CA Umesh Sharma

Arjuna (Fictional Character): Krishna, businessmen of Maharashtra State are facing a question, whether they should purchase goods from Maharashtra or not? It seems that due to provisions of MVAT Setoff carrying out business in Maharashtra has become difficult. Dear Krishna, please tell, what is this “SETOFF”?

Krishna (Fictional Character): Arjuna, Sales tax department grants set off, if goods are purchased from Maharashtra by registered dealers of the state. For e.g. If registered dealer Mr. “A” (Purchasing Dealer) has purchased goods from Mr. “B” (Selling dealer) then “A” can avail set off of Sale Tax paid on purchases. If B has sold goods worth Rs. 1,00,000/- and levied sales tax @ 12.5% of Rs. 12,500/- and Tax Invoice of Rs. 1,12,500/- is given then “A” can avail the set off of Rs. 12,500/-. If “A” further sales these goods for Rs. 1,50,000/- then it levies sales tax @12.5% of Rs. 18,750/- on it. While paying sales tax, “A” will reduce Rs. 12,500 from Rs. 18,750/- and will pay net tax liability of Rs. 6,250/- to the state government. Thereby “A” and “B” both carry the business in the State. It’s so simple, then what is problem in it?

Arjuna: Krishna, availing setoff has become difficult due to the other provisions of sales tax law as interpreted by the sales tax department.

Krishna: Arjuna, as give in above example, “A” has made the payment of purchases to “B”. As per MVAT provisions, afterwards “A” will have to mention TIN and other details in the return and in Annexure J 2 for purchases made from “B”. Similarly “B” will have to mention TIN and other details in the return and in Annexure J 1 of the sales made to “A”. If these and other provisions are followed then set off can be availed.

Arjuna: Krishna, as stated in above example if “B” does not pay taxes or makes errors, then set off availed by “A” is disallowed without any mistake of “A” and he is required to pay taxes, interest and penalty also? Which is absurd.

Krishna: Arjuna, you asked correct question. “A”(buyer) and “B” (seller) are registered with sales tax department. Therefore responsibilityof proper implementation, administration of the tax laws and final assessment of tax of dealersis of the department. If “A” and “B” decided to enter into bogus purchases and sale transactions, then set off of “A” may be disallowed and tax is collected from him, if tax is not collected from “B”. However this is may be correct in bogus transactions only, to safe guard the revenue of state government.

Arjuna: Krishna, now if, sales tax department has collected taxes from “A” without granting set off and also collected taxes from “B” then department is collecting taxes two times on one transaction. Is this not a contradiction or illegal?

Krishna: Arjuna, Sales tax department in the Bombay High Court has filed a affidavit in the case of Mahalaxmi Cotton Ginning, that if taxes are collected from both parties then “A” will be given refund. Further Honorable State Finance Minister while delivering 2014 budget speech, has stated that in such cases, refund will be given faster. However, it is also true that, how “A” will come to know that “B” has paid the taxes or not. As per today’s computerized system of Sales tax department, the dealer has not been provided with such a mechanism.

Arjuna: It seems that in such cases as per law, taxes should have been collected from “B” first.

Krishna: Arjuna, correctly said. Sales tax department cannot collect taxes on same thing twice. In these cases taxes should be collected from “B” first and “B” should be assessed and asked to pay taxes forcefully. If all the recovery proceedings fails then, at the end if taxes were not collected from “B” then only it should be collected from “A”. This seems to be logical.

Arjuna: Krishna, this may be correct for bogus purchases. But now if “B” made any technical error then also set off of “A” is disallowed and taxes are collected from “A”. What are these circumstances or parameters issued by department of disallowance of setoff?

Krishna: Arjuna, for disallowing set off department is using following parameters:

1. If TIN of “B” (Seller) is not seen in the computer system of sales tax department 2. If TIN of “B” is cancelled 3. If “B” has not filed returns 4. If “B” is a specific composition dealer. 5. If “B” has shown all tax free sales in the return. 6. If “B” has given wrong incorrect information in Annexure J 1, etc.

Due to these technical mistakes of “B”( seller) the “A” (Buyer) should not be penalized. Sales tax department should get rectified the mistakes from “B” and collect taxes from “B” subject to compliance of laws as discussed earlier.

Arjuna: It means responsibility of following tax laws by seller should not be given to purchaser.

Krishna: Due to this if, goods are purchased from Maharashtra State, then after some years if, seller have made mistake then purchaser is penalized. This is not correct. Mistake of one and other have to suffer for it. It seems that it’s beneficial to purchase from other states, instead of purchasing from Maharashtra State. Because on the goods purchased from Maharashtra, when the “atom bomb” of set off of goods purchased will explode no one knows. No one takes the guarantee of following tax laws by seller, while purchasing goods in business world. In business there is no guarantee of many goods, then how one should obtain the guarantee of seller.

Arjuna: Krishna, on one hand there are strict laws for availing set off and afterwards refund is not received. In these situations how businessman in Maharashtra should do his business?

