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ITC Refund to Cement Dealers vis-a-vis impact of after sales discount on Revenue Collection.

Introduction

Generally Cement Companies announces after sales discounts called ex post facto discount by way of credit notes to cement dealers. As  a result of this the ultimate cost of the dealers comes down in comparison to the billed price and even after adding dealer’s margin the sale price usually remains lower than the billed purchase price. Consequently the input tax always runs in excess of the output tax and the excess input is carried forward from year to year for adjustment in subsequent years or is claimed as refund. This trend created a doubt among the officers and in the government that it is resulting into revenue leakage and they formed an opinion that the ITC attributable to the ex post facto discount should be reversed. To prevent the refund or carry forwarding of excess ITC the state government inserted sub section (3A) into section 18 of RVAT Act 2003 w.e.f. 09-03-11 and provided that the amount of ITC will not exceed the output tax where goods are sold on subsidized price and freezed the amount of ITC. I do not agree with this opinion as neither there is a violation of law nor there is any leakage of revenue even if the dealers issue bills at a price lower than the billed purchase price. The amendment is unfortunate.

Prevailing Trade Practices vis a vis System of billing:

As per prevailing trade practices some companies like cement companies are announcing various types of rewards, by way Credit Notes, in the name of turnover discount, target discount, trade discount and so on to promote their sales and achieve their targets, in addition to the discount given at the time of sale or at the time of issuing vat invoice. The after sales discount or reward ultimately goes to reduce the cost of the dealer who after adding his margin and considering the competition fixes its sale price which usually remains lower than the purchase price. But, there is no violation of law, in determining the sale price on which vat is charged, either on the part of Cement Companies or on the part of the Cement Dealers.

Sale Price-

The sale price on which vat has to be charged has been defined in section 2(36) of RVAT Act 2003, which stood as under:

2(36) "sale price" means the amount paid or payable to a dealer as consideration for the sale of any goods less any sum allowed by way of any kind of discount or rebate according to the practice normally prevailing in the trade, but inclusive of any statutory levy or any sum charged for anything done by the dealer in respect of the goods or  services rendered at the time of or before the delivery thereof, except the tax imposed under this Act;

Explanation II.- Cash or trade discount at the time of sale as evident from the invoice shall be excluded from the sale price but any ex post facto grant of discounts or incentives or rebates or rewards and the like shall not be excluded;

Analysis of Sale Price:

Now we examine the sale price on which vat is being charged in the present scenario by the Cement Companies as well as by the cement dealer, whether the same is in accordance with the above definition or not. We take an example that the basic sale price of a Cement Company for a cement bag is Rs. 140/-. The Cement Company gives discount of Rs. 20/- in the invoice and thereafter it gives further discount of Rs. 20/- after issue of invoice by way of credit notes. In this situation the ultimate cost to the cement dealers comes to Rs. 100/- per bag and who after adding his margin of Rs. 5/- per bag charges vat on Rs. 105/-. Now we test the sale price of both the dealers whether it holds good as per the above definition. As per the above definition the sale prices is computed as under:

Vat Invoice

Sale price of cement company (Rs.)

Sale price of cement dealer (Rs.)

Basic Sale Price

140.00

105.00

Less: Discount allowed in invoice

20.00

0.00

  1. sale price u/s 2(36)

120.00

105.00

  1. Vat @ 14%

16.80

14.70

  1. Gross value

136.80

119.70

Further discount allowed by way of credit Note

20.00

In the above example the cement company has charged vat on the sale price of Rs. 120/- after reducing discount of Rs. 20/- only as given in invoice itself as per section 2(36) of the Vat Act, it has not considered the ex post facto discount of Rs. 20/- granted by way of credit note for calculation of vat. Thus the ex post facto discount does not affects the sale price on which vat has to be charged. Similarly the Cement Dealers are also satisfying the condition of sale price as defined in section 2(36) as they are also charging vat on the sale price as mentioned in their VAT Invoice. Hence in both the cases vat is being charged on the sale price as determined u/s 2(36) read with Explanation II of the RVAT Act 2003, as such there is no violation of law.

