Do not break VAT chain

EXPERT EYE

One of the weakest links in the value-added tax (VAT) chain is exemption. In case of exemption, no duty is paid. So there is no credit of input duty.

Since no duty is paid, there cannot be any credit. This creates a problem for industries who want to pay duty and get the Cenvat credit. Sometimes some units do not want the exemption.

But because of representation by other units or by the association or for reasons best known to the revenue department, an exemption is given.

In such a situation, a question arises whether a factory can pay the duty even if there is an exemption and thereafter claim the credit of duty paid so that the VAT chain is complete.

If the chain breaks, then down the line nobody can claim the credit. That will have a cascading effect, which VAT intends to avoid.

In the law ministry's view, any duty paid when it is not due to the government is not duty in the eye of law but an ex gratia payment. The ministry has been quoting Article 265 of the Constitution to justify this.

It follows that, not being a duty, it cannot be given credit as duty. As a measure of legal solution, the revenue department started saying in notifications that it is optional to avail of it (exemption) and if the manufacturer wants to pay the duty he may do so.

Since this was not written in all notifications, in some cases manufacturers argued that even if there was an exemption, they should be allowed to pay duty and avail of the Cenvat credit.

Then came the judgment of the tribunal in the Everest Converters vs Commissioner of Central Excise case, 1995 (80) ELT 91 (T), that an exemption could not be forced upon an assessee if it did not suit him.

The tribunal argued that it was for the party to claim the exemption and if he did not claim it, there was no way of forcing it on him.

This view was reiterated in the Harita Grammer Ltd vs Commissioner of Central Excise case, 2004 (164) ELT 37 (T). The tribunal said the option to pay duty and claim the Cenvat credit were valid.

The order drew strength from the Supreme Court judgment that if there were two exemptions, the taxpayer could choose the one, which suited him. This established the optional nature of an exemption and enabled the VAT chain to continue and not fell apart.

There is yet another way by which the VAT chain breaks. In the Commissioner of Central Excise vs Hindustan Sanitaryware case, 2002 (145) 3 (SC), a duty was paid on plaster of Paris.

Then the material was used to make moulds, which were exempted. Then the moulds were used in the same factory to make sanitaryware, which were dutiable. But the duty paid on the original input was not allowed to be credited as a Cenvat credit on the ground that the moulds were exempted.

The Supreme Court ruled that since plaster of Paris was used in relation to manufacture of sanitaryware, the input credit was allowed, regardless of the fact that the intermediary product was exempt. This saved the VAT chain.

So the trend of judicial decisions is for allowing exempted goods to pay duty optionally and claim the Cenvat credit and also to allow input credit in the Cenvat system even where the intermediate goods are exempted. This augurs well for VAT in the states as (if) and when it is introduced.

smukher2000@yahoo.com