Representation on claim of Input Tax Credit on LPG by hotel industry under PVAT Act, 2005

I had prepared a reprsentation on allowance of input tax credit on purchase of LPG to the Hotel Industry. This representation was prepared on behalf of Hotel Industry of Punjab and has already been sent to Dy. Chief Minister of Punjab on 15.05.2015. The Dy. CM Punjab has already forwarded this representation to the Financial Commisasioner Taxation, Punjab for necessary action.

It is worth noting that LPG is a main input tax credit for hotel industry, however, the input tax credit on the purchase of the same is not allowed by the revenue on the basis of section 13(5)(b) of Punjab VAT Act, 2005. The letter of representation is as under:

Dated : 15.05.2015

To,

S. Sukhbir Singh Badal

The Hon’ble Deputy Chief Minister of Punjab

Chandigarh.

Subject : Letter of Representation regarding claim of input tax credit on the purchase of LPG by hotel industry.

Through : The Grand Windsor Resorts Ltd (Hotel Raddison), Jalandhar on behalf of the Hotel  Industry.

Respected Sir,

This is in reference to the above noted subject. Please find attached a letter of representation from our association in the welfare of Hotel industry in Punjab.

You are requested to kindly see into the matter as soon as possible so that Hotel industry of Punjab may be saved.

Thanks and warm regards,

For _________(name of the association)

General Secretar/President

Email ID :

LETTER OF REPRESENTATION

(Regarding claim of input tax credit on purchase of LPG by Hotel Industry)

Respected Sir,

This is a representation regarding disallowance of claim of input tax credit of taxes paid on purchase of LPG by the Excise and Taxation Department, Punjab on the basis of provisions of section 13(5)(b) of Punjab VAT Act, 2005 read in isolation ignoring completely the provisions  of section 13(1) of the said Act.

By this letter of representation it is urged that input tax credit on purchase of LPG by the Hotel industry must be allowed to its fullest extent as the LPG is the main input for the hotel industry for producing the taxable goods I.e. cooked food and the allowance of input tax credit is in consonance with the provisions of section 13(1) of the Act.

For this purpose it is further urged that a clarification in this regard may kindly be issued from the Government or the provisions of section 13(5)(b) may kindly be suitable amended so as to upheld the main objects of the VAT system sought to be achieved at the time of implementation of Punjab VAT Act, 2005. We make the following representation in this regard, while also simultaneously highlighting and explaining the relevant legal provisions and the objects behind the VAT system supporting our legitimate demand as to the claim of ITC on LPG by hotel industry.

Preface: The system of Value Added Tax  was introduced in State of Punjab in 2005 by enactment of Punjab Value Added Tax Act, 2005 w.e.f. 01.04.2005 replacing the single stage sales tax system administered under the Punjab General Sales Tax Act, 1948. The VAT system  is a multiple point of taxation system which levies tax at every stage of sale of goods, however the credit of taxes paid at the previous stage of sale is given set off against the output tax liability at the next stage.

The main objective behind introduction of VAT system was to avoid double taxation and the resultant tax cascading which means tax on tax. Under the sales tax law the manufacturers did not get the set off of the taxes paid on their inputs i.e. raw material and the sales tax paid on the purchase of inputs used to become the part of cost of output produced finally. Thus the single stage taxation system under the old sales tax law resulted in tax cascading and thereby resulted in increase in prices.