No loss to Revenue:

Now we look at the issue from another point of view whether ex post facto discount results into revenue leakage or does it affects the revenue of the department in any way?  Or what is wrong in this system? The dispute is only because the Cement Companies are giving further incentives by way of credit notes after issue of invoice which results into refund of ITC. To understand this we take two case studies. In one case study a portion of discount is given in Invoice and a portion of discount is given afterwards by credit notes and in second case study the entire discount is given in invoice itself, we have to look whether ultimate revenue collection in both cases is same or different. If revenue collection in both the situations is same then there is no leakage of revenue nor there is any harm in these system. In my view in both the situations the revenue collection will remain same and there will be no loss to the Revenue, it can be understood with following two case studies.

Vat Invoice issued by the Cement Manufacturer

Particulars

Case 1

Some discount allowed in Invoice and some discount allowed by way of credit Note

Case 2

Entire discount is allowed in the Invoice itself

Comments

Basic Sale Price

140.00

140.00

Same

Less: Discount allowed in Invoice

20.00

40.00

  1. Sale Price u/s 2(36)

120.00

100.00

  1. Vat @ 14%

16.80

14.00

Revenue Collection

  1. Gross value

136.80

114.00

  1. Further discount by CN

20.00

0.00

  1. Ultimate purchase cost for whole seller (a-d)

100.00

100.00

Same

Vat Invoice issued by the Whole Seller

Particulars

Case 1

Some discount allowed in Invoice and some discount allowed by way of credit Note

Case 2

Entire discount is allowed in the Invoice itself

Comments

Basic Sale Price

(Cost Rs. 100/- + margin Rs. 5/-)

105.00

105.00

Same

Less: Discount allowed in Invoice

0.00

0.00

No practice

  1. Sale Price u/s 2(36)

105.00

105.00

  1. Vat @ 14%

14.70

14.70

same

  1. Gross value

119.70

119.70

Output tax

14.70

14.70

Ultimate Revenue Collection is same

Less: Input tax

16.80

14.00

Result

-2.10

refundable

.70

payable

From the above example it is clear that in both the situations the ultimate revenue collection of the department is Rs.14.70.  Whether a portion of discount is given in invoice and a portion of discount is given by way of credit note or whether the entire discount is given in invoice itself, the situation does not changes. The only difference is that the situation, where ex post facto discount or say after sale discount is given by way of credit note, has resulted into refund of Rs. 2.10 as higher input tax was paid at the time of purchases because of higher billing system, whereas the situation, where entire discount including the after sale discount is given in the invoice itself, has resulted  into tax payable by Rs.0.70 because of less tax was paid at the time of purchases due to billing system of the company . In one case there is a refund and another case there is a tax payable, but, in both situations the ultimate revenue collection which went into the government treasury is same i.e. Rs. 14.70 as such there is no loss to the revenue. These are only business tricks that how much discount is given in invoice and how much discount  is given by way of credit note. It is immaterial for the Revenue to see the system when none of the system is detrimental to the revenue. In one instance excess tax was paid at the time of purchases therefore refund is claimed and in another instance less tax was paid at the time of purchases therefore difference tax is paid at the time of sale,  but there is nothing wrong in any of the system or practice. Hence If the cement dealer has paid excess tax at the time of purchase he is entitled to get refund of the excess tax paid or excess input.

It is also not a case of under billing:

 

We look at the issue from this angle also whether there is any under billing, or/and whether the dealers are claiming wrong refunds? Under billing means where an item is actually sold for Rs. 200/- but the bill is issued for Rs. 150/- or where the goods are sold at a price even lower than the cost price to take undue benefit of input tax. But it is not the case here in the present situation. Billing price and actual sale price is same. In both the case study the ultimate purchase price to the purchasing dealer is Rs. 100/- and after adding margin of Rs. 5/- per bag, they are billing the cement bag at Rs. 105/- per bag and it is the actual and correct sale price. It is a well settled market practice and it can not be challenged. Apparently the purchase cost is on higher side but after adjustment of incentives the actual and ultimate cost is lesser than the price that appears. Hence it can not be said to be a case of under billing and therefore the refunds claimed by the cement dealers cannot be held to be unethical or illegal.

