Value Added Tax

Why VAT?
*Tax on sale within the state is a state subject. The traditional Sales
Tax system had developed a lot of distortions. They were:

1. Unhealthy competition amongst states by giving incentives to new

industries. When one state gave incentive, others also followed.
This ruined State finances.
2. The Central Sales Tax rate was lower than State Sales tax. Often,
goods from one state were sent to another state on stock
transfer basis and brought back to the same state to show inter-
state sale and thus pay tax at a lower rate.
3. States introduced a “First Point Sale” to avoid cascading effect of
Sales tax. This made tax evasion easy.
4. Cascading effect of tax due to Central Sales Tax.

Advantages of VAT
1. Will reduce tax evasion: Since a tax invoice would be essential
to claim input tax credit, there will be no tax evasion in the entire
value chain except for the last stage where the goods are sold to
the consumer. This will introduce more accountability in the
system and will broaden the tax base thus increasing tax
revenues.
2. Avoid the cascading effect of taxes: VAT only taxes the value
addition made to the goods. Hence it avoids the cascading effect
of taxes and will thus result in lowering of prices to the customer.
3. Uniform rates of taxation across the country: The single
point sales tax system was highly complex with multiplicity of
rates, plethora of explanations, extensive use of statutory forms,
high and unrealistic quota of assessment, tax rate war between
states etc. The basic advantage of VAT is its neutrality,
transparency, certainty and self-policing mechanism.
4. Transparent system: Compared to Sales Tax, VAT is more
transparent. Under VAT, the consumer knows the total tax
incidence when he buys goods.
5. Lower Tax Rate: Under VAT, every dealer pays the tax on his
selling price and takes credit of tax paid by him. As tax is paid on
the final selling price, the tax rate will be lower as compared with the
First Point Sales Tax System.
6. No Forms: Most of the forms that were prevalent under the Sales
Tax system have been abolished under the VAT system.
7. Simple Classification: Under Sales Tax regime, there used to be
a number of rates even in a state. In the VAT regime, only 5
different rate structures are provided. They are:

*Schedule A: Goods which carry 0% rate. Mostly agricultural

products, necessities, etc.
*Schedule B: Precious metals carrying 1% rate.
*Schedule C: Mostly declared goods, Industrial raw materials,
intermediate products, etc. carrying 4% rate.
*Schedule D: Liquor and Petroleum products, carrying a rate of 10%
to 34%.
*Schedule E: All goods not included in Schedules A to D. Rate is
 12.5%.

8. Self Assessment: Under the VAT system, the Government would

generally rely on the returns filed by dealers and there will be no
separate assessment. The Department would resort to Business
Audit in rare cases.

Disadvantages of VAT
1. No Input tax credit on Inter state purchases: India does not
have a classic VAT structure due to its federal structure. Thus
interstate commerce attracts CST. Though the government has
reduced CST to 2%, it breaks the VAT chain and results in a
fragmented VAT system. Besides, there is no input tax credit on
Inter-State purchases. This will impact the free flow of goods
across States and will not result in a true VAT-based system.
2. More Dealers: VAT is a multipoint sales tax. Under the Sales Tax
regime, mostly First Point Sale in a State was taxed. Under VAT,
each dealer in the state is taxed. Hence, a lot of dealers would
get involved in collecting and paying the tax to the Govt. This
would increase the workload of both, dealers as well as the
department.
3. Variation among the laws of the different states: Every
state has formulated their own VAT laws. Though there is a
general consensus among all States, there is still variation in tax
definitions, rates & procedures across states.
4. Tax Audit: Under the VAT system, if a dealer crosses the
prescribed turnover, he is required to undergo VAT Audit, which is
to be performed by a CA. This is in addition to the Tax Audit
under the Income Tax Act and other audits required under various
other laws.

Definitions
1. Agriculture: Agriculture, with all its grammatical variations and
cognate expressions, includes floriculture, horticulture, the
raising of crops, grass or garden produce, and also grazing; but
does not include dairy farming, poultry farming, stock breeding,
the mere cutting of wood or grass, gathering of fruit, raising of
man-made forests or rearing of seedlings or plants.

