Deficiencies in VAT Law – Procedural and Legal

P.S. Sarin

Direct Taxes

  1. Introduction

1.1 I must thank our law framers of the country in bringing out the Act in such a manner as to provide the butter on both sides of the toast to the tax fraternity by creating all-round confusion, uncertainties and ensuing protracted litigation. This reminds us of the famous poetry “The Six Blind Men And The Elephant” by John Godfrey Saxe. So is the case with tax laws framed by Centre and the States which create tremors lasting for many years to come. Not that the people entrusted with the administration are heartless or thoughtless or in any way less patriotic or well intended than the tax payer, but it is the machinery wherein they are fitted which goes the wrong way, the perverted administrative system they are subjected to, which compels them to make offensive assessment. If ingenuity is the mother of tax evasion, the complexities and burden of tax is its father. Taxes are life and blood of any Government. But it can not be overlooked that such blood is taken from the arteries of the tax payers.

1.2. The subject which has been given to me by the organizers of this seminar is “Deficiencies in VAT Laws - Procedural and Legal. In this regard I share my thoughts with you in narrating the deficiencies in VAT Laws – Procedural and legal. I can do no better than quoting in a nutshell one instance. One secretary of the businessman a dealer under VAT laws told his boss as under :

“ Sir….today you have to appear for the VAT assessment before one officer and for the CST assessment before another officer….you also have to attend refund audit officer and you are also required at our shop for the business audit proceedings…..there are six more notices from different, different officers for late filing of returns to be attended today…..”

VAT was introduced in all states of India in hurried manner. As a result, the same is suffering from inadequate and handicapped provisions in legislation as well as in the administration. Almost 6 years are over after the implementation of VAT , but still the things are not settled.

  1. Constitutional Aspects are ignored

Article 51 A of the Constitution “ Everybody talks about “Fundamental rights“ of the citizen .Nobody bothers or even aware that the same Constitution postulate “ Fundamental duties“ of the citizen under article 51A.

Article 265 provides that “No tax shall be levied and collected except by authority of law.”

Article 246 provides for distribution of Legislative powers between Union and State Legislature. Article 246(1) read with Entry 92A of the List I of 7th Schedule pertains to Union. Article 246(3) read with Entry 54 of List II of 7th Schedule pertains to State Legislature. Entry 54 of State List says “Taxes on the sale or purchase of goods other than newpapers, subject to the provisions of entry 92A of List I. It means that where Entry 92A comes in, the State power under entry 54 is driven out. There is provision in VAT law of every State that no tax shall be levied on transaction covered under sections 3, 4 and 5 of the Central Sales Tax, 1956. But the States ignore it and try to tax such transaction in the State. Many litigations are in this areas. This is one of the grey area in regards to Deficiencies in VAT Laws – Procedural and Legal.

  1. Refund

Timely refund is the sole of success of a good VAT system. A strong deterrent should be provided to discourage delay in issue of refund. Suitable mechanism should be introduced for computation of due input tax credit. Export is presently zero rated. Therefore, refund to exporter should be made without hassles. Input tax which cannot be adjusted against the VAT payable over a specified period of time and input tax paid on purchase made for exports out of the country are eligible for refund. Central Govt has evolved a system of payments through freely tradable duty entitlement pass book wherein an importer can buy a tradable instrument from the exporter and use the same to pay the customs duty. It is, therefore, suggested that VAT entitlement certificates on the lines of customs be issued by the State Govt which can be issued to dealer engaged in export instead of refund which is delay and dishonest oriented intentions of the revenue officers. Such other steps should be taken to ensure a speedy and time bound refunds under the VAT laws.

  1. Statutory Forms under CST Act

One of the main problems made before the introduction of VAT was to abolish the system of declaration forms. However, with the amendment in Rule 12(7) of the Central Sales Tax (Registration and Turnover) Rules, 1956 with effect from 1 October, 2005 to file the declaration forms on quarterly basis, it has become a hard need to crack specially due to the reasons that the Departmental officers are very much slow in issuing the declaration forms and they are not following the statutory provisions in regards thereto. Many a times the statutory forms request is rejected on false and frivolous grounds.

