Vat on Fabric with reference to the Maharashtra Value Added Tax Act-2002

ROTI   KAPDA   AUR   MAKAN: VAT ON FABRIC

With reference to the Maharashtra Value Added Tax Act-2002

CA Lalit Munoyat

What do the words ROTI & MAKAN mean to a common man is very well known. These two basic needs of a common man are today very uncommon, thanks to the very high rate of food inflation and extra super inflation in the prices of need based House. What was left to the common man was perhaps, KAPDA i.e. Fabric. But the eagle eye of the central government has eventually fallen on this last lame duck pray so as to smoothen the beginning of the end of the common man. The reason: An expected VAT on FABRIC @ 5% . How ? Let us see:

The Finance Bill 2011 was introduced in Lok Sabha on 28th February, 2011 to give effect to the financial proposals of the Central Government for the financial year 2011-2012. On enactment this bill it will be called the Finance Act, 2011.

Chapter VI of the Bill –Miscellaneous – contains clause 75 which reads like this:

“75. The First Schedule to the Additional Duties of Excise (Goods of Special Importance) Act, 1957 shall be amended in the manner specified in the Thirteenth Schedule. “

Notes on clauses of the Bill explained the provisions of the above clause as under:

Clause 75 of the Bill seeks to amend the First Schedule to the Additional Duties of Excise (Goods of Special Importance) Act, 1957 in the manner specified in Thirteenth Schedule so as to take out sugar and textile from the purview of the said Act to enable the States to levy VAT on those goods, by omitting the following:-

(a)     All items of Sugar

(b)    All items of Textiles

You are alarmed now because from the above explanation you will know what is in the offing for the common man. It is: VAT ON FABRIC & SUGAR. As usual the language of law is always highly precise and technical so that no one can attempt an interpretation of the intended legal clause in a way which is not in consonance with the intention of the highest law making authority i.e. the Parliament. At this point even I feel I am becoming more and more technical and out of the bounds of the common knowledge of the business community. Let me be very simple. The above discussion can be summarised in just one line for Textile Industry and that is:

VAT ON FABRIC – EXPECTED ANYTIME FROM NOW.

Now let me explain the technical language of the law as above stated in the most simple and familiar way. I propose to restrict my discussion to Textile Industry only and would not deal with Sugar.

In 1956 the Central government decided to designate certain goods which it considered to be goods of special importance in inter-State trade or commerce, as ‘Declared goods” and having regard to the special importance of those goods in inter-State trade or commerce and regulate the levy of sales tax on those goods at a uniform rate in place of sales tax levied by the State Governments at varying rates. As a result The Central Sales Tax Act, 1956 was enacted. Section 14 this Act contained, inter alia, many products of textile industry mainly yarn and fabric of cotton, synthetic filament yarn and other manmade fibres which are known as Declared Goods. In order to regulate the taxation of the declared goods the central government placed two restrictions. 1) The levy shall not exceed Four percent and 2) Tax shall not be levied at more than one point. These restrictions caused losses to the States and in order to compensate these losses the Central Government decided to enact an Act known as “Additional Duties of Excise (Goods of Special Importance) Act, 1957” (popularly known as AED-GSI) to provide for the levy and collection of additional duties of excise on these goods and for the distribution of a part of the net proceeds thereof amongst the States to compensate for the loss of revenue due to the restrictions as above stated.  The commodities covered under this AED-GSI are listed in the First Schedule to the Act and are generally the mill-made textiles, tobacco and sugar. It has been also been provided that the States which levy a tax on the sale or purchase of these commodities after the 1st April, 1958 shall not participate in the distribution of the net proceeds.

It is thus apparent that the additional duty of excise AED-GSI was actually IN LIEU OF SALES TAX.

The mean rate of duty on items under Schedule I of the AED (GSA) Act 1957 was 8%. However by [Central Excise Notification No. 11/2006-C.E., dated 1-3-2006] the  Central Government  exempted all the goods falling under the First Schedule to the said Additional Duties of Excise (Goods of Special Importance) Act, from whole of the duty of excise leviable thereon under the aforesaid Act. Thus fabric enjoyed exemption from both the excise duty and sales tax. When this exemption was introduced it was widely perceived that the levy of sales tax on fabric was just a matter of time. But that was not to be. While the rate of AED-GSI was reduced to 0%, the taxable items continued to remain to be listed in the said First Schedule. The state governments were thus prevented from levying sales tax on Fabric because this product enjoyed the protection of being listed in the First Schedule to the AED-GSI Act 1957, though the rate of tax was 0%. Therefore so long as Fabric is listed in the AED (GSI) Act 1957 the State government can’t levy sales tax/VAT on fabric. This is clear from the following Entry in Schedule A which contained zero rated items:

Schedule “A”

Entry-45– Sugar and Fabrics as described from time to time in column (3) of the First Schedule to the Additional Duties of Excise [Goods of Special Importance] Act, 1957 (From 1-4-2005 to 31-03-2010)

Rate of Tax – NIL %

Schedule “C”

Entry-101- Varieties of sugar, tobacco, textile and textile articles as may be notified from time to time by the State Government in the Official Gazette.(From 01-04-2005 To 31-03-2010)

Rate of Tax- 4%.

