Legality of Single Stage Taxation under the Punjab Value Added Tax Act, 2005

Varun Chadha (Advocate)

On 01-04-2005 Government of Punjab introduced Punjab Value Added Tax Act, 2005 (in PVAT Act, 2005) by abolishing the Punjab General Sales Tax Act, 1948. As the name suggests it’s a tax charged on portion of Value Addition at each stage. At each stage, tax calculated on sales (Outputs) and vendors are able to claim tax credits to recover the tax paid on their purchases (Inputs).
White paper issued by the Empowered Committee for implementation of VAT by the States also speaks of the Concept of VAT and Set-off/ Input Tax Credit:

“The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. The Value Added Tax (VAT) is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period.”

However the Excise & Taxation Department, Punjab miserably failed to implement the Value Added Tax and the same had resulted in huge loss to state exchequer. Nothing was done by the Excise & Taxation Department to check the leakage of revenue in the past 10 years and under the garb of simplifying tax collection and giving relief to Lakhs of small traders and retailers The Government of Punjab reverted back to the old system of Single Point Taxation on some items though no powers were conferred upon by the Act.

All the Notifications of Single Stage Taxation are issued under Section 8(3) of the PVAT Act, 2005. The same is reproduced below for reference:

“Section 8(3) The State Government after giving fifteen days notice by notification, of its intention so to do, may by like notification, alter the rate of tax specified in any of the Schedules, add to or omit from or otherwise amend the Schedules and thereupon, the Schedule shall be deemed to have been amended accordingly:

Provided that if, the State Government is satisfied that circumstances exist, which render it necessary to take immediate action, it may, for reasons to be recorded in writing, dispense with the condition of previous notice.”

Section 8(3) only empowers the State Government to alter the rate of tax or omit any item or amend the Schedule. It nowhere confers any power to change the stage of tax or to implement Single Stage/ First Stage Taxation. Interestingly the Excise & Taxation Department, Punjab itself in the clarification have stated that:

“These notifications have been issued under the powers vested in Government under section 8(3) of VAT Act, 2005 to modify the rates of tax.

These notifications have nothing to do with newly introduced section 8-C of Punjab VAT act, 2005 which has provisions for introduction of optional scheme.”

So all notifications issued are illegal and bad in law and are liable to be struck down as the Act nowhere provides for the Single Stage levy of the Tax.

Goods which are added in Single Stage Taxation cannot be termed as tax free goods as they do not fulfils the conditions laid down in Section 16 of the PVAT Act. The same goods are under mentioned under Schedule ‘A’ as well as in Schedule ‘B’ or ‘E’. The Excise & Taxation Department vide its Notifications and Clarifications had made same goods as tax free at one stage and taxable at the other which they cannot do under the Act.

“The object behind introduction of Single stage taxation is to impose single stage taxation on the goods sold in retail to the end consumers at karyana stores and in which no further value addition is baing done.”

There are many goods in this Single Stage System where there is huge value addition and this Single Stage System of Tax is causing huge loss to State Exchequer. Let’s take an example of Cold Drink/ Aerated Drinks taxable @ 27.5% w.e.f 01-10-2014 sold by Hotels/ Restaurants to its customers.

Tax Payable Under the old System Tax Payable Under the Single Stage System
Assuming the Hotel/ Restaurant purchases a bottle of Cold Drink @ Rs.6/- a bottle and paying tax of Rs.1.65/- @ 27.5% to its vendor.

Now they sell a glass of Cold Drink to their customer @ Rs.100/- and charges VAT @ 27.5% which amounts to Rs.27.5/-

Net Tax Payable in government Treasury by Hotel/ Restaurant on 1 Bottle

Output Tax               Rs.27.5/-

Less Input Tax Paid   Rs.1.65/-

Net Tax Payable       Rs.25.82/-

Assuming the Hotel/ Restaurant purchases a bottle of Cold Drink @ Rs.6/- a bottle and paying tax of Rs.1.65/- @ 27.5% to its vendor.

Now they sells a glass of Cold Drink to their customer @ Rs.100/- and charges no tax as the same is made tax free at subsequent stage.

