Karnataka Value Added Tax Act, 2003

1. Karnataka Value Added Tax Act, 2003

2. Preamble • The Karnataka Value Added Tax Act, 2003 (VAT Act) received the Presidential assent on 15.12.2004 and was published in the Karnataka Gazette on 19.01.2005 • The VAT Act was amended in the 102 session of the legislative council vide L A Bill no. 4/2005 by the legislative assembly on 04.02.2005

3. Preamble • The legislature passed this Act under its powers available to it vide Entry 54, List II of the Seventh Schedule to the Constitution which reads: • “Taxes on sale or purchase of goods other than newspaper, subject to the provisions of Entry 92 A of List I of the Seventh Schedule”

4. Preamble • The legislative powers is inter-alia subject to restrictions and conditions relating to sales vide Article 286(1) and 286(2) of the Constitution of India read section 3, 4, 14, & 15 • Article 286(1) speaks about the restriction on the State to impose Tax on: • Sale outside State • Import or Export • Article 286(2) speaks about the formulation of principle in the above cases.

5. Some Important Definitions • Business • The word business is an inclusive definition (it commences with Business includes…..) • Since it is an inclusive definition the activities specified in the definition clause is only a enumerative and not exhaustive

6. Some Important Definitions • Dealer • Dealer means any Person…. • The word person is not defined under the VAT Act, therefore one has to fall back on allied acts or follow the meaning stated in Karnataka General Clauses Act • A noticeable exclusion is “a miller who carries on business”. • It is possible to contend that the miller who does not buy and sell on his own account is neither a dealer nor is a person liable to tax

7. Some Important Definitions • Import • This definition does not refer to section 5(2) of the CST Act and has a wider meaning. • It includes inter-State purchases / Stock transfers / receipt from agents / principal or • Receipt by any other means – loan / demo / exhibition etc.

8. Some Important Definitions • Branded Goods means any goods sold under a name or trade mark registered or pending registration or pending registration of transfer under TMM Act 1958 or TM Act 1999 • There is no reference to branded goods anywhere in the Act. However, the amendment bill of Feb 2005 refers to Un-branded broomsticks in entry 43 of First Schedule (Exempt goods) • There is a possibility of further amendment to the Act in respect of branded goods or goods sold in a MRP scenario – like sale of pharmaceutical goods

9. Incidence & Levy • In terms of Section 3(1) of the VAT Act every sale of goods in the State by a registered dealer (or dealer liable to register) is liable to tax. • On an analysis of section 3(1), issues that emerge are: • VAT is a multi-point levy on RD / person liable for registration • It is levied at every stage of sale • It is levied on all goods. However, goods listed in First Schedule specifically exempted u/s 5 viz. petrol / diesel / ATF / sugar cane / lottery tickets. • Goods not listed in the first schedule may be exempted u/s 5 by way of notification

10. Incidence & Levy • In terms of section 3(2) which reads “taxable goods purchased from an unregistered dealer will be liable to tax in the hands of the buying dealer.” On an analysis of this sub-section the issues that emerge are: • Levy is at the point of purchase on a person who is RD or liable to register • Levy is applicable on such purchases meant for sale / re-sale • Levy is applicable even on a transaction of a purchase provided such goods purchased are taxable and covered under second / third / fourth schedules to the Act • Levy is applicable on taxable goods not covered in any schedule when purchased within the State

11. Incidence & Levy • Packing materials when charged for separately will attract the same rate of tax as that of the goods sold • Power to reduce tax on sale of goods by way of Notification is retained • Place of sale of goods- • In respect of local sale, the sale or purchase is deemed to take place within the State irrespective of where the contract is entered into so long as the goods are within the State. • In case of specific or ascertained goods at the time, the contract of sale is entered into • In case of unascertained or future goods at the time of their appropriation

12. Incidence & Levy • Place of sale of goods • In respect of Works Contract, if the goods are within the State at the time of transfer irrespective of the place where the contract is entered into • In respect of Transfer of Right to use goods, if the goods are for use within the State tax is payable in the State irrespective of where the contract is entered into • Section 6(3) & 6(4) are ultra vires the constitution – 20th Century Finance Corporation Ltd. (119 STC 182). In this decision expl. 3(d) to sec 2(1)(t) of the KST Act (defines Sales) was held unconstitutional.

