Representation to Punjab Govt. on restriction of ITC on iron and steel under Punjab VAT

I had prepeared representation on behalf of Iron and steel industry in Punjab, which has been filed with the Punjab Government for withdrawl of latest notification dated 01.02.2014 regarding restriction of input tax credit on iron and steel goods to only two stages and also on closing stock as existing on the date of reduction of tax from 4.95% to 2.75% on iron and steel goods.

The representation covers the difficulties faced by the industry due to the above notification and some light has also been thrown on the constitutional validity of amendment covered under the said notification.


The Hon’ble Chief Minister,


Sub: Representation on restriction of input tax credit on iron and steel goods under Punjab VAT Act, 2005

As we all are aware the Government of Punjab recently has reduced the rate of tax on Iron and steel goods falling under definition of Iron and Steel in Clause (iv) of section 14 of Central Sales Tax Act, 1961 from 4.95% to 2.75% and on Non Cenvat Paid Iron and Steel Scrap to 1.10%.

With the above relief to the Iron and Steel Industry, certain amendments causing hardship to the industry have also been made like restricting input tax credit of VAT paid on Iron and Steel Goods excluding wheels, wheel sets, tyres, axles to only two stages, restricting Input Tax Credit of the already tax paid on the stock lying with the dealers as on 31.01.2014 (i.e. the date of amendment) only at reduced rate of 2.75%, a certificate showing the stages of sale of iron and steel goods, to be printed on the back side of invoice.

The above amendments would not only cause a considerable loss to the industry, but also would add up prices of iron and steel goods, making the products made of iron and steel goods costlier, affecting the trade at national and international level, reduction in the turnover of the industry and affecting the economic growth of our Punjab State and our Nation adversely.

At the same time such amendments have also caused chaos and confusion among the industry in respect of certain aspects of the amendment which needs clarification from the Government.

In regard to the above said amendment while highlighting the major areas of concerns of the Iron and Steel Industry in Punjab and the legal issues arising there from, we make the following representation as under:

1.      Restriction of Input tax credit of tax paid before the amendment on the closing stock: Rule 21(8) of Punjab VAT Rules has been introduced vide notification dated 25.01.2014, whereby the input tax credit from the date of reduction of rate of tax has been made admissible at the reduced rate on the sale of goods lying in the stock on the date of such reduction.

Areas of concerns of the trade and industry:

a.       Loss at the rate of 2.20%: This amendment has  adversely affected the iron and steel industry and the manufacturers who are ultimate users of iron and steel goods, as this amendment has caused a considerable loss of the tax already paid on the stock of iron and steel goods lying as on 31.01.2014. By this amendment a loss to the extent of 2.20% of such stock of iron and steel goods and 3.85% on Non CENVAT paid iron and steel scrap has been caused, which is a huge amount.

b.      Loss of 2.20% more than gross profit: Nowadays in the competitive market where profit margins are only to the extent of 1 to 2%, a loss at the rate 2.2% is a huge loss and is a direct attack on the income of the industry. It is also a violation of vested statutory right of the traders to get full input tax credit of the taxes they have paid.

c.       ITC on closing stock restricted for no fault of dealers: In a layman language if we can say, the implications of this rule would be, you pay tax on certain goods at the rates applicable at the time of purchase, presuming that you have a statutory vested right that such tax paid by you on your inputs would be fully reimbursable against your output tax liability and thereby you can shift your tax liability to your buyer in the system of Value added tax which is a consumption based tax.

But as soon as the rate of tax is reduced on such goods, your vested statutory right vanishes and you are unexpectedly burdened with a loss of the reduced rate and instead of passing the burden of such tax paid, you are now burdened to bear that tax of your own pocket at a stage when the goods have not reached the final consumer.

