Interactive session on Karnataka Value Added Tax

© Confederation of Indian Industry

Interactive session on Karnataka Value Added

Tax

September 15 2011, Bangalore

Mahesh Jaising

(Partner) BMR Advisors


GENERAL ISSUES – SUBSTANTIVE /POLICY

RELATED ISSUES


Issues relating to Input Credit1. Difference between date of accounting the invoice and the date of the

invoice

Issue: Invoices are accounted on their receipt from the vendor - certain cases where

invoices pertaining to a particular month might get accounted in the subsequent month - results in there being a difference in the invoice period and the accounting period

Section 10 - methodology prescribed for claiming credit of input tax paid by the assessee

against the purchases made so as to set of its liability against the tax collected on sales made by a registered dealer;

Section 10(4) - provides that deduction of input tax shall be made against a tax invoice,

debit note or a credit note, in relation to a sale, and is with the registered dealer taking the deduction at the time of any return in respect of the sales

Authorities have seeking to deny credit on the said purchases due to the

difference of the period and demand is raised to the extent of differential amount


1. Difference between date of accounting the invoice and the date of the invoice

Recommendation:It is suggested that a clarification issued stating the process adopted for

reflecting purchases in the VAT returns is fine and that tax should not be levied on such differential amount

Issues relating to Input Credit


2. Documents evidencing Input credit Issue:The Dealers claim input credit based on the payments made to the vendor vide a

tax invoice. However, there might be cases where such vendor is not discharging his liability with the VAT authorities

VAT authorities disallow such input credit on the basis that the corresponding

vendors have not remitted the applicable tax, even though the Dealers cannot determine if the Vendor has remitted the applicable tax or has defaulted in this regard.

This is causing undue hardship to the Dealers as the rightfully claimed credit is

being disallowed by the VAT authorities

Recommendation:It is suggested that there should be specific instructions against the practice of

disallowing credit on this ground and instead action should be taken against the defaulting vendors



3. Availment of Input Credit on office equipment used in the Manufacturing Industry

Issue: Section 11(2) of the KVAT Act provides that Input tax shall not be deducted in

calculating the net tax payable in respect of tax paid on goods as specified in the Fifth Schedule.

Fifth Schedule includes electrical or electronic goods and appliance including fax

machines, duplicating machines other than for use in the manufacturing, processing, used for computing and storing information. Further, it also includes furniture and stationery articles.

Accordingly, the manufacturer is unable to claim VAT credit of such items

although they are being used in the relation to the manufacturing process Recommendation:It is recommended that the Fifth Schedule should be amended to remove the

restriction of claiming input credit of VAT on all goods that are used in the process of manufacture



4. Availment of VAT credit on purchase of Capital Goods when the Manufacturer is involved in both taxable and non taxable transactions

Issue: Section 11 of the KVAT Act provides restrictions with regard to the allowance of

input tax deductions.

It provides for partial allowance of credit in certain situations.

Further, Section 17 provides certain activities which the dealer might be involved in, then he would only be eligible to claim input tax apportioned in accordance with the formula specified in Rule 131(3) of the KVAT Rules.

Rule 132 provides that any Dealer claiming Input tax deduction under Rule 131,

shall complete his return on a provisional basis each month

the true apportionment for the year shall be made in the returns to be furnished for the sixth and final months of the year after calculating the apportionment under clause (3) or (5) of Rule 131 for the part period and the whole year.

Accordingly, such Dealers are currently facing difficulty in maintaining records for

the purpose of claiming input tax credit



4. Availment of VAT credit on purchase of Capital Goods when the Manufacturer is involved in both taxable and non taxable transactions

Recommendation:It is recommended that the availment of credit on Capital goods is simplified by

allowing the Dealer to avail credit on proportionate basis based on the past year’s proportion of taxable and exempt turnover



5. Requirement of pre-deposit of 50% of tax and other amounts

Issue: Section 62 of the KVAT Act - Dealer seeking stay of recovery of disputed taxes

and other amounts is required to deposit 50% of tax and other amounts at the time of filing the appeal

The first appellate authority may stay the recovery of the balance 50% of tax and other amounts, subject to the dealer providing security to the satisfaction of the departmental authorities.