13. Incidence & Levy • Time of sale of goods • Sale is deemed to take place at the time of transfer of title / possession or incorporation of goods in any Works Contract irrespective of receipt of payments. (New Rules are yet to be prescribed for issue of tax invoice) • If tax invoice is issued within 14days from the date of sale, sale is deemed to take place at the time of issue of invoice • If tax invoice is issued prior to sale or receives payment in respect of such sale, sale is deemed to take place at the time invoice is issued or payment is received which ever is earlier • Fixing by legal fiction the taxable event on receipt of advances or issue of tax invoice, before transfer of property may amount to unconstitutionality – Consolidated Coffee ltd (46 STC 164) & Installments Supply Ltd (34 STC 65)

14. Incidence & Levy Agents • There is no change in the taxability of agency transactions under the VAT Law when compared to KST provisions • Agents are liable to pay tax on behalf of non-resident, even if the principal is not a dealer under this Act or whose turnover is less than the threshold limit. • Such transactions of purchase or sale as the case may be, the principal is not liable to pay tax under the Act • Agent is not eligible for input tax setoff in terms of section 11(b). However, if tax paid by agent is part and parcel of output tax in the hands of principal, such principal is entitled to set-off • Agents acting on behalf of non-resident principal are eligible for input tax set-off.

15. Collection of Tax • Every registered dealer liable to pay tax shall collect tax and such collection of tax shall be accounted as prescribed • Central / State Governments, Statutory Body or a Local Authority shall collect tax on taxable sale of goods • Provisions of section 18(1) of the KST Act, bars collection of tax by URD and bars excess collections by RD’s. • Under VAT Act, there is no specific bar on URD from charging and collecting tax nor the registered dealer is barred from collecting excess tax on sale. However, section 47 requires that such amounts collected is to be paid to the Government within 20 days

16. Input Tax • Input Tax means tax paid or payable by a registered dealer on purchase of goods under this Act in the course of business • It is sum total of tax paid on purchase of goods mentioned in the second, third, fourth and non-scheduled goods effected from the registered dealers inside the State • Such purchases are meant for sale / resale, for use in the manufacture / processing of goods or on capital goods purchased for use in the business • Input Tax includes tax paid by the registered dealer to his agents who purchases on his behalf

17. Input Tax • No deduction for Input tax will be permitted unless such deduction is supported by a Tax Invoice / Debit note / Credit note • Tax paid by the registered dealer on URD purchase need not be supported by such Tax Invoice / Debit note /Credit note • If the Input Tax exceeds the Output Tax, the excess can be adjusted or refund claimed (together with interest) as prescribed • Goods returned to vendor within six months from the date of receipt – input tax is to be reversed

18. Input Tax Partially allowable • Input used in taxable goods sent on consignment / stock transfers will be rebatable only in excess of 3% (2% effective 01.06.2008) • Input tax is not deductible in the hands of a commission agents purchasing and selling goods on behalf of any other person other than non-resident principal • Input tax paid by the agent, will be rebatable in the hands of principal provided principal is a registered dealer within the State • Pre-registration purchases: Stock of business inputs& capital goods held at registration (section 13) are rebatable if purchased within the previous three months (condition is - such goods must be in stock on registration date)

19. Input Tax Partially allowable • Pre-registration purchases - If the goods are sold or otherwise disposed off within the three months period – input tax setoff will not be allowed • Proportionate rebating is envisaged in respect of a dealer whose sale consists of both taxable and exempt goods and stock transfers • Input Tax are subject to restrictions specified in Sec 11, 12, 14, 17 & 18 of the Act – dealt separately

20. Input Tax restrictions • Tax paid on purchases relatable to sale of exempted goods. However, if such exempted goods are exported input tax rebate is permissible • Sec 11(1) talks of exempt goods listed in first schedule or as notified in terms of section 5. In such cases input tax will not be available for set-off • Input tax restriction does not apply to goods where tax rates are reduced by way of notification u/s 4(3). For instance, a commodity subject to tax at the rate of 12.5% may be reduced to 4% or 0% by way of notification

