Many amendments are made applicable with retrospective effect, which is not a welcome trend, as it causes genuine hardship to dealers' community at large. Some of the important amendments and their relevance to MVAT Audit of 2005-06 and 2006-07 are discussed in this write up.

Important Retrospective Amendments under Maharashtra Value Added Rules.

Refer Notification No. VAT-1507/C.R.17/Taxation 1, dated 31st October 2007 (Second Amendment to Rules, 2007):

1. Rule 45 is amended to specify the Challan No. 210 for payment of deposit or Rs. 25,000 at the time of voluntary registration.

Deposit is payable from 15-8-2007 while Voluntary Registration beside the Fees of Rs. 5000/- which is also payable through Challan No. 210.

It will be advisable to pay through separate challans, as both the amounts are separate, and deposit is adjustable against tax liability and fees is not adjustable.

It will be interesting to note that as per section 16(2) the unadjusted deposit in a financial year when it is paid can be carried forward to the subsequent year.

As per amendment in section 50 w.e.f. 15-8-2007 the refund is not carried forward to subsequent year.

Rule 55(3)(a) which is amended on 31-10-2007 retrospectively w.e.f.
8-9-2006 elaborates the sequence to adjustment of taxes paid and refund against tax liability, the adjustment of deposit comes at last stage.

Thereafter, as per rule 55(3)(b) the remaining unadjusted balance (which will definitely cover deposit amount being last item), is not to be carried forward.

A refund has to be claimed compulsory at the year end.

Then a question may arise as to how a dealer can carry forward the unadjusted deposit to the subsequent period against section 50 and rule 55?

2. Explanation to Rule 53(3) is amended on 31-10-2007 in a very interesting manner; let’s take a look at it.

The amendment is as follows:

In the explanation:

(i) In clause (a), the words and letter "are the goods covered by any entry in Schedule B" shall be deleted.

Let’s go through the original explanation:

1. If the taxable goods dispatched outside the state, are the goods covered by any entry in Schedule B, then an amount equal to one per cent of the purchase price of the corresponding taxable goods, in so far as the corresponding taxable goods are covered by any entry in Schedule B, shall be deducted from the amount of set off otherwise available in respect of the said purchases;

The explanation was brought in from 8-9-2006, with retrospective effect from 1-4-2005. The purpose of inserting this explanation was to disallow the setoff on Schedule B goods transferred outside state. This retrospective amendment is to be take care in VAT Audit of 2005-06 and 2006-07.

Now in the amendment the words "goods" is not there in explanation. Hope it a drafting error.

After plain reading of revised explanation,

"If the taxable goods dispatched outside the state, then an amount equal to one per cent of the purchase price of the corresponding taxable goods, in so far as the corresponding taxable goods, shall be deducted from the amount of set-off otherwise available in respect of the said purchases"

What purpose is served is not known. The main rule 53(3) and explanation is conflicting with each other.

Whether three per cent is replaced by one percent through explanation to main rule?

Hope this error is corrected and the explanation itself is deleted in total.

3. Rule 53(4)(b) is amended to remove the error of applicability of setoff rules for Composition dealer in case of Construction works contract

The set-off rules are applicable from 20th June instead of 21st June, 2006.

This amendment is retrospective hence to be taken care while doing audit of year 2006-07. Setoff on purchases made on 20-7-2006 are eligible for reduction @ 4% of purchase price.

4. Setoff on Plant and Machinery in case of gross receipts on account of sale are less than 50%..,

Rule 53(6) is amended w.e.f. 8-9-2006, due to which the set-off on Plant and Machinery is available, if they are treated as Capital Goods, where the gross receipts from sales are less than 50% of total gross receipts from business activity carried on in the state.

This amendment is made retrospective hence it will affect the tax liability of F.Y. 2006-07. The issue arises why this amendment is made retrospective from 8-9-2006.

If at all the benefit is to be taken by the dealer then he will have to file revised return.

What will happen if, depreciation is taken on the setoff amount? Balance sheet for year 2006-07 is already filed with Income tax dept. then?

The purpose of amendment may be helpful for Project Stage Units or Start up units, but does not serve purpose for the year 2006-07 though retrospective.

This rule was amended on 8-9-2006, by which condition of sale within six months from the date of purchase is placed to get setoff on corresponding goods purchased. Thus setoff on other items is not available to such dealer.

