Issues in Single Stage Taxation system in Punjab

Single Stage Taxation system, now while it is flowing and roaring in the taxation system of Punjab requires attention at a few subtle points:

1.      Not Supported by appropriate Legislation

Schedule A and Schedule E have been amended to give effect to single stage taxation system. While Schedule A has its genesis in Section 16, Schedule E bears its roots in Section 8. As per Schedule A , specified commodities have been made tax free at wholesaler or distributor or retailer stage. However, section 16 bears no relation with stages of goods

At the same time, Schedule E has made specified goods taxable at first point of Sale i.e. manufacturer or first importer, while section 8 has not been amended at all .

                        Hence first point taxation system at first instance appears to be ultra vires the provisions of Punjab Vat Act.

2.     Confusions in Clarifications

The first point taxation system since lacked any legislative authority, has been supported by number of clarifications which have compounded the confusion of dealers.

The department issued following notifications and

Clarifications on First point taxation system:

a)      Notification No. 116 & 117 dated 13-12-2013

b)      Clarification with reference to Notification No. 116 and 117 dated 13-12-2013

c)      Notification S.O.17/P.A./2005/S.8/2014 dated 21-02-2014

d)      Clarification with reference to Notification S.O.17/P.A./2005/S.8/2014 dated 21-02-2014

e)      Notification No. S.O. 23/P.A.8/2005/S.8/2014 dated 25-03-2014

f)       Public Notice/Clarification dated 19-04-2014

The above notifications at times have taken stands which stands contradictory to each other or sounds strange as under:

A.     Tax in hands of second subsequent buyer

Para 9 of Clarification with reference to Notification No. 116 and 117 dated 13-12-2013 reads as under:

“ The dealers at the subsequent stages after Manufacturer/First Importer have to declare their stock as on 31st December, 2013. The dealers at the subsequent stages after Manufacturer/First Importer will continue to pay the tax according to the provisions of Punjab VAT Act, 2005 on this stock until completely sold or disposed off. The stock purchased by the dealers at the subsequent stages after Manufacturer/First Importer on or after 1st January, 2014, will be tax free at the subsequent stages after Manufacturer/First Importer’s Stage. “

But Para 5 of Clarification with reference to Notification  S.O.17/P.A./2005 /S.8/2014 dated 21-02-2014 reads as under:

“The dealers at the subsequent stages after Manufacturer/First Importer have to declare their stock as on 28th February, 2014. For this proforma is being uploaded on the website of Department The dealers at the subsequent stages after Manufacturer/First Importer will continue to pay the tax according to the provisions of Punjab VAT Act, 2005 on the stock of goods which were not covered under single stage taxation and were being taxed @ 6.05% and @ 14.30% and , until it is completely sold or disposed off. The stock purchased by the dealers at the subsequent stages after Manufacturer/First Importer on or after 1st March, 2014, will be tax free at the subsequent stages after Manufacturer/First Importer’s Stage subject to the conditions “

The words underlines and marked appear to have changed an important position of law. From the change made in language of clarifications position of law appears to have been changed as follows:

Earlier Position: All the purchase and sale made by Subsequent buyer after effective date are tax free

Later Position: Stock which suffers tax @ 6.05% and 14.30% shall continue to be governed by earst while provisions of Punjab Vat law.

Whether the department really meant this new position of law, should be clarified, because it shall have following implications:

1.      Goods purchased by one subsequent buyer from old stock of another subsequent buyer shall be purchased against Vat Invoice and shall be entitling the second subsequent buyer to claim input tax credit. Further the second subsequent buyer shall sell them at 6.05% or 14.30% only.

2.      Stock existing on effective date i.e. 31^st December or 28-02-2014 shall always remain taxable at 6.05% whatever the ages of time goods travel, say even after ten years

3.      Second Subsequent buyer can claim refund of ITC in case of inter- state sale or export.

B.     Allowance of Input Tax Credit against goods not subject to First Point Taxation

Para 2 of Public Notice/Clarification dated 19-04-2014 reads as under:

“………..Subsequent Stage Dealers( Wholesaler, Distributor, Retailer) : These dealers should adopt the following procedure for filing their returns:-

a) Treatment of transitional stock When the above mentioned notifications were issued,the dealers were requested to declare their stock on the website of the Department. So far as this stock is concerned, a worksheet is being created on the website of the Department and linked with VAT-15. When the dealer opens this worksheet, he will fill the columns of the work sheet. The dealer will be required to submit information regarding the stock soldby him and to pay tax on value addition at the old rate.

