on their inputs as per section  20.

The 100% EOU if it desires has to go in for refund under normal scheme under KVAT.

Agent and principal:

The agent of a principal is not entitled to deduct input tax unless he happens to act on behalf of a non-resident principal (resident outside the state). The principal would be entitled to deductinput tax in respect of the purchases made by the agent on his behalf and the principal shall forthis purpose get a declaration (VAT 145) from the agent before the prescribed date (within tendays from the end of the month).

Import :

As per Section 2(18), “Import” means sale or purchase in the course of the import of goods into the territory of India if the sale or purchase either occasions such import or is effected by transfer of documents of title to the goods before the goods have crossed the customs frontiers of India and includes procurement of goods from outside the State either as a result of purchase or otherwise.

Registration under KVAT Act  (Pag 36)

Who is liable to register?

A dealer is liable to register under the KVAT Act when -

a. A Person whose taxable turnover is likely to exceed rupees Seven lakhs fifty thousand  during any year.

b. A person whose taxable turnover exceeds sixty two thousand five hundred rupees in any one month

c. A business or part of a business is transferred to him by another dealer liable to register  but who has not registered

d. A person who obtains or brings goods from outside the state whether as a result of purchase or otherwise

e. A Person who exports goods outside the country

f. A Person who effects a sale in the course of interstate trade or commerce or dispatches goods to a place outside the state

g. A Person who is a casual trader or a non-resident dealer or his agent

h. A Person who is involved in the execution of works contract

The registration is granted only from the date of application or from the date of commencement of business whichever is later.

Cancellation of registration may be needed where –

a. Any business has been discontinued, transferred or disposed off or

b. There is a change in the status of the ownership of the business or

c. The taxable turnover during twelve months does not exceed rupees two lakhs or

d. Death of a proprietor (legal heirs can apply for cancellation)

 Amendment of the registration certificate might be needed where -

a. A registered dealer sells or otherwise disposes off his business or part thereof or

b. There is a change in the ownership of the business including any change in status or

c. Business is discontinued or changed or new place of business is opened or

d. Name of the business or the nature of the same is changed

Section 71 of the act explains about Penalties relating to registration

a. A dealer who, without reasonable cause, fails to apply for registration within the time prescribed by act shall be liable for the shall be liable to a penalty of two thousand rupees in addition to the interest chargeable on the tax payable at the rate provided under section 37.

b. A dealer who fails to report to the prescribed authority a change in circumstances as required by Section 28 shall be liable to a penalty not exceeding five thousand rupees.

c. The power to levy the penalties shall be vested in the registering authority as prescribed.

Security:

As per Section 26 of the VAT Rules, the security that can be demanded cannot exceed the limits as explained below -

a.Where the dealer has opted to pay tax by way of composition u/s 15, an amount equivalent to the tax anticipated to be payable by him in a two months period,

b. In other cases, an amount equivalent to the tax anticipated to be payable by him in a three months period.

Penalties relating to registration: Section 71

a. A dealer who, without reasonable cause, fails to apply for registration within the time prescribed in sub-sections (1) or (5) to (9) of section 22 shall be liable to a penalty of two thousand rupees in addition to the interest chargeable on the tax payable at the rate provided under section 37.

b. A dealer who fails to report to the prescribed authority a change in circumstances as required by Section 28 shall be liable to a [penalty not exceeding] five thousand rupees.

c. The power to levy the penalties shall be vested in the registering authority as prescribed.

Tax invoice under KVAT:

The registered dealer shall issue a tax invoice when he sells taxable goods or sells exempted goods along with any taxable goods.

A dealer making a taxable sale is required to issue a tax invoice for such sale. In case of sale of exempt goods or if the dealer pays tax under composition scheme, he is to issue a bill of sale. With effect from 01.04.2007, the amendments made even allow for affixing of digital signatures on the tax invoices. The tax invoice raised by the dealer should consist of complete details regarding the sale such as, serial number of invoice, date of issue of invoice, time of issue of invoice, name, address and registration number of the selling dealer, name and address of the buyer with registration number, full description of the goods, quantity of goods, value of the goods, rate and amount of tax charged in respect of taxable goods, total value and the signature of the selling dealer or his agent.

As per law, a duplicate invoice can be raised when the buyer requests for the same in case of loss of the original. The duplicate copy is to specifically state the fact that it is a duplicate.