Net Tax Payable in government Treasury by Hotel/ Restaurant on 1 Bottle

Output Tax               NIL

Less Input Tax Paid   NIL

Net Tax Payable       Rs.1.65/-

(Charged at importer/ Manufacturer level)

So on 1 bottle of Cold Drink served in Hotel/ Restaurant Government of Punjab is losing VAT of Rs.24.17/- due to this Single Stage Taxation System.

Similar is the conditions with Mineral Water, Fruit Juices, Fruit Drinks, Ice Creams.

Some Hotels/ Restaurants are still charging VAT from the customers and not paying them into the Government Treasury. There is no mechanism to check this evasion of tax and nothing is been done so far to curb this leakage of tax and the customer is charged twice and state is gaining nothing out of it.

Denial of Refund in case of CST Sale of Single Stage Goods:

In the clarification dated 31-12-2013 it was stated:

“In light of these notifications any transactions in the hands of subsequent dealers will be tax free. So, if any subsequent dealer makes any inter-state sale of the notified goods, the tax liability will be nil and at the same time ITC available will also be nil.”

No ITC can be denied on the tax paid on the purchase of Single Stage Tax goods as the same are sold by way of Interstate sales against ‘C’ Forms. If a subsequent dealer sells the goods @ 2% by way of interstate sale the department is bound to give refund of the excess tax paid by him within the State of Punjab. Section 13 of the PVAT Act provides for the availability of the Input Tax Credit while making Interstate sales and No amendment was made in the said Section for denying any ITC on the Interstate sales of Single Stage goods. Clarification by department in no terms can supersede the provisions of Statute. Thus the same is illegal and bad in law and issued without applying proper mind and thus not binding on the dealer.

On one hand Excise & Taxation Department itself admits that there is nominal value addition in these First Stage goods and on other hand the Department is denying ITC to subsequent dealers who are making interstate sales of first stage goods thus by forcing these subsequent dealers to reduce the amount of tax paid to the Manufacturer/ Importer from their profit margin.

Denial of Refund to the Exporters on Export of First Stage Goods:

Excise & Taxation Department is denying refunds to the exporters of the First Stage goods on the grounds that these goods are tax free at the subsequent stage and no refund can be claimed on tax free goods. Section 5 of the Central Sales Tax Act, 1956 provides that last sale or purchase made preceding to sale or purchase occasioning the export shall also deemed to be in the course of Export and will be exempt from tax.

Section 18 of the PVAT Act, 2005 provides that Exporter shall be entitled to claim refund of Input Tax paid on the goods exported out of the territory of India. Section 5 of CST Act, 1956 & Section 18 of the PVAT Act, 2005 are reproduced below for reference:

“Section 5 of CST Act, 1956

Sec 5(1) xxx

(2) xxx

(3) Notwithstanding anything contained in sub-section (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.

Section 18 of PVAT Act, 2005

18 (1) xxx

(2)    A taxable person shall be entitled to claim refund in respect of input tax paid on goods exported out of the territory of India, subject to such conditions and the manner, as may be prescribed.”

Instead of encouraging the exporters and streamlining the process of refunds Excise & Taxation Department is denying the refund of the Input Tax paid by them on the purchases of the goods exported out of India by simply terming them to be the export of Tax Free goods.

The Departmental authorities have failed to understand the fact that changing of the stage of taxability of certain goods will not make them tax free. Goods still remain taxable and no refund can be denied to the exporters merely due to wrong interpretation by the departmental authorities.

Changing Schedules by way of Clarification:

The Excise & Taxation Department had not only changed the stage of taxability of certain goods but have also amended the Schedules by way of Clarifications which are in complete violation of the provisions of law and liable to be struck down. Amendment to Schedule can only be made as per the provisions of Section 8(3) of the PVAT Act and not otherwise. As clarifications has no authority of law the same are not binding on the dealers

I would like to conclude this by saying that the Excise & Taxation Department have to take effective step to check the leakage of revenue at every stage whether it be the First Stage or at subsequent stage. Issuance of irrelevant, illegal and improper Notifications and Clarifications will not be of any use and will only increase hardship on the traders who are fighting for their survival in the State of Punjab.

(Author: Varun Chadha (Advocate), Taxation Consultant Off: 3, Shastri Market-II, Jalandhar City. Ph: +91-9872200724