In a ruling that could mean a windfall in tax revenue for the Tamil Nadu government, the Madras high court has said the government was right in stipulating a time frame for traders to claim VAT refund and there was nothing wrong in implementing the 2010 legislation retrospectively from 2007.
The Tamil Nadu VAT Act, 2010 came into effect on August 9, 2010. The government later brought in an amendment to make it enforceable with retrospective effect from January 1, 2007. Accordingly, commercial or sales tax notices to the tune of several hundred crores of rupees were slapped on manufacturers, dealers, agents and traders. Similarly, by Section 19 of the Tamil Nadu VAT Act, the government stipulated that traders must avail themselves of the Input Tax Credit (ITC), which is nothing but refund/adjustment of the VAT already paid, before the end of the financial year or within 90 days the date of purchase, whichever is later.
Assailing both the measures, a slew of petitions were filed in the court.
The traders contended that enforcing the Act retrospectively and serving notices for business transactions since 2007 would render them poorer by lakhs of rupees, when they had not foreseen or made provision for such an outgo. As for the time limit to claim refund, they said the original legislation did not provide for such a stipulation and hence it could not be introduced afresh.
A division bench comprising Justice R Banumathi and Justice T S Sivagnanam, concurring with the submissions of advocate general A L Somayaji, upheld their constitutional validity of the act saying: "VAT structure has the ultimate goal of augmenting the revenue by making the procedure simple and more transparent. Legislature in its wisdom mandated a time frame for availing ITC" As for those facing show-cause notices, the judges said the challenge has no legs to stand since the constitutionality of the section itself had been upheld. Hence, all petitions against the notices were dismissed.
Explaining the rationale behind the retrospective enforcement of VAT regime, the bench referred to a specific case of a commercial tax evasion by a consumer durable goods dealer. "A registered dealer reported a turnover of Rs 28.42 crore under the erstwhile TNGST Act for 2005-06 and paid a tax of Rs 28,42,905, whereas after the implementation of the VAT regime for the year 2007-08, the same dealer reported a taxable turnover of Rs 31.53 crores, but did not pay any VAT."
The judges attributed this tax evasion to the practice of vendors reducing the sale price under the pretext of discount, resulting in accumulation of ITC at the hands of purchasers. "Giving discount and then reducing price is an internal arrangement between the selling dealer and the buying dealer. State is not concerned about the discount."