LEVY DE HORS THE SALE

In our editorial for the month of September, 2006 we had brought to the notice of the Government the apex court judgment in the case of State of Rajasthan vs. Rajasthan Chemists Association reported in 145 STC page 542. An article explaining the implications of that judgment was also published in the same Review. But, the Commissioner instead of taking corrective steps has issued one more circular No. 35T of 2006 dated 13th November, 2006 making one more attempt to regularize the illegalities committed by the Legislature and thus giving rise to more illegalities. The Government it seems, has not realised the administrative hazards with which it is going to be confronted in near future.

In modern times very few industries are manufacturing their products themselves. In most of the cases it is third party manufacturing. The Commissioner vide his Circular No.1T of 2005 dated 1-4-2005 has permitted such companies to exclude such sales on which taxes have already been paid on MRP at earlier stage, from their returns. In reality number of such companies are collecting the taxes again and are claiming input tax credit of the taxes paid to vendors on MRP. This is because those companies are reluctant to declare to the buyer that their products are being bought from somebody else and law permits such collection. This problem is solved from this October onwards since the seller is prohibited to collect the tax separately and hence no input tax credit is available. But, till then, the difficulty subsists. These reseller will take shelter of the apex court judgment vis-à-vis their resales and at the same time claim the ITC of the taxes paid on MRP.

Ironically, what is true with third party manufacturing is untrue with own manufacturing. Now, from October, 2006, as aforesaid, the first sellers can’t charge tax separately in their invoices. Thus there is no recovery of taxes from the buyer even if the taxes are paid on MRP. The first sellers have to absorb this tax incidence in their cost since the MRP is fixed and the stockists or wholesalers would never reduce their margin.

Any such first seller who is not paying tax on MRP, since he is not able to absorb the higher incidence, will ultimately challenge the legality of levy on MRP at first stage and the explanation enacted for such levy will be read down to comply with the law laid down by the Apex Court. No one knows when this will happen. But, the day it happens all circulars will become redundant and the Government will have to reopen the assessments of everyone whether he is manufacturer, wholesaler or retailer.

Further, in Pharma Industry free goods are offered with every sale. Such offers are known as bonus schemes. The Government expects such sellers to pay tax on the MRP of all such free goods. Be informed that all such sellers are not following the Commissioner’s circular instructions. They are protected by law. Nothing de hors the sale can be taxed. The Department will have to identify the resellers of such goods since those are also not showing such turnover in their returns, and recover the taxes from them, which they may again dispute.

Another area of chaos is the classification of the product as drug or cosmetic. The Department is not accepting even the Apex Court judgments, under the Excise law, holding the goods like anti dandruff oil, anti pimple powder as medicinal formulations. The litigations are on and finally if those are held to be cosmetics the payment of VAT by the wholesalers and retailers will arise. As aforesaid, the Department will have to identify such dealers and reopen their cases since tax on MRP can’t be recovered so far it relates to cosmetics.

Diagnostic reagents is the another headache for the Government. Some of those are covered by entry C-29A and all others are covered by entry C-29. The gentleman who has suggested these entries has never made any attempt to understand what is ‘diagnosis’ ‘reagents’ etc. and he has proceeded on the basis of available judgments. We have done lot of research in this regard and we have not found any formulation which can be used on the body of the person (in the sense the Government understands the same) for the purpose of diagnosis. But, if the contention of the Government is upheld then levy of VAT on further resales is bound to create enormous difficulties.

We wish, the wisdom prevails.