2. Business: “business” includes, —

(a) any service;

(b) any trade, commerce or manufacture;
(c) any adventure or concern in the nature of’ service, trade,
commerce or manufacture;
whether or not the engagement in such service, trade,
commerce, manufacture, adventure or concern is with a motive
to make gain or profit and whether or not any gain or profit
accrues from such service, trade, commerce, manufacture,
adventure or concern.

Explanation. For the purpose of this clause,—

(i) the activity of raising of man-made forest or rearing of seedlings or
plants shall be deemed to be business;
(ii) any transaction of sale or purchase of capital assets pertaining to
such service, trade, commerce, manufacture, adventure or concern
shall be deemed to be a transaction comprised in business;

(iii) sale or purchase of any goods, the price of which would be

credited or, as the case may be, debited to the profit and loss
account of the business under the double entry system of
accounting shall be deemed to be transactions comprised in
business;
(iv) any transaction in connection with the commencement or closure
of business shall be deemed to be a transaction comprised in
business;

3. Capital Asset: “capital asset” shall have the same meaning

as assigned to it, from time to time, in the Income Tax Act, 1961,
but the said expression shall not include jewellery held for
personal use or property not connected with the business.

4. Dealer: ‘Dealer’ means any person who for the purposes of or

consequential to his engagement in or, in connection with or
incidental to or in the course of, his business buys or sells, goods
in the State whether for commission, remuneration or otherwise
and includes,-
(a) a factor, broker, commission agent, del-credere agent or any
other mercantile agent, by whatever name called, who for the
purposes of or consequential to his engagement in or in
connection with or incidental to or in the course of the business,
buys or sells any goods on behalf of any principal or principals
whether disclosed or not;
(b) an auctioneer who sells or auctions goods whether acting as an
agent or otherwise or, who organizes the sale of goods or
conducts the auction of goods whether or not he has the
authority to sell the goods belonging to any principal whether
disclosed or not and whether the offer of the intending purchaser
is accepted by him or by the principal or a nominee of the
principal;

(c) a non resident dealer or as the case may be, an agent residing in
the State of a non-resident dealer, who buys or sells goods in the
State for the purposes of or consequential to his engagement in
or in connection with or incidental to or in the course of, the
business.
(d) any society, club or other association of persons which buys
goods from, or sells goods to, its members;
*Explanation- For the purposes of this clause, each of the following
persons, bodies and entities who sell any goods whether by
auction or otherwise, directly or through an agent for cash, or for
deferred payment, or for any other valuable consideration, shall,
notwithstanding anything contained in clause (4) or any other
provision of this Act, be deemed to be a dealer, namely:-
(i) Customs Department of the Government of India administering the
 Customs Act, 1962;
(ii) Departments of Union Government and any Department of any
State Government
(iii) Incorporated or unincorporated societies, clubs or other
associations of persons;
(iv) Insurance and Financial Corporations, institutions or companies
and Banks included in the Second Schedule to the Reserve Bank
of India Act, 1934;
(v) Local authorities;
(vi) Maharashtra State Road Transport Corporation constituted under
the Road Transport Corporation Act, 1950;
(vii) Port Trusts;
(viii) Public Charitable Trusts registered under the Bombay Public
Trusts Act, 1950;
(ix) Railway Administration as defined under the Indian Railways Act,
1989 and Konkan Railway Corporation Limited;
(x) Shipping and construction companies, air transport companies,
airlines and advertising agencies;
(xi) any other corporation, company, body or authority owned or
constituted by, or subject to administrative control, of the Central
Government, any State Government or any local authority:

Exception I. An agriculturist who sells exclusively agricultural produce

grown on land cultivated by him personally, shall not be deemed to be
a dealer within the meaning of this clause.
Exception II. An educational institution carrying on the activity of
manufacturing, buying or selling goods, in the performance of its
functions for achieving its objects, shall not be deemed to be a dealer
within the meaning of this clause.
Exception III. A transporter holding permit for transport vehicles
(including cranes) granted under the Motor Vehicles Act, 1988, which
are used or adopted to be used for hire or reward shall not be deemed
to be a dealer within the meaning of this clause in respect of sale or
purchase of such transport vehicles or parts components or
accessories thereof.

