INPUT TAX CREDIT REFUND by CMA Samir Biswal

Following problem has been referred to us by several users of this Site:

A manufacturing company sells particular goods for a certain price (say Rs.10, 00,000=00) to its selling dealers. Company realizes Rs. 1, 25,000/- towards VAT @12.5 % and deposits such VAT amount into the Government Treasury through Bank. The purchasing dealer pays to the company total sum of Rs. 11, 25,000/-. Company promises to the purchasing dealer for allowing him a credit of Rs. 4, 00,000 after a certain period. Also company instructs the purchasing dealer for making subsequent sale of such goods for Rs. 6, 60,000/-. The purchasing dealer sells such goods for Rs. 6,60,000 and realizes Rs. 82500/- as VAT @ 12.5 % on sale price of Rs. 6,60,000/-. Dealer claims input tax credit of Rs. 125,000/. As the amount of output VAT is less than the amount of VAT paid in respect of purchase of goods, the dealer claims refund of differential amount which works out Rs.42,500/-.

Querists want to know whether process is adopted by dealer purchasing goods from the company is valid in view of provisions of the VAT Act.

Reason why companies are adopting such practice is not clear. It has been stated that companies do not claim any refund out of the amount of VAT deposited by them. Also they do not issue any credit note for any amount of VAT.

Assuming that the sale price is not suppressed by the purchasing dealer and sale price declared by such dealer is actual sale price, then his output tax is the amount of VAT computed on his sale price. As per VAT law, selling dealer, subject to provisions of Input Tax Credit, is liable for payment of tax on sale price. At the same time, if amount of input tax credit exceeds the amount of tax payable, then such dealer is entitled for claiming refund of the amount which exceeds the amount of output tax.

VAT is indirect consumption based tax. In the system, the Government gets the amount of tax which is paid by the ultimate consumer. Credit of input tax cannot be denied where after purchasing particular goods the same are sold at a price lower than the purchase price.

But in the case before us, we have also to look into the situation at the stage of company. If Amount (Rs. 10,00,000/-) realized by the company is not the sale price for the purpose of VAT, then tax payable on turnover of goods sold by the company will differ from the amount realized and deposited by him. Amount which is not leviable as per provisions of law cannot be assessed even if selling dealer deposits it voluntarily. Then excess amount deposited will have to be treated in the manner provided under the VAT law. For such cases, most of the laws provide for refund of such amount to the person from whom it has been realized and if such dealer has not passed burden of this amount to others. Since the purchasing dealer has already claimed refund of total amount collected by the company by way of input tax credit, he will not be entitled for any other refund. But the Department will have to receive excess amount paid by the company in the revenue account. But unfair practice cannot be allowed to be continued.

If amount charged as sale price by the company from the selling dealer is sale price for the purpose of levy of VAT on the company, then question of excess realization will not arise and tax realized and deposited by the company will be tax leviable and payable. In that case, without going into other details, it can be said that process adopted by both dealers is legally valid. This Article is written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com.

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