Most of the States have legislated provision in their respective VAT Acts for allowing a restricted input tax credit on the goods purchased within State if such goods are transferred outside the State otherwise than as sale. Ussualy Input tax credit in such cases is allowed only in excess of 4% or 2%.

Under Punjab VAT Act, 2005 section 13(2) deals with such situation and allows input tax credit to the extent by which the amount of tax paid in the State exceeds 4% on the purchase of goods, If such goods are:

(a) sent outside the State otherwise than as sale in the cource of inter-state trade or commerce or in the cource of export out of India;and

(b) used in manufacturing or in packing of taxable goods sent outside the State other than by way of sale in the course of inter-State trade or commerce or in the course of export out of the territory of India.

The idea behind this provision seems that State Governments do not want to loose out the revenue on goods sent outside the state otherwise than as sale, which the State Government otherwise would have got by way of CST, had the goods been disposed of by way of inter-state sale.

Similarly If the goods are exported outside India as sale then State Government cannot levy VAT on such export sales, however if goods are sent outside the State in the cource of export out of India otherwise than as sale, State Governments want to retain Input Tax Credit on such goods sent as if there was inter-state sales of such goods.

Article 286 of the Constitution of India provides that State Government cannot impose tax on sale or purchase of goods during imports or exports or on sale outside the State. Entry 54 of the State List i.e List II to Seventh Schedule to the Constitution of India also provides that State Governments have exclusive power to levy tax on sale or purchase of goods other than newspaper except on inter-state sale or purchase.

Thus it is clear that State Governments can levy tax on sale or purchase of goods within State only. Power of the State Government under entry 54 is restricted only to levy tax on sale or purchase of goods other than newspapers except tax on inter-state sale or purchase.

Inter-state stock transfer is neither a sale or purchase within the State nor is an inter-state sale or purchase. When goods are stock transferred outside the State then it means that such goods would be sold outside the State and at the time of inter-state stock transfer there is no sale or purchase within the State.

Therefore the question now is, when ITC is retained on the goods purchased within State on the ground that such goods are being sent outside the State otherwise than as sale, whether such retaining of the ITC amounts to indirectly taxing the inter-state transaction?

Restricting Input Tax credit on inter-state stock transfer amounts to taxing the inter-state transaction by back door. It is indirectly taxing an inter-state transaction which is outside the purview of the powers of the State Government under the Constitution.

In Sangramsinh P Gaekwad v. Shantidevi P Gaekwad(2005) 57 SCL 476 (SC), it was observed (although in different context) that what cannot be done directly also cannot be done indirectly. The principle should also apply here as well.

This matter needs the attention of higher judiciary and the validity of such provision indirectly taxing inter-state transaction should be judged in the background of Constitutional provisions.

Another thing which seems irrational especially in the context of Punjab VAT Act is that the rate of CST has been reduced to 2% from 4% by the Central Government, but section 13(2) of Punjab VAT Act, 2005 still provides for retaining of ITC @ 4% on the goods sent outside the State otherwise than as sale, till date.

The rate of retaining ITC u/s 13(2) should be reduced to 2% because if the goods are disposed off as inter-state sale then only 2% of ITC will be adjusted against CST(if goods are sold against C form), however if goods are sent otherwise than as sale then 4% ITC will be lost. So an inter-state stock transfer of goods is suffering more tax than an inter-state sale, which seems not justified.

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Read Other Articles from Advocate Amit Bajaj

(Author – Amit Bajaj Advocate, Bajaj & Bajaj Advocates, 128, Sangam complex, Milap chowk, Jalandhar City (Punjab), Email: amit@amitbajajadvocate.com, M +919815243335)

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