This rule 21(8) clearly attacks the income of the dealers in an indirect tax law in which the incidence of tax is sale or purchase of goods. Here a tax is collected from back door in an uncertain way, dependent upon the future contingency which is reduction of rate of tax by the State Government.

d.      Restricting ITC on closing stock adds up the cost of goods: No doubt the reduction of rate of tax is a welcome step and is for the benefit of the industry, but at the same time it will cause a huge loss to the industry if the ITC of earlier tax paid is restricted at reduced rate. If a benefit is to be given, it should be given to its fullest extent. The restriction of ITC at reduced rate would cause adding up the cost of goods lying in the stock with the whole industry, thereby it nullifies the benefit of reduction of rate of tax to a greater extent to the industry.

For example:

If I have stock of iron and steel goods of Rs. 100000/- on the date of reduction and have ITC standing to the tune of Rs. 4950/- as I had paid tax @ 4.95%.

From the date of reduction I will be disallowed ITC of Rs. 2200/-. It will result in adding cost to my stock because I cannot pass on the burden of tax of Rs. 2200/- I paid. It will affect the overall capital of the dealers.

Thus overall reduction of tax will be increasing the cost rather than diminishing it.

e.        Retrospective tax:  By restricting ITC of tax paid in the past amounts to levy tax with retrospective effect. As the credit of taxes paid in the past is taken away against the future output liabilities. The amendment should not create any unreasonable restriction upon the fundamental or existing statutory rights of the tax payer. If it creates untoward fiscal impacts on the tax payers so as to deprive him of his rightful claim, then in such a case, the amendment cannot be upheld to have been done in public interest and is arbitrary and discriminatory and violates Articles 14 and 19(1) (g) of the Constitution of India.

The restrictions must not be arbitrary or of an excessive nature so as to go beyond the requirement of the interest of the general public.

On legal front following submissions are made:

a.       Restricting ITC of tax paid on the closing stock in past amounts to levy tax with retrospective effect, which is unreasonable and arbitrary in nature.

b.      Rule 13(8) is ultra vires of Punjab VAT Act, 2005 as there is no provision under the said Act restricting ITC on the closing stock as existing on the date of reduction of tax. Such reduction of input tax credit is a substantive provision and not the procedural one so as to be prescribed in the Rules only. Therefore this rule also violates Article 265 of our Constitution.

c.       Rule 13(8) would result in tax cascading and inflation which is against the public policy and also defeats the object of system of VAT.

d.      Rule 13(8) also violates the vested statutory right of claiming input tax credit.

e.       Rule 13(8) is violative of Article 14 and 19(1)(g) of our Constitution

2.      Restriction of Input Tax Credit at two stages: By introduction of Rule 21(7) of Punjab VAT Rules, 2005, w.e.f. 01.02.2014, input tax credit on the iron and steel goods will be available only at two stages beginning from the person purchasing goods from manufacturer/importer who is registered in Punjab.

Areas of concerns of the trade and industry:

a.       Harsh Provisions:The above amendment is a very harsh provision and is going to adversely affect the iron and steel trade and industry and small scale manufacturers, resulting in rise in prices, making the finished products costlier in the national and international market and ultimately affecting the business of local industry and putting the same out of competition on the national and international front.

b.       Unequal treatment between dealers at 1st , 2nd stage and dealers at subsequent stages-violation of Article 14: The iron and steel goods are the basic raw materials for many large scale as well as small scale industries. Most of the manufacturers carrying business in the State of Punjab do not buy iron and steel goods directly from the first manufacturer/importer, rather iron and steel goods reaches the ultimate user of such goods through a chain of traders of such goods which includes dealers selling the goods at stages later than 2nd stage within the Punjab.

Even considering the general principle of every trade, there are four to five persons involved in every industry who trade the goods before such goods reach the final consumer. These persons are usually Manufacturers/importers, distributors/MOU holders, Wholesalers and retailers.

 Since the Iron and steel goods are raw material products, after the above four stages the goods again reach the manufacturers of finished goods, for which iron and steel is the basic input.

 Pipe fitting, Almirahs made of iron and steel, Utensils, Surgical goods, Bus body fabricators etc are only fewer items in the endless list of goods, in the manufacturing process of which iron and steel is the basic raw material. The manufacturers of these goods buy the iron and steel from retailers who sell goods at a stage beyond 2nd stage in the local markets. In such case how far this amendment is justifiable is a question to be asked.