Above Retrospective amendment are to be considered while conducting Audit of 2006-07.

5. Reduction of Set-off on purchases of Office Equipments, Furniture or Fixture

Rule 53(7A) is amended w.e.f. 31-10-2007. In respect of any purchase of above goods and treated as Capital assets and the dealer is not engaged in the business of transferring the right to use of these goods for any purpose, then reduction of set off is to be done @ 3% of purchase price, instead of 4%.

The word "electrical installation" is removed while inserting the rule 53(7A) from reduction of set-off w.e.f. 8-9-2006, hence full set-off will be available on such capital goods.

As per new rule 54(1) inserted on 31-10-2007 w.e.f. 8-9-2006 no set-off on Office Equipment, Furniture and Fixture and Electrical Installation is available from 1-4-2005 to 7-9-2006. This amendment is self explanatory.

Rule 53(7A) was inserted w.e.f. 8-9-2006 thus while doing Vat Audit for year 2006-07 special care should be take to see whether effect is properly taken under MVAT returns and corresponding Depreciation calculation under Income-tax Act.

6. Reduction of set-off in case of Dealers having licence for Transmission and Distribution of Electricity as per The Electricity Act, 2003. New Rule 53(7B) inserted.

The effect of this insertion is that dealer holding above licence are now affected with retention and that too retrospectively; i.e., w.e.f. 1-4-2005. The retention of 4% of the purchase price of the goods purchased by him for distribution and transmission of electricity including the goods treated as capital goods w.e.f. 1-4-2005 to 31-3-2007 and 3% w.e.f. 1-4-2007.

This rule is not applicable for Power generating dealer not involved in transmission and distribution of power.

7. Rule 54(j) amended retrospectively w.e.f. 20-6-2006. This a very interesting story of composition for Lease Tax transaction (Mandap Keepers Composition Scheme)

On 20-6-2006 the section 42(4) was amended and details regarding composition scheme were inserted.

Section 42(4) is the taxable section for the composition scheme, were tax is payable @1.5%. Section was amended on 15-8-2007 retrospectively w.e.f. 1-4-2005 for the applicability of section 42(4); i.e., scheme is applicable from 1-4-2005.

Rule 54(j) was originally inserted w.e.f. 8-9-2006 which prohibited set-off for such dealer for specified goods.Now on 31-10-2007 it is amended retrospectively w.e.f. 20-6-2006. Actually it should be from 1-4-2005.

The effect of the amendment is that no set-off is available on purchases made of mandap, tarpaulin, pandal, shamiana, decoration of such mandap, pandal or shamiana, and utensils and other articles ordinarily used along with a mandap, pandal or shamiana, if the purchasing dealer has opted for composition of tax under section 42(4).

Thus a dealer can claim set-off from 1-4-2005 to 20-6-2006, retrospectively. For the period 21-6-2006 to 7-9-2006 if set-off claimed, then revised returns are to be filed.

Thus this scheme has really given dealer a difficult run since inception of scheme. These types of unnecessary retrospective amendments are not welcome in case of composition schemes, where simplicity of taxation is prime objective.

8. Unregistered Dealer and set-off admissibility for URD period

Rule 55(1)(a) is substituted retrospectively from 8-9-2006:

For sake of simplicity the rules regarding URD period are tabled in the following format.

Conditions	From 1-4-2005 to 7-9-2006	From 8-9-2006 onwards (Before amendment on  31-10-2007)	From 8-9-2006 onwards (After amendment on 31-10-2007)
1. Goods are purchased or entry is effected on or after 1st April of the year in which the dealer has  obtained registration and ..,	No Setoff available on any goods purchased before registration.	Set-off available with below mentioned conditions.	Setoff available with below mentioned conditions.
2. On Capital assets.	No set-off	Setoff available on goods treated as capital assets and have not been used,  consumed, sold or disposed off before date of registration.	Setoffs available on goods  treated as capital assets and have not been sold before the date of registration. (Use and consumption of goods is allowed now)
3. On other  purchases (For  trading goods and P&L debit goods)	No set-off	Setoff available if not been used, consumed, sold or  disposed of before date of registration.	Setoff available if the goods  are not treated as capital assets and have not been sold before the date of effect of registration. (Use and consumption of goods is allowed now)
4. On Manufac-turing goods like  Raw Material, etc.	No set-off	Setoff available if not been used, consumed, sold or disposed of before date of registration.	Setoff available if the goods are not treated as capital assets and have been used or consumed in manufacture and the  manufactured goods have not been sold before the date of effect of registration.

