Will VAT become the acronym for
Value Added Trouble? I am afraid it will, if impractical provisions
proposed in the VAT Draft Acts/Rules are not removed. One such issue is the
taxation of Capital Goods under VAT.
Capital goods, in accounting
terminology, are generally understood as assets used in the business either by a
trader or a manufacturer and includes plant and machinery, tools, buildings, Air
Conditioners, motor vehicles and all other assets.
Though much has already been
written about the confusion in the definition of Capital Goods and their
eligibility for Input Tax Credit in different States, I thought it appropriate
to highlight certain aspects that requires immediate attention before the draft
VAT Bills become law.
I.
Definition of Capital Goods is biased against Trading Activity
I
always believed that VAT is neutral as between different tax paying
entities and so far as the tax administrator is concerned the tax paid
by a dealer is on the value addition, no matter who the tax payer is,
be it a manufacturer or a distributor/trader. One of the much professed
features of VAT is that all tax paying entities are treated equally
and that there shall be no discrimination.
I
fail to understand the logic or the reasoning for the denial by most
of the States of Input Tax Credit on Capital Goods used by a trader.
A distributor/trader needs capital goods like Furniture and Fixtures,
Cold Storage facility/ Air Conditioning for storage of goods, special
vehicles for transport of goods like perishable commodities that are
taxable. Investment in these capital goods may be substantial in some
cases. The cost of these goods are definitely factored in the pricing
by the dealer and the value addition by the dealer includes the cost
of these goods as well. The VAT paid by a dealer includes the cost of
these equipments as much as the VAT paid by a manufacturer includes
the cost of the Plant and Machinery.
It
appears that the drafters of the legislation have been swayed by the
definition of capital goods in the Central Excise Act. While Central
Excise is a tax on manufacture, VAT is levied on manufacturers as well
as traders. The definition of the term must cover capital goods used
by manufacturers as well as traders.
It
may be noted that in the Accounting Standard AS 10 - Accounting for
Fixed Assets issued by the Institute of Chartered Accountants of India,
Fixed Asset has been defined as " an asset held with the intention
of being used for the purpose of producing or providing goods or services
and is not held for sale in the normal course of business"
Input
Tax Credit should be made available on Capital Goods used by distributors/traders
as well. It is surprising that Trade lobbies have not raised their voice
against the discrimination.
II.
Need for uniformity in the definition of Capital Goods
A
large number of disputes in the present sales Tax Acts relate to classification
of Commodities and the rate of tax applicable thereon. With fewer rates
and clear-cut classification of Goods in the 4% category, I thought
that Tax Professionals would have much less assignments under VAT. It
is not to be as at least the interpretation of the term "Capital
Goods" will keep tax professionals busy, considering the scope
for litigation in the term as defined in various draft Acts.
The
list of goods covered and the details of activity specified will give
ample room for disputes on the eligibility or otherwise of goods to
be classified as "Capital Goods".
Please
click
to view the analysis of the definition of the term in the various State
draft Acts.
The
brief list of disparity and the terms that give room for ambiguity and
confusion are
1. Some States specify that the goods should be used
in the " manufacturing of goods " while some States specify
" manufacture or processing of Goods" and the term "
used in the process of manufacture" and " used directly
in the manufacture" is also used.
The
will be a need to interpret "manufacture" , "processing"
, "used directly in manufacture" etc., which will lead
to harassment and confusion.
Further,
a dealer may use the assets for both trading activity as well as
manufacturing activity. For instance in the case of ,say, Material
Handling Equipments used by a a granite goods manufacturer. The
equipment will qualify as "Capital Goods" eligible for
Input Tax credit. Suppose the manufacturer also trades in granite
and the same equipment will also be used for trading activity, Will
there be a disallowance of the Input Tax Credit on capital goods
to the extent the assets are used for trading activity?
Therefore
the restriction on the use of Capital Goods only for manufacturing
activity needs to be removed.
2.
While Plant and Machinery and equipments are listed as goods that
qualify as capital goods, the purchase of right to use such goods
is included in some Acts. Some of the States have specified the term
to have the same meaning as in the Income Tax Act. Gujarat has adapted
the definition in Excise Rules but includes the equipment and appliances
meant for use in an office.
3.
