Delhi Value Added Tax - Part 9 - Special Transaction
November, 01st 2010
This part explains the application of DVAT in special situations. It covers:
Second hand goods;
Composition Scheme; and
If you have dealings involving any of these types of transactions you need to read the relevant section carefully so that you can account for DVAT correctly.
Second-hand goods are goods previously used by you or someone else.
The standard rules apply to transactions in second-hand goods between registered dealers. You will need to charge tax if you sell second-hand goods as part of your turnover, and will be entitled to claim tax credits for any DVAT paid on the purchase of second-hand goods.
Where the person from whom you bought the second-hand goods may not be registered (e.g. a private person selling his motor car to a registered dealer), there will be no tax charged and no tax invoice issued to you for the sale.
The law allows you to claim an input tax credit in such cases, provided:
You, as a registered dealer, sell second-hand goods;
You, as a registered dealer, sell second-hand goods;
You have adequate proof of the amount paid for the goods;
The goods were purchased as stock for resale in the same form, or as raw materials for other goods; and
The sale of the goods, or the goods into which they were incorporated, is liable to DVAT.
If you meet these conditions, the amount of the input tax credit allowable will be the least of:
The input tax on the original cost of the goods when bought by the seller;
The tax fraction (i.e., tax rate/(100+tax rate)) of the original cost of the goods to the seller;
The tax fraction of the fair market value of the goods at the time of purchase of the goods by you; and
The tax fraction of the consideration paid by you to the seller.
The tax credit can normally be claimed when you buy the second-hand goods. However, if the amount paid for the second-hand goods is more than Rs. 2,000, the input tax credit will be allowed only in the tax period when the goods are resold.
The following example illustrates the calculation of the input tax credit for second-hand goods:
Arun is a registered dealer in Delhi. In December 2005, he purchases an item X from Navin for Rs 80,000. Navin had purchased the same item for Rs 100,000 plus DVAT of Rs 12,500 in April 2005. Let us assume that the Fair market Value of the item X was Rs 90,000. No tax is charged by Navin as he is an unregistered dealer. The tax rate applicable to item X at the time of sale is 12.5%.
Input Tax Credit available to Arun would be least of the following: (in Rs)
Input tax borne by Navin when he purchased the item
Tax fraction of the original cost of item X (12.5/112.5 x 112,500)
Tax Fraction of the Fair Market Value of item X (12.5/112.5 x 90,000)
Tax Fraction of the amount paid by Arun (12.5/112.5 x 80,000)
While transfer of goods through a mortgage or hypothecation is not covered under the DVAT Act, the law has a special rule for goods transferred under a hire purchase agreement.
In such cases, the transfer of goods is deemed to be a sale and the time of sale is when the hire purchase agreement is executed. Tax should be computed and paid on the total price payable (including all future installments) under the hire purchase agreement. The tax must be paid, within 28 days from the end of the tax period in which the agreement is executed.
If the buyer defaults in the payments required under the terms of the hire purchase agreement, the seller normally repossesses the goods.
Here, the buyer who owned the goods under the agreement, and not the party repossessing them, is considered to be the "vendor" when there is a forced sale. If the sale is taxable under the standard rules, the vendor is liable to charge tax.
The transfer of the right to use any goods for any purpose (i.e., leases), whether or not for a specified period, for cash, deferred payment or other valuable consideration is a "sale" under the DVAT Act.
This means that where any goods are leased in Delhi or outside Delhi, the lessor must charge tax. He can also claim an input tax credit on purchases made for his leasing business.
The amount of tax payable in respect of a lease during a tax period is the portion of the sale price for the lease that is due and payable during the relevant tax period.
A works contract would include an agreement executed by you for building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, repair or commissioning of any moveable or immoveable property.
You are required to pay tax on any transfer of property in goods during the course of execution of a works contract. The turnover pertaining to charges for labour, services etc. is not taxable provided you are able to show evidence for payment of such charges. If you are not able to substantiate payments towards such charges from your books of accounts, then the amount towards such charges shall be calculated at specified percentages of the total contract amount, as indicated in the following table.
PERCENTAGES FOR WORKS CONTRACTS
Type of contract
Labour, service and other like charges as percentage of total value of the contract
Fabrication and installation of plant and machinery.
Twenty five percent
Fabrication and erection of structural works of iron and steel including fabrication, supply and erection of iron trusses, purloins and the like
Fabrication and installation of cranes and hoists.
Fabrication and installation of elevators (lifts) and escalators.
Fabrication and installation of rolling shutters and collapsible gates.
Civil work like construction of buildings, bridges, roads, dams, barrages, canals and diversions.
Twenty five percent
Installation of doors, doorframes, windows, frames and grills.
Supply and fixing of tiles, slabs, stones and sheets.
Supply and installation of air conditioners and air coolers.
Supply and installation of air conditioning equipment including deep freezers, cold storage plants, humidification plants and de-humidors.
Supply and fitting of electrical goods, supply and installation of electrical equipments including transformers.
Supply and fixing of furniture and fixtures, partitions including contracts for interior decoration and false ceiling.
Construction of Railway coaches and wagons on under carriages supplied by Railway.
Construction or mounting of bodies of motor vehicle and construction of trailers.
Sanitary fitting for plumbing and drainage or sewerage.
Twenty five percent
Laying underground surface pipelines, cables or conduits.
Dying and printing of textiles.
Supply and erection of weighing machines and weighbridges.
Painting, polishing and white washing.
All other contracts not specified from Sl. No. 1 to 19 above.
