Sukumar Mukhopadhyay: VAT: Caution at the threshold

EXPERT EYE

While evasion by all types of industry is possible in a situation of input credit, the basic feature of the value-added tax (VAT), there are circumstances where caution is warranted. This is about the misuse in relation to the threshold.

There will have to be a threshold above which the VAT will be attracted. If the threshold is, say, Rs 5 lakh of turnover then a firm that produces or sells worth Rs 6 lakh may as well make two firms.

This fragmentation often attracts frown from the law enforcement authorities. If the sales of the two firms are clubbed together then it will exceed the limit. So it will attract the VAT.

In central excise also there are similar provisions for exemption for small-scale industries. The case laws on the subject in excise indicate that often one person starts two firms just to split the turnover and to avail of the concession. They are usually dependent on each other.

In some cases, raw materials are supplied to the other. In other cases, financial, technical, supervisory or other help is given by one firm to the other. Basically one firm is not independent but dummy of the other.

But judicially it is very difficult to nail a case of evasion by clubbing. The main reason is no clear-cut criterion has been laid down for judging if one is a dummy of the other.

There is also unanimity that if there are two firms and if one firm buys goods from another firm, who manufactures and fixes the trade name of the buyer, the buyer does not become a manufacturer or the other firm does not become a dummy of the buyer so long the transaction is on principal-to-principal basis.

All the judgments are on facts and no two cases have the same facts. In the Pilky Foot wear vs Union of India case, 1880(6) ELT 338 (Bom), the Bombay High Court said in such cases the "cumulative effect of various circumstances" should be taken into account.

The basic principle that emerges is that one firm should not have financial control over the other. This is the key consideration.

The VAT officers should take the following principles for their guideline to determine if one firm is a dummy of the other.

There should be no financial deal between the new and the old firms. No loans. No advances and no credit notes. The new firm should borrow funds from banks independently. There should be no flow back of funds.

Premises should be separate.

There should be separate telephone and power connections.

They should be separately registered companies under the Income and Sales Tax Acts.

There should be no power of attorney given by the wife to the husband.

There should not be any control exercised by the old firm on the new firm.

The transactions by the two firms should be separate and independent.

If the conditions are not satisfied, then one is a dummy of the other. But it is a hard task to succeed in a case since some of the conditions may not be fulfilled.

smukher2000@yahoo.com