5. “non-resident dealer” means a dealer who effects purchases

or sales of any goods in the State, but who has no fixed or
regular place of business or residence in the State;

6. “goods” means every kind of moveable property not being

newspapers, actionable claims, money, stocks, shares, securities
or lottery tickets and includes live stocks, growing crop, grass
and trees and plants including the produce thereof including
property in such goods attached to or forming part of the land
which are agreed to be severed before sale or under the contract
of sale;

7. “place of business” includes a warehouse, godown or other

place where a dealer stores his goods and any place where the
dealer keeps his books of accounts;

8. “purchase price” means the amount of valuable consideration

paid or payable by a person for any purchase made including any
 sum charged for anything done by the seller in respect of the
goods at the time of or before delivery thereof, other than the
cost of insurance for transit or of installation, when such cost is
separately charged;

Explanation I. —The amount of duties levied or leviable on the

goods under the Central Excise Act, 1944, or the Customs Act,
1962 or the Bombay Prohibition Act, 1949 shall be deemed to be
part of the purchase price of such goods, whether such duties are
paid or payable by or on behalf of the seller or the purchaser or
any other person.

Explanation II. —Purchase price shall not include tax paid or

payable by a person in respect of such purchase.

Explanation III. —Purchase price shall include the amount paid by

the purchaser by way of deposit whether refundable or not which
has been paid whether by way of a separate agreement or not, in
connection with or incidental or ancillary to, the said purchase of
goods;

9. “resale” means a sale of purchased goods—

(i) in the same form in which they were purchased, or
(ii) without doing anything to them which amounts to, or results
in, a manufacture,
and the word “resell” shall be construed accordingly;

10. “sale price” means the amount of valuable consideration paid or

payable to a dealer for any sale made including any sum charged
for anything done by the seller in respect of the goods at the
time of or before delivery thereof, other than the cost of
insurance for transit or of installation, when such cost is
separately charged.
Explanation 1. —The amount of duties levied or leviable on goods
under the Central Excise Act, 1944 or the Customs Act, 1962 or
the Bombay Prohibition Act, 1949, shall be deemed to be part of
the sale price of such goods, whether such duties are paid or
payable by or on behalf of the seller or the purchaser or any
other person.
Explanation II. — Sale price shall not include tax paid or payable
to a seller in respect of such sale.
Explanation III. — Sale price shall include the amount received by
the seller by way of deposit, whether refundable or not, which
has been received whether by way of a separate agreement or
not, in connection with or incidental or ancillary to, the said sale
of goods;

11. “turnover of purchases” means the aggregate of the amounts

of purchase price paid and payable by a dealer in respect of any
purchase of goods made by him during a given period, after
deducting the amount of,—

o purchase price, if any, refunded to the dealer by the

 seller in respect of any goods purchased from the seller
and returned to him within the prescribed period; and
o deposit, if any, refunded in the prescribed period to the
dealer by the seller, in respect of any goods purchased
by the dealer.

12.“turnover of sales” means the aggregate of the amounts of sale

price received and receivable by a dealer in respect of any sale of
goods made during a given period after deducting the amount of —
(a) sale price, if any, refunded by the seller, to a purchaser, in
respect of any goods purchased and returned by the purchaser
within the prescribed period; and
(b) deposit, if any, refunded in the prescribed period, by the seller
to a purchaser in respect of any goods sold by the dealer.

Incidence of Tax
Schedule A: Schedule A contains all exempted goods. It contains 51
entries.
Ex: Agricultural implements, books periodicals, etc.

Schedule B: Schedule B includes 3 items which are in the nature of

valuable items and tax rate is 1%. The items are Gold, Silver and
Precious Metals.

Schedule C contains around 108 items and tax rate is 4%. Goods
included in this schedule are mostly raw-materials and intermediate
goods.