Tax Deductions at Source
The current system of tax deductions at source in respect of works contracts will be continued under DVAT. Thus, all persons (whether registered dealers or not) to whom property in goods is transferred through a works contract by a dealer or contractor must deduct tax at the rate of 2% from the payment they release towards such transfer to the dealer or contractor. They will issue a certificate in Form DVAT-43 to the dealer/ person transferring property and deposit the tax so deducted in the government treasury before the expiry of 28 days following the month in which the deduction is made.
For deducting tax at source all persons to whom property in goods is transferred through a works contract are required to apply for registration in Form DVAT-44 and obtain a tax account number (TAN) within thirty days from the date on which tax was deducted or deductible. TAN will be issued in Form DVAT-45. All those who are already registered for this purpose under the current Works Contract Tax Act of Delhi will be automatically deemed to have been registered for DVAT purposes and the TAN already allotted to them shall remain valid under the new system.
Persons who have been allotted TAN are required to deposit the tax deducted and file a TDS return in Form DVAT- 48 within a period of 28 days from the end of the year in which the tax is deducted. The timing of depositing of the TDS amounts and frequency of the TDS returns will be the same as for DVAT. Any delay in depositing of the TDS amounts and failure to file TDS returns is subject to interest and penalties.
The works contractor/dealer on whose behalf the tax has been deducted at source can claim a credit for the TDS amount in the tax period in which he is issued the TDS certificate.
A dealer who receives an advance in connection with a future sale of goods is not liable to tax on that advance until the sale occurs. However, deposits (whether refundable or not) received in connection with sale of goods will be liable to tax.
An agent who carries on the business of buying, selling, supplying or distributing goods on behalf of any principal is treated as a dealer under the DVAT law. The agent may comply with all the requirements of the law on behalf of the principal.
Sometimes, a non-resident, non-registered principal may want to sell goods in Delhi, without having to establish a place of business here. The non-resident may contract the services of an agent to sell the goods. If the non-resident is a dealer, the agent will also be a dealer under the DVAT Act. The agent, rather than the non-resident principal, will be responsible for accounting for tax, issuing tax invoices, and will be able to claim input tax credits.
Composition Scheme for Specified Dealers
The Composition Scheme is a special method of determining the tax liability for specified dealers. It is applicable to dealers whose turnover in the year prior to April 1, 2005, or in the current year exceeds Rs 5 lakhs but does not exceed Rs 50 lakhs.
This scheme will not be applicable to you if you procure goods from outside Delhi or sell goods to any place outside Delhi at any time during the year or you are registered under the CST Act.
The composition scheme is an elective option which you exercise by making an application in Form DVAT-01 within 30 days from the first day of the beginning of the financial year. The option may only be reversed after the end of the year for which the option is made. The application for the reversal of the election for this scheme is made in Form DVAT-03 within 30 days from the first day of the beginning of the financial year.
Tax Payable Under Composition Scheme
Tax payable under the composition scheme is 1% of the turnover of sales of the dealer. The tax applies to turnover of sales of all goods (including goods which are exempt from tax under the standard DVAT rules).
If you elect to pay tax under the Composition Scheme:
You cannot purchase goods from a person who is not registered under this Act ;
You will not be allowed to claim any credits for input tax paid on your purchases;
You will not be entitled to issue tax invoices;
You will not be allowed to charge and collect tax from your customers; and
You will be required to retain tax invoices and retail invoices for all purchases
Tax on Opening Stock
If you elect to pay tax under the Composition Scheme, you will be required to pay DVAT on the trading stock, raw materials, packaging materials and finished goods held at the beginning of the financial year for which you make this election. The tax applies on the fair market value of such opening stock.
Where you make this election for the financial year beginning April 1, 2005, you will be required to pay DVAT on only that part of the opening stock which has not already borne the tax under the Delhi Sales Tax Act.
You should file an application in Form DVAT-02 giving particulars of the opening stock held and specifying your intention to pay tax under the Composition Scheme within 30 days from April 1, 2005.
If your taxable turnover comes to exceed the threshold of Rs 50 lakhs, you will become liable to pay tax at normal rates from the day your taxable turnover exceeded the threshold and you would be required to opt out of the composition scheme by making an application in Form DVAT-03.
If you are doing business with a related party, you must ensure that the relationship does not influence the terms and conditions of the transactions.
For DVAT purposes, a person will be related to a dealer if that person is -
a relative of the dealer;
a partnership of which the dealer is a member, or a partner in that partnership;
a company in which the dealer (either alone or in conjunction with another person who is or persons who are related to the dealer under another paragraph of this definition) directly or indirectly holds forty per cent or more of outstanding voting stock or shares;
a person who (either alone or in conjunction with another person who is, or other persons who are, related to the person under another paragraph of this definition) directly or indirectly owns forty per cent or more of outstanding voting stock or shares of the dealer;
a company in which forty per cent or more of outstanding voting stock is held directly or indirectly by a person (either alone or in conjunction with another person who is, or other persons who are, related to the person under another paragraph of this definition) who also holds forty per cent or more of the outstanding voting stock or shares of the dealer; or
is controlled by the dealer, a person whom the dealer controls, or is a person who is controlled by the same person who controls the dealer.
The legislation does not prohibit business between related persons. But, if -
The transaction is influenced by the relationship, and
If the buyer had purchased the goods from some related person, the buyer would not have been entitled to a tax credit for the purchase, or the amount of the tax credit would have been reduced, then, for the purpose of computing his DVAT liability, the seller must take the sale price as the fair market value of the goods.