Before 8-9-2006 no set-off was available for URD period for a new dealer. This is welcome amendment which is in line with Excise Act, setoff is allowed on goods purchased before date of registration but where no sales are affected.

It means if the liability to pay tax arises, no setoff should be disallowed on goods purchased or used in manufacturing of finished product. Same applies for the trader for traded goods.

Again this is retrospective amendment w.e.f. 8-9-2006; to take the benefit revised returns are to be filed.

While conducting MVAT audit of 2006-07 above effect has to be taken care of in case of newly registered dealer after 8-9-2006.

9. After going through these Retrospective amendments to setoff rules 53, 54, 55 amendments, some issues arise:

10. Rule 65: MVAT Audit Report

W.e.f. 31-10-2007, the dealer shall, in addition to the report of audit shall also file an electronically readable CD-ROM by downloading the Form 704 from the website http://www.mahavat.gov.in.

No format is yet prescribed and also not available on the website, hence which type of file is to be submitted on CD is yet not known. One can file PDF file of Form 704, which are tamper proof, until the format is available on the website.

Above rule will be applicable for all MVAT Audit Reports submitted after 31-10-2007 irrespective of year for which audit report relates.

11. Due date of filing of Audit Report under rule 66

Rule 66 is amended on 31-10-2007 with retrospective effect from 1-4-2007. As per the amended rule, the report of the audit under section 61 shall be submitted within 10 months from the end of the year to which the report relates. Earlier it was 8 months. It means the due date to file audit report is 31st January. This rule deals with procedural aspect of filing of audit report. This will apply to every audit report filed after 31-10-2007.

Due date of filing of 704 for the year 2005-06 is extended time to time through various circulars, now as per latest circular No. 66T dated 31-10-2007 due date is 31st December. Write Petition No. 3203 is before High Court against the Form 704, hence it is likely due date may get affected.

So, whether above amendment is relevant for the audit report of year 2005-06?

As per the amended rule due date for year 2005-06 will be 31st January 2007, which is already over, hence the rule will not be applicable for 2005-06.

Whether above amendment is relevant for the audit report of year 2006-07?

As per the amended rule due date will be 31st January, 2008, which is yet to arrive, this means the rule holds good for year 2006-07.

But as per circular dt. 31-10-2007 the due date for the year 2006-07 was extended from 30th November to 31st December.

In such a scenario whether circular will prevail or rule which are applicable for the same dt. i.e., 31-10-2007?

So let’s go through the circular first, while issuing the circular dt. 31-10-2007 the reason for the extension of date for the year 2006-07 was mentioned in para 2 which is as follows:

"Date of filing of the Audit Report in Form 704 for the year 2006-07 is 30th November, 2007. This date is also extended up to 31st December 2007."

The 30th November date is derived from the rule 66, which is amended w.e.f. 1-4-2007 on 31-10-2007, the date on which circular is issued. Rule 66 now w.e.f. 31-10-2007 amended and due date is 31st January instead of 30th November.

As per para 9 of the said circular this circular cannot be made use of for legal interpretation of provision of the law as it is clarificatory in nature.

In my view, it seems that amended rule will prevail above circular and the date for year 2006-07 may be 31st January 2008.

Writ petition No.3203 is before high court against the Form 704, now due date for audit is extended to 31-1-2008 for year 2006-07 also, and next hearing is on 17-1-2008?

Still a suitable clarification is required from the department urgently in this matter.

12. Refund of tax to the eligible PSI Units: Rule 79

Sub-rule 2 is amended retrospec-tively from 1-4-2005. This rule is to allow refund in case of PSI units under exemption @ 4% on purchase price:

1. Of any taxable goods purchased by it and used as fuel.

2. Of any taxable goods (other than those used by it as fuel) used in the manufacturing of tax free goods, and

3. Of any taxable goods other than the purchases to which clause (i) or (ii) applies and used in the manufacturing of taxable goods when such manufactured goods are dispatched by the said unit outside the state, not by way of sale to its own place of business or to its agent.