Some States require that the capital assets should be capitalised
in the books of accounts
Capital Goods, in the present sales tax parlance, is normally understood
as assets purchased not for resale but for use in the business and
includes parts and accessories of the assets that are bought for
maintenance or for replacement as spares. In most of the States
concessional rate of tax have been granted for purchase of capital
assets and the concession extends to parts and accessories as well.
So far under the present sales tax Act the list of eligible capital
goods were notified.
The
requirement that the assets should be capitalised in the books of
accounts is an undesirable restriction , not compatible in VAT ,
as Input Tax Credit will be denied on spares and replacements which
are not capitalised in the books of accounts. There is no such restriction
under CENVAT.
4.
Some of the States have specified a minimum monetary value for the
goods to qualify as "Capital Assets".
The
fixation of a minimum monetary value for capital assets is inexplicable.
There will be instances where each of the capital asset may be less
than the minimum prescribed limit, but the manufacturer will need
to install and use a minimum quantity of the small value assets
to carry on manufacturing activity. The sum total will be more than
the minimum monetary value prescribed.
5.
Some of the States have used the expression " manufacture of
Goods for taxable sale"
The
restriction of input tax credit on assets used only in the manufacture
of goods for taxable sale leaves unanswered the question as to what
happens if a portion of the goods manufactured are despatched on
stock transfer. By using the words " manufacture of goods for
taxable sale", stock transfer will not be covered and there
may be a reverse credit of the Input Tax Credit taken on machinery
if a part of the goods manufactured are despatched on stock transfer.
This restriction " for taxable sale" may be removed to
avoid complications.
While
most of the States have defined Capital Goods, Andhra Pradesh has
defined the term for the limited purpose of payment of tax on capital
goods on closure of the business.
In
my opinion the definition of the term in the Karnataka Draft Act
reproduced below is comprehensive though the monetary ceiling requires
reconsideration.
SECTION 2(7)
In
this Act unless the context otherwise requires:-
(7) ‘Capital goods’ means plant, including cold storage and similar plant, machinery,
goods vehicles and equipment or any other goods, whose total cost
is not less than an amount to be notified by the Government or the
Commissioner, and used in the course of business other than for sale.
In
this definition the words "any other goods "will cover all
capital goods and the expression " and "used in the course
of business other than for sale" will cover manufacturers as well
as traders.
III.
Impractical provisions relating the period of set off of Input tax Credit
on Capital Goods
Normally
Input Tax Credit should be available in the month of purchase. In the
Case of capital goods several States have spread over the adjustment
against output tax for periods upto three years as can be seen from
the following table:
State |
Period |
Assam |
Three years |
Bihar |
Depreciation under the IT Act for the relevant year to be
claimed in 12 monthly installments. |
Goa |
Two years. 1/24th in each month |
Karnataka |
To be specified |
Orissa |
Three years |
Pondicherry |
Five years |
Model VAT Bill |
Three years |
While
the concern of the States of the possible revenue impact on the granting
of Input Tax Credit in the first month is appreciated, the practical
difficulty in enforcing the provision and the onerous record keeping
responsibility on the dealers seems to have been lost sight of.
The
tax department will need an army of inspectors to verify the claim of
input tax credit as there will be additions in every month in each factory.
For each asset a separate record will have to be maintained. In a particular
month the dealer will have to include the 36th,35th,34th,33rd installment
and so on and this definitely is not simplification of procedures in
VAT.
Even
in Central Excise the set off is allowed on a yearly basis over two
years. The VAT on capital assets may not be more than 10% of the revenue
and the State Governments should come forward to allow set off in the
month of purchase for existing businesses.
The
restriction if any may be made applicable to newly set up business where
Input Tax Credit claim on capital goods has been accumulated of more
than a year. In such cases the claim may be allowed over the number
of years in which ITC had been accumulated.
IV.
Denial of Input Tax Credit on Capital Assets used in Works Contract
Some of the States like Assam have
provided that purchase of capital goods required for execution of works contract
shall not be eligible for input tax credit.
Input tax credit should be made
available on works contract as well if works contract is taxable under the VAT
Act of the respective State.
The denial will automatically
disappear if the restriction on the requirement of capital assets to be used in
the manufacture or processing of goods is removed.
Trade
Bodies should strongly represent to the Empowered Committee and the
State Governments to remove the anomaly in the treatment of Capital
Goods under VAT.
25/02/2003
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