Also, in terms of section 63 of the KVAT Act that there is a requirement of pre-deposit of 50% of the tax and other amounts as pre-condition for admitting an appeal by the Honourable Karnataka Appellate Tribunal.

However, in states like Rajasthan, only 10% of the differential tax demanded /

assessed needs to be paid for admission of the Appeal and in many northern states like Delhi, West Bengal no amount is required to be deposited while filing the first appeal

Issues relating to Stay Proceedings


5. Requirement of pre-deposit of 50% of tax and other amounts

Recommendation:In case of dealers preferring appeals before the first appellate authority and

seeking stay of recovery of tax and other amounts, there should not be any mandatory pre-deposit amount. Alternatively, the % of pre-deposit can be reduced to 10% of the disputed tax.

It could also be clarified that pre-deposit % needs to be applied on the disputed

tax amount and not on the interest/ penalty



6. Demand during the period of Stay

Issue:Section 62(4)(c)(i) provides for staying 50% of tax on payment of other half along

with filing an appeal Further, Section 62(4)(d) provides that during the continuance of the stay order,

the appellate authority should dispose of the appeal within a period of 240 days from the date of such order. However, if the same is not disposed off within 240 days, such order of stay shall stand vacated after the expiry of 240 days and the First Appellate Authority shall not make any further stay order

Further, Section 63(7)(b) states that if such appeal is not so disposed of by the

Appellate Tribunal within the period specified of 180 days, the order of stay shall stand vacated after the said period and the Appellate Tribunal shall not make any further stay order

In a situation where during the pendency of the case, the stay order expired, the

assessee is left with no statutory remedy, since under the KVAT Act, there is no provision for seeking of extension of the stay order granted in a specified case



6. Demand during the period of Stay

Recommendation:It is requested that a statutory remedy of seeking further extension of the stay

order be specifically provided for in a situation where the stay order granted expires pending the case, so that the interest of the assessee is well guarded



7. Penalty on filing of revised returns

Issue:

Section 72(2) of the KVAT Act provides for penalty on account of differential tax on filing of revised returns

If the differential tax payable by a Dealer on filing a revised return exceeds by more than 5% of his actual liability to tax, shall after being given the opportunity of showing cause in writing against the imposition of a penalty, be liable to a penalty equal to 10% of the amount of such tax under or overstated

Accordingly, even a voluntary correction of mistake / error which may in all possibility be due to oversight or a clerical error deems the Dealer to pay a penalty the differential tax if the same is more than 5% of the actual tax payable

Recommendation:

The said provision should not be applicable on voluntary revision of returns. However, the penalty can be imposed in cases department detects the error either at the time of audit or during the visit for verifying the books of account of a dealer

The said principle is followed in Central Excise and Service Tax laws as well

Penalty related issues


8. Revision in the criteria for levy of penalty

Issue:The KVAT Act prescribes various penalties for various offences even where

there is no malafide intention or suppression. Further, the penalty amounts are typically equal to the tax amount resulting in high demands of penalty even for minor procedural infractions

Recommendation:It is requested that a graded system of penalty be introduced with a nominal

penalty being imposed for procedural violations and a higher penalty (equal to the tax amount) being imposed only where fraudulent suppression/ evasion of tax is established

Penalty related issues


9. AMC tax to be paid on actual consumption of the materials

Issue:Explanation to Rule 3(1)(c) of KVAT Rules provides that any amount paid as

advance to a dealer as a part of consideration for transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be included in his total turnover in the month in which execution of such works contract commences

Further, Section 7 of the KVAT Act creates a legal fiction to levy tax on any

amount received as advance. Accordingly, a Dealer providing AMC is required to discharge VAT on the amount received as advance, even though the value of goods to be transferred during the actual execution of the AMC is not determinable at this stage. Hence VAT becomes leviable on adhoc basis and not on the actual value of goods transferred in the works contract.

