One of my clients has received the demand notice from the Commercial Tax Department of Gujarat for payment of VAT against wrong claim of Input Tax Credit. On scrutinizing the relevant documents of input tax credit it was found that Tax Invoice was issued by the supplier and other documents to prove the genuineness of the purchase transaction i.e. Purchase order, Delivery challans etc. was also found in order. The reply along with the attachment of relevant documents proving the genuineness of transactions was submitted to the department.
Surprisingly concerned CTO did not pay any heed towards the submission and bluntly stated that since the TIN no. of concerned supplier has been cancelled with retrospective effect no input credit is available to the buyer of goods.
The provision of Input Tax Credit has been provided under section 11 of Gujarat Vat Act 2003. On thorough study of the provision of section 11 it can be observed that terms and conditions of allowing Input Tax Credit have been discussed precisely under subsections 4, 5 and 7.
i. Sub section 4 talks about the maintenance of record in the form of Tax Invoice in Original.
ii. In Sub Section 5 various conditions have been listed from clause (a) to (p) describing the situation where Input Tax credit may not be available.
iii. In subsection 7 the fraudulent transaction has been highlighted where Input Tax Credit is not available.
The relevant portion of the section 11 i.e subsections 4, 5 and 7 have been produced below for the ready reference of the readers.
“(4) The tax credit shall not be claimed by the purchasing dealer until the tax period in which he receives from a registered dealer from whom he has purchased taxable goods, a tax invoice (in original) Containing Particulars as may be prescribed under Sub-section (1) of Section 60 evidencing the amount of tax.
(5) Notwithstanding anything contained in this Act, tax credit shall not be allowed for purchases-
(a) made from any person other than a registered dealer under this Act;
(b) made from a dealer who is not liable to pay tax under this Act;
(c) made from a registered dealer who has been permitted under section 14 to pay lump sum amount of tax in lieu of tax.;
(d) made prior to the relevant date of liability to pay tax as provided in sub-section (3) of section 3;
(e) made in the course of inter-State trade and commerce;
(f) of the goods which are disposed of otherwise than in sale, resale or manufacture;
(g) of the goods specified in the Schedule I or the goods exempt from whole of tax by a notification under sub-section (2) of section 5;
(h) of the goods which are used in manufacture of goods specified in Schedule I or in the packing of goods so manufactured;
(i) of the goods which are in the nature of capital goods as defined in clause (5) of section 2 and which are meant for use as capital goods in the manufacture;
(j) of vehicles of any type and its equipment, accessories or spareparts (except when purchasing dealer is engaged in the business of sales of such goods)
(k) property or goods not connected with the business of the dealer;
(l) of the goods which are used as fuel in generation of electrical energy meant for captive use or otherwise;
(m) of the goods which are used as fuel in motor vehicles;
(n) of the goods which remain as unsold stock at the time of closure of business;
(o) where original invoice does not contain the details of tax charged separately by the selling dealer from whom purchasing dealer has purchased the goods;
(p) where original tax invoice is not available with purchasing dealer or there is evidence that the same has not been issued by the selling dealer from whom the goods are purported to have been purchased;
Notwithstanding anything contained in clause (a) or (b) in this sub-section and subject to conditions as may be prescribed, a registered dealer shall be allowed to claim tax credit in respect of purchase tax paid by him under subsection (1) or (2) of section 9.
(7) Where a registered dealer without entering into a transaction of sale, issues to another registered dealer tax invoice, retail invoice, bill or cash memorandum with the intention to defraud the Government revenue or with the intention that the Government may be defrauded of its revenue, the Commissioner may, after making such inquiry as he thinks fit and giving a reasonable opportunity of being heard, deny the benefit of tax credit, in respect of such transaction, to such registered dealers issuing or accepting such tax invoice, retail invoice, bill or cash memorandum either prospectively or retrospectively from such date as the Commissioner may, having regard to the circumstances of the case, fix.”
Normally dealers are advised by the consultants to ensure the following steps while claiming the Input Tax Credit.
i. To ensure that the concerned supplier is registered dealer and the TIN no. has been printed on the Invoice.
ii. To ensure that proper Tax Invoice in the prescribed format has been issued by the supplier.
iii. To ensure the documentary evidence like Lorry Receipt, Delivery challan duly stamped proving the receipt of delivery of material.
Even if the dealers comply with all the provisions that have been described under the Act there are chances that commercial tax department may reject the Input Tax Credit if the TIN No. of supplier who has issued Tax Invoice got cancelled.
It is pertinent to note that if any dealer fails to file the return for consecutive 3 Tax period then Commercial Tax Department cancels the registration of the dealer after issuing a show cause notice to the concerned dealer. If you are one of the genuine buyers of such dealers who are not complying with the provision of VAT Act, you may get punished for their non compliances in the form of reversal of Input Tax Credit.
Although such recovery of reversal of Input Tax Credit by the department from the dealers is absurd and challengeable with appellate authority but some of the dealers are making the payment to buy the peace of the department.
While It would be a hardship but it is recommended to verify the TIN no. of the suppliers on the website and save it as an evidence to prove that on the day of purchase the dealer was registered as per the record available on the website. At least this practice should be adopted for all the dealers from whom major purchases are made on monthly basis to safeguard the input tax credit.
On receipt of disallowance of input tax credit due to cancellation of registration of suppliers, concerned supplier should be approached for the recovery of vat that has been collected by him and not paid to the government treasurery. But recently the department is issuing the notices for the purchase transactions that had been taken place two to three years back and now the cases have been observed where suppliers had either close the business or not trace able at the address that was printed on the invoice. In such circumstances dealers will end up paying double tax once originally to the supplier and secondly on receipt of the demand notice from the department.
It is suggested that competent authority of the commercial tax department should review this situation and find some alternate way of handling such issues so that the genuine buyers do not get unnecessary punished. The action should be taken only against the right culprit who has collected VAT and not paid to the government. The input tax credit should be reversed only when the credit is taken based on non genuine purchases as stated under subsection 7 of section 11 of VAT Act 2003.