VAT INPUT CREDIT ON PURCHASE OF TRADE MARK

This query is : Resolved

ANUJ GARG (Querist)
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08 September 2007 1. We are manufacturer of Ice-Cream with Brand Name “Cream-Bell”.
2. The Business Trade Mark is registered with “UNIVERSAL DAIRY PRODUCTS PVT. LTD.” (UDPPL);
3. UDPPL has a Factory at Agra (Uttar Pradesh) and registered office at Delhi.
4. We have another company namely DEVYANI FOOD INDUSTRIES PVT. LTD. (DFIPL);
5. DFIPL is also doing Ice Cream Business with Brand Name “Cream Bell”.
6. DFIPL has a Factory at Baddi (Himachal Pradesh), Sales Depot in Agra (UP) and registered office at Delhi.
7. We have shut down our Agra Factory of UDPPL;
8. Now our business is running from Baddi Factory;
9. We wish to Sell trade Mark from UDPPL to DFIPL on or before 31.3.07.

So, please give your opinion with example on the followings:

1. If we sale Trade Mark to DFIPL, will it attract Sales Tax / Vat?
2. Should we make sale from UP or Delhi?
3. In case Sales Tax / Vat is payable then UDPPL will like to sale Trade Mark in Delhi to DFIPL Delhi and DFIPL will set off vat input tax (paid on purchase of Trade Mark) with vat output tax against sale of ice cream in Delhi? Can we do this?

Thanks,
Anuj Garg

CA. Dashrath Maheshwari

CA. Dashrath Maheshwari (Expert)
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24 September 2008 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.

VAT can be computed by using either of the three methods detailed below

* The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input.
* The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc).
* Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales.

States such as Andhrapradesh, Kerala, Maharashtra, Madhyapradesh, Delhi and Haryana have experimented with VAT albeit in a limited manner, covering only limited goods. The experiments never had the full-fledged features of VAT and were only concoctions. These states have even called off their experiments owing to different reasons. If one analyses why VAT or its variant failed in Maharashtra, which was the only state to come closer to a true VAT regime, the following reasons emerge:

1. Dual methodologies of computation of VAT credit Error! Hyperlink reference not valid. , one for the Manufacturing stage and the other for the trading stage, thus breaking the audit trail. It may be noted that one of the advantages of VAT system, as we would be dealing later on, is the audit trail that is created in the VAT chain.

2. Presence of a large number of tax deferral and holiday schemes, which resulted in a narrow base. It may again be noted that under VAT, which is multi-point, the tax rates have to be reasonably low, and lower tax rates presupposes that the tax base is wide. These two features were not present in the Maharashtra tax regime.

3. Low level of awareness among traders, and even administrators, giving rise to fears and apprehensions. Owing to this, there was considerable consternation among the trade, which gave rise to open revolt against the system.

4. Partial implementation of the ideal VAT with the existing system coexisting even under this regime.

5. Increased burden on retailers of Bookkeeping and compliance.

6. Multiplicity of rates of tax under the VAT regime.

7. Drop in revenue for the State Government, though there are no studies attributing such reduction to the system of taxation.