Illustration -I : If a dealer had declared a stock of 6.05% goods of Rs.1.00 lac on 1.3.2014, and during the month of March, 2014, he has sold it for Rs.1.20 lacs, then he will be required to pay tax on Rs.20,000/- at the rate of 6.05%.

Illustration-II : In the above case, if the dealer sells stock worth Rs.60,000/- only during the month of March, 2014, then he will simply declare this stock and the balance stock in the worksheet. His tax liability will arise when he sells the entire stock during the future return periods…………………………”

Further Note under work sheet reads as under:

“……..Tax liability = (Value of 6.05% stock mentioned in col.6 Value of 6.05% stock mentioned in col.5) X 6.05% + (Value of 14.30% stock mentioned in col.6 Value of 14.30% stock mentioned in col.5) X 14.30% + (Value of 22.55% stock mentioned in col.6 Value of 22.55% stock mentioned in col.5) X 22.55%.

Note: If the tax liability is negative, then it will be treated as nil and it will not be added in the output tax liability. If the tax liability is positive, then it will be added in the output tax liability………………”

Hence it implies that vat shall be payable only when sale exceeds purchase. The Impact of above clarification may be understood as under:

Ignoring Clarification

	Input Tax Credit	Output Tax	Tax Payable
Goods Not Covered by First Point Taxation	400000	500000	100000
Goods Covered by First Point Taxation	200000	180000	-20000
Net Tax Payable			80000

As per Clarification

	Input Tax Credit	Output Tax	Tax Payable
Goods Not Covered by First Point Taxation	400000	500000	100000
Goods Covered by First Point Taxation	200000	180000	NIL, because by implication you have to keep ITC in reserve till output tax exceeds ITC
Net Tax Payable			100000

                                    Hence an important change in taxation of subsequent

buyer has been put in place without perhaps going into implication of the same.

3.      Work Sheet Dilemma

Further Public Notice/Clarification dated 19-04-2014 requires work sheet with following columns

a)     Previous Rate of Tax

b)     Value of Stock declared on 31-12-13

c)      Value of Stock declared on 28-02-14

d)     Total Declared Stock

e)     Value of Stock Sold out of Stock as in Column 5

f)       Closing Stock as on 31-03-2014

g)     Tax Liability

Here it may be pertinent to note that the notification dated 21-02-2014 has replicated some items with minor modification in item No. 87 of Schedule A mentioned in notification.

While the same items were under first point taxation in notification dated 13-12-2013 they have been repeated in notification dated 21-02-2014.

                        Hence whether one has to again declare the stock of items which has already been declared on 31-12-2013 or one has to declare the stock not already declared. Further whether one can alter the position of stock already reflected on 31-12-2013. The department does not appear to have cared about these obvious questions.

                        Further the words “Value of Stock Sold out of Stock as in column 5” when read with other entries in worksheet such as “tax liability” and note appended to worksheet requires following further clarification as to whether one has to declare

Sale value of stock sold  OR Cost of Goods Sold

            Because Closing Stock as at 31^st March 2014 can be worked out only if one gives cost of goods sold but tax liability can be worked out of Sale value is given. The department should have taken care about this obvious accounting aspect.

                        Further the department should clarify that what is the intent behind asking for stock of 31^st March. Whether subsequent dealer has to now declare stock of every successive month.

4.      Business Adversity:            First point taxation system has thrown subsequent dealers selling their goods outside the state of Punjab out of business.

It appears that the department has chosen to sacrifice

not only the interest but the very existence of small dealers, in its urge to over-simply taxation system.

Conclusion:  The department must ponder that its endeavor to over simplify the things has perturbed the entire business community and has lead to multitude of confusion which the department itself shall find difficult to handle in future.