Traders/manufacturers purchasing goods at 3rd or 4th stage are being treated unequally than the traders/manufacturers existing at 1st or 2nd stage without any reason. As the formers are not given input tax credit of tax paid by them, but laters are allowed input tax credit of the taxes paid by them.

Three Charts as Annexture A, B, C showing trade cycle of Finished Steel Goods, Pig Iron & Steel Scrap are attached herewith for your kind reference.

c.       Increase in Cost of goods: The traders and the manufacturers purchasing goods after 2nd stage will be the big losers as they will not get any input tax credit of the taxes paid by them to their sellers, resulting into the taxes paid on their purchases becoming part of the cost of their product.

d.      Tax cascading:  Such addition to the costs would result in tax cascading i.e levy of tax on the tax, which will defeat the very purpose of system of Value Added Tax, which was introduced basically to remove this tax cascading effect in the system of indirect taxation in the sales tax law.

e.       No Benefit of tax reduction-increase in overall tax burden by many folds:  No doubt the reduction of rate of tax is a welcome step and is for the benefit of the industry, but at the same time it will be of no use to the industry, if the Input Tax Credit is restricted only at two stages. It will not only nullify the benefit of reduced rate of tax but also it will multiply the overall tax burden on the trade and industry, when calculated from stages beyond second stage.

f.       Undue hardship on dealers at subsequent stages: Since as per Rule 21(7) of the Punjab VAT Rules, 2005, input tax credit in case of iron and steel goods would be available only to the persons who are first stage taxable persons and second stage taxable persons, it would be an undue hardship on the third and fourth stage dealers as they will be paying tax at their stages of sale but they will not be getting any input tax credit of the tax paid by them in their purchases.

This can be explained with the help of an example as below:

“A”(manufacturer) sells iron and steel goods to “B”(Distributor). “B” sells goods to “C”(Wholeseller). “C” again sells the same goods to “D”(Retailer). “D” then again sells the same goods to “E”(small scale manufacturer).

In the above example B and C being the first and second stage dealers, will get input tax credit.  D will not get any input tax credit of the tax paid by him to C. However D will be charging tax on the sales made by him to E and pay the same into Government Treasury.

But inspite of payment of tax by D, input tax credit of the same is not available to E as per Rule 21(7). This adds up the cost to the material and results in tax cascading.

g.      Rule 21(7) Inconsistent with the provisions of Punjab VAT Act: After the amendment in section 13(12) the input tax credit of tax is available only to the extent of tax actually paid into the Government treasury. Therefore when the tax has been paid at all the stages, restricting the same at any stage beyond 2nd stage by Rule 21(7) would be in contradiction of provisions of section 13(12) as stated above.

h.      Step motherly behavior - violation of Article 14: A step motherly behavior have been done by the Government of Punjab with the iron and steel trade and industry, by restricting input tax credit to two stages in the case of iron and steel goods only and not in other cases. What is the reason for this classification is unknown. Why such harsh provisions have been made for only iron and steel goods and not in case of other goods?  

As per Article 14 of our constitution every person has right to equality before law. But the provisions made specifically targeting iron and steel trade and industry is clearly violation of Article 14.

On legal front certain points given below are also being brought to your knowledge:

a.       Restricting Input Tax Credit at two stages only is a part of substantive law and not part of procedural law, The Punjab VAT Act, 2005 nowhere talks about restriction of ITC at any number of stages, whereas rule 21(7) has restricted the ITC at two stages only. Therefore this Rule 21(7) is ultra vires of the provisions of Punjab VAT Act, 2005.

b.      Restricting ITC is also against the public policy as it would result in inflation and rise in prices.

c.       ITC restriction would result in tax cascading which was one of the main objective behind introduction of VAT system.

d.      Restricting ITC at two stages will result in vanishing the businesses of persons operating after 2nd stage as the ultimate user will prefer buying from 1st stage dealer only so as to get input tax credit, thereby it will effect the fundamental right of freedom of trade of the persons operating from 2nd stage of sale of goods within Punjab.

e.       Provisions of section 21(7) defeats the very purpose and spirit of system of VAT.

f.       Provisions of Rule 21(7) are inconsistent with the provisions of section 13(12) and other provisions of the Act.

g.      Rule 21(7) is ultra vires of Article 14 of the Constitution as it denies right to equality before law to the iron and steel industry. It also treats traders existing at Ist and IInd stage dealers and the dealers trading at subsequent stages unequally without any intelligible differentia.