Books of Account :

Below are the books are to be maintained under KVAT,

i. Records of purchases, receipts, sales, other disposals, production, manufacture and stocks.

ii. Sales and Purchase Invoices.

iii. VAT Account containing details of input and output tax

iv. Credit / Debit Notes

v. Bills for purchase from unregistered dealers

vi. Copies of contracts entered into with customers

vii. Details of deductions claimed in computation of taxable turnover

Maintenance of books of account :

i. Every registered dealer liable to pay tax is required to maintain true and correct accounts in Kannada, Hindi, English or any of the languages notified by the Government

ii. Commissioner is empowered to notify registered dealers to maintain accounts in specified manner

iii. The dealers who maintain accounts and other documents electronically are required to retain them in electronically readable formats

iv. Such records shall be maintained in paper printed on a monthly basis

v. Any changes in manual books to be made under an attestation

vi. Any changes in books maintained electronically must be supported by a record of correction.

Section 74 (1) ofKVAT act explains the Penalties relating to the keeping of records.

If such failure is the first during any year or [ten thousand rupees] if such failure is the second or subsequent during that year] and, in addition, [a further penalty not exceeding two hundred rupees] per day for so long as the failure continues after being given an opportunity to show cause against such imposition of penalty.

Period of retention of accounts:

(1) Every dealer required under this Act to keep and maintain books of account or other records including tax invoices relating to his purchases and sales shall retain them until the expiration of five years after the end of the year to which they relate or for such other period as may be prescribed or until the assessment reaches finality, whichever is later.

(2) Where such dealer is a party to an appeal or revision under this Act, he shall retain, until the appeal or revision and any appeal there from is finally disposed of, every record and accounting document that pertains to the subject matter of the appeal or revision.

Section 74(2) of the act explains on Penalties relating to the retention of records in accordance with Sections 32 and 33, after being given the opportunity of showing cause in writing against the imposition of a penalty, shall be liable to a penalty of ten thousand rupees.

Filing of return

The dealer shall submit the return in Form VAT 100 along with the document showing the proof of payment of tax, to the jurisdictional local VAT officer or sub-officer on or before the 20th  day from the end of the month pertaining to which the return relates.

Revised return under KVAT

Where the registered dealer having filed the return in the normal course, finds any omission or incorrect statement therein, other than as a result of an inspection or receipt of any other information or evidence by the prescribed authority, he can file a revised return within six months from the end of the relevant tax period.

This is however, subject to sub-section (2) of section 72 which states that the dealer shall be liable to penalty where he understates his liability or overstates his entitlement to tax credit by more than five percent of his actual tax liability. The revised return cannot be filed where the Original return had been filed after the best judgment assessment had been completed u/s 38 (2).

Below are the various  Return that are required to  be filed dealers under  Relevant Provisions of KVAT Act:

Monthly Returns:

> Form – VAT 100: Within 20 days from the end of the relevant month

> Form – VAT 120: Within 15 days from the end of the relevant month in case of composite scheme

 Annual Returns:

> Form – VAT 115: Within 60 days from the end of the year

> Form – VAT 135: Within 60 days from the end of the year in case of composite scheme

 Statement of tax deduction at source

> Works contracts – Monthly Statement in Form VAT 125 (20th of the next month)

> Caterers – Monthly Statement in Form VAT 126 (20th of the next month)

Audit Report

> Form VAT 240 – 9 Months from the end of the year

Interest in case of failure to furnish returns (Section: 36)

Interest at 1.25% /month or part of the month

- If the omission is rectified by filing of revised return after more than 3 months from the date on which the tax was due

Penalty:

Returns & Payment  (Section: 72)                                                                                                  

Upto 5 days =  Rs. 50 / day

Beyond 5 days = Rs.250 Or  WEH

Amount of Tax

Further Penalty

Upto 10 days =   5% of Tax due Or  WEH Rs.50

More then 10 days = 10% of the short payment.

Incomplete Returns

Rs. 50 per day of default

Section 73 of  KVAT act explains Penalties in relation to unauthorised collection of tax

(1) If any dealer, not being registered under this Act, collects any amount by way of tax or purporting to be by way of tax under this Act, he shall be liable to remit to the prescribed authority such amount, whether or not that amount would be payable under the provisions of this Act, and also liable to a penalty of an amount [equal to] the amount so collected, after being given the opportunity of showing cause in writing against repayment of the tax and the imposition of such penalty.

(2) The power to levy the above penalty shall be vested in the assessing authority as prescribed.

Due Date: