Maharashtra VAT assessments – Denial of Set-off denied and Addition to turnover in an arbitrary way – Need for revamp of assessment procedure

1. The procedure followed in VAT assessments under Maharashtra VAT Act has been putting the dealers to severe hardship, so far as it relates to denial of set-off and addition to turnover in most arbitrary manner, based on reports generated by the department’s system.

2. In case of set-off, assessing authority generates the report from the department’s system which contains (i) the value of purchases and set-off declared by the purchasing dealer (whose assessment is being done) in J2 and (ii) the value of sales and tax paid declared by the selling dealer in J1. Then, in all those cases where the department’s system shows that set-off of VAT claimed by the purchasing dealer is more than the VAT on sales declared by the selling dealer, the departmental has been simply disallowing the claim of the purchasing dealer to the extent of difference. The Department has been totally relying upon the report generated by their system and disallowing the set-off in the hands of the purchasing dealer, in case the set-off claimed by the purchasing dealer is more than the VAT on sales declared by the selling dealer. The purchasing dealer is given the option to follow-up with the selling dealer and get the invoices, that were not uploaded by the selling dealer in his return, uploaded through ledger confirmation utility available on MahaGST Portal. Unless and until the selling dealer uploads the missing invoices on MahaGST portal through ledger confirmation utility, the set-off is disallowed, without any further verification from the department’s end. Even though the selling dealer has paid VAT on the sales made to the purchasing dealer, but failed to upload the details in his return properly against the TIN of the purchasing dealer, due to mistake or inadequate knowledge or sales declared in Form 704 under the category of ‘others’ without assigning any TIN, the purchasing dealer has to bear the brunt.

3. Basic principle of natural justice is denied to the dealer for the reason that the report generated through department’s system is not made available to the purchasing dealer in advance along with the notice for assessment. The report is provided at the last minute of the assessment and huge amounts of set-off are denied in an arbitrary manner. The report should be made available to the dealer as soon as the notice for assessment is service upon him, so that he can take up with his suppliers and get the mistakes rectified at the earliest. Getting the report should not be an affair to be followed-up with the department or it should not become a hidden tool till the end to deny the eligible set-off. The report should be made available on the dash board of the dealer in his login id on MahaGST portal, so that he need not go to department and beg for the report.

4. The Hon ‘ble Bombay High Court in the case of Mahalakshmi Cottong Mills case has held that unless the selling dealer pays VAT, the purchasing dealer is not entitled to claim the credit. It is based on the principle that Government revenues should not be put to loss, due to unscrupulous dealers, which is the correct proposition. But, at the same time, where both the purchasing dealer and selling dealers are live and carrying on the business, dis-allowance of set-off based on system generation report, without any verification is totally unjustifiable. During the hearing before the High Court, the department has agreed that it will carry out the verification from their end, in case of mis-matches and on getting confirmation from the selling dealer about payment of VAT, department will allow set-off to the purchasing dealer which was denied to him due to mis-match. At Para No.51 of the judgement, the steps proposed by the Advocate General are reproduced hereunder –

51. The Learned Advocate General appearing on behalf of the State has tendered a statement of the steps that would be pursued against defaulting selling dealers:

1) The Sales Tax Department will identify the Defaulters namely, registered selling dealers who have not paid the full amount of tax due in the Government Treasury either by not filling their returns at all or by filing returns but not paying the full tax due (i.e. “short filing”) or where returns are filed but sales to the concerned dealers are not shown (i.e. “undisclosed sales”).

2) Set off will be denied to dealers where at any stage in the chain of sales a tax invoice/certificate by a Defaulter is or has been relied on:

a) In the event of no returns having been filed by the Defaulter, the dealers will be denied the corresponding set off;

b) In the case of short filing, dealers who have purchased from the Defaulter will be granted set off pro rata to the tax paid;

c) In the case of undisclosed sales, the dealers will be denied the entire amount being claimed as set off in relation to the undisclosed sale;

d) To prevent a cascading effect, the tax will be recovered only once.

As far as possible, the Sales Tax Department will recover the tax from the dealer who purchases from the Defaulter. However, the Sales Tax Department will retain the option of denying a set off and of pursuing all selling dealers in the chain until recovery is ultimately made from any one of them.