Krishna: Yes Arjuna, firstly refund is not received from years. Refund means excess set off remained after adjusting sales tax collected. As refund is not issued, it is as good as benefit of set off is not given to dealer. Further, disallowing set off means punishment for purchasing goods from Maharashtra. If businessman purchases goods from other states, then set off will not be allowed of Central Sales Tax, and there will not be refund to such dealer. Even if CST is cost to dealer, the Cost of disallowance of setoff or refund is unbearable. But he will be relieved from the unnecessary responsibility casted on him under MVAT as discussed above.

Arjuna: On one side state government gives incentives to business to come in Maharashtra and on other side there such problems for businesses. It’s not a business friendly?

Krishna: In Maharashtra, if facilities are given to business, then only financial growth will take place. Further the Honorable State Finance Minister considering the above situation has given a statement in the budget speech of 2014. While reducing VAT on cotton from 5% to 2% he stated that, “the funds of the businessman preparing yarn from the cotton is blocked in the refund, further purchase of cotton from other states is increasing, therefore they are reducing tax rate on cotton.” Government should collect taxes smoothly like “Honey bee”, it collects honey from the flower without hurting to flowers. However due to such tax provisions, it seems that government in putting honest taxpayer in trouble. In the Tax policy of government, tax follower should not be penalized, rather he should be saved. In the recent case of TCS Company, Honorable Supreme Court has also stated that “government should collect taxes with interest and should give refund with interest. No one’s money should not be misused, it may be of government or taxpayer”. All citizens of country should follow tax laws and pay taxes, they should not do transaction, by which government’s revenue suffer. Tax policies of Governments, should be equal to all tax payers as well as to tax authorities.

 Dear Taxguru lovers, your comments please, they are very precious.

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  1. Ramniklal dedhia says:

    Maharashtra govt is just damaging its position rather than collecting tax rightway they are just collecting through penalties. People are forced to think otherway by not filing returns as they are not friendly with business community honest businessman paying taxes but just in business there is delay in receiving c forms. The other state govt have failed to pass in this segment the business community throuighout india is suffering. Maharashtra govt is denying the refund they gave reduced the period of refund application such that is equal to filing incimetax return. The consultants are not interested in taxation practice just because they do not defend his clients. This govt just waiting when you commit a mistake. Traffic police posted at signal is standing away rather than monitoring traffic but waiting when you break a signal. Purposefully to fine you even after online returns the greasing business is sliowed down and that is not suited to beaurocracy. Thats why in companies of ministry. They are anending the law by notification power they gave got. Because changing law democratic way it should be billed discussed then passed. Here nothing is required Amend the law which suits to us and not. Citizen. It is the motto of all government ruling in any states of india. Including central govt. even tds deducted by a honest deductee smaller amount but penalty starts with rs200/- is the people doing business are criminal. Why all bad example rules of foreign govt are copied. Than why the good rules of theirs not enforced.

  2. P Balakrishnan says:

    The purpose of VAT is that there should be tax only on value addition & not on tax.However the same is negated by such stance of dept which is against principles of VAT Law.Where ever details are not matching details can be called for from parties but denial of credit unless it is proved bogus transaction is totally wrong. Similiarly as earlier years stock is transferred to next year the unadjusted setoff of earlier year should be allowed to be setoff in subesequent year without any limit as it is ridiculous that a dealer who has setoff(unadusted of Rs 10 lacs in Mar) is asked to pay tax in April as only 1/5 lacs can be carried forward.

  3. JAYENDRA says:

    Dear Sir,
    Many thanks for explaining complex issues of VAT matter in the form of Krishna-Arjun Dialogue form. It makes us understand the matter clearly.

    In order to plug loopholes up to certain level, we have suggested Department that for every such product having MRP printed on it should distinctly carry two details on it. Central Excise amount, CST amount and VAT Amount. All these taxes should be calculated on MRP and to be deposited at first point only. This will yield following benefits:
    1-Highest revenue for Central & State Government.
    2-There will be no leakages in pipe-line
    3-The Consumer prices will become fair, reigning the unreasonable profits
    4-Reduce the burden of tax departments as set-off will arise only at first point. All other will be reflecting re-sales only.

    To do this of course will require legislative changes in definition of MRP/consumer price in:
    1-The sale of goods act
    2-Consumer Protection Act,
    3-CST and State VAT Acts &
    4-Essential Commodity Act.
    The time is right for present Government to do so, because they are in process of finalizing GST. So in future a consumer can know how much excise and taxes he is paying for the product he is buying.

    For other commodities, not having MRP on it regular MODVAT & TAX input-output system may continued till alternative is arrived at.

  4. CMA ASIM SAHA says:

    Instead of disallowing input credit Maharashtra govt may introduce a scheme of proportionate input credit scheme. In this scheme the credit of input will be allowed based on input / output ratio of the final product. The assessing officer will check that the relation of input to the output as per standard fixed by the competent Authority which ultimately enable the department to get more revenue in each transaction by deferring the balance credit on inputs. In short instead of allowing input credit in one go allow ability may be actual utilization / consumption of inputs.

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June 2021