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SEMINAR ON

VALUE ADDED TAX

BY

NIRC OF ICAI
RAKESH GARG, FCA

Concepts of Value Added Tax


Contents
Supreme Court in BSNLs Case Transfer of Right to Use Goods Central Declaration Forms One year of VAT - A Glance

Value Added Tax by Rakesh Garg, FCA

Supreme Court (3 Js)


In BSNLs Case (02.03.06)

(2006) 145 STC 91


An Analysis

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


The High Courts of Allahabad, Andhra Pradesh, and Punjab & Haryana all held that there was no sale of goods under the State Sales Tax Acts justifying the levy of sales tax on rentals charged by service providers to its subscribers. Kerala HC held that the transaction of sale of a SIM Card included its activation and that the activation charges formed part of the consideration and could be subjected to sales tax under the Kerala General Sales Tax Act.
Value Added Tax by Rakesh Garg, FCA

Background

SC in BSNL Case - An Analysis


All three decisions were overruled by the Supreme Court in State of U.P. vs. Union of India (2003) 3 SCC 239. At the same time, selling of the SIM Card as well as the process of activation by the Mobile Companies to the subscribers were declared as services and fell within the definition of taxable services as defined in sections 65(72)(b) of the Finance Act, 1994.

Background

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Question
What is the nature of the transaction by which mobile phone connections are enjoyed. Is it a sale or is it a service or is it both? If it is a sale then the States are legislatively competent to levy sales tax on the transaction under Entry 54. If it is a service, then the Central Govt. alone can levy service tax under Entry 97 of List I (or Entry 92C after 2003). And if the nature of the transaction partakes of the character of both sale and service, then the moot question would be whether both legislative authorities could levy their separate taxes together or only one of them. Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


What are Goods
A goods may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored & possessed. If a software whether customized or non-customised satisfies these attributes, the same would be goods. Tata Consultancy Services vs. State of A.P. (2005) 127 STC 620 (SC) adopted.
Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


What are Goods
The 46th Amendment does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word goods has not been altered by the 46th Amendment. No comments on intangible goods since matter is pending before another bench.

Lottery tickets are not liable for Sales Tax SC dated 28.04.2006.
Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Lottery Tickets
Lottery tickets are not liable for Sales Tax - SC (5J) dated 28.04.2006. [TOI - 29.04.2006 Page 12] Sale of a ticket does not necessarily involve sale of goods and it can be equated with sale of tickets by Railways. Tickets are themselves normally evidence of and in some cases the contract between buyer & seller. The person who buys a ticket would have to claim to the prize money on future event of winning a draw. This right is nothing but an actionable claim. There is no value in the mere right to participate in the draw and the purchaser does not pay for this right to participate. Consideration is paid for chance to win. The right to participate, being an inseparable part of the chance to win, is therefore, an actionable claim. Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


SIM Cards
SIM cards are used with carriers that operate on the Global System for Mobile Communication (GSM) network. The competing network is Code Division Multiple Access (CDMA) and R-UIM (Re-Useable Identification Module) The SIM card itself doesn't do anything as far as activating service. The SIM card just contains the programming information for the phone, including the phone number (DN), the authentication key (A-Key) and other information. Just having a SIM card doesn't mean one get service. The service provider has to associate the information stored on that SIM card to the electronic serial number (ESN) of the phone for it to become active.

