Published in WICMA's Industry Insight
(Expert
Guidance of SHRI. SANDIP PARIKH, Business Owner and Vice President TSSIA)
EXAMPLE
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
