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Duplication in input tax credit major source of misuse in VAT
January, 03rd 2011

Value Added Tax is widely believed to be a tax which is not so evasion prone because of the audit trail that it creates. However, this audit trail is not so much easy to pursue mainly because of very voluminous records of input credit that are to be checked. Unless it is supplemented by action on the basis of intelligence reports, merely routine check of documents do not reveal the misuse of input tax credit resorted to by the manufacturers and dealers. The occurrence of frequent misuses led to the Central Board of Excise and Customs (CBEC) to tighten the check as well as to introduce the measure of debarring the manufacturers from availing of this system of input tax credit for a certain period.

In a recent case (NCR Corporation Indian Pvt Ltd vs. Member, CBEC -2010(259)ELT663(Mad.), the Madras High Court has upheld that the duplication in the entry of credit of nearly Rs 2 crore was a deliberate act which attracted the punishment as in the notification No.32/2006 dated 30-12-2006. The High Court noted that this notification was issued to prevent the violation of such misuse and the manufacturer could not take the plea that it was just a mistake due to a very large number of input tax credits taken per month. This mistake was not detected by their internal audit though the audit was already completed. It was detected by the Department on the basis of intelligence report. The notification No.32/2006 has laid down certain procedure which is quite elaborate so that ultimate decision is taken by the CBEC. If the CBEC is convinced that the manufacturer is knowingly involved in committing the offence of taking the same credit twice or similar fraudulent actions for evading duty, it can debar the manufacturer from availing of the facility of Cenvat Credit for a certain period and also from availing of the facility of paying duty on a monthly basis. In that case the manufacturer has to pay the duty on a daily basis. In this case when an order was passed by the CBEC to take action under the above notification, the action was upheld by the Madras High Court.

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