Position of refund in pre amendment period and post amendment period:

Whether after sales discount  is reduced from the purchase price in Trading Account or it is reflected in the income side of the Trading account is immaterial for the purpose of giving input tax credit. Input tax credit has to be given on the basis of vat invoice and what input has been paid in the invoice. In some case the department took the view that input should be allowed on the basis of net purchases shown in trading a/c and the ITC calculated on the amount of after sales discount should be reversed and in some cases it took the view that it is a part of  sales price and imposed tax thereon. All these are wrong interpretations as the Rajasthan Tax Board has not confirmed this view and granted relief to the cement dealers for the period prior to 09.03.11. Reliance is placed on the following decisions:

i. CTO Circle, Jalore vs Solanki Krishi Bhandar, Jalore, RTB, Tax Update-V-34, Part-3, Oct 1-15 (2012) 117

ii. Hingad Traders, Udaipur v CTO, Circle-B Udaipur (RTB V.33 Part-5 July 12

iii. Asstt. Comm. Circle-A Bharatpur vs Bhagwati Building Material Store, Bharatpur, Tax Update 16-28 Feb 2013, 178

iv. CTO, Jalore vs Ambika Cement Agency, Sayala, RTB, Tax Digest Vol-1, Part-1, July 16-31 2012, P-4

v. CTO, Nagor vs Syaram Irregation Appeal No. 1506/2012/Nagor dt. 16.05.13

vi. CTO Circle Jalore vs Ramdev Trading Company Bhinmal RHC, Tax update V-37, Part-5, 1-15 Nov 2013

vii. CTO Circle-B Bharatpur vs Narendra Kumar Govind Prasad, Bharatpur, RTB Tax Update . V-37, Part-5, 1-15 Nov 2013

However, w.e.f. 09.03.11 new sub-section (3A) has been inserted in section 18 of the RVAT Act which provides that where goods are sold on subsidized price then the input credit shall not exceed the output tax on sale of such goods. The effect of this amendment is that input credit in respect of purchases made during the period falling after 09.03.11 shall be restricted to the amount of output tax on sale of such goods. It confirms that prior to amendment the cement dealers would be entitled to claim credit of entire Input Tax whatever it may be, but in the post amendment period credit shall be restricted to the amount of output tax and there will be no question of either refund or carry forward of excess ITC. In post amendment period whatever excess input tax is there that has to be reversed and no benefit can be taken thereof. However in my opinion it is not a good law because it has put the dealers into a financial hardship. Because of this amendment now the dealers will not be able to get the credit of what they have already paid to the vendor. The excess input tax paid by the dealers will got accumulated into the government exchequer without its credit being given to anyone. It is not a good means of revenue. What a dealer has paid credit must be given to him.

Conclusion:

From the above discussion we come to the conclusion that after sales discounts ultimately reduces the cost of the dealer resulting into excess input tax without any loss to the revenue. The accounting treatment of the excess input tax whether it is reduced from the purchase price or is shown in income side of the trading account is immaterial for this purpose. Neither it can be treated as a part of sale price and subjected to tax nor it can be reversed on the plea that input tax credit will be allowed on the basis of net purchases shown in trading account. Therefore, for the period falling prior to 09.03.11 when sub-section (3A) was not there in the statue the dealers are entitled to claim either refund or carry forward of the same in next period. However w.e.f. 09-03-11 the amount of input tax credit has been restricted to the amount of output tax on sale of such goods due to introduction of sub-section 3A into section 18. It is therefore input tax credit in respect of purchases made w.e.f. 09-03-11 shall not exceed the output tax on sale of such goods. In nutshell now the cement dealers will not be entitled to either carry forward or claim the refund in respect of such ITC w.e.f. 09-03-11 although it is not a good law as it has curtailed the fundamental rights of the dealer.           

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