Further, in light of the recent case of Nagarjuna Construction vs State of

Karnataka (2011) (6 GST 120 Kar), the Honourable Karnataka High Court held that Explanation to Rule 3(a) to (g) is contrary to section 4(1)(c) and Article 366(29A)(b) of the Constitution of India and is, therefore, unconstitutional and invalid

Other issues


9. AMC tax to be paid on actual consumption of the materials

Recommendation:It is recommended that the Explanation to Rule 3 and Section 7 is deleted

Further, a clarification could be issued providing that there would not be any levy of VAT on the advance amount pertaining to a works contract and tax can be paid as and when there is transfer of property in goods

Other issues


10. Time limit for payment of tax assessed

Issue:Section 42(4) of the KVAT Act provides that “Any other amount due under this

Act shall be paid within ten days from the date of service of the order or proceedings imposing such amount, unless otherwise specified”

The requirement to remit tax within 10 days is causing undue hardship to the

Dealers

Recommendation:It is suggested that the period for remitting tax should be increased to a

reasonable period of 30 days instead of the current period of 10 days

This would also align the same to the appeal time frame and address a disconnect – which often results in recovery officers seeking to recover from dealers, even though the appeal period has not lapsed

Other issues


11. Constitution of Advance Ruling authority in Karnataka

Issue:Section 60 which provides with regard to “Clarification and Advance Ruling” was

inserted by Act No 4 of 2010 wef April 1, 2010 Further, the Authority has been constituted on February 18, 2011 by the Order

No EST1/GPCR-142/10-11 However, the Bench has not yet started hearing the Advance Ruling matters

Recommendation:It is suggested that this is taken up on priority because in most of the other states

there is already a well functional Advance Ruling Authority

The Advance Ruling route provides an opportunity to the Dealer help in confirming his interpretation of a particular provision, to avoid future litigation and to plan his future course of action in a lawful manner

Other issues


12. Multiple Authorities investigating the same Dealer

Issue:An issue presently faced by many dealers, especially medium and large sized

companies is multiple authorities investigating into the same transaction/ dealer.

Specifically, investigation is carried out by the Local VAT Officer, Investigation

Cell as well as the Audit Wing on the same issue/ transaction resulting in considerable time and effort being spent on addressing the same query from different authorities

Recommendation:Given that all these authorities function under the VAT department, it is

requested that, only one investigation be undertaken by any one of these authorities vis-à-vis any dealer with appropriate internal information sharing within the department

Also, once an investigation/ audit is completed for a particular period, no other

authority should again initiate proceedings for the same period

Other issues


13. Extension of time limit for filing revised returns

Issue:As per section 35(4) of the KVAT Act, the prescribed time limit for filing a revised

return (except where such revised return is on account of issuance of a debit note) is 6 months from the end of the relevant tax period

Recommendation:Given practical difficulties being faced by the trade in adhering to the aforesaid

time frame, especially, where input tax credits pertaining to past periods require to be claimed, we request that the said time limit for revised returns be extended to a period of 12 months from the relevant tax period.

Alternatively, the time period may be relaxed where a revision is warranted on

account of availment of past period input tax credits - This would also enable revision of any error detected at the time of VAT audit by auditor of the company issuing certificate in VAT 240

Other issues


GENERAL ISSUES – PROCEDURAL

/ADMINISTRATIVE ISSUES


Procedural / Administrative Issues

1. Online facility for issuing TDS forms

Issue: Karnataka VAT law has introduced online systems in respect of all the administrative issues and we welcome the same. However, there is no such facility for procuring the TDS form online and the Dealer still needs to get the same issued from the VAT authorities. Further, in a particular case for one of the members, the TDS deducted is being shown as credit in their account instead of the particular contractor on whose behalf the TDS has been deducted. Accordingly, the said contractor is required to remit 100% tax

Recommendation:It is suggested that an online system is introduced for the purpose of obtaining TDS forms. Further, in the specific case, the corrective action should be taken to ensure that the credit is available to the contractor instead of the person deducting TDS



2. On-line submission of details pertaining to sales and purchases

Issue: Significant issues are being faced with respect to uploading of transaction wise details in the online systems of the department for filing Form Cs. The following issues in relation to uploading of transaction details are being faced by us: Xml files provided through the system are cumbersome and difficult to comprehend. For example, a dealer is required to enter details of Forms C received online. For this purpose a specific xml file has been provided. However a single Form C could be issued for many invoices. However, the xml provides that a Form C can be issued only for a single invoice. Each Form C entered online needs to be verified individually. Systems to be introduced to verify all Forms C at once.Interstate purchase details can be inserted only after the receipt of the goodsManual verification of physical Forms C and details entered online need to be done away with. There are cases of disconnect between the computer centre and the LVO Similar issues are faced while uploading details of purchases and sales of dealers online



