Issues in treatment of Tax Concessions/Deferral

Should the concessions/deferral continue beyond 2002?

Can the Governments renege on the commitment on Tax Concessions and modify/cancel the concessions already committed?

Should all the States have a uniform policy on treatment of existing concessions?

Before going into the issues let us have a look at the draft VAT Act different States on the existing concessions/deferral

* (Extract of Section appended)

v   DEFERMENT CASES

Should dealers eligible for deferral get input tax credit?

The dealer enjoying deferral should normally be eligible for input tax credit as the output tax is deemed to have been paid. Therefore, the input tax will be eligible to be offset against the output tax. If the input tax credit is more than the output tax, the dealer will have a credit balance. The issue of treatment of credit balance i.e. whether it will be allowed to be carried forward or should the dealer be given refund is to be addressed.

There may be a situation where the output tax exceeds the input tax credit. But for the operation of the deferral agreement, the dealer would have paid the tax as applicable. Will deferral in such a case will only be for the output tax payable as determined under the VAT Act?

The Government, may in the event of deferral units being permitted to avail input tax credit, face the predicament of giving input tax rebate and, may be, a refund without being able to realise the tax on the output.

   If No, the issues

By denying rebate on input tax credit to units enjoying deferral, the Government may not be accused of not honouring a commitment, as input tax credit was not part of the original agreement. Therefore, I feel there may not be any legal hurdle in blocking input tax credit to units enjoying deferral. (Do you agree? Please give your feed back)

Since the tax is deemed to have been paid, a dealer purchasing goods from a unit eligible for deferral, can take input tax credit.

The reaction of units enjoying deferment on the availability or otherwise of input tax credit will depend upon whether they have net output tax payable or not.

One of solutions is that the units may be given an option to continue under deferral without the benefit of input tax credit.

The units will then be able to decide the option best suited to its interest.

Concessions have been granted by the Government in the form of tax exemption for specified periods. In some cases, tax exemption has been granted on sales as well as purchase of raw materials/machinery by the units.

Should the tax concessions be withdrawn or converted to deferral?

             If No, the issues

The sale by the unit enjoying concession will be an exempted sale and therefore the benefit of input tax rebate will not be available. The implication to the unit will depend upon whether unit will have a net tax out flow or credit, had the concession not been available.

The implication to the dealer purchasing from units enjoying concession is that they will also not get input tax rebate. The sale by such dealers should attract the applicable rate of tax and the VAT chain should begin from here. This will be disadvantageous since input rebate is not available. However, this will be similar to the situation as it existed prior to introduction of VAT. There should not be any complaint that the introduction of VAT had put them in a disadvantageous position compared to what it was prior to introduction of VAT!

             If yes, the issues

The Government may have to face the charges of breach of contract if the concessions already granted are withdrawn. FICCI has in a recent press release stated that "There is a general feeling that mandatory conversion to a deferred system may tantamount to a breach of contract. This would also create a negative image of the States and India as an investment destination".

Without going into the legality of the issue, the implication of conversion of concession to deferral are

1. The unit will get the benefit of input tax credit. If the concession had continued input credit would not have been available.

2. The purchasing dealer will get input credit, which would not have been available, if the concession had continued.

v Possible solutions

One of the possible solutions is to give the option to the dealer enjoying concession to

1. Continue with the concession without the benefit of input tax credit to the unit as well as the dealer purchasing from the unit.

2. Opt for deferral without input tax credit.

3. Opt out of tax concession/deferral.

It is desirable that all the States have uniformity in the matter of treatment of  existing concessions/deferrals.

I welcome your feedback.

S. SRIDHARAN

PROVISIONS RELATING TO CONCESSION AND DEFERRAL IN DRAFT VAT ACTS

(o) Where a registered dealer was enjoying the benefit of deferment of tax under the State Sales Tax Act immediately before the appointed day and who would have continued to be so eligible on such appointed day under that Act had this Act not come into force, may be allowed deferment of payment of tax payable by him under this Act by the Commissioner, for the balance un-expired period or such percentage of gross value of the fixed assets, as may have been allowed to such dealer under that Act, whichever is earlier.

Nothing in this sub-section shall prevent the Commissioner from withdrawing the benefits of deferment of tax if the dealer holding the certificate of eligibility violates the terms and conditions subject to which such certificate was issued under the West Bengal Sales Tax Act, 1994 and rules framed thereunder.

(p) [Issue of dealers enjoying the benefit of tax holiday to be finalized.]

(q) [Issue of dealers enjoying the benefit of remission of tax to be finalized.]

Change in the nature of incentives.

(1)   Where any Certificate of Entitlement has been granted to any unit whether before or after the appointed day under any of the Package Schemes of Incentives and such unit is entitled to receive benefits under such scheme for any period which is to end after the appointed day, then such benefit shall be availed of by the unit after the appointed day, only in the form of deferment of taxes.

(2)   If the unit is, entitled to receive benefits by way of exemption from taxes, then the unit shall apply to the Commissioner within the prescribed time and in the prescribed manner for amendment of the Certificate of Entitlement granted to it, so as to enable it to claim benefit by way of deferment of taxes for the period commencing on or after the appointed day.

(3)  The State Government may by general or special order issued in this behalf, determine afresh the period for which the unit whose Certificate of Entitlement has been amended, shall be entitled to receive benefits by way of deferment of tax as also the quantum of benefits that the unit may avail of after the appointed day

There are no incentive schemes in Delhi as clarified by the Commissioner of Commercial Taxes to the following query.

Query: What would happen to the units those are operating under the Exemption Schemes.

How and when are the Sales Tax exemptions likely to be withdrawn and what would be the implications for them?

Reply: There are no Incentive Schemes in Delhi

(Source: Circular No.ST-12-D-C-368 dated 27-08-2001 of PHD chamber of commerce and industry)