MVAT

A Project By:
Mohammed Aniq Syed Farheen Kadge Awais Ghori Moheen Shaikh Javed Shaikh Ganesh Katre 44 23 05 49 27 24

Dheeraj Yadav Aafaque Shaikh

19 01

Prof. Chetan Kadam

Rizvi Institute of Management Studies & Research

1. What is VAT?
MVAT Act, 2002, has been introduced in the state of Maharashtra w.e.f. 01042005.As the name suggests, VAT i.e. Value Added Tax is a tax upon every value addition.Prior to 01042005, Maharashtra had first stage singlepoint levy system of taxation implemented through the Bombay Sales Tax Act, 1959. Under that system, only manufacturers and importers were required to pay the tax on the first sale taking place in the state. As against this, VAT system contemplates tax at every stage in the entire chain of transactions relating to the same goods. The concept has become quite familiar with our fellow brothers and need not be explained further with the help of examples etc. Suffice it to say, VAT is leviable on each sale happening in respect of the same goods. A question frequently is asked whether positive value addition at every stage is necessarily required under VAT. The scheme of MVAT Act, 2002, does not require such value addition at every stage. Even if the seller sells the goods at cost price, without adding any margin for his expenses or profit etc., VAT is leviable on that sale. Value addition also does not mean enhancement of the intrinsic value of the goods. To give an example, A purchases motor car and fits accessories therein like air conditioner, music system etc. In this case, there is positive value addition to the intrinsic value of the goods and VAT is certainly applicable on the sale of such motor car. In another case, A purchases the said motor car and sells in the same condition without any refurbishment. In that case too, VAT is payable on the sale of such car although there is no value addition made by the seller therein. Value addition can also be in the nature of expenses incurred on the procurement of the goods and marketing thereof without adding anything into the intrinsic value of the goods such as selling expenses, advertising expenses, transport etc. Even in such cases, VAT is applicable on the sale of such goods. Another frequent query is in respect of the case where goods are sold at a loss. In that case too, VAT is applicable on the sale price although offsetting the purchase tax against such sales tax may result into a refund. There is no express prohibition under MVAT Act to claim refund in such cases.

2. Incidence of tax
The charging section is contained in section 4 which reads as under: Subject to the provisions of this Act and rules, there shall be paid by every dealer or, as the case may be, every person, who is liable to pay tax under this Act, the tax or taxes leviable in accordance with the provisions of this Act and rules. Thus, it is clear that every dealer/person who is liable to pay tax is required to pay taxes in accordance with the provisions of the Act and rules. The term person liable to pay tax has not been expressly defined under the Act. However, considering the

provisions of section 3, 4, 5 and 6 collectively, one can infer that VAT is payable only on the sales of goods where the threshold limit of turnover of sales is crossed by the dealer. It is pertinent to note that there is no provision for purchase tax under MVAT Act.

2.1. Dealers Registered under Earlier Laws: Section 3(1) of the MVAT Act makes it clear that dealers already registered under the erstwhile BST Act would automatically be treated as registered under MVAT Act w.e.f. 01042005. In fact, the registration certificate under BST Act continued till 31032006 and new TIN certificates were allotted to the dealers w.e.f. 01042006.

2.2. Dealers Liable to Pay Tax in the Preceding Year: There is another category of dealers who may not have been registered under the BST Act prior to 01042005 for whatever reason, but their turnover of sales or purchases have exceeded the threshold limit as prescribed under section 3(4) of the MVAT Act during the immediately preceding year. In other words, the dealer being an importer, whose turnover of sales or purchases exceeded Rs. 1,00,000/ in the F.Y. 200405 or a dealer other than an importer whose turnover of sales or purchases exceeded Rs. 5,00,000/ in F.Y. 200405 are the dealers liable to pay tax from the appointed day i.e. 01042005. Such dealers are required to obtain registration certificate and pay the tax w.e.f. 01042005 irrespective of their turnover in the year 200506.