2. On-line submission of details pertaining to sales and purchases

Recommendation:Entering of transaction data electronically is a new concept. It is suggested that the VAT Department•Set up help desks for the benefit of all dealers, especially to assist dealers during initial introduction of electronic data entry•Set up an issue resolution mechanism to resolve issues faced by dealers



3. Clarification on requirement of E - Sugam for all types of movements

Issue: Notification No: Adcom (I&C)/AC/CR-22/2010-11, Dated 28th February, 2011 provides for the transactions with respect to which an accompanying E-Sugam is required.

(1)Practically at the check posts authorities require the Dealers to produce E-Sugam for all kinds of transactions, even those which are not covered by the said Notification (2)For import transactions, the TIN details of the seller, ie, the exporter are required to be provided (exporter in another country does not have a TIN) - hence a default number has to be keyed in.(3)Specific query as to whether an E-Sugam is mandatory for movement of Import equipment from Airport to Destination

Recommendation:A clarification is issued to make the scheme clear in the minds of the Dealers


SEZ ISSUES


1. Time frame for processing of VAT refunds and fresh issues being brought up

Issue: Delays are being faced by exporters (especially SEZ units) in obtaining refund of

input VAT relatable to exports, and the time frame for processing refund application/ passing refund orders varies depending upon the jurisdiction/ authority

Recommendation:With a view to streamline and infuse an element of certainty in the refund

adjudication process, it is requested that a specific time frame be laid down as a part of the refund process, mandating adjudication of refund claims and issuance of refund orders within such time frame.

Specific recommendation that a time period of 30 days be prescribed as being

the time frame within which refund applications are to be processed and refund orders issued

SEZ Issues


2. VAT Refunds on certain products being sought to be denied

Issue: Refund is being sought to be denied on Schedule V goods like furniture, air

conditioners, telephones, etc. The VAT authorities are contending that as input credit on these goods is restricted in the normal course of business, refund cannot be claimed by SEZ developers as well

Recommendation:Rule 130A of the KVAT Rules clearly provides that a registered dealer being a

developer of an SEZ shall be eligible for refund of tax paid on any inputs purchased by him despite fulfilling the following conditions –

Such inputs are purchased for the purpose of development and maintenance of the

processing area of the SEZ; and Such inputs are purchased for the purpose of setting up, operation or maintenance of

an unit in the processing area of the SEZ; However, this Rule is not being followed. In this regard, it is suggested that a

circular be issued that the interpretation that restrictions of credit in Schedule V do not apply to SEZ developers/ units claiming refund

SEZ Issues


3. Refund being sought to be denied where credit claimed later than the purchase

Issue: SEZ developers and units account for purchases post acceptance of purchases

(including post inspection of purchases). Hence, on a practical basis, there may be a difference in the date of actual purchase and date of availment of Input VAT credit. In all such cases, the credit is only claimed later.

Some authorities are seeking to deny credit/ refund, if credit is claimed in a

month other than month of actual purchase. This is against the design of the KVAT law and in any case the dealer does not benefit on his own by claiming credit late

Recommendation:A circular be issued that Credit/ refund of VAT can be availed in any month post

the month of purchase

SEZ Issues


SOFTWARE INDUSTRY ISSUES


1. Issues faced by software service providers

Issue:

Software service providers are facing huge tax demands on their entire service revenue on grounds that the same pertains to sale of software liable to VAT – Circular issued by the Honourable Commissioner of Commercial Taxes, Karnataka on July, 24, 2006, is not being followed in its true spirit.