21. Input Tax restrictions • No deduction shall be allowed in respect of goods specified in Schedule five and other notified goods except when such goods are meant for resale • No deduction shall be allowed in respect of capital goods listed in schedule five and other notified capital goods

22. Input Tax restrictions • Petroleum products used as fuel in motor vehicles are not rebatable • Petroleum products when used as fuel in production of taxable goods or captive power generation will be rebatable in excess of 3% (2% effective 01.06.08) QUESTION IS - TAXES ON CERTAIN PERTROLEUM PRODUCTS WILL BE PAID UNDER KST ACT. HOW DOES ONE CLAIM REBATE UNDER THE VAT ACT.

23. Input Tax restrictions • Purchase of taxable goods from URD’s for use as fuel. The word fuel is not defined. • Purchase of taxable goods from URD’s (except fuel) will be liable for payment of tax. However, such input tax shall be eligible for rebate only when the output becomes liable to tax (trading scenario) or when such goods are consumed in the manufacture of taxable goods • Input tax paid on purchase from a dealer who is required to register, but has failed to register will not be rebatable

24. Input Tax restrictions • A dealer who opts for payment of tax under composition scheme is restricted from claiming rebate on purchases. • Change in use of input goods / lost / destroyed / capitalised etc. However, in such scenario the input tax set-off claimed shall be paid in succeeding month. The value of goods on which tax is to be paid will be the PMP (QUESTION IS – WHETHER SUCH TAX CAN BE SUSTAINED SINCE THERE IS NO SALE INVOLVED)

25. Input tax on Capital Goods • The word capital goods defined u/s 2(7) means plant including ……. Equipments……jigs used in the course of business other than for sale. Since the word equipment is used and not defined it is possible to contend that all business assets of the dealer could fall within the meaning of capital goods • Restrictions apply as dealt with earlier on notified and exempted capital goods

26. Conditions in respect of Capital goods – Rule 133 • Deduction of input tax shall not be allowed, in case capital goods are used wholly for sale of exempt goods (except when such goods are exported) • In case of change in use of capital goods from sale of exempt goods or non-taxable goods wholly or partially, within 12 months from the date of its purchase, the dealer is eligible for set-off on such capital goods; • If the above change happens - say in the fourth month - Whether such dealer is eligible to avail the input tax set-off fully or on proportionate basis?

27. Conditions in respect of Capital goods – Rule 133 • If the Capital goods is used for both: • sale of goods in the course of export or sale of taxable and exempt goods; and • Taxable goods disposed of otherwise than by way of sale or non-taxable transaction The non-deductible element of input tax shall be calculated on the basis of the following formula: Non-deductible input tax = (sale of exempt goods + non-taxable transactions) * total input tax / total sales (including non-taxable transaction)

28. Conditions in respect of Capital goods – Rule 133 • A Registered Dealer whose taxable turnover is less than the threshold limits specified under section 22(2) in a year are not eligible to claim deduction of input tax paid on capital goods. • What happens - if a dealers invests in Capital Goods in March and his taxable turnover in that year is below Rs. 2 lakhs? • Deduction can be claimed by the dealer in his monthly return. • The un-expired portion of rebate on capital goods purchased before April 2006 can be claimed in the month of April 2006 subject to conditions as specified

29. Conditions in respect of Capital goods – Rule 133 • After taking deduction of input tax, if there is a change in use of capital goods, and the dealer is no longer eligible for such input tax set-off, he is required to inform the prescribed authority within 10 days of such change in use – Taxable to job work etc.,. • If the capital goods are disposed of otherwise than by way of sale, the dealer shall be liable to pay tax at prevailing market price of such capital goods at the time of such disposal – stock transfer, donate, gift etc.,