However the Government of Maharashtra issued a notification No VAT-1510/CR 47/Taxation-1.- dated 10th March 2010 under THE MAHARASHTRA VALUE ADDED TAX ACT, 2002 to amend, with effect from the 1st April 2010 the SCHEDULE “A” and “C” appended to the said Act as follows:

Schedule “A”

Entry-45- Sugar and fabric as described from time to time in column 3 of the First schedule to the Additional Duties of Excise [Goods of Special Importance], Act, 1957 (58 of 1957) but excluding those specified in schedule ‘C’. (From 01-04-2010 to Date)

Rate of Tax – NIL %

Schedule “C”

Entry-101(a)-Fabrics and sugar as defined from time to time, in section 14 of the Central Sales Act, 1956. (01-04-2010 to Date)

Rate of Tax – 4%

Entry-101(b)– Varieties of Textile and Textile Articles as may be notified from time to time, by the State Government, in the Official Gazette. (01-04-2010 to Date)

Rate of Tax-  5%

The purpose of the above notification was to increase the rate of tax on Schedule C items from 4% to 5%. In so far as the Declared Goods were concerned, the rate of tax was kept @ 4% only because under section 15 of the Central Sales Tax Act 1956 the maximum rate of tax on Declared goods could not exceed 4%.

Later the Maharashtra Government issued a Notification No VAT-1510/CR 47A/Taxation-1.- dated 17th March 2010 to specify the Fabric for the purpose of Entry 101(a) of Schedule C which were to be taxable @4%. The items covered under the generic Fabric were as under:

1)      Terry toweling and similar woven terry fabrics of any textile materials other than cotton.

2)      Tulles and other net fabrics of cotton

3)      Tulles and other net fabrics of other materials

4)      Handmade Lace

5)      Narrow Fabric consisting of Warf without weft assembled by means of an adhesive (bolducs)

6)      Textiles Wall covering

7)      Rubberised textile fabric

The remaining items of fabrics continued to be listed in the Schedule I of AED-GSI.

1)      Woven fabrics of silk or of silk waste

2)      Woven fabrics of carded wool

3)      Woven fabrics of combed wool

4)      Woven fabric of cotton of different measure & count

5)      Woven fabrics of synthetic filament yarn

6)      Woven fabrics of artificial filament yarn

7)      Woven fabrics of synthetic staple fibres of different variety

8)      Woven fabrics of artificial staple fibres

9)      Woven pile fabrics and chenille fabrics

10)  Gauze, other than narrow fabrics

11)  Embroidery in the piece, in strips or in motifs

12)  Textile fabrics coated with gum or amylaceous substances,

13)  Tyre cord fabric of high tenacity yarn of nylon or other polyamides, polyesters or viscose rayon

14)  Textile fabrics, impregnated, coated, covered or laminated with plastics

15)  Fabrics covered partially or fully with textile flocks, or with preparation Containing textile flocks:

16)  Pile fabrics, including “long pile” fabrics and terry fabrics, knitted or crocheted

17)  Knitted or crocheted fabrics  of different weight & count

18)  Warf knit fabrics

19)  Other knitted or crocheted fabrics

Now comes the Clause 75 -Chapter VI of the Finance Bill 2011–Miscellaneous

Clause 75.- The First Schedule to the Additional Duties of Excise (Goods of Special Importance) Act, 1957 shall be amended in the manner specified in the Thirteenth Schedule i.e. all the items of fabric as above stated will be omitted from Schedule I of the AED GSI Act.

So once the Finance Bill 2011 is enacted as Finance Act 2011 without any modification to the above clause 75, all the items of fabric listed as 1) to 19) above will lose the protection of Entry-45 of Schedule A. All these items, being goods of special importance u/s 14 of the CST Act 1956, will now be covered by Entry 101(a) of Schedule C which means that all these items of fabric will attract a VAT of 4% and more so, the levy shall be automatic without any positive action by the State Government. Even worse is the effect of clause 74 of the Finance Bill 2011 which reads as under:

74. “In section 15 of the Central Sales Tax Act, 1956, in clause (a), for the words “four per cent.”, the words “five per cent.” shall be substituted”. “Thus this Clause seeks to amend section 15 of Central Sales Tax Act, 1956, so as to increase the ceiling imposed through the Central sales tax on the power of the States to levy VAT on the “declared goods” from 4 % to 5%.. (However for raising the rate from 4% to 5% a notification will be required)

Conclusion: Unless all the associations of cloth merchants assemble under an umbrella association and take up the case with the Central Government for dropping the Clause-75 of the Finance Bill-2011 and , just in case of any need, convince the State government to come out with a specific notification exempting the listed items of fabric from VAT, should the Central Government decline to consider the request for dropping clause-75, the Aam Adami would be the highest sufferer on the third count of Kapda i.e. Fabric also.

Compiled By: CA Lalit Munoyat, B.Com.(Hons.), CS., FCA, DISA, Email-[email protected], Mobile- 98201 93508

Click here to Read Other Articles of CA Lalit Munoyat