Provided that, if the goods purchased are covered by any entry in Schedule B, then the refund of tax shall be calculated at the rate of one per cent of the purchase price of goods.

The original sub-rule 2 was substituted on 8-9-2006 retrospectively w.e.f. 1-4-2005.

After amendment, rule is applicable to Deferral Units retrospectively w.e.f. 1-4-2005.Earlier it was applicable to Exemption Units only. And 4% is replaced by 3% w.e.f. 1-4-2007 which is also retrospective.

These rules are in line with rules 53(1)(2)(3) as applicable to normal dealer. In rule 53(3) the proviso is amended w.e.f. 31-10-2007 and words "Schedule B Goods are removed" but same is not done here in proviso to clause iii of sub-rule 2 of rule 79. It means the PSI units will get refund, and in case of normal dealer it needs to be clarified as amendment in rule 53(3) is not in tune.

Sub-rule 3 is newly inserted w.e.f. 31-10-2007:

This sub-rule restricts the claim of refund under sub-rule 2, unless the PSI units increase their CQB to the amount of refund. And files the returns or, as the case may be, revised returns for the period to which refund relates by admitting such claims therein.

Due to both the amendments in sub-rule 2 and 3 the exemption units and deferment units are treated at par along with Non EC dealers.

But to claim the benefit of refund PSI units will have to change their CQB and also required to file revised returns since 1-4-2005. The filing of revised returns will cause hardship to dealer under PSI units. The calculations are to be made since 1-4-2005 for refund and CQB figures, which will take lot of man days. Thus it may so happen that dealer may not claim the refund and increase the CQB, as it is optional to him whether to claim refund or not?

During the Audit for the year 2005-06 and 2006-07 above retrospective changes are required to take care while conducting audit of PSI units.

Rule 81 specifics the conditions which should be fulfilled for deferment of tax by the dealer.

Sub-Rule 2(a) is as follows;

"Such deferment shall be permitted only to those Eligible Industrial Units, which have filed the returns by the date as prescribed."

What will be the position if, some returns are filed late?

It will be too harsh rule, hope sales tax dept will take lenient view, if all returns are filed correctly.

VAT auditor may take reference of this rule and put a suitable comment, if such PSI unit is found while checking.

Some of the Important Amend-ments under MVAT Act, 2002 incorporated on 15-8-2007:

1. Section 8(3C) is newly introduced w.e.f. 15-8-2007, which grants power to State Govt. to give relief to processing of textiles from payment of works contract tax. But no notification is issued till the date. This was required to give relief to dealers after decision of Matrushree Textiles Ltd. Again retrospective amendment may be made to give the relief.

2. Section 20, Revised returns due date:
   
   W.e.f. 15-8-2007 section 20 is amended. Revised Returns can be submitted within 9 months from the end of the year containing the period to which the return relates. Earlier it was 8 months.
   
   Revised returns have to be filed before 31st December each year. After amendment on 31-10-2007 due date of filing of Audit is 31st January. Thus the same issue for filing revised return after observation of audit report may arise for year 2007-08 and onwards. Thus it needs to be clarified further.

3. Section 50 is amended w.e.f. 1-4-2005. Refund will be granted even for fee paid except paid by way of court fee.
   
   A Retrospective amendment from 1-4-2005, which also requires attention while conducting Audit for 2006-07. Suitable Note is to be given in 704, as no separate space is provided in 704 for disclosure, if such refund is found.

4. Section 61(2) amended for Penalty for non filing of MVAT Audit Report in time. Penalty of sum equal to 1/10th of the total sales is leviable.
   
   Suppose a dealer is having turnover of purchases during the year of Rs. 60 lakhs and no sales effected during the year. Then Nil penalty is imposed on such dealer. Which needs to be clarified?

5. Section 61(3) is inserted to give relief to Central, State Govt. and semi Govt. bodies from audit applicability.

6. Section 91 amended retrospective w.e.f from 1-4-2005. The EC holder under the new Package Scheme of Incentives for Tourism Project 1999 is excluded from the list of PSI Units and hence will be taxed as normal dealers and other provision will be applicable as a normal dealer.

Some important Circulars, Notifications & Cases from 1-4-2007 with reference to MVAT Audit :

1. Trade Circular No.70T of 2007: Issues and receipt of declaration in Forms C/F/H:
   
   Normally, the dealers enter the purchase invoices in their register’s as per invoice date, but some dealers may enter such invoice in their purchase register on the basis of the date of receipt of the goods or the date of inspection of goods, etc.
   