30. Output Tax • Output Tax means tax payable under this Act on TaxableSale of goods in the course of business • It is sum total of tax liability on the taxable turnover of sale or purchase of goods, mentioned in second / third / fourth and non-scheduled goods at the rate of tax prescribed therein. In case of works contract at the rate prescribed in Sixth Schedule. • Output Tax includes tax payable by a commission agents on Taxable Sales • Commission agent is required to issue a prescribed declaration to the principal • If Output tax exceeds Input tax, the excess amount of input tax is eligible for refund / adjustment in the subsequent month • In case of sales returns within 6 months out put tax is to be reversed

31. Net Tax • Net Tax means tax payable by a registered dealer on his output less Input Tax available as deduction

32. Computation of Partial rebate • In terms of Rule 131(4) of the KVAT Rules, 2005 - any input tax used in both sale of taxable goods and exempt goods including non-taxable transaction, the non-deductible input tax may be calculated as follows: Non-deductible input tax = (sale of exempt goods + non-taxable transactions) * total input tax / total sales (including non-taxable transaction)

33. Special Accounting Scheme • Retail dealer liable to pay tax may apply to the authority to pay tax under special method if he is unable to identify the each individual sale, its value or the rate of tax

34. Special Accounting Scheme • Primarily two classes of such dealers exists who choose to opt for special accounting scheme: • For instance if the tax rates are 4% and 12.5% the methodology of working is as follows: • If sale of 4% goods is 50000/- and 12.5% goods is 10000/- the output tax liability will be as follows: • 4 / 104 = 0.0385 * 50000/- = Rs. 1923 • 12.5 / 112.5 = 0.0111 * 100000 = Rs. 1110

35. Special Accounting Scheme • Dealers who cannot identify sales turnover of different taxable goods shall go by the purchase method. For instance, if 4% purchases is at Rs. 100000 and 12.5% purchases is at Rs. 200000 the tax liability is worked out as follows: • The ratio of 4% goods vs 12.5% goods is 33.33 : 66.67 • If total sales of both the above goods is 3.6 lacks the ratio of 4% vs 12.5% is 120000 and 240000 • Output tax is calculated as follows: • 120000 * 4% and 240000 * 12.5%

36. Adjustment, Refunds & Reimbursements • Adjustment based on returns (Rule 127) • Excess input tax relatable to a dealer is permitted to be adjusted against tax payable / arrears under VAT Act or CST Act or seek adjustment against arrears arising under KST Act / KTEG Act / SET Act. • A dealer who files a monthly or quarterly or final return (on cancellation of RC) can opt for adjustment cited above. • The above adjustment must be sought for (an application should be made).

37. Adjustment, Refunds & Reimbursements • Refund in relation to an exporter (Rule 128) • A dealer is entitled to lay claim for refund of excess input tax based on monthly or final return. • Can one argue that a dealer who is filing his return quarterly is not entitled for refund? • Such refund is permissible after adjustment of taxes / arrears specified in Rule 127 • Such refund shall be given by the officer authorised by the Commissioner within 35 days after the end of the month provided the return is filed in time specified in section 35 ( time limit for return is 20 days from the close of the month). • It implies that if the return is filed on 10th of subsequent month the refund is due within 35 days from the last date of return (i.e., from 20th of the subsequent month)

38. Adjustment, Refunds & Reimbursements • Refund in relation to an exporter (Rule 128) • If return is filed belatedly within 15 days of filing of such belated return • It implies that if the return is filed say on 21st of the subsequent month, the refund will be due within 15 days (within 6th of the next month) from the date of the receipt of the such belated return • It appears that a defaulter can get a refund earlier • In case of any dealer who files a final return refund will be due within 35 days from date of receipt of such final return.

