On Tuesday, the Gujarat assembly finally bid farewell to value added tax (VAT) after it passed the State Goods and Services Tax (GST) Bill in a special session. This may send VAT into oblivion, but an unresolved question, whether derivatives trading on commodity exchanges is liable for VAT vexes the Gujarat's commercial tax department. This issue was raised by the Public Accounts Committee of the state assembly in 2015.

According to the PAC document, on September 2, 2015, an assistant commissioner of Unit-15 of the commercial tax department raised a mammoth VAT liability of Rs 3,781 crore against a leading brokerage firm involved in derivatives trading on various commodity exchanges. The order claimed that Entry 54 of List 2 of the Constitution empowers the states to levy taxes on the sale of goods other than newspapers.

The assessment order ran into 526 pages and stood its ground that "derivatives" itself meant that it derived its value from the underlying commodity, for instance like crude oil. "The sale of a derivative of crude oil is not the sale of crude oil. The derivative itself is the good which is being continuously bought and sold without buying and selling of the underlying commodities." The document also carries the opinion of the Gujarat's advocate general who opined that, "derivatives are certainly goods for the purposes of the VAT Act. However, Entry 90 of List 1 empowers the Union government to impose tax on transactions in stock exchanges and futures markets and there was a supposed conflict between the two entries." The advocate general further opined that the above conflict can only be solved in a court of law.

The PAC, which was then chaired by Shaktisinh Gohil, informed the assembly that the mammoth assessment order was blatantly set aside by the appellate authority of the commercial tax department without a proper reason and it questioned the legislative competence of the department.