Schedule D: This schedule includes 10 items. Tax rate on foreign

liquor, country liquor and imported liquor is 20%. The schedule also
includes petroleum products on which tax rate is between 10% and
34%. On High Speed Diesel Oil, the tax rate is Re. 1 per litre.

Schedule E: All goods not covered in other schedules are included in

schedule E. The rate is 12.5% (Revenue neutral rate).

Tax Rate on Packing Material

The same rate of tax that is leviable on the goods is also leviable
on packing material.

Sales and Purchases not liable to tax

*Inter-state Sale, Import and Export.
*Sale of Fuel and Lubricant to a Foreign Going Aircraft.
*Sale by SEZ Developer, SEZ unit or EOU.
*Goods specified in the Import and Export Policy
*Sale to/by Canteen Stores for armed forces.
*Sale of goods to State Government and other specified agencies.
Registration
Any dealer, whose turnover first exceeds the prescribed limits in a
year, is liable to get himself registered under the Act.

Prescribed Limits:
Importer: Turnover of sales exceeds Rs. 1,00,000 and the value of
taxable goods sold or purchased by him during the year is not less
than Rs. 10,000.
Any other Dealer: Turnover of sales exceeds Rs. 5,00,000 and value
of taxable goods sold or purchased by him during the year is not less
than Rs. 10,000.

For calculating turnover of sales, turnover of all taxable and non

taxable sales shall be considered. The turnover shall also include sales
or purchases made by the dealer on behalf of his principal.

o A dealer may also apply for Voluntary Registration even

if his turnover has not exceeded the prescribed limits.
On such registration, he will be able to take input tax
credit and also issue tax invoice.
o If a person has obtained Voluntary Registration, he is
liable to pay tax on the turnover of taxable goods even
if he has not reached the required turnover limits.
o Once registered, the dealer is liable to pay tax till
registration is cancelled. (i.e. even if turnover in the
next year falls below the limits).

Time Limits:

o A dealer who becomes liable to pay tax under the above

provisions has to apply for registration:
1. Within 30 days from the date of achieving the stipulated turnover
2. In case of succession, he has to apply within 30 days of
succession.

o Application for registration is to be made in Form 101.

o If the dealer has more than one place of business in the
State, he has to make one application for registration for
all places and declare one place as principal place of
business. Application is to be made to Registering
Authority within whose jurisdiction the principal place of
business is situated.
o The dealer cannot apply for separate registration for
different places of business. However, he can file
separate returns for different places of business with
prior approval of Commissioner.
o Application in Form 101 shall be signed by the
authorized person. In case of a Partnership, the
declaration in Form 101 needs to be signed by all
partners.
o The dealer is required to furnish PAN along with proof of
 PAN.
o The application shall give in general terms the nature of
business as well as the classes of goods in which the
applicant deals.
o The Certificate of Registration will be issued in Form
102, in the name of the Firm, Body Corporate, etc. as
the case may be.
o The dealer will be allotted a TIN (Taxpayer Identification
Number), which will be an alpha-numeric code.
o When the dealer is having more than one place of
business, the registration authority shall issue one copy
of certificate of registration for each additional place of
business specified in the application. For a warehouse,
extra copy of registration will not be issued.
o Every registered dealer shall display conspicuously at
each of his place of business (including warehouse) the
Certificate of Registration or a copy thereof.

Cancellation of Registration
o When business is discontinued, transferred or
disposed, or change of place takes place the dealer
shall apply for cancellation of registration certificate
within 30 days in Form 103.
o If application is in order, the concerned authority
shall cancel the registration and serve the necessary
order. The cancellation is effective from the date of
discontinuance or transfer, etc.
o If any changes take place in the Registration
Certificate (such as change in place of business, etc.)
the dealer has to submit the RC and copies thereof to
the authority within 60 days. The authority shall
make necessary amendments and return the
certificate, or issue a fresh certificate.
o Dealer opting for Voluntary Registration has to
deposit Rs. 25,000 with the department. This can be
used to pay the tax in the year of registration and
subsequent year. If he is not in a position to utilize
the deposit fully even in the second year of
registration, he can claim refund of the amount.
o If a person who has obtained Voluntary Registration
has not commenced business within 6 months from
the date of registration, Department may cancel the
registration.