Transactions connected with software is being treated as sale of “goods”, Software implementation services; Manpower supply services (i.e. of software engineers), where the contract only involves

deputation of qualified personnel for consideration. In this transaction, the manpower supplied to the clients would work under the direction and control of the client and thereby be involved in enabling the clients to fulfil their requirements; and

Software development services, not involving transfer of property in the software

Also, demands being raised in respect of non software related services such as BPO/ call centre services – anyway, these when provided domestically would have suffered service tax

Recommendation:

A specific instruction be issued to the field officers to follow the circular above in its right spirit and no tax be sought to be levied on these service transactions

Software Industry Issues


2. Levy of VAT on export of services revenue

Issue: VAT demands are being raised on the export revenue failing to consider the fact

that, export, irrespective of whether the same pertain to goods or services is not liable to tax.

Specifically, the department insists on production of documents such as “bill of

lading” / “airway bill” for software service exports failing to appreciate that, unlike goods which are tangible, software services supplied electronically will not be exported under the cover of a “bill of lading” / “airway bill”

Recommendation:It is suggested that such documentary evidence, should not to be insisted upon

by the VAT authorities as proof of export and a condition precedent for grant of exemption.

To contest such exorbitant tax demands as above, the tax payer is forced to pay

50 percent of the disputed taxes as a pre condition of having their appeal heard

Software Industry IssuesIt is suggested that such documentary evidence, should not to be insisted upon by the VAT authorities as proof of export and a condition precedent for grant of exemption. Further, to contest such exorbitant tax demands as above, the tax payer is forced to pay 50 percent of the disputed taxes as a pre condition of having their appeal heard


3. Levy of VAT on manpower supplied to the clients

Issue: Authorities are demanding VAT on the revenue earned towards manpower

supplied to the clients would work under the direction and control of the client and thereby be involved in enabling the clients to fulfill their requirements.

While there is a circular issued by the Commissioner of Commercial Taxes,

Karnataka on July 24, 2006 vide Circular no 17/2006-07, the same is not being followed in its true spirit

Recommendation:A specific instruction should be issued to the field officers to follow the circular

above in its right spirit and that no tax be sought to be levied on any service transactions (software or non software)

Software Industry IssuesIt is suggested that such documentary evidence, should not to be insisted upon by the VAT authorities as proof of export and a condition precedent for grant of exemption. Further, to contest such exorbitant tax demands as above, the tax payer is forced to pay 50 percent of the disputed taxes as a pre condition of having their appeal heard


CONSTRUCTION/ REAL ESTATE INDUSTRY ISSUES


1. Rate of tax applicable on transfer of Declared goods involved in the execution of civil works contract

Issue: Section 4(1)(c) of the KVAT Act, provides that taxable turnover pertaining to

transfer of property in goods involved in the execution of works contract is liable to tax at the rate of 14%.

However, the taxable turnover relating to transfer of property in declared goods namely, iron and steel involved in the execution of civil works contract is liable to tax at the rate of 5% as provided in Section 14 and Section 15 of the CST Act read with Section 4(1)(c) of KVAT Act

The Karnataka VAT Department vide Circular no KSA CR 13/09-10 dated December 7, 2009 has clarified as follows:

that in all works contract, iron and steel would not be utilized and transferred by the contractor in the execution of civil works contract in the same form in which they were purchased and that only in a few cases it could be so. Therefore, in such cases, the works contractor would not be entitled to charge 4% on such turnover as is available to declared goods.

Construction/ Real Estate Industry Issues


1. Rate of tax applicable on transfer of Declared goods involved in the execution of civil works contract

Issue Contd:

The HC held as follows in the case of Nagarjuna Construction vs State of Karnataka (2011) (6 GST 120 Kar):

Tax rate applicable to declared goods under the CST Act (4%) would prevail over other rate specified in the schedule to the state VAT Act (12.5%) - distinguished the tax of rate applicable on declared goods from the rate applicable to a works contract. It has been held that when the declared goods do not change their form at the time of execution of works contract, the rate applicable on such goods shall be a lower rate of 5% instead of 14% which is applicable in case of a works contract

Recommendation:

The Circular be revisited/ withdrawn in light of the above decision and a suitable clarification should be issued to the effect that the iron and steel (Declared goods) involved in the execution of works contract would not attract the levy of VAT at 14% as works contract and would instead be chargeable at 5% in accordance with the rate specified under Section 14 and Section 15 of the CST Act read with section 4(1)(c) of the KVAT Act



