As if confusion created by VAT in relation to real estate transactions wasn’t enough, a fresh controversy has been stirred by recent notifications issued by the State VAT department to tax the sale of furnishing fabric.
‘Fabric’ was covered under Excise Act. Rate on fabric under Excise Act was lowered to 0% w.e.f. March, 2006. This led to the apprehension that State governments would now levy tax on the same. However, unless the entry was completely omitted from the Excise Act, VAT could not have been levied.
The Finance Bill, 2011 introduced during Union budget 2011-12 sought to amend the Excise Act, so as to take out sugar and textile from the ambit of the said Act. This enabled states to levy VAT on the same. Furthermore with the passage of Finance Bill, 2011 on 1st May, 2011; Maharashtra Government increased the rate of VAT on declared goods to 5%.
Fabric being a declared good, the rate of 5% is also listed against Fabric in Entry 101(a) of Schedule “C”.
In the Maharashtra State Government Budget, 2012; it was announced that the exemption given to fabrics, except furnishing cloth when sold at last point of sale, shall continue. To formulate the budget proposal into a law, notifications relating to taxation of furnishing cloth/ fabric were issued on 27th August, 2012.
ANALYSIS OF NOTIFICATION:
Four notifications were issued to enact the budget proposition w.e.f. 1st September, 2012. Short gist of the same is as under:
1. Notification No. VAT 1512/CR-91(1)/Taxation 1 dt.27.8.2012 – This notification is issued under section 41(4) and it is for granting exemption from payment of tax for sales prior to last point of sale. In other words, the above furnishing cloth/fabrics is liable to tax ONLY AT LAST POINT OF SALE that is when sold for consumption.
2. Notification No. VAT 1512/CR-91(2)/Taxation 1 dt.27.8.2012 – This Notification is issued under section 42. The effect of this notification is that the retailer will not be able to take benefit of composition scheme of retailer in respect of sales of furnishing fabrics
3. Notification No. VAT 1512/CR-91(3)/Taxation 1 dt.27.8.2012 – In this Notification the list of various fabrics which are covered in the category of declared goods and covered by Sch. Entry C–101(a) of MVAT Act is mentioned.
4. Notification No. VAT 1512/CR-91(4)/Taxation 1 dt.27.8.2012 – In this Notification – Govt. has specified the list of various fabrics which are covered in Sch. Entry C–101(b) of MVAT Act.
Notifications at Sr. no. 3 & 4, simply list out the various types of furnishing fabric/ cloth which have been brought under the tax net.
The important notification which needs to be analysed for the purpose of our discussion is notification at Sr. no. 1.
The notification exempts “the sale of furnishing fabrics notified under entry 101 of Schedule-‘C’ appended to the said Act when sold other than at the last point of sale within the State”.
In our opinion, the above phrase in the notification should be read as “the sale of furnishing fabrics notified under entry 101 of Schedule-‘C’ appended to the said Act when sold other than at the last point of sale (of fabric) within the State”.
Last point of sale has been explained in the notification so as to mean “a sale made for consumption”. However this has only created more controversy… When can it be said goods are consumed, only when they are used by the end consumer or also when they are used by an intermediate industry in the manufacture of some other goods. Is the intention of the government to tax the leg of sale post which no further credit can be taken?
The word “consumption” has not been defined under any Act/ law. Hence we must attribute its general literary meaning.
The word consumption as is normally understood and defined in dictionary means “The process in which the substance of a thing is completely destroyed, used up, or incorporated or transformed into something else”.
Meaning of the word ‘consumption’ as per legal dictionary is ‘using up’.
Judicial parlance to the meaning of the word can be drawn from decision of the Hon’ble Supreme Court wherein it was observed that the expression ''use" is not defined in the Act. But the word ‘use’ occurs in Entry 52 List II of the Seventh Schedule to the Constitution sandwiched between ‘consumption’ and ‘sale’.
The coupling of three words "consumption", "use" and "sale" connotes that the underlying common idea was that either the title is transferred or the thing or commodity ceases to exist in its original form.
In view of the above discussion, in our opinion it could be said that tax @ 5% would be levied on the sale of furnishing fabric/ cloth when it is used by a person in manufacture of a new commodity or when it is sold to an end consumer who would use the fabric without selling it any further.
To illustrate by way of a practical example:
· Furniture with Fabric embedded
In the above case, sale of fabric from Manufacturer to Wholesaler would be exempt, but sale from wholesaler to Furnishing company would be taxable being the last point of sale meant for consumption by the Furnishing company.
Sale of furniture from the Furnishing company to customer of the furniture along with the fabric shall be taxable as furniture @ 12.5% (rate for furniture under MVAT Schedule) and not as fabric as it is not longer furnishing fabric. The furniture company has used the ‘fabric’ and consumed it to make ‘furniture’ out of it which is an entirely new marketable commodity.
Here by any stretch of imagination, it cannot be said that the customer is the last point of sale as saying that would mean separating the amount of fabric in the furniture and charging it to a rate of 5% would be absurd.
To further simplify any doubts, let us take another example:
Here all throughout the chain, it is the fabric which is being sold. Hence no new commodity comes into existence as such. However, it is the sale from Retailer to Customer that will be taxable. This is because when wholesaler is selling to Retailer it is for further sale by Retailer and it cannot be said the goods are sold for consumption by Retailer as they have neither changed form nor changed Schedule entry under MVAT.
Having understood the above issue pertaining to interpretation of the word “consumption”, let’s look into the other issue. This pertains to inter-state sale:
Notification No. VAT 1512/CR-91(1)/Taxation 1 uses the phrase exempts the sale of furnishing fabrics notified under Entry 101 of Schedule ‘C’ appended to the said Act when sold other than at last point of sale within the State.
There are 3 important limbs of the above definition:
· Sale of notified fabrics
· When sold other than at last point of sale
· Within the state
Since the last limb has the words “within the state”, some people (including those in the department) are of the opinion that this notification is applicable only to sales within the states and not to inter-state sales. Therefore, all sales made inter-state whether for consumption or not shall be subject to CST.
In my opinion however, the notification has the words within the state because of the fact that the Maharashtra government has the power to make a law only with respect to the state.
Thus it should be read as having the intention sale of notified fabrics, when sold other than at last point of sale within the state. i.e. the 2nd and 3rd limb should be read harmoniously.
Also, since the law of the state from where sale if effected is the law determining taxability and rate for CST sale, the exemption shall also be applicable to inter-state sale in cases where movement of goods commences from Maharashtra.
(The author, Ashish Kedia, is a Chartered Accountant and is a Partner at A V Kedia & Associates, Mumbai. He can be reached at email@example.com)