Business Advisory Visit

An advisory visit team of the Department shall visit the place of
business of the newly registered dealers normally within 3
months from issuance of RC, with prior appointment. The team
will appraise the dealer about various VAT provisions, records to
be maintained, etc.

Invoice
 o When RD sells goods to another RD, he shall issue to
the purchaser a tax invoice, containing all the
prescribed details. A copy of the tax invoice is to be
preserved for 3 years from the end of the year in which
the sale took place.

Tax invoice shall contain the following particulars:

o The words “TAX INVOICE” in bold letters at the top or

some prominent place.
o The name, address, RC No. of selling dealer as well as
name and address of purchasing dealer.
o An individual serialized number and date on which tax
invoice is issued.
o Description of goods, qty. or number, price of goods sold
and amount of tax charged thereon indicated
separately.
o Signed by the selling dealer or authorized person.
o Declaration in the prescribed form.

Invoice
o The RD may also issue a cash memo or a bill serially
numbered, signed and dated. However, in this case,
he shall not collect tax separately on the sale.
o A dealer opting for composition scheme cannot issue
a tax invoice (except dealers carrying out works
contract and opting for composition scheme).
o A tax invoice or a cash memo/bill is compulsory if the
value of goods sold is more than Rs. 50.
o The Department may permit maintaining invoices in
electronic form, subject to following conditions:

o Permission will be granted only in those cases where the total

amounts of bills or cash memoranda issued by selling dealer
in the immediately preceding year has exceeded Rs. 10 lakhs.
o The selling dealer shall furnish a monthly abstract in the
prescribed format to the specified authority.
o The selling dealer shall undertake to preserve the bills in
electronic format for 3 years from the end of the year in which
sale took place.

Input Tax Credit

o Input Tax Credit is available to a registered dealer in respect
of tax paid separately by him on purchase of capital goods as
well as other goods debited to profit & loss account, trading
goods, raw materials, parts, components, spares, packing
material and fuel purchased by him from another registered
dealer under a tax invoice.

o ITC will be available on capital goods provided they are used

in manufacturing of goods for sale or used in relation to sale.
 o ITC can be claimed as soon as goods and tax invoice are
received.

o ITC on capital goods is also available immediately. However, if

the capital asset is sold within 36 months, proportionate set-
off will be withdrawn.

Input Tax Credit

o When a dealer gets himself registered in the middle
of the year, he is eligible to claim ITC on tax paid on
purchase of goods effected by him from a registered
dealer even during the period when he was an
unregistered dealer, subject to the following
conditions:

o Goods are purchased or entry is effected on or after 1 st April of

the year in which the dealer has obtained registration.
o The goods purchased are treated as capital goods by the
dealer and such goods have not been sold by him before the
date of effect of registration.
o The goods purchased are not treated as capital assets and
have not been sold before the date of effect of registration.
o The goods are not treated as capital assets and have been
used or consumed in manufacture and the manufactured
goods have not been sold before the date of effect of
registration.

o ITC will be available in full to both, manufacturers and traders

if inputs purchased are for manufacturing / sale within the
state.
o Generally, ITC is available only when the output is taxable.
However, in Maharashtra, ITC is available subject to retention,
even if output is tax free.

Reduction of Set-off / ITC: Rule 53.

o According to Rule 53, the set-off / ITC available under any

rule shall be disallowed in part or in full in the following
cases:

• If the dealer has used any taxable goods as

fuel, an amount equal to 3% of corresponding
purchase price shall be reduced from the ITC
that would otherwise have been available.
• If the dealer manufactures tax-free goods, an
amount equal to 2% (which is the CST rate
w.e.f. 1/5/08. Earlier it was 3%) of the purchase
price of corresponding taxable goods
purchased by him (not being goods treated as
capital assets or used as fuel) shall be reduced
from the amount of ITC otherwise available in
 respect of the said purchases.
• If the dealer resells any tax-free goods and tax-
free goods are packed in any material, then an
amount equal to 2% (i.e. CST rate) of the
purchase price of the corresponding purchases
of packing material shall be reduced from the
amount of set-off otherwise available in
respect of the said purchases of packing
materials.