3.      Amendment in Rule 54 of Punjab VAT Rules, 2005: Rule 54 of Punjab VAT Rules, 2005 has also been amended w.e.f 01.02.2014 which provides additional condition of printing a certificate behind the VAT invoice in case of iron and steel goods, in which 1st and 2nd stage person has to mention the name of manufacturer/importer and their purchaser, with weight of goods, invoice number, quantity details etc.

Areas of concerns of the trade and industry:

a.      Affect on business and trade secrets :This would affect the business of the 1st stage person, as 2nd stage person would get to know about the manufacturer, as a result of which he may purchase goods directly from the manufacturer. This affects the trade secret.

b.      Difficulty in maintenance of stock register: Moreover as a result of the above amendment, every 1st and 2nd stage dealer would have to maintain not only stock register but also party wise, stage wise stock register. A person buying goods from different suppliers, manufacturers, how will come to know that which goods he purchased from which person.

It is only possible if party wise stock register is maintained. This would only add up to the botheration of the concerned dealer and it would be almost next to impossible for a person trading in different goods and buying from different persons.

c.       Diificulty in assessments: Moreover it would also be very difficult for the assessing authority in such circumstances, to arrive at a definite conclusion, that whether the goods mentioned in the certificate were purchased from the same person as mentioned in the said certificate. It would further give rise to litigation and harassment to the innocent dealers.

In view of the above practical difficulties it is in the interest of not only traders but also for the Government to withdraw these amendments relating to stages, restriction of ITC on closing stock and the requirement of certificate.

4.      Chaos and confusions-clarifications required: The above amendments have only left iron and steel trade and industry in chaos and confusions. Many doubts have emerged as a result of the above amendments. A chaotic law will definitely lead to litigation. Some of the chaos and confusions of trade and industry are stated below:

a.       The input tax credit in case of iron and steel goods is restricted to two stages only w.e.f 01.02.2014. But what will be the status of closing stock as existing on 31.01.2014 is not clear at all. The amendments made above are totally silent on this aspect.

b.       Printing of certificate behind the VAT invoice has been made mandatory wherein the name of the manufacturer/importer, Ist and 2nd stage dealer along with quantity of goods, weight etc details have been asked for. In case a person purchasing goods from large number of manufacturers/traders, large number of items and he sells different items in a single invoice to a person, how will he mention the name of each manufacturer from which he has bought a particular item under an invoice. It is an impossible task for a person to identify each and every item with each of his sellers.

Concluding remarks:  We understand that levying tax is an act of sovereignty, however power to levy tax doesnot include power to destroy the business. The tax should be collected like honey bee and not in such a way so as to destroy the flower from which honey is to be extracted. Such amendments would only hinder the economic growth of the industry, State and Nation. If such amendment has been made for checking tax evasion, then It must be remembered, if there is a wide spread tax evasion, it may be more meaningful to search for the cause in the tax administration than in the taxpayer.

Such amendments are neither in the interest of the industry nor in the interest of overall growth of the State, nor it is going to generate any more revenue for the Government, what it will do is, ruining the trade and industry. Therefore in the interest of justice, economy it is humbly requested to your good self to withdraw the above amendments.

Summary of Demands of Iron & Steel Trade & Industry

A.    Withdrawal of restriction of Input tax credit of tax paid before on the closing stock lying as on 31.01.2014 at reduced rate of 2.75% i.e full value of 4.95% tax paid should be reimbursed.

B.     Withdrawal of restriction of Input Tax Credit at two stages. i.e ITC should be allowed to unlimited stages.

C.    Withdrawal of condition of printing a form behind the VAT invoice giving information under Rule 54.

D.    Closing Stock lying on 31.01.2014 should be treated as 0 Stage Stock.


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