3. Registration Liability:
Section 3(4) prescribes the limits of turnover of sales for the purpose of attracting registration liability. It must be borne in mind that it is only the turnover of sales which has to be computed for this purpose and not the turnover of purchases. The said limits are as under: Category Of Dealer Limit Of Turnover Of Sales Other Conditions Importer Rs. 1,00,000/ Value of taxable goods sold or purchased during the year is not less than Rs. 10,000/ Others Rs. 5,00,000/ Value of taxable goods sold or purchased during the year is not less than Rs. 10,000/

Importer, here, means as defined u/s. 2(13) and is a dealer who brings any goods

into the state or to whom any goods are dispatched from any place outside the state. Thus, he can be a dealer who receives the goods from other states either by way of stock transfers or by way of interstate purchases or by importing the goods from a foreign country. The condition of minimum value of imported goods is conspicuously absent in this section as compared to the corresponding section under the BST Act. Therefore, a dealer who is an importer in the sense described above, even for a negligible amount, would be liable for registration if his turnover of sales exceeds Rs. 1,00,000/. The condition regarding sale or purchase of taxable goods worth Rs. 10,000/ also has to be complied. If a dealer is wholly dealing in taxfree goods, then he does not attract the registration liability.

4. Interpretations:
Section 3(5) is in the nature of an explanation since it explains the meaning of the term turnover of sales. 4.1. Clause (a) of section 3(5) stipulates that turnover of sales will be considered whether the goods are taxable or not. It means that, for the purpose of computing the turnover limit of, say, Rs. 5,00,000/, sales of taxfree goods will also be considered. 4.2. Clause (b) refers to the computation of turnover of an agent. It explains that the sales made by such agent on his own account as well as on behalf of his principals, whether disclosed or not, will have to be counted. This subsection is based upon a principle that principal and agents are jointly and severally liable to pay tax under the Act. 4.3. Clause (c) deals with the case of an auctioneer who has been categorically included in the definition of dealer u/s. 2(8). The legislature has taken care to see that even an auctioneer who organises the auction without taking the possession or custody of the goods at any point of time, and without having any authority to transfer the title in the goods. This clause is made wider that its counterpart under the BST Act and has been introduced to overcome the ratio of the judgment in the case of M/s. Ashwin & Co. (Appeal No. 35 of 1994) decided on 25012002. However, it has to be borne in mind that the turnover of sales will be counted in the hands of an auctioneer only when he receives the price of the goods on behalf of his principal. In other words, the turnover of sales will not be accounted in the hands of an auctioneer when the sale price is directly paid to the principal or his nominee and the auctioneer merely organises the auction by bringing the seller and buyer together although, he is treated as a dealer by virtue of his activity. 4.4. Clause (d) deals with an agent of a nonresident dealer. Such agent has to compute the sales turnover of his own as well as that effected on behalf of his nonresident dealer and also the turnover effected by such nonresident dealer directly. In other words, the sales effected by the nonresident dealer within the state without the help of the agent also need to be counted in the sales turnover for the

purpose of computing the threshold limit of turnover u/s. 3(4). 4.5. It is provided u/s. 3(6) that various kinds of agents such as factor, broker, commission agent, delcredere agent or any other mercantile agent or auctioneer or agent of a nonresident dealer are liable to pay tax under the Act whether or not their principal is a dealer and whether or not such principal is liable to pay tax under this Act and whether or not such principal is disclosed. Thus, to give an example, an agent who effects sales on behalf of the principal who is an individual and not a dealer, is liable to pay tax under the Act, although such individual may not be a dealer under the provisions of the Act. 4.6. An important deviation has been made under the MVAT Act in respect of the dealers who are only liable to pay tax under CST Act and do not attract the registration liability under MVAT Act. Prior to 20062006, subsection (7) of section 3 provided for the liability of such person. The registration liability under CST Act is attracted when a dealer makes an interstate sale of whatever amount. There is no minimum threshold turnover limit under CST Act. The provisions under the BST Act made such dealers liable to pay tax under BST Act although they never exceeded the minimum turnover limit under that Act. However, under the MVAT Act, such dealers are not liable to pay tax unless they cross the minimum turnover limit attracting registration under the Act. To give an example, a dealer may effect interstate sales worth Rs. 50,000/ in a financial year and also local sales worth Rs. 50,000/. He is liable under CST Act and has to obtain registration under it. However, he is not liable under the MVAT Act since the minimum prescribed limit of turnover of Rs. 5,00,000/ is not attained by him. In such a case, he is not liable to pay tax on his local sales by virtue of deletion of this provision w.e.f. 20062006.