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


SIM Cards
What a SIM card represents is ultimately a question of fact, to be decided by the Assessing Authorities keeping in mind the following principles:- If the parties intended that the SIM card would be a separate object of sale, it would be subject to Sales Tax. However, if the sale of a SIM card is merely incidental to the service being provided and only facilitates the identification of the subscribers, their credit and other details, it would not be assessable to sales tax.
Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Electromagnetic Waves
Electromagnetic waves are neither abstracted nor are they consumed in the sense that they are not extinguished by their user. They are not delivered, stored or possessed. Nor are they marketable. They are merely the medium of communication. What is transmitted is not an electromagnetic wave but the signal through such means. The signals are generated by the subscribers themselves. In telecommunication what is transmitted is the message by means of the telegraph. No part of the telegraph itself is transferable or deliverable to the subscribers. Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Telecom Compan y
Traditionally, a contract for carriage of goods or passengers is by roadways, railways, airways and waterways. This is associated with carriage of tangible goods. On this analogy, Telecom Companies are only carriers of messages and have neither property in the message nor effects any transfer to the subscriber. The advancement of technology should be so absorbed in the interpretation that this method of carriage of message should also be understood as carriage of goods and not a transfer of a right to use goods, if any.
Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Clause 366 (29A)(d) Existence of Goods
The essence of the right under Article 366(29A)(d) is that it relates to user of goods. It may be that the actual delivery of the goods is not necessary for effecting the transfer of the right to use the goods but the goods must be available at the time of transfer and must be deliverable and delivered at some stage. If the goods are not deliverable at all, the question of the right to use those goods, would not arise. 20th Century (SC) clarified.
Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Clause 366 (29A)(d) Existence of Goods
Feature of sale of goods is that the user would be of the thing or goods delivered. The delivery may not be simultaneous with the transfer of the right to use. Therefore, whether goods are incorporeal or corporeal, tangible or intangible, they must be deliverable. To the extent that the decision in State of U.P. vs. Union of India (2003) 130 STC 7 (SC) held otherwise, is erroneous.

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Clause 366 (29A)(d) Existence of Goods
To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes: a. There must be goods available for delivery;

b. There must be a consensus ad idem as to the identity of the goods;


c. The transferee should have a legal right to use the goods. Consequently all legal consequences of such use, including any permissions or licenses required therefor, should be available to the transferee;
Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Clause 366 (29A)(d) Existence of Goods
d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor. This is the necessary concomitant of the plain language of the statute viz. a transfer of the right to use and not merely a licence to use the goods; e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Clause 366 (29A)(d) Existence of Goods
Comparison between Rashtriya Ispat (Machinery) & Agrawal Bros. (Shuttering), both decided by S.C. - In First case, no transfer, but in later case - taxable What is noteworthy is that in both the cases there were goods in existence which were delivered to the contractors for their use. In one case there was no intention to transfer the right to use while in the other there was.

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Composite Transactions
Covered by 366 (29A)
- First to identify if it is covered - Dominant Test not to be applied

Not Covered by 366(29A)


- Dominant test still critical

- Essential ingredients as per - Rainbow Color lab. to that extent Sales of Goods Act be applied is incorrect and A.C.C. agreed - Composite charges by hospital - Remarks in C.K. Jidheash on for fees and medicine do not fall in ACC incorrect - Rules for valuation necessary - 366(29A). K. Damodaraswamy 117 STC 1

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Simultaneo us Levy of Sales Tax and Service Tax
No one denies the legislative competence of States to levy sales tax on sales provided that the necessary ingredients of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union list and tax services by including the cost of such service in the value of the goods. . For the same reason, the Centre cannot include the value of the SIM cards (likewise, other goods), if they are found ultimately to be goods, in the cost of the service. Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Issues framed & Answered by the SC
What are goods in telecommunication for the purposes of Article 366 (29A)(d)? Goods do not include electro-magnetic waves or radio frequencies for the purpose of Article 366 (29A)(d) because these cannot be delivered and consumed. The goods in telecommunication are limited to the handsets supplied by the service provider. As far as the SIM cards are concerned, the issue is left for determination by the Assessing Authorities.

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Issues framed & Answered by the SC
Is there any transfer of any right to use any goods by providing access or telephone connection by the telephone service provider to a subscriber? There may be a transfer of right to use goods as defined in answer to the previous question (Handset) by giving a telephone connection.

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Issues framed & Answered by the SC
Is the nature of the transaction involved in providing telephone connection a composite contract of service and sale? If so, is it possible for the States to tax the sale element? The nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale.

Value Added Tax by Rakesh Garg, FCA

SC in BSNL Case - An Analysis


Issues framed & Answered by the SC
Would the aspect theory be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Govt. levies service tax?

The aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of Aspect theory deals goods in the value of the service. which in one with legislative competence. Subjects
aspect and for one purpose fall within the power of a particular legislature may in another aspect and for another purpose fall within another legislative power. They might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects.