   In such cases the officers will not object the sale/consignment transfer against the declaration in Form "C"/Form "F"/Form "H", if there is a difference in recording the date of transaction by the purchase and the date recorded by the purchase falls in a next quarter/month. This clarification will therefore become applicable in case of receipt of declarations in Forms C, H & F from buyers/branch/agent from other states.
   
   While finalizing sections P, S, T of Form 704 the benefit of the Circular can be taken.

2. Circular No. 53T of 2007 dt. 7-8-2007:- Calculation of Vat liability on pro rata basis.
   
   Dealers who are retailers and semi wholesalers and who are selling to retailers and householders, due to their peculiar nature of business are not in position to identify sales rate wise. In such cases ratio of tax rate of purchases can be taken for calculating tax liability on sale side. However turnover of sales in the immediately previous year should be less than Rs. 2 crs.
   
   Clarification issued by Sr. D.C.(A&R)/VAT/MMB-1005/40/Adm-3/B 35 dated 31-1-2006 also cover the above issue, but the restriction of turnover was not there.
   
   W.e.f. 7-8-2007 dealer having turnover of Rs. 2 crs or more in P.Y. 2006-07 will be in a difficult position and will be forced to move to normal taxation.

3. Circular No.52T of 2007 dt. 31-7-2007:- Grant of exemption from filling returns in case of CST, where turnover of outside Maharashtra sale is Nil. The earlier circulars issued in this regard in year 1981 is reconfirmed.

4. Notification No. VAT-1507/CR-55/Taxation-1 dt. 3-7-2007 issued w.e.f. 1-7-2007 for abolishment of MRP based taxation on medicine and drugs; i.e., Schedule C-29 goods.

5. Assotech Reality Pvt. Ltd. vs. State of Uttar Pradesh judgment may be correlated with K. Raheja Judgment, which will give some relief in case of taxation of developers and builders under MVAT Act.

Major amendments made to MVAT Act and Rules on or after 8-9-2006, which are to be taken care, while finalizing MVAT Audit Report.

• Change in Periodicity of Returns, especially for February, 2007.

• Change in date of payment of WCT-TDS from 10 days to 21 days from the end of month.

• Retrospective amendment for Opening stock setoff on 1-4-2005.

• Allowability of setoff on Tax Invoices were composition tax charged by the purchaser w.e.f.
1-4-2005.

• MRP price to be considered for calculation of reduction of setoff for C-29 goods. w.e.f. 1-4-2005.

• Allowability of setoff on immovable properties treated as plant and machinery. Like ETP tanks, Storage Plants, etc.

• Change in % of deduction from 20% to 25% on "Any other works contract" and insertion of AMC contracts with 40% deduction under % method for Works Contracts. W.e.f. 1-4-2006.

Other major issues effecting MVAT Audit for year 2006-07:

1. Best Judgment assessment order passed by Dy. Comm. of Sales Tax, Aurangabad in Balkrishan Industries Ltd. case. Where 704 and Export, Import related disclosure is discussed.

2. New Form 704 if, it arrives before 31-12-2007, which is most likely to come as, it is pending from long time.

To sum up for easy reference while conducting MVAT Audit:

• In case of following Dealer special care should be taken while conducting MVAT Audit of the years 2005-06 or 2006-07:

• PSI dealers – For change in refund rules on fuel, etc and change in CQB w.e.f. 1-4-2005.

• WCT-Composition Dealers: For new scheme w.e.f. 20-6-2006.

• WCT-AMC and other contract dealers: For change in deduction % from 1-4-2006.

• Mandap Keepers Dealers: For Composition Scheme w.e.f.
1-4-2005. Disclosure under 704.

• Newly Registered Dealer after
8-9-2006: For change in setoff rules.

• Dealers having sales receipts below 50% of Gross receipts. Changes in setoff rules w.e.f. 8-9-2006.

• All Dealers for changes in periodicity of returns and setoff on Off. Eqp, F&F, etc. w.e.f.
8-9-2006.

• All Dealers for Revised return, disclosure of C/F refund and adjusted in 2006-07, Circular 26T of 2006 and 56T of 2007.