5. Deduction of the first turnover u/s. 3(2):

The proviso u/s. 3(2) provides that the dealer shall not be liable to pay tax in respect of such sales as take place during the period commencing on the first day of April of the financial year till his turnover of sales does not exceed the relevant limit applicable to him under subsection (4). The expression does not exceed indicates that the dealer is able to claim the exemption till the point, he does not cross the prescribed limit. This can be explained with the help of an example. A dealer has effected sales through 10 invoices and sum total of the first 9 invoices is Rs. 4,50,000/ and the 10th invoice is worth Rs. 75,000/. In this case, he exceeds the turnover limit of Rs. 5,00,000/ through the 10th invoice. However, he will get the exemption only in respect of the turnover of first 9 invoices. In absence of the expression does not exceed he could have claimed the exemption for all the 10 invoices. In an extreme example where the first invoice itself exceeds the threshold turnover limit, the dealer does not get any exemption at all.

6. Liability till the cancellation of registration:

Section 3(3) provides for continuation of liability until the registration certificate is duly cancelled. It means that the registration obtained wrongly will also continue to be operative until it is duly cancelled. A person cannot have a defence on the ground that he was not liable to obtain registration by virtue of not being a dealer. The grounds for cancellation also need to be checked in this respect in section 16(6) r/w. Rule 11. The registration certificate can be cancelled on two grounds viz. upon transfer or discontinuance of business and not exceeding the turnover limit during the previous year. In the first case, the cancellation is compulsory whereas in the second case, it is voluntary. A person who has erroneously obtained the registration certificate will have to get it cancelled on the ground that he was not liable to obtain the registration at all. However, such cancellation will have to be done prospectively and he will be held liable to tax in respect of the turnover of sales until the date of cancellation by virtue of this section 3(3).

7. Business and Dealer:

These two definitions are of utmost importance to decide the incidence of tax. They are defined u/s. 2(4) and 2(8) respectively. Business id defined in a much broader way under the MVAT Act as compared to the BST Act. It includes any service as well. However, only such services are covered which are notified by the state government in an official gazette by virtue of the definition of service u/s. 2(27). There is no such notification issued so far. An interesting question may arise where a fully service oriented organisation which might sell capital assets during the course of its activity. Whether such sales will be liable to tax as in the course of business? The Honble Tribunal has answered this question in the case of M/s. Zenith Global Pvt. Ltd. (SA No. 1026 to 1029 of 2001 dtd. 31012002) where it was held that purchases of fixed assets and other purchases while engaged in consultancy business are outside the purview of business as defined in section 2(5A) of the BST Act. This case is under BST Act and the wider definition of business under MVAT Act is not considered here. However, since no services are notified as yet, a fully service oriented organization cannot be construed as carrying on business and hence, sales of obsolete / old capital assets cannot be treated as sales liable to tax. Under the definition of dealer, certain persons, bodies or entities are treated as deemed dealers qua their activity of selling any goods such as scrap, unserviceable items, capital assets, etc. Examples are customs department, central government or state government departments, local authorities etc. Public charitable trust has also been included under this definition ostensibly to override the effect of the Supreme Court judgement in the case of Commissioner of Sales Tax vs. Sai Publication Fund (126 STC 288). In this case, the said trust was selling books and other items to spread the message of Sai Baba to devotees. The activity was not held as business looking to the objectives of the trust. By specific inclusion of public charitable trusts in the definition of dealer, it is now possible to take a view that the sales of any

goods incidental to the charitable objectives of the trust are in the course of business. It is also worthwhile to refer to the case of Shree Mahila Griha Udyog Lijjat Papad (SA No. 1108 of 1995 dtd. 15122006). The object of the trust was to raise the standard of living of women involved in making papad. The sales of papad are just incidental to the main objective and hence the activity was not construed as business. Thus, the transactions of sale or purchase of capital assets pertaining to the business have to be treated as liable to tax and one cannot take a view that they are not effected in the course of business since the main activity of business relates to some other goods. A partner of a firm bringing in a capital asset like motor car as his capital cannot be termed as purchase of the firm. Similarly, appropriation of the capital assets to the accounts of the individual partners at the time of dissolution of the firm also cannot be construed as sales of such capital assets. Ref. Recent Bombay High Court judgment in the case of M/s. Synthetic Suppliers (STA 8 of 2003 in Reference application No. 34 of 1998 decided on 06052010). The definition of business specifically excludes the profit motive and any activity which or without profit motive can be termed as business provided it has all other ingredients necessary for the same.

