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.
To
The Hon’ble Chief Minister,
Punjab
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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