VAT advantage on burden of proof mostly notional

EXPERT EYE

Burden of proof is a general concept in legal terms, but in fiscal law, relating to Customs, excise, sales tax, value-added tax and service tax, this principle has some special application.

That is why special provisions have been included in the fiscal Acts. In the Customs Act, for instance, Section 123 says that if goods, even gold and diamond, are seized from anybody under the reasonable belief that they are smuggled goods, then the burden of proof will be on the person from whom the goods have been seized.

The Supreme Court, has held such provisions as constitutional in its famous judgment in the case of Collector of Customs, Madras vs Nathella Sampathu Chetty, 1999 (110) ELT 157 (SC).

The burden of proof in the case of VAT needs special elaboration. VAT's multi-stage collection mechanism obliges the taxpayer to prove to the satisfaction of the tax authorities that he is entitled to the credit claimed in its return.

If the input credit is claimed, the burden of proof is on the taxpayer. The taxpayer has to produce all the invoices, etc. and prove that the claim is correct.

On the other hand, under the retail sales tax (RST), the onus of proving that there has been an understatement of sale is on the revenue department""the tax authorities have to prove that a firm liable to tax has understated its sales.

The conventional view holds VAT as superior to retail sales tax. As per this view, understatement of sale is the bane of RST. Taking false input credit by bogus invoices is the bane of VAT, but the use of invoices through out the system gives auditors an opportunity to create a better series of checks (audit trail).

However, it is important not to exaggerate this property of the VAT. A cross-verification of millions of invoices is practically impossible. Korea attained very minimal success in its attempt at a comprehensive crosscheck.

Even understatement of sale is possible, and is often resorted to, under VAT. But that needs connivance of those who sell input to them.

While this greatly increases the risk of detection under VAT, a systematic understatement leading to generation of black money at every level is quite possible, particularly in underdeveloped countries or even less developed countries in Europe who have a higher percentage of black money in their economies.

Anecdotal evidence indicates prevalence of cash sale even in Canada. And, in general, neither VAT nor RST can tax the "unofficial" or black money.

The conclusion, therefore, is that VAT has an advantage over RST on the purely legal ground that the burden of proof of the input credit, in the case of VAT, is on the assessee.

However, in practice, when the assessee produces all the invoices before the tax authorities, he can said to have discharged his burden of proof. After that, it is up to the tax authority to disprove the veracity of the invoices. This is where it makes all the difference.

In the case of sales tax also, the assessee must produce, if asked to, the invoices to prove his sale proceeds. Once he produces all the invoices, the situation is the same so far as the tax authorities are concerned in respect of disproving the invoices.

Although theoretically the burden of proof is different in respect of VAT, when it comes to examination of the invoices, there is no difference at all. The theoretical advantage of VAT in respect of onus of proof is therefore , more ephemeral than real.

The author is a former member of the Central Board of Excise & Customs smukher2000@yahoo.com