8. Voluntary registration:
The MVAT Act provides for voluntary registration upon a deposit of Rs. 25,000/ adjustable towards tax liability shown in the returns. Such registration is obtained without exceeding the turnover limit. The dealer becomes liable to pay tax from the date of registration irrespective of his turnover and he is not eligible for the first turnover exemption u/s. 3(2). Proviso u/s. 16(6) provides that the Commissioner may cancel the registration certificate granted voluntarily in a case where the dealer has not commenced the business within six months from the date of registration. Therefore, such dealers have to ensure that business is started within a period of six months when voluntary registration is obtained in anticipation.

9. Levy of tax as per schedules:

The VAT is levied on the sales of goods at the rate specified in column (2) of schedules B, C, D or E. Schedule E is a residuary entry and the goods which are not specified anywhere in the other schedules are included in this entry and the rate of tax is 12.5%. Schedule A contains all tax free goods. Schedule B contains jewellery, precious/ semiprecious stones liable at 1%. Schedule C comprises of goods liable to tax at 5% w.e.f. 01052010. Schedule D comprises of motor spirits, petroleum products and liquor liable to tax at higher rates. The turnover of sales has to be classified accordingly and subjected to tax at appropriate rates.

10. Conclusion:

In nutshell, it can be stated that a person effecting sales has to ascertain that whether he is doing so in the capacity of a dealer having regard to the frequency, continuity, regularity, volume etc. of the transactions. Refer Supreme Court judgment in the case of State of Gujarat vs. Raipur Manufacturing Co. Ltd. (19 STC 1). Once it is established that he is a dealer carrying on a business having regard to the peculiar definitions of the terms under the MVAT Act, he has to ascertain the total turnover of sales so as to determine his registration liability. The incidence of tax will be on the transactions of sales effected during the course of business by the dealer and not otherwise. The liability of tax has to be discharged taking into consideration the rates of tax as per schedules. Although the Act nowhere confers an express right to collect the taxes from the buyers, there is no prohibition to recover the taxes form the buyers as well. Considering all the provisions of the Act harmoniously, it can be concluded that the dealer can collect the taxes separately through the invoices only equal to his liability of tax on the said transaction.

Registration under MVAT Act

WHY TO OBTAIN REGISTRATION CERTIFICATE? 1 Obtaining of registration certificate is statutory obligation of every dealer, who is liable to pay tax under the Act. 2 It empowers the dealer to collect tax. 3 A registered dealer gets the benefits of set off (input tax credit) 4 Business without registration invites penalty/prosecution. 5 Nobody would like to buy goods from unregistered dealer. Who should apply for the registration? The dealer who attains or crosses prescribed turnover of purchase or sale should apply for registration under VAT Act within 30 days from the date on which turnover crossed the prescribed limit. Note: Once a dealer exceeds the prescribed turnover and fulfils the conditions as mentioned in table below, then the liability to pay taxes under the Act commences from the time of transaction by which the turnover exceeds the prescribed limit. What happens if not applied in time for registration? When a dealer does not apply within 30/ 60 days from the date of exceeding the prescribed turnover of purchases or sales than certificate of registration will be issued with effect from the date of uploading of the application. Therefore, from the date of starting of business till the date of uploading of the application, the dealer will be treated as unregistered. Provisions of Penalty for unregistered dealers: If dealer does not apply in time and remains unregistered, it is an offence under the Act.

Benefits of Registration:
i. He can claim set off of tax paid on the purchase if eligible to get any. ii. He can issue various declarations prescribed C.S.T. Acts like Form C etc. iii. Registered dealers are preferred while awarding the government contracts. The above mentioned benefits are denied to an unregistered dealer.

Disadvantages of non registration:

1 Unregistered dealer is liable to pay tax on the sales affected by him but he cannot collect tax. 2 He cannot claim any set off or refund of the tax paid by him. 3 Purchases at concessional rate of tax not available to him. He cannot issue forms or declarations like Form C etc. 4 No authenticity in the market as majority of dealers purchases goods from registered dealers only. 5 Possibilities of non consideration for awarding the government contract. 6 Imposition of penalty and prosecution for remaining unregistered.