39. Adjustment, Refunds & Reimbursements • Rejection of Refunds • If claim suffers from any mistakes apparent on the record • Claim appears to the VAT officer to be incorrect or incomplete based on information available on record ( Intl reports, Invoices available on record – pending cross verifications) • In such cases dealer seeking refund is to be given an opportunity to show cause prior to rejection • In case of delay in issuing refunds within specified time interest at 6% per annum proportionately for part of the month

40. Adjustment, Refunds & Reimbursements • Reimbursement – Rule 130 • Input tax paid on corresponding purchases effected by UNO / Consulates/ Embassy of other countries shall be reimbursed. • Such UNO / Consulates / Embassy claiming reimbursement must make an application in Form 165 to the Commissioner within 60 days from the date of purchase together with copies of invoices • On satisfaction the Commissioner shall direct the local VAT officer to reimburse such amounts

41. Registration • Turnover exceeding Rs.2 lakhs as on 31.03.2005 • Turnover exceeding Rs.15,000 p.m. in any month • Voluntary registration • Transfer of business – transferee should get registered • Dealer involved in Inter-State transactions, Imports / Exports / Works contracts / Casual trader / Non-resident • If dealer fails to register, prescribed authority is empowered to Suo moto register

42. Registration • Dealer to apply in prescribed form • Prescribed authority to grant registration on his satisfaction that a applicant is bonafide dealer and on compliance of prescribed requirements • Registrations to be valid from the first of the following month or on such earlier date mutually agreed • Registrations can be refused for good & sufficient reasons • Commissioner to authorise for issue of RC to Central / State Governments, Statutory Body or Local Authority

43. Registration • Prescribed authority can demand security deposit as specified • Prescribed authority can forfeit security deposit when tax remains unpaid / misuse of certificates / declarations etc., • Dealer to intimate changes in business/ ownership/ status/ name/ nature/ succession Amendment to RC • In respect of amendment of registration certificate the provisions relating to the existing sales tax law hold good.

44. Cancellation of Registration • Registration under this Act, can be cancelled when: • The business is discontinued / transferred fully or otherwise disposed off • Change in status / ownership • Taxable turnover of sale of goods for a period of 12 months is below Rs.2 lakhs • A registered dealer issues Tax Invoice without affecting taxable sales • For any other good or sufficient reasons

45. Cancellation of Registration • On cancellation of registration: • Liability to pay tax / penalty / interest for period prior to date of cancellation continues • Dealer liable to pay tax on stock of taxable goods held by him at prevailing market price • Obliged to file a final return

46. Returns & Taxes • A registered dealer / Central / State Government is required to file a return within twenty days after the end of the month together with the amount of tax due • The competent authority can insist upon filing separate branch returns if a dealer has more than one place of business in the State. • Any omission or incorrect statement in the return to be revised within a period of six months • Interest @ 1.25% shall be payable if taxes due have not been declared in the return within a period of three months • Interest @ 1.25% is payable on non-payment of tax declared/ non-filing of return

47. Assessments & Reassessments • A scheme of deemed assessment is envisaged except in cases where the Commissioner notifies production of accounts • Best judgement assessments is envisaged in cases where monthly / final returns are not filed • In cases where best judgement assessment is completed and the dealer files the returns within a period of one month, the prescribed authority is empowered to withdraw such best judgement assessment • Protective assessment can be passed if the assessing authority has evidence to prove a liability to tax and such other conditions as specified. In case of such protective assessment the tax / penalty / interest will become payable forthwith

48. Assessments & Reassessments • Returns which are deemed to be assessed or any assessment issued u/s 38 understates the correct tax liability of the dealer, he can reassess to best of his judgement, the additional tax payable including imposing penalty and interest. In such cases the tax is required to be paid within ten days of service of notice. The dealer shall have an opportunity of being heard • An assessment or reassessment is required to be completed within five years from end of the tax period. In case of evasion such period is ten years • Mistakes apparent on face of the record can be rectified

49. Assessments & Reassessments • Commissioner can authorise any authority, to assess the unregistered dealer (who is liable to get himself registered) to the best of his judgment. • Rectification of assessment / re-assessment if prejudicial to revenue to be within a period of 3 years from the date of relevant order • Power to withhold refund has been retained in certain circumstances • All other provisions relating to recovery of unpaid taxes are similar to the provisions of the existing KST laws

50. Entry, Search & Seizures • The prescribed authority may inspect business premise of any dealer and demand production books of accounts pertaining to business • Such authority is empowered to seal the premises or seize the books of accounts and other documents relating to business in case of suspicion of evasion of tax • Such authority is empowered to record statement of any authorised person and affix identification marks on accounts / registers / documents or goods