New Year gifts

The Government has sent shock waves through the notifications issued on 1-12-2006 coming within the knowledge of the dealers only at the beginning of the new year. The new notifications specify construction contracts, motor spirit and petroleum products, oil companies and also grant exemption to retail outlets of motor spirits; i.e., petrol pumps. A few issues arising out of the said notifications are discussed here.

1. Construction contracts

The notification No. VAT 1506/CR-134/Taxation-1 dt. 30-11-2006 has been issued in pursuance of powers granted u/s. 42(3) w.e.f. 20-6-2006 to specify construction contracts which are made liable to composition @ 5%. These are similar powers which were granted u/s. 6A of the erstwhile Works Contracts Act, 1989 (shortly described). The same old problem has recurred where section is amended from 20-6-2006 and notification is issued thereunder from 30-11-2006, the concession apparently not applying to the intervening period from 20-6-2006 till 29-11-2006. Under the old Act too, a controversy arose when the notification specifying construction contracts was issued on 7-3-2000 whereas section come into effect from 1-1-2000. There is no clarity as regards the date of effect of such notification. In all fairness, the Government should allow the effect from 20-6-2006 itself which should be expressly notified.

2. Motor spirits

Section 41(4) empowers the State Government to notify ‘motor spirits and petroleum products.’ Prior to amendment from 20-6-2006 to this sub-section, the expression used was ‘motor spirits and crude oil’. The amendment thus has deleted ‘crude oil’ and added ‘petroleum products’. In pursuance of the said powers, a notification effective from 1-12-2006, is issued to specify various motor spirits and petroleum products, which includes common fuels like kerosene, LPG, LDO, furnace oil, naphtha, LSHS etc. The immediate adverse effect of the notification is denial of set-off on such motor spirits u/r. 54(b). However, there is one point of distinction here. Rule 54(b) mentions only ‘motor spirits’ as notified under sec. 41(4), whereas sec. 41(4) empowers notification of ‘motor spirits and petroleum products.’ The notification dt.30-11-2006 does not distinguish between motor spirits and petroleum products. Therefore, it is quite likely that set-off may get denied on all the products so notified.

It is not clear what is intended by enlarging the above list of motor spirit and inflicting hardships on the common trader. The manufacturer within the State will suffer a heavy loss of set-off. The escape route of inter-State purchase against ‘C’ form is also closed due to Entry Tax levied under Maharashtra Tax on the Entry of Goods into Local Areas Act, 2003. If the intention is otherwise, it must be clarified to the trade at the earliest.

3. Promise fulfilled by Government

During the inspection period of VAT, it was given to understand that motor spirit will be kept out of VAT. In other words, the subsequent dealers of motor spirits such as distributors, petrol pumps etc. were not required to pay sales tax once again. There was no warrant in the Act to that effect but the Government had promised the trade that no sales tax would be recovered on resales of motor spirits. The promise has been fulfilled nearly after 2 years. It is not clear, however, whether the tax already recovered and paid or merely paid without collection would be refunded or not. In all fairness, such tax has to be refunded to the dealers.

The expression used by the notification is ‘retail outlet’ which is not defined. Therefore, the question arises as to whether distributors, dealers who are intermediaries between oil companies and petrol pumps are eligible for the said exemption. These points need to be addressed by way of a trade circular.

4. Penalty u/s. 29(8)

The VAT returns branch has geared up and is sending show cause notices for levy of penalty for late filing of returns u/s. 29(8) of the MVAT Act, 2002. The quantum of penalty is at Rs.1,000/- per return. It is a settled position as regards penalty under VAT law that the levy of penalty is discretionary but once it is decided by the authorities to levy the penalty, the quantum of penalty is fixed under the law and cannot be varied by the authorities. In these circumstances, the VAT Returns Branch officer seeks to levy the penalty at Rs.1,000/- for every return right from the beginning; i.e., April 2005. The readers may recollect that an assurance was given by the dept. that an penal actions would be taken against the dealers for at least six months after introduction of VAT since there were teething problems both to the trade and the dept. The time has now come to fulfil that promise and the Commissioner of Sales Tax should issue trade circular to grant the protection against penalties leviable under MVAT Act during the gestation period of six months, at least. No doubt, the legality cannot be challenged in respect of such levy but fairness demands that trade cannot be taken to task right in the beginning of the new taxation system. The forms of returns were new and some of the terminologies were also new at that time. Considering these genuine difficulties, the Commissioner of Sales Tax may intervene and grant necessary protection.