Drugs and medicines – Sick scenario

Taxation of drugs and medicines has become topsy-turvy on issuance of Ordinance No. V of 2007 dt. 30-6-2007. The said Ordinance has deleted Explanation IV from the definitions of ‘Sale Price’ u/s. 2(20) and ‘Purchase Price’ u/s. 2(25) and as a result, VAT is payable on actual sale price of the drugs and medicines and not on MRP. The said position is made applicable from 1-7-2007. Thus, Govt. expects the dealers to change their billing pattern with magical effect. Probably, it is not aware of the modalities needed to change the systems of the invoicing, especially in case of a big organizations. The changes cannot be made overnight and if any shortfall occurs, who is responsible for it? The dept. probably feels that the move has been taken at the request of the trade. However, this fact cannot justify the hasty manner in which the amendment is brought. It cannot be expected that entire industry is aware about the issue which is represented by a few on their behalf. Therefore, a breathing time ought to have been granted by the Ordinance to enable the dealers to switchover to another billing system. The Commr. of Sales Tax should at least see that no penal actions are taken in case of inadvertent mistakes in the process of switch over.

Apart from it, the copy of the Ordinance itself was made available to the Trade only after 3-4 days of its effect. Until then, only the web-site of the Govt. of Maharashtra flashed a news about its publication which cannot be construed as authentic intimation.

The direct implication of the Ordinance is that VAT is made applicable to drugs and medicines in the same manner as in case of any other commodity. The distributors, stockists, chemists who were not required to pay VAT till 30-6-2007 are now supposed to discharge their liability on sales. The various trade circulars issued by Commr. of Sales Tax [1T of 2005 dt. 1-4-2005, 7T of 2005 dt. 9-4-2005 etc.] have lost significance and need to be withdrawn immediately. The said circulars had formed a parallel statute to codify a law in respect of taxation of drugs and medicines although there were no provisions under MVAT Act or Rules. Until the circulars are withdrawn, can the trade take cognisance of the Ordinance since the circulars are beneficial to the trade?

There are certain issues popping up from the said Ordinance. For example, under free schemes and Bonus schemes, medicines are given free of cost to stockists. As per Trade Circular No. 7T of 2005 dt. 19-5-2007, manufacturers and importers making such free suppliers were required to pay VAT on MRP of such medicines although no consideration was received. Under the new scenario, it will not be necessary to pay VAT on free supplies. However, a detailed Trade Circular has to be issued covering all such issues upon the promulgation of Ordinance.

The web-site of the Govt. of Maharashtra had advertised that the resellers of medicines would get set-off on the opening stock as on 1-7-2007 at 3.5% out of the VAT paid on such purchases at 4% on MRP. There seems to be no logic to restrict the said set-off to 3.5% when Govt. has actually received VAT at 4% on MRP. The resellers in the distribution chain are now required to pay VAT on the sales of such medicines lying in opening stock as on 1-7-2007.

The MVAT Rules, 2005 have been amended on 11th July, 2007 and rule 52(3) has been inserted enabling the resellers of drugs and medicines to claim set-off on the closing stock as
30-6-2007. Fortunately, there is no restriction as envisaged in the news flashed on website. The said set-off is available even if the purchase bill is inclusive of tax; i.e., tax amount is not shown separately.

There appears one practical problem in this whole process where manufacturers / importers have despatched materials prior to 30-6-2007 but they have been received by the stockists / distributors after 30-6-2007. Strictly speaking, such goods on which tax is paid on MRP are not lying in the stock as on 30-6-2007. The stockists / distributors cannot show them in the stock statement and manufacturer also cannot refund the VAT to him on such sales. This situation should be considered and Commr. of Sales Tax should issue a suitable Trade Circular to that effect in order to allow such set-off to the resellers.

Refund for 2005-06

The Commr. of Sales Tax has graciously allowed adjustment of refund for the year 2005-06 against the liability shown in any return pertaining to 2006-07 vide a Trade Circular. Similar concession has been granted for the year 2006-07 too (Refer, Trade Circular No. 41T of 2007 dt. 21-5-2007). Although the provisions under MVAT Act u/s. 50 do not permit such adjustment, he has allowed it looking to the practical difficulties of the dealer, teething problems of VAT etc. However, one aspect has to be appreciated that last date for filing VAT audit report for the year 2005-06 is continuously getting extended. If a dealer is entitled to a refund as per such VAT audit report which is yet to be finalised, then he is required to file revised return for the month of March 2006 showing such refund. If the facility to adjust the refund is restricted only to 2006-07 the said circular would lose its practical significance. The same situation may arise for the year 2006-07 for which VAT audits are yet to be commenced or finalised. Therefore, it would be advisable to grant the said benefit to any subsequent return to be filed after the dealer claims the refund. The Commr. of Sales Tax may revisit the issue and revise the instructions since the dealers apprehend such rigid interpretation of the said Trade Circulars from the sales tax authorities.

Application in Form 501 – A cumbersome procedure

It is not now sufficient to merely file a return or revised return showing refund in order to claim it. The dealer has to file an application in Form 501 and annexure thereto is a big exercise. It is almost a duplication of purchase register running into volumes. Time and again, it has been represented that the procedure may be curtailed to make it practical.

Apart from the tedious provisions and procedures there is one more hassel created by the refund section. Dealers normally file a revised return after finalising VAT audit report in order to claim the refund as modified by the audit report in Form No. 704. Such refund may be more or less than the original claim. The refund section now advises the dealer to file a revised application in Form No. 501 which invalidates the original application in Form No. 501. As a result, the time limit to grant the refund u/s. 51 date of application of interest on refund u/s. 52 also gets delayed if the original refund is not already granted. Section 52 provides for interest on delayed refunds subject to a ceiling of 24 months. The last date for filing VAT audit report is getting extended endlessly. If the entire refund is blocked for further six months due to the above procedure, the dealers are definitely at loss. Therefore, a proper policy for granting refund and interest thereon has to be chalked out without resorting to intermittent issuance of conditional circulars.