Related vat

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vikash thakur (Querist)
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06 February 2013 I received a government grant of Rs. 10 lacs against purchase of fixed assets in manufacturing unit and i less this from my fixed assets value during its capitalization but vat assessing officer says that you done evasion of vat when you sold this. How i can solve this problem in future.

MJ Krishnamurthy

MJ Krishnamurthy (Expert)
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08 February 2013 Mr Vikash thakur,
Once the govt has a grant for purchase of an asset, and you have done so, then it should remeain in your asset list. This fixed asset can not just vanish or be consumed away. so the VAT is correct in taking that you have sold that asset for some value. This sale is taxable.Now you declare it and pay tax,penalty and interest due.......MJK

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vikash thakur

vikash thakur (Querist)
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09 February 2013 dear sir,
I am Vikas Thakur who ask a query related vat. I have not been intention of sale of machinery. I booked this machinery on nominal value ( Rs. 1/-). but vat assessing officer says that you can sold this machinery on lower value to related party for evasion of tax. Please suggest a method for this on capitalization time or this main time of asking query by assessing officer.

Aashok Kumar Sharma

Aashok Kumar Sharma

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21 July 2025 Here’s a simple explanation and some advice for your VAT issue:

Issue:
You received a government grant of Rs. 10 lakhs for buying fixed assets and reduced the asset’s value by this grant amount (capitalized it at lower value). Later, the VAT officer says that when you sold this asset (even if at a nominal price like Rs. 1/-), you evaded VAT because the asset value was understated.

What’s happening here?
When you get a government grant for an asset, you should record the full cost of the asset in your books, i.e., the actual purchase price.
The grant amount should be recorded separately as income or a liability, not reduced from the asset cost.
If you capitalize the asset at a lower value (purchase price minus grant), your selling price will look too low.
VAT authorities consider the fair market value or actual transaction value, and if they suspect undervaluation, they can raise an evasion notice.
How to avoid this in future:
Record full purchase cost of the asset in fixed assets (don’t reduce it by grant).
Record the government grant separately (either as deferred income or other income) in your books.
When selling the asset, declare the actual sale price (or fair market value if selling to related parties).
Maintain proper documentation to show the grant treatment and asset valuation.
What to do now with the VAT officer:
Explain and provide your accounting treatment.
If you capitalized asset lower by mistake, you may have to pay VAT on the assessed value plus penalties.
Consult a tax professional to represent you before the officer.
Cooperate with the VAT officer and show correct valuation documents.

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