2. Applicability of VAT on amounts collected by the Developer as BWSSB, KPTCL deposits, Car Park charges, Club development charges and Membership fees

Issue: For the purpose of determination of turnover of tax which would attract the levy of

VAT, currently the authorities are proposing to include the following charges:

charges like BWSSB charges, KPTCL charges, Car Park Charges, Club Development charges / Membership fees collected by the Developer / Builder

While, Honourable Commissioner of Commercial Taxes Circular No 11/2009-10

has been issued on December 7, 2009 and Clarification No CLR.CR.220/05-06 dated February 6, 2006 clarifying that the amounts collected towards BWSSB and KPTCL deposits cannot be taken as part of the total turnover or total consideration relating to transfer of property in goods involved in the execution of civil works contract by the Developer / Builder, there is no clarification on the other charges collected by the Developer / Builder



2. Applicability of VAT on amounts collected by the Developer as BWSSB, KPTCL deposits, Car Park charges, Club development charges and Membership fees

Issue Contd: As the underlying undivided share in the car park, amenities, infrastructure of the

club, etc do not get transferred to the buyers, there is no transfer of property in goods from the Builder / Developer to the buyers

In other words, these amounts are not in relation to the transfer of property in goods during the execution of works contract

Recommendations:A suitable clarification should be issued stating that the charges like BWSSB

charges, KPTCL charges, Car Park Charges, Club Development charges / Membership fees collected by the Developer / Builder should not form part of the taxable turnover



3. Composition scheme should be Contract specific and not Dealer specific

Issue : Currently, Section 15 of the KVAT Act provides that a Dealer would be eligible to

register as a Works Contractor with regard to its business stream (for instance Works contract, Hotel, etc) and does not have the option to choose different schemes for different projects / contracts at the same time

Recommendations:It is recommended that suitable amendment should be introduced to allow the

Dealer to register under different schemes for the purpose of payment of VAT with regard to different contracts and the said scheme should not be Dealer specific



5. Clarity on payment of VAT on sale of partly constructed flats

Issue : When a purchaser purchases a partly constructed flat, the consideration that he

pays is partly towards construction of the contract and the other part is towards purchase of immovable property (to the extent already constructed)

As immovable property does not attract VAT, the levy of VAT should be restricted to the value of goods, transfer of property in which has transferred after the agreement date

Recommendations:It is recommended that a suitable clarification is issued to clearly specify that only

the consideration pertaining to the “yet to be constructed” portion should attract the levy of VAT. Also, the method of computation of such split consideration may be prescribed



GST ISSUES


1. Update on GST

Issue: CII welcomes the introduction of GST soon. We request for a confirmed time

frame and also request for inputs from CII, on the draft legislations/ Rules when ready, before the introduction of GST in India

Recommendation:We request for an update on GST and steps that CII/ its members can take for

active discussion with the Department on possible issues under GST, so that Industry’s inputs are appropriately considered

GST Issues


2. Position under GST with regard to continuity of currently available different schemes for remitting VAT

Issue: Currently a Dealer has the option to register under various schemes and remit

VAT / CST under exemption / refund or rebate schemes. However, there is no clarity regarding the scheme of payment or registration that

would be operational under GST

Recommendation:It is suggested that some guidelines / draft paper on the scheme proposed under

GST is issued to provide some clarity to the Dealers

GST Issues


3. Applicable Adjudicating / Administrative authority under GST

Issue: Currently a Dealer is required to communicate with only one VAT department in

a particular state with regard to both adjudicating and administrative matters. However, there is no clarity about the scheme of things under GST, ie, whether

the respective administrative / adjudicating VAT offices would be in different states or would be a single point

Recommendation:It is suggested that GST scheme introduces centralized compliances, at the

place where the head office of Business is situated

GST Issues


4. Implementation of GST in totality

Issue: There is no clarity that whether GST would be accepted by all states in totality.

Further, there is no clear picture on the interstate movement of goods which are currently covered under waybills and road permits

Recommendation:It is suggested that some guidelines / draft paper on the scheme proposed under

GST is issued to provide some clarity to the Dealers.

GST Issues

Interactive session on Karnataka Value Added Tax

Documents

Transcript of Interactive session on Karnataka Value Added Tax