Kerala VAT Penalty on undervalued import purchases

we are trading in led bulbs and in 2016 we imported some decorative bulbs from China amounting 20 lakhs but due to some reasons our accountant recorded it for 8 lakhs and the same were submitted in KVAT returns. However the sales tax department intimated us regarding the undervaluation of goods purchased as per records of customs and considered the undisclosed purchase deemed to be sold applying 35% gp rate and applied 14.5% tax rate as the liability and penalty thereafter. However we filed an appeal and assessment is going on

The physical stock is still lying with us and is there any restriction to sell the same stock in the normal course of our business?
can we show the stock in our books as it is deemed to be sold by law?

Hi Rahul,

Thanks for sharing your issue—this kind of VAT penalty and assessment scenario can be tricky. Let me break down your concerns and provide clarity on how to handle your stock and accounting during the ongoing appeal.

1. About the Deemed Sale on Undervalued Import Purchases

The tax authorities have treated the undervalued purchase (₹8 lakhs recorded vs ₹20 lakhs actual) as a deemed sale by applying a 35% gross profit margin and charging VAT on the resulting value.
This is a common practice under VAT laws to prevent tax evasion via undervaluation.

2. Physical Stock Still Available

Your physical stock is still lying with you and has not actually been sold.
But, by law, the department has treated it as "deemed sold" for tax assessment purposes.

3. Can You Sell the Stock in the Normal Course of Business?

Yes, you can continue selling the stock as usual.
The "deemed sale" is a tax treatment, not an actual sale transaction.
However, you should disclose the correct value of stock and purchases in your books going forward to avoid further issues.

4. How to Show This Stock in Your Books?

Since the department has treated the stock as sold, there is a conflict:
- Accounting perspective: Stock physically exists and should be recorded as closing inventory.
- Tax department’s stance: Treated as sold for VAT purposes.

Recommended Approach:

Continue to show the stock physically available as closing stock in your books at the correct value (₹20 lakhs).
Disclose the VAT assessment and pending appeal as a contingent liability or a note in your financial statements.
Avoid writing off or removing the stock from your books solely because of the tax assessment.
Once the appeal is decided, adjust your books accordingly if needed.

5. Next Steps

Maintain proper documentation for the stock (purchase invoices, customs records, stock registers).
Work with your tax consultant and accountant to ensure your books reflect the true position while the appeal is pending.
Follow up on the appeal diligently.

Summary

Concern	Suggestion
Physical stock exists but tax department treated as sold	Continue showing stock in books at correct value
Restriction on selling stock?	No, you can sell stock normally
Accounting treatment	Disclose tax assessment as contingent liability; do not remove stock until appeal is resolved