Justification and objects behind implementation of VAT system: The extracts for white paper on State Level VAT by Empowered Committe of State Finance Ministers is as reproduced hereunder so as to clarify the main objects and justification for implementation of VAT:

“In the existing sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the existing structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. In the VAT, a set-off is given for input tax as well as tax paid on previous purchases. In the prevailing sales tax structure, there is in several States also a multiplicity of taxes, such as turnover tax, surcharge on sales tax, additional surcharge, etc. With introduction of VAT, these other taxes will be abolished. In addition, Central sales tax is also going to be phased out. As a result, overall tax burden will be rationalised, and prices in general will also fall. Moreover, VAT will replace the existing system of inspection by a system of built-in self-assessment by the dealers and auditing. The tax structure will become simple and more transparent. That will improve tax compliance and also augment revenue growth. Thus, to repeat, with the introduction of VAT, benefits will be as follows:

a set-off will be given for input tax as well as tax paid on previous purchases

other taxes, such as turnover tax, surcharge, additional surcharge, etc. will be abolished

overall tax burden will be rationalised

prices will in general fall

 there will be self-assessment by dealers transparency will increase

 there will be higher revenue growth

The VAT will therefore help common people, traders, industrialists and also the Government. It is indeed a move towards more efficiency, equal competition and fairness in the taxation system.”  

Thus the justification for introduction of VAT was to rationalize the taxation system and to remove double taxation and the tax cascading effect.

Statutory provisions relating to input tax credit under Punjab VAT Act, 2005: One of the most important pillers of the VAT system is the concept of input tax credit which helps in achieving the primary object of VAT that is avoiding double taxation and tax cascading.

Section 13 of the Punjab Vat Act, 2005 contains the provisions relating to input tax credit. Section 13(1) of the Act provides for the input tax credit of taxes paid on the goods purchased if they are sold or are used in the manfucaturing and processing of taxable goods or are sold inter-state or in the cource of export outside India.

Section 13(1) is produced herebelow:

(1)   A taxable person shall be entitled to the input tax credit, in such manner and subject to such conditions, as may be prescribed, in respect of input tax on taxable goods, including capital goods, purchased by him from a taxable person within the State during the tax period :

PROVIDED THAT such goods are for sale in the State or in the course of inter-State trade or commerce or in the course of export or for use in the manufacture, processing or packing of taxable goods for sale within the State or in the course of inter-State trade or commerce or in the course of export :

PROVIDED FURTHER THAT a taxable person shall be entitled to partial input tax credit in any other event, as may be provided in this section in such manner and subject to such conditions as may be prescribed :

PROVIDED FURTHER THAT if, purchases are used partially for the purposes specified in this sub-section and the taxable person is unable to identify the goods used for such purposes, then the input tax credit shall be allowed proportionate to the extent, these are used for such purposes, in the prescribed manner :

PROVIDED FURTHER THAT input tax credit in respect of purchase tax paid or payable by a taxable person under section 19, shall be allowed subject to the conditions laid therein.

The Liquified Petroleum Gas is directly used by the hotel industry in manufacturing and processing of taxable goods i.e. cooked food. The cooked food cannot be produced without the use of LPG. Thus the taxes paid on the purchase of LPG is eligible for input tax credit as per the provisions of section 13(1) of the Act.

However section 13(5)(b) of the Act bars the input tax credit on LPG to all the persons except those who are in the business of selling LPG. Thus the provisions of section 13(1) are clearly in contradiction with the bar contained under section 13(5) on claim of LPG so far the persons using LPG directly in the manufacturing and processing of taxable goods.

Section 13(5)(b) is produced herebelow for ready reference

“Section 13(5): A taxable person under this section, shall not qualify for input tax credit in respect of the tax paid on purchase of,-

(a)…..

(b) petrol, diesel, aviation turbine fuel, liquefied petroleum gas and condensed natural gas, unless the taxable person is in the business of selling such product.”

Claim of input tax credit on LPG by hotel industry is in accordance with section 13(1): It is worth mentioning here that the provisions of section 13(1) and 13(5) are independent to each other as neither of the provisions is subject to the other provision.

It is very much clear from the provisions of section 13(1) that whatsoever goods are used in the manufacturing and processing of the taxable goods for sales, taxes paid on such goods is eligible for input tax credit. Thus section 13(1) clearly allow us to claim input tax credit on the purchase of LPG.