3) The full machinery of the Act will be invoked by the Sales Tax Department wherever possible against Defaulters with a view to recover the amount of tax due from them, notwithstanding the above. Once there is final recovery (after exhaustion of all legal proceedings) from the Defaulter, in whole or part, a refund will be given (after the end of that financial year) to the dealer(s) claiming set off to the extent of the recovery. This refund will be made pro rata if there is more than one dealer who was denied set off;

4) Refund will be given by the Sales Tax Department even without any refund application having been filed by the dealers, since the Sales Tax Department will reconcile the payments, inform the dealer of the recovery from the Defaulter concerned and grant the refund;

5) Details of Defaulters will be uploaded on the website of the Sales Tax Department and dealers denied set off will also be given the names of the concerned Defaulter (s);

6) The above does not apply to transactions by dealers where the certificate/invoice issued is not genuine (including hawala transactions). In such cases, no set off will be granted to the dealer claiming to be a purchaser;

7) The above should not prevent dealers from adopting such remedies as are available to them in law against the Defaulters.

5. But, practically department has not been carrying out any verification from their end. Set-off of huge amounts are getting denied and purchasing dealers are put to severe hardship, in the process of following-up with the selling dealers and getting the missing invoices uploaded on MahaGST portal. In the meantime, assessment orders are passed with huge liability and dealers are forced to file appeals by depositing 10% of the disputed tax demand, which is causing severe hardship.

6. The irony is that the department is not bothered to call for the confirmations from the dealers who are active as per the departmental records, who can respond to the department immediately and provide the data, so that the set-off disallowance in the hands of the purchasing dealers can be avoided. When the dealer is active and he is continuing now also with the GSTIN in the GST regime, obviously department should call for confirmation from them with respect to the difference in sales declared by him, compared to purchases declared by the purchasing dealer.

7. But department has been resorting to mechanical process of generating the report and disallow the set-off to the extent of difference between J1 and J2.

8. Now, the pertinent issue in the case is that the department on one side disallowing the set-off availed by the purchasing dealer on the plea that selling dealer has not declared the invoices in their return, during the assessment of purchasing dealer. On the other hand, at the time of assessment of selling dealer, since the purchasing dealer has declared more purchases in his returns from the selling dealer, addition to that extent is made to the turnover of the selling dealer. In effect, department is disallowing the set-off one side and collecting the tax on the other side, thus making the same transaction liable for tax twice. This is resulting total injustice to the genuine tax payers.

9. Till the assessment year 2013-14, department was allowing set-off in full, in case (i) the purchases from top 10 suppliers were matching or (ii) purchases covering more than 50% of the total purchases were matching (whichever is higher), based on the circulars issued by the Commissioner of Sales Tax, Maharashtra. In such a case, dealers themselves were taking up with the suppliers and getting ledger confirmations from top 10 suppliers or suppliers with whom more than 50% of the purchases were done, so that entire set-off gets allowed.

10. However, with effect from 2014-15, revised instructions were issued making the life of the purchasing dealers miserable. As per the revised instructions, purchasing dealer has to get the ledger confirmations online in all those cases where the purchases declared by him are less than the sales declared by the selling dealer. In case of mis-match, the difference amount is deducted from the set-off claimed by the purchasing dealer.

11. As brought out above, no verification, no inquiry is being carried out by the department, even in case of dealers who are live in the system, ignoring the assurance given to High court. Even the credit availed on purchases from premier Public Sector Undertakings (PSU) are disallowed on the ground of mis-match. After that no report is called for from them. Purchasing dealers have to file appeals by depositing 10% of the disputed tax demand, which has arisen due to reduction in set-off, and approach the appellate authority, which is casting heavy burden on them.

12. Similarly, department is running opposite statement i.e., sales declared by the selling dealers versus purchases declared by the buying dealer. Any difference is added to the turnover of the selling dealer, without any verification at all. Once the assessment order is passed, department is not bothered to do any verification, but simply leaving the dealers to the recourse of appeal.

13. This is resulting is severe hardship to the dealers, since set-off is denied to the buying dealer on the ground that selling dealer has not declared the sales, while tax is levied on the selling dealer on the ground that buying dealer has not declared the purchases in his return.

14. It is suggested that where the selling dealer is a live dealer and continuing his business even under GST, department should resort to recovery proceedings against the dealer, rather than denying set-off to the purchasing dealer. In effect, unless the department proves that the selling dealer is not traceable, or not filed returns and not paid taxes, set-off cannot be denied to purchase dealer who has purchased goods in good faith, paid for the purchases, used the goods in his business and therefore eligible for set-off. This will repose confidence in the minds of the trade and industry on the department, which should be a booster for government’s campaign of ease of doing business. Simply denying the credit to purchasing dealer based on system generated statement, without verification at their end, is unfair and illegal, and causing undue hardship to the purchasing dealers.

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May 2021