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The
unique feature of VAT is that it envisages set off of tax paid on purchases.
Ideally the source of purchase i.e. is the purchase from within the State or is
it from outside the State, should not matter. However the States may not be
willing to allow rebate of input tax paid on purchases from outside the State
for obvious revenue considerations that the tax has been collected by another
State.
The
denial of input tax credit is a matter of great concern to trade and industry as
it negates the basic objective of introduction of VAT i.e., avoiding cascading
of taxes. However, in the draft Acts published so far no State has given Input
Tax Credit on inter State purchases.
Kelkar
in the final report on Indirect Taxes, has in para 7.2 under Chapter 9 on Value
Added Tax observed that the denial of credit in inter-State transactions appears
to have legal implications, inasmuch as it could well attract the provisions of
article 304(a) of the Constitution which prohibits any discrimination between
local goods and imported goods in the matter of taxation.
Kelkar
has therefore recommended that the VAT scheme should provide for grant of credit
of duty by the importing State for the duty paid in the exporting State, in the
course of inter-State movement of goods.
As
rightly observed by Kelkar, If tax rebate is given only to Inputs purchased
within the State, the question of discrimination under Article 301 and 304 of
the Constitution has to be resolved.
Article
301 reads as follows:
"301.
Subject to the other provisions of this part, trade, commerce and intercourse
throughout the territory of India shall be free."
Article
304 of the Constitution of India reads as follows:
"304.
Restrictions on trade, commerce and intercourse among States.- Notwithstanding
anything in article 301 or article 303, the Legislature of a State may by law-
(a)
impose on goods imported from other States or the Union territories any tax to
which similar goods manufactured or produced in that State are subject, so,
however, as not to discriminate between goods so imported and goods so
manufactured or produced; and
(b)
impose such reasonable restrictions on the freedom of trade, commerce or
intercourse with or within that State as may be required in the public interest:
Provided
that no Bill or amendment for the purposes of clause (b) shall be introduced or
moved in the Legislature of a State without the previous sanction of the
President."
The
scope of Article 301 and 304 (a) have been considered by the Supreme Court on
many occasions. The decisions in the following judgement will help better
understanding.
1.
Firm A.T.B. Mehtab Majid & Co. Vs. The State of Madras and Another -
(14 STC 355)
In
this case the validity of a rule which provided for differential levy on Tanned
Hides and Skins purchased from outside the State and on Hides and Skins Tanned
and sold within the State, was under consideration. The levy of tax on tanned
hides and skins purchased from outside the State was with reference to their
sale price whereas the rate of tax on hides and skins tanned within the State
was with reference to the purchase price of raw hides and skins.
The
rule was struck down by the Supreme Court as violative of Article 301 and 304(a)
of the constitution with the following observation:
"...It
is therefore now well settled that taxing laws can be restrictions on trade,
commerce and intercourse, if they hamper the flow of trade and if they are
not what can be termed to be compensatory taxes or regulatory measures.
Sales Tax, of the kind under consideration here, cannot be said to be a
measure regulating any trade or a compensatory tax levied for the use of
trading facilities.
Sales
tax, which has the effect of discriminating between goods of one State and
goods of another, may affect the free flow of trade and it will then offend
against Article 301 and will be valid only if it comes within the terms of
Article 304(a).
Article
304(a) enables the Legislature of the State to make laws affecting trade,
commerce and intercourse. It enables the imposition of taxes on goods from
other States if similar goods in the State are subjected to similar taxes,
so as not to discriminate between the goods manufactured or produced in that
State and the goods which are imported from other States....".
2.
Video Electronics Pvt. Ltd. and Another Vs. State of Punjab and Another and
other petitions - 77 STC 82
In
this case the Supreme Court has given clear observations as to the circumstances
in which a legislation will be considered as violative of Article 301 and 304 of
the Constitution of India.
In
this case the same rate of tax was charged on goods whether manufactured within
the State or purchased from outside the State. However exemption was given to
specify goods manufactured within the State for a certain period and subject to
conditions.
The
Supreme Court upheld the validity of granting of exemption for specified class
of dealers for limited period subject to conditions.
"A
backward State or a disturbed State cannot with parity engage in competition
with advanced or developed States. Even within a State, there are often
backward areas which can be developed only if some special incentives are
granted. If the incentives in the form of subsidies or grant are given to
any part or unit of a State so that it may come out of its limping or
infancy to compete as equals with others, that does not and cannot
contravene the spirit and the letter of Part XIII of the Constitution.
However, this is permissible only if there is a valid reason, that is to
say, if there are justifiable and rational reasons for differentiation. If
there is none, it will amount to hostile discrimination".
The
Supreme Court also made the following observations as to the circumstances which
may amount to discrimination.
"The
granting of exemption from tax by a State to a special class for a limited
period on specific conditions, while maintaining the general rate of tax on
goods manufactured by all the producers in the State who do not fall within
the exempted category at par with the rate applicable to imported goods,
does not interfere with the freedom of trade and commerce envisaged by
Article 301.
If
the power of granting exemption from tax is exercised in a colourable manner
intentionally or purposely to create unfavorable bias by prescribing a
general lower rate on locally manufactured goods either in the shape of
general exemption to locally manufactured goods or in the shape o a lower
rate of tax, such an exercise would be struck down by the Courts."
Those
opposed to VAT may challenge the denial of input credit on purchases from
outside the State. The urgent need is to overcome the constitutional constraint
by suitable legislative changes.
What
then is the alternative
In
my opinion the legal challenge of violation of the Constitution, if input tax is
denied on Inter State purchase, is real and not to be wished away.
As
a step in the right direction the decision to phase out CST levy has been taken.
The complete phase out, as planned, is only from 2005-06.
Considering
that the constitutional constraint and the demand of the industry to avoid
cascading of taxes, I strongly feel that the Centre must persuade the States to
grant input tax credit on inter State purchase. The Central Government should
compensate the importing State of the possible revenue loss, at least on
industrial inputs, on granting input tax credit till CST is phased out.
The
exporting State has created industrial infrastructure at huge cost and need to
be compensated by the levy of tax on goods, which are produced in the State and
are consumed in some other State.
It
is also logical that in VAT, the importing State should not be expected to give
set off of tax paid on inter purchase, tax on which has been collected by
another State.
The
interest of both the importing State and the exporting State need to be
balanced. With the reduction of CST to 2% initially and to 0% in due course the
exporting States need to find alternative sources of revenue to compensate the
loss, unless the Central Government agrees to compensate.
In
my opinion, till the phase out of the CST, the Centre should compensate the
importing State of the input tax credit given on Industrial Raw materials, at
least. In so far as Inter State purchase of goods, other than industrial raw
materials are concerned, the importing States should find alternative sources of
revenue to offset the revenue loss on granting of input tax credit. The States
may be given the flexibility to fix the RNR suitably.
02/02/2003
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