Reduction of Set-off / ITC: Rule 53.

o If the dealer dispatches any taxable goods outside the

State to any place within India, not by reason of sale, to his
own place of business or his agent (i.e. case of
consignment agent/branch transfer), then an amount equal
to 2% (i.e. CST rate) of the purchase price of the
corresponding taxable goods (not being goods used as
capital assets or fuel) shall be deducted from the amount
of set-off otherwise available in respect of the said
purchases.
Note: If the corresponding taxable goods are goods mentioned
in Schedule B, the retention rate would be 1% and not 2%.
o If the dealer makes a sale by way of transfer of property in
goods involved in execution of works contract and the
dealer has opted for composition scheme, the
corresponding amount of set-off (other than set-off
pertaining to purchases of capital assets) shall be allowed
as follows:
 By multiplying the said amount of set-off by 16/25, if
the dealer has opted to pay tax @ 8% on contract
value. (why 16/25? It is the same ratio as 8/12.5).
 By reducing from the amount of set-off a sum equal
to 4% of the purchase price on which set-off was
calculated, if the dealer has opted to pay tax @ 5%
of contract value (which is the composition rate
applicable in case of construction contracts).

Reduction of Set-off / ITC: Rule 53.

o If on account of gross receipts of a dealer in any year,
receipts on account of sales are less than 50% of the
total receipts, set-off is available in the following
manner:
o If the dealer is a hotel or club, not covered by
composition scheme, he shall be eligible for set-off only
–
 On purchases corresponding to food and drinks which
are served, supplied, sold or resold.
 On purchases of capital assets and consumables
pertaining to the kitchens and sale, service or supply of
the said food or drinks.
o If the dealer is not a hotel or club, he shall be entitled to claim
 set-off only on those purchases effected in that year where
the corresponding goods are sold or resold within 6 months
from the date of purchase (not being by way of sale to
another state) and purchase of packing materials used for
packing of such goods.
 However, a dealer who is a manufacturer will be eligible
for set-off on purchase of plant and machinery which
are treated as capital assets and also parts, accessories
and components of such capital assets. (i.e. even if
receipts on account of sale are less than 50% of total
receipts).

Reduction of Set-off / ITC: Rule 53.

o While reducing set-off as mentioned above, if it is not
possible to ascertain the purchase price with reference to
the books of accounts, the ratio of sales price of taxable
goods and tax free goods shall be applied.

Non-admissibility of Set-off: Rule 54

Set-off is not available in the following cases:

*On purchases of Passenger Motor Vehicles.

*On purchases of Non – VAT goods.
*On inter-state purchases.
*On crude oil purchased by the refinery for refining.
*On any purchases by deemed dealers.
*On purchases by way of works contract where works contract results
into immovable property.
*On purchases of liquor when the dealer opted for composition.
*On purchases by Mandap Keeper, who opted for composition.
*On purchases of capital goods by hotels (other than those used in
sale of food, drinks, etc. as already discussed above).
*On purchases of goods of intangible nature.

Refund
*Unutilized ITC during the year is not allowed to be carried forward.
The dealer will have to claim refund from the Department. In
case of Exporters and Entitlement Holders, refund must be
granted within 3 months from the end of return period.
Application for refund is to be made in Form 501.

Returns
*Frequency of Filing Returns

*E-filing of returns has been made mandatory.

*Dealer has option to file separate returns for different places of

business with prior permission from the Joint Commissioner.

*A return shall be treated as complete and self-consistent only if it

gives the following details correctly:

*Turnover of Sales and Purchases

 *Claim of set-off.
*Amount of set-off claimed as refund.
*Calculation of tax.

Revision of returns
*If the dealer discovers any misstatement, he may file revised return
at any time before notice of assessment is served upon him or
before the expiry of 8 months from the end of the year containing
the period to which the return relates, whichever is earlier.

