Published in WICMA's Industry Insight
(Expert Guidance of SHRI. SANDIP PARIKH, Business Owner and Vice President TSSIA)
Consider a situation where you have bought some raw material or consumables for your business in say 2012-13. Let us take the example of gum or stitching wire (for reference purpose only). The purchase was conducted from a registered VAT dealer (manufacturer or trader). Supplier had valid VAT TIN number at that time. The entire transaction was conducted with proper documentation – purchase order, bills, delivery challan, lorry receipt, and payment through bank. You have taken set-off on the VAT amount and at the stated interval you filed your VAT returns using E-231 and Form 704 too (if applicable) and possess the challans as proof.
THE VAT PROBLEM
Nowadays in many business circles, it is commonly seen that an Income Tax Reassessment is initiated by the IT Officer based on inputs from the Sales Tax department who provide information of sworn affidavits, deposition of suppliers and the purchase details. This becomes a huge problem for the Assessee that is YOU.
In the Income Tax Assessment of such cases, notices are issued to the suppliers and they remain unserved. Even the assessee is unable to produce these suppliers. Hence, the purchases are considered as bogus (even if it was legitimate) and the entire amount is added to income.
In an ideal situation, your supplier pays the VAT to Sales Tax department and files the requisite return forms.
In a second scenario, the supplier does not pay the total VAT amount to the department. One can know about the parties who have not paid VAT only through Annual Return Form 704 where in Annexure J1 one has to mention Sales and in J2 Purchases in details (VAT TIN of the opposite party, Net Value and Tax Value). Without Form 704, one cannot find these details from E-231. If the seller is not under VAT audit, he/ she will not file 704 and there will be mismatch of data.
In a third scenario, the supplier has discontinued/ closed his/ her VAT TIN after sometime. Subsequently, after 2 - 3 years it is identified during scrutiny. The Sales Tax department never intimates about closed VAT TIN details.
PENALTY AND ALTERNATIVES
Based on the second and third scenario, Sales Tax can disallow your VAT set-off and ask you to pay the amount with interest of 18% per annum. Further, if it is found that the supplier is a hawala dealer who has given fake bills and not the goods then your Income Tax will be affected too. This is when the supplier ends up providing an affidavit that only invoices were given and not goods. Sales Tax department declares these dealers on their website. There are many cases in various courts challenging this VAT issue.
The Sales Tax department should first try to recover the amount from the supplier who has failed to make the payment and then recover the amount from you (the buyer) as per section High court order. Income Tax should be informed only when it is a hawala transaction.
How do we protect ourselves from such biases when the purchases were made genuinely from a party?
I. When you buy any goods ensure that the TIN of the supplier exists. Remember to check the list of hawala traders on the Sales Tax website. It is recommended that the VAT site be checked regularly for continuation of TIN of your suppliers.
II. At the end of each financial year, check your J1 and J2 and contact your suppliers in case of discrepancy. It could be a genuine oversight in most cases but you have to confirm the same.
III. Request for a specific undertaking from the suppliers at the end of each financial year stating the bills and amount of VAT paid. This will render the sworn affidavits or deposition as invalid or inadmissible.
In the worst case scenario of supplier absconding or canceling the TIN and becoming untraceable, the Sales Tax department can demand the payment of VAT from you. It is however, highly unjustified to be penalized for purchases that were genuinely made and all documents presented to the Assessing Officer.
It is extremely cumbersome for small business players to keep track of the VAT TIN details of their suppliers on a routine basis to avoid being slapped with Reassessment notices and penalties levied couple of years later.
Statistics show that many companies shut shop each year due to economic factors, other business crisis and mismanagement or simple state of being unviable due to grave market conditions. Are the genuine buyers responsible in such cases? Or should we call for a change of system where the information technology enabled sales tax return filing system sends the buyer an e-intimation of VAT payment by their supplier?
Disclaimer. This is a generalized article for information purpose only. Please consult your Chartered Accountant or VAT Consultant for specific cases