It should also be noted that the mechanism of input tax credit is a heart beat of the VAT system without which VAT system will fail. The basic spirit of VAT system and also the intention of the legislature behind the provisions of section 13(1) of Punjab VAT Act, 2005 is that whatever taxes are paid on inputs used for production of the output product, the credit of those taxes would be allowed against the taxes payable on the output products. Any devation from this intention/principle would defeat the very purpose of introduction of system of VAT which was to remove tax cascading effect. Thus the disallowance of input tax credit on LPG could not have been the intention of the legislature so far as the persons who are using LPG as raw material.

Since LPG is the main input for the Hotel industry without which the output goods i.e. cooked food cannot be produced, hence the allowance of claim of input tax credit on LPG is  inevitable and is in the spirit of provisions of section 13(1) of Punjab Vat Act, 2005.

 So far section 13(5)(b) is concerned which bars the input tax credit on LPG, it bars the credit for those who are using LPG as just a fuel or as an acilliary product. Section 13(5)(b) is not applicable to those person for whom it is the main raw material for manufacturing the taxable goods for sale.

The golden rule of interpretation of law is the rule of purposive construction which means that if strict interpretation of a provision  leads to absurdity and defeats the objects of the legislature which were intended to be achieved by the enactment of law then such interpretation would be made as would upheld the objects of the legislature which are intended to be achieved.

Even the FAQs of the VAT as existing on the official website of the Central Government i.e. tinxsys.com also supports the claim of input tax credit on LPG by those persons for whom the LPG is the main input without which output product cannot be produced.

The relevant extracts are produced herebelow:

“Will input tax credit be available on all purchases for the business? 

Generally, input tax credit will be eligible on all goods purchased for resale, raw material and packing materials for use in the manufacture of goods or even capital goods as specified. However, eligibility of input tax credit on capital goods is different in the draft VAT legislations of various State Governments.

Only good purchased from VAT registered dealers in the State will be eligible for input tax credit. Input tax credit will not be available on Inter State purchases.

There are likely to be restrictions or denial of input tax credit on Petroleum products, Tobacco and certain other products. One should refer to their respective State VAT Acts. Goods ineligible for Input Tax credit are also referred to as “Input Tax Credit Blocked goods”.

“In my opinion, the purchases on which you cannot claim a credit for your input tax are: 

Automobiles, including commercial vehicles, unless you are in the business of dealing in such automobiles; 

Spare parts for repair and maintenance of automobiles unless your business is dealing in such automobiles; 

Petroleum products unless the petroleum products are used in the production of goods or for industrial use; 

Goods used for personal consumption or gifts; 

Air-conditioning units unless you are in the business of dealing in such units”. 

Thus the denial of input tax credit on petroleum products including LPG was meant for those who are not using the same in the production of goods or for industrial use.

Since the hotel industry use the LPG directly in the manufacturing of LPG therefore the ITC on such purchase of LPG cannot be denied as the same is not only in consonance with the provisions of section 13(1) but also is in the spirit of VAT system.

However despite the clear cut provisions of section 13(1) the claim of input tax credit on purchase of LPG is being denied by the Excise and Taxation Department.

Our Recommendations and demands:-

A. Full input tax credit on purchase of LPG be allowed to the Hotel industry.

B. A clarification in this regard kindly be issued from the Excise and Taxation department itself that claim of input tax credit on purchase of LPG by the hotel industry is in consonance of scteion 13(1) of Punjab VAT Act, 2005 and section 13(5)(b) is not applicable to hotel industry so far as purchase of LPG is concerned.

C. Suitably amend section 13(5)(b)  so as to allow input tax credit on LPG to the hotel industry who is using LPG directly in the manufacturing or processing taxable goods for sale.

We have drafted these recommendations keeping in view interest of the justice for the Hotel Industry. If these suggestions are accepted, we assure you that Punjab VAT as well as business of hotel industry in Punjab, both will increase.

Expecting an early and positive response from your good self to safeguard the interests of Hotel Industry.

Thanking You.

_______________ Association name 

Jalandhar City, Punjab

General Secretary/President