Works Contract
*Works contract means a contract for carrying out for cash, deferred
payment or other valuable consideration, fabrication, erection,
installation, fitting out, improvement, modification, repair or
commissioning of any movable or immovable property.

*A contract that is merely for supply of goods or only for labour is not
a works contract.

*In case of a works contract, the value of goods which are used in the
works contract is alone taxable under the Maharashtra VAT Act.
The State Government has no right to tax the cost of labour, cost
of consumables, etc.
*In order to arrive at the sales price of the works contract, the
following 2 methods can be used:

*The amount of labour charges charged for executing the contract,

charges for planning, designing and architects fees, charges
for obtaining machinery on hire, cost of consumables and
other similar expenses relatable to supply of labour and
services and also the profit earned by the contractor to the
extent it is relatable to supply of labour and services is to be
deducted from the value of the contract, to arrive at the value
of the goods sold.
*The contractor can also arrive at the sales price by adding the
purchase prices of all the materials used in the contract and
adding the profit margin to the total purchase price of all
materials.

*After arriving at the sales price of the works contract, the contractor
has to calculate the tax liability according to the classification of
goods involved in the works contract.

*To make taxability of works contract easier, a composition scheme

has been introduced.

Composition Scheme for Works Contract

*In case of works contract, the dealer may opt for composition
scheme.
*If the contract is a construction contract, the dealer has to pay 5%
composition tax on the contract price.
*In case of other works contracts (i.e. other than construction
contract), he pays 8% composition tax on the contract price.
 *If the dealer opts for composition, he cannot deduct the value of
labour, consumption, declared goods, etc. from the contract
price.
*If he pays 8% composition tax, he is entitled for only 64% (i.e.
16/25th) of the set-off that he would have been normally eligible
for on inputs. If he pays 5% composition tax, he has to forgo 4%
of purchase value of goods transferred to the contractee by way
of works contract. However, set-off on capital goods shall be fully
allowed.
*The contractor can choose Composition scheme for certain contracts
and regular scheme for other contracts. (i.e. it is not necessary
that he opts for composition for all contracts).
*The contractor who opts for composition scheme (either 8% or 5%)
can issue tax invoice and recover 8% or 5% tax through the
invoice.
Composition Scheme for Retailers
*A dealer shall be considered to be engaged in the business of selling
at retail if 9/10th of his turnover of sales consists of sales made to
persons who are not dealers.

*If any dispute as to whether a dealer is retailer or not, Commissioner

will take a decision, which shall be final.

*Eligibility: Retailer who has turnover upto Rs. 50 lakhs in the

previous year shall be eligible.

*The composition scheme will be available upto Rs. 50 lakhs and

when turnover exceeds Rs. 50 Lakhs, he has to pay normal tax.

*Turnover includes sale of taxable goods and tax-free goods, but

excludes sale of liquor, drugs and motor spirit.

*Composition Scheme is not applicable to the following:

*Manufacturer
*Importer (i.e. purchasing goods from other state or country).
*Retailer of Liquor
*Resellers of specified drugs.
*Resellers of Motor Spirit.

*Composition Rate: The dealer who has opted for composition

scheme shall pay tax as follows:
*@ 5% on the difference between total sales and total purchases,
provided the turnover of sales of goods chargeable at a rate of
4% or less is more than 50% of the total turnover.
*@ 8% in other cases.

*The dealer who has opted for composition scheme shall not collect
tax separately. He cannot issue a tax invoice. He is also not
eligible for any ITC.

*The dealer has the option to avail the benefit of the composition
scheme. The option once exercised cannot be changed during
 the year. It can be changed in the next year.

Composition Scheme for Eating Houses

*Eligibility: Restaurants, clubs, hotels, etc. not having a grade of
“Four Star” and above.

*Coverage: Aggregate of sale of food and non-alcoholic drinks.

*Composition Tax Rate: 8% of turnover of sales of RD and 10% of

turnover of sales of URD.

*No tax invoice, no ITC.

TDS Provisions
*Currently, TDS provisions apply only to Works Contract.