Value Added Tax by Rakesh Garg, FCA

VAT
On Transfer of

Right to Use Goods

Value Added Tax by Rakesh Garg, FCA

TRANSFER OF RIGHT TO USE


Sale
Transfer of right associated with delivery of goods and transfer of effective control & possession Rashtriya Ispat vs. Agrawal Bros.

Goods

Movable goods capable of delivery. Electricity vs. Electro-magnetic waves


DEPB, Trademarks, etc.: Matter pending with a larger bench of the Supreme Court

Intangible Goods

Value Added Tax by Rakesh Garg, FCA

TRANSFER OF RIGHT TO USE


Sale Price
Proportion of sale price that is due & payable during the relevant tax period - Rule 4 Transfer of right to use goods to the extent utilised on or after 01.04.2005. Agreements before 1.4.05 also taxable

Liability under DVAT Rates of tax

Tax-rate applicable to the respective commodity- 95/CDVAT/2005


Value Added Tax by Rakesh Garg, FCA

TRANSFER OF RIGHT TO USE


Inter-State Lease vs. Local Lease
Tangible goods - To be fixed as per sec. 3 and 4 of CST Act, i.e., if goods moving in pursuance of a contract, taxable in the State from where movement commences If goods are not moving in pursuance of the contract, then taxable in the State where appropriation is made. Kerala H.C. for installation & hiring of computers In case of intangible goods, e.g., patents, copyrights, since there is no movement of goods as such, transfer thereof is taxable in the State where agreement is made
Value Added Tax by Rakesh Garg, FCA

CENTRAL DECLARATION FORMS NEW PROCEDURE

Value Added Tax by Rakesh Garg, FCA

CENTRAL FORMS
Forms upto 30.9.05
Obtain forms for the half year from 01.04.2005 to 30.09.2005 Form 2A to be filed along with last return for 05-06; Procedure - as earlier Furnishing of Forms : up to 31.12.2006 along with DVAT-51 Seek extension from the AA if forms are not received

Value Added Tax by Rakesh Garg, FCA

CENTRAL FORMS
Forms after 30.9.05
PRE-CONDITIONS FOR OBTAINING FORMS i) All taxes (including under DVAT Act and the repealed Acts) have been paid upto date; ii) All returns including reconciliation return in form DVAT-51 have been filed upto date;

iii) Security (including additional security) u/s 7(3A) of the CST Act, as stipulated by the AA, has been furnished;
iv) Dealer had filed proper utilization account in form-2B of forms issued to him earlier; and v) There should not be any adverse information on record. Value Added Tax by Rakesh Garg, FCA

CENTRAL FORMS
Forms after 30.9.05
Obtain forms on quarterly basis Form C, D, E-I & E-II will cover the transactions for the whole quarter; whereas Form F will cover for the month File Form 2C for obtaining blank forms, whenever so required. File Form 2B for utilization of Forms already issued, if not filed earlier
Value Added Tax by Rakesh Garg, FCA

CENTRAL FORMS
Forms after 30.9.05
Form 2B (utilization) shall be filed within 3 months from end of the quarter; and even if no Form is utilised. Furnishing of Forms : Within 3 months from the end of quarter. Form DVAT-51 shall also be filed within said period Seek extension from the AA if forms are not received. No provisions for payment of tax if forms not already received.

Value Added Tax by Rakesh Garg, FCA

ONE YEAR
OF VALUE ADDED TAX

Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


State Govt.
Increase in Revenue ; Delhi touched 6600 crores; increase by 28%; but a question mark on calculation. Much wider tax net; Builders and hospitals are also made liable to pay tax, rightly or wrongly. Better manpower utilisation. In Delhi, No. of wards reduced to 40 from 106.

Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


State Govt.
Nuisance of issuance of declaration forms is removed local

Reduced interaction with the dealers fall in corruption level Above all, automatic generation of revenue without making much efforts. Ultimately more funds for Delhi Development and infrastructure.

Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


Dealers
Nuisance of Obtaining and furnishing local declaration forms is removed Simplified registration and filing of returns Self Assessment environment. Unhealthy competition reduced due to increase in tax base.

Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


Dealers
Better product classification and uniformity in rates except few items. Availability of tax credit is more as compared to purchase ag. Forms in DST. Better record keeping due to mandatory provisions. Somewhat reduced overall compliance cost.

Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


Central Govt.
Roadmap for G.S.T. laid down Reduced compensation due to better collection Win-win situation - More sales - more income tax - more capital formation

Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


Hurdles & Grey Areas
CST not reduced to 2% as promised Uniformity in tax rates across the States is too far, even H.S.N. not adopted Classification of goods, Non-Creditable List, Procedure, Returns, Assessment, all different in different States Quarterly obtaining and furnishing of Central Forms - Enough to neutralize all plus point of VAT.
Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


Hurdles & Grey Areas
State level VAT not I.T. compatible due to lack of uniformity States not following guidelines of Empowered Committee, who has also not done enough to inspire discipline among States Clear guideline for scrutiny and audit system not decided - Pick & Choose system is continuing in most of States TINX System across the States - Too far
Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


Delhi PLUS POINTS
Composition Scheme prescribed for bullion Traders; tax 0.1% without restriction of inter-State trade.

Efforts were made to bring more and more items in Schedule III, i.e. 4%
Form H prescribed for sales by penultimate exporter to merchant exporters within Delhi u/s 5(3)- Deter.20/CDVAT/2005 dt. 13.4.06

Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


Delhi Failure
A year of chaos - Lack of knowledge amongst professionals, dealers & Deptt. Press Releases for reduction in tax rates issued - Notifications issued much later Imposition of arbitrary penalties Unrestricted powers to Commissioner

Value Added Tax by Rakesh Garg, FCA

ONE YEAR OF VAT


Delhi Failure
Determinations u/s 84 - 90% of them prescribing higher rate of tax Advance ruling concept - Utilised only to increase revenue; Making the law instead of interpreting the law. Composition Schemes - An eye wash due to harsh restrictions Finally, not done enough to persuade the dealers
Value Added Tax by Rakesh Garg, FCA

Some Interesting Observations


Its our opinion that works Contract transactions might not be liable to Central Sales Tax unless rules are made in CST Act It is our opinion that Caterers and Mandap keepers might not be liable to pay tax unless rules for bifurcation of turnover are made Though builders are not liable to pay sales tax on merely for booking a flat. But what happens if builders are made liable to pay tax.
Value Added Tax by Rakesh Garg, FCA

Some Interesting Observations


Meaning (CST): Sec. 2(ja) : Works contract means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property. Sale Price [Sec. 2(h)] : .. PROVIDED that in the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause. (not yet prescribed)
Value Added Tax by Rakesh Garg, FCA

Some Interesting Observations

Supreme Court in Tamilnadu Kalyan Mandapam (135 STC 480) - Catering contracts have service as well as sale dominantly. Tax only on supply portion under sub-clause (f) of article 366(29A). Supreme Court in K.Damodaraswamy (117 STC 1)- In relation to residential hotels Rules are necessary for bifurcation. This power cannot be given to the assessing authorities. The same ratio can be applied to caterers

Value Added Tax by Rakesh Garg, FCA

Some Interesting Observations


In my opinion, builders are not liable to pay sales tax merely because they have booked the space from intended purchasers since it is a contract of sale as is where is. The property in the goods is not transferred while executing the works contract. The builder is constructing the flat for a customer and not for and on behalf of the customer. The quotes are two distinct terms have different legal meaning. It is an agreement of sale of future goods subject to fulfillment of conditions.

Value Added Tax by Rakesh Garg, FCA

Some Interesting Observations


Assuming Builders are liable to pay tax, they shall be eligible to claim tax credit on All purchases other than consumable which get destroyed Capital goods other than listed in Schedule VII. A complex has some common areas and structures which the occupant has right to use but not to occupy. Builders has right to construct additional floors. Occupants have right over inside the wall but outside belong to builders. Rules are necessary for determination of such complexity. Builders shall pay stamp duty only on land portion and not on movable goods involved in the execution of works contract. If the goods have already been transferred at the time of incorporation, there can never be a second sale at the time of registration of transfer of immovable property.
Value Added Tax by Rakesh Garg, FCA

THANK YOU
RAKESH GARG, FCA
Author

Delhi VAT Ready-Reckoner Works Contract and Delhi VAT Concepts of Central Sales Tax Goods under Sales Tax Laws Basics of Delhi VAT
phones : 011- 5528 8584; 5525 7539 (New Delhi)
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