*Only notified persons (such as Central Govt., State Govt., Local

Authorities, Companies, etc.) are liable to deduct TDS.

*If aggregate amount payable to a dealer in a financial year is less

than Rs. 5,00,000/-, no TDS is required to be deducted.

*Quantum of TDS: 2% if contractor is registered and 4% if

contractor is unregistered.

*The quantum of TDS shall not exceed the amount of tax payable
towards such works contract.

*The contractor may apply to the registering authority to grant him a

“Certificate of Deduction of TDS at Nil Rate”.

*If the authority is satisfied that the contract involves only labour or
service, it may grant such a certificate.

*On production of such certificate by the contractor, TDS is not

required to be deducted by the contractee.

*When the contractee has deducted tax at source, he is bound to

remit it within 10 days from the end of the month in which such
tax was deducted.

*The contractee shall issue a certificate of deduction of tax, when

TDS has been deducted.

Assessment
*If a registered dealer has filed the return within the due date, a
notice calling the dealer for assessment cannot be issued after
the expiry of two years from the end of the year containing the
period to which the return relates.

*If a registered dealer has not filed the return within the due date, the
department cannot issue a notice calling the dealer for
assessment after the expiry of three years from the end of the
 year containing the period.

Best Judgment Assessment

*If a dealer fails to file a return before the due date, the officer may
assess the dealer in respect of the period to the best of his
judgment without serving a notice for assessment and without
giving him an opportunity of being heard.

*If subsequently, the dealer submits the return along with the
evidence of tax payment, the officer shall cancel the assessment
that he has made to the best of his judgment. The dealer would
be then assessed according to the other provisions of the Act.

*In case where return has been filed, if the Commissioner considers it
necessary to require the presence of the dealer or production of
documents, he may serve a notice on the dealer. If the dealer
complies with the notice, the Commissioner shall assess the tax
accordingly. Otherwise, he may proceed with Best Judgment
Assessment.

Scrutiny Assessment
*If the officer is of the opinion that any turnover of sales or of
purchases has not been disclosed or that tax has been paid at a
lesser rate, set-off has been wrongly claimed or deduction
wrongly claimed, he may, at any time within 5 years from the
end of the year containing the concerned period, serve a notice
on the dealer and proceed to assess him.

*The dealer must be given a reasonable opportunity of being heard.

Refund Audit
*Refund audit may be ordered by the department.
*The auditor shall communicate in advance the details of the dealers
records, documents, etc. that would be verified by him.
*The date of audit would be fixed, as far as practicable, according to
the convenience of the dealer.
*The dealer is required to afford all facilities to the auditor in the
course of audit any provide all necessary information and
records. Failure to do so may call for penal action.
*During the course of the audit, the auditor shall go through the
purchase record on the basis of which the claimant has claimed
refund of tax.
*He shall also check the correctness of the tax liability on sales
effected by the dealer.
*The officer conducting audit shall on no account remove or cause to
be removed any books of accounts, other documents or any cash
or stock.

Tax Audit
*If the turnover of sales or purchases of a dealer exceeds Rs. 40
Lakhs in any year, the dealer is liable to get his books of
accounts audited by a CA or Cost Accountant.
*The Government may also specify other classes of assesses who are
 required to get their accounts audited.
*If a dealer liable to get his books of account audited fails to furnish a
copy of the audit report within the prescribed time, the
Commissioner shall impose upon him, in addition to any tax
payable, a sum by way of penalty equal to 1/10 th percent of total
sales.
*Before imposing penalty, the dealer shall be given an opportunity of
being heard.
*If the dealer fails to submit the audit report within the prescribed
time but files it within 1 month from the end of the period and
proves to the satisfaction of the Commissioner that the delay was
on account of factors beyond his control, then the Commissioner
may condone the delay.

*Following dealers are exempt from audit:

*Departments of Union Government

*Departments of State Governments
*Local Authorities
*Railways
*Konkan Railway Corporation
*MSRTC

Appeals
*Every original order can be appealed against and the appeal shall lie
as given below

*Note: If first appellate order is passed by DC, the second appeal lies
directly with the Tribunal.