  1. Inequitability of Penal Provisions and non observation of principles of natural justice.

The claim of input tax credit is rejected mainly on the ground that selling dealer has not deposited the tax and sometimes certain sales are not reflected in his return or returns which he is expected to file in the normal course of business. Technically it is called mis-matching of sale and purchase from the seller and purchaser. The claim is rejected in a mechanical manner without complying the principles of natural justice. Problem does not end here and fuel to fire is added, when taxable person is further made liable for penal action under the VAT Act.
It should be desirable that the designated officer should follow the legal path such as the material on which the designated officer intends to rely must be confronted, reasonable opportunity of being heard must be afforded and even so much so apart from right to cross examine the material and statements. The following should be adhered to:-

5.1 Material relied upon must be confronted

  1. Since the proceedings are quasi-judicial the assessee must be given an opportunity to cross examine the person or witness as held by Vasanji Ghela & Co. vs Commissioner of Sales Tax [1977] 40 STC 554 (Bom). Further the material should be disclosed to the assessee and fair opportunity should be granted as held in Atul Glass Industries vs. State of Haryana [1971] 28 STC 148 (P&H), Sales Tax Officer vs. Uttareswari Rice Mills [10972] 30 STC 567 (SC).

  2. Departmental Authorities should rely only on legal and admissible evidence meaning thereby the evidence on which a judical mind can act by forming a belief that it is true although the assessee denies it as held by Chiranji Lal Steel Rolling Mills vs .Commissioner of Income Tax [1972] 84 ITR 222 (P&H).

  3. The authority should act honestly and give its decision on the basis of some evidence which has been brought to the notice of the assessee in accordance with the principles of natural justice in view of [1980] 48 STC 494 (P&H), [1971] 28 STC 567 (P&H), [1965] 16 STC 240 (SC), [1970] 25 STC 57 (SC) and [1997) 10 PST 263 (P&H).

  4. However, when the assessee fails to produce documentary evidence to contradict the materials when confronted to him the Departmental authorities will be justified in regarding any conclusion against him in view of [1976] 38 STC 459 (Alld). But it is also a settled proposition that no one should be penalized without a proper enquiry in view of [1968] 21 STC 174 (SC).

5.2 Reasonable Opportunity must be given

It is settled principle that the officer must afford reasonable opportunity of being heard and the same starts through the proper and valid notice. The opportunity should be a real and reasonable opportunity under which sufficient time should be given to the petitioner to mete out his case. The length of time depends from case to case in view of Dwijendra Kumar Bhattacharya vs Superintendent of Taxes [1990] 78 STC 393 (Gauhati), Inderjit and Brothers vs State of Punjab [1982] 51 STC 245 (P&H), Warrangal District Coop. Co. Ltd vs State of AP [1983] 54 STC 385 (AP), AK Kraipak vs Union of Insdia [1970] 1 SCR 457, [1954] 26 ITR 775 (SC).

5.3 Right to cross examine

  1. Opportunity to cross examine is a must under natural justice in view of Kalra Glue Factor vs. Sales Tax Tribunal [1987] 66 STC 292 (SC).

  2. The Deptt is duty bound to produce the witness for cross examination in view of Arjan Radio House, Batala vs. State of Punjab STI 1978 P&H H.C. 12, Seth Gurmukh Singh vs. CIT [1944] 12 ITR 393 and Vasant Lal & CO vs. CIR [1962] 45 ITR 206.

  3. The dealer is entitled to receive the copies of the documents. In Arjan Radio House vs. State of Punjab [1978] 41 STC 360 (P&H), it was observed that when the authorities under the Sales Tax Act themselves wish to take any action against a dealer, he is, as a matter of law entitled to receive copies of the documents on the basis of which action is sought to be initiated against him.

5.4 The penalties could be of the following nature:-

  1. Penalty for not making application for registration.

  2. Penalty for failure to furnish security or additional security.

  3. Penalty for failure to furnish return.

  4. Penalty for not maintaining or keeping accounts.

  5. Penalty for failure to comply with the provisions of amendment of registration.

  6. Falsely representing as Registered dealer.

  1. Builder’s dilema

K Raheja case (2005) 141 STC 298 (SC) held that even an owner of land/property can be regarded as a works contractor for the purpose of definition of “ works contract” if he undertakes the construction for and on behalf of the prospective buyer.

Raheja case was a peculiar case where there were two agreements, one for proportionate land and the other for the flat % per sq. ft of the construction. Such peculiarity under the agreement is not in the agreements that are executed in other States wherein regards to sale of flat there is an indivisible agreement for immoveable property. BSNL case of the supreme court specially in Para 45 says that every contract can not be bifurcated except that is provided under Article 366 (29A)(b) of the Constitution.

The case of Allahabad High Court in Assotech Reality Pvt Ltd vs. State of U.P. (2007) 8 VST 738 (All) though well reasoned was remanded back to lower authorities on technical ground that the Writ should not have been admitted by the High Court. The High Court held as under:

  1. There must be an agreement express or implied.

  2. But if the activity of construction is undertaken by a person for self it would not amount to works contract.

  3. In the case before the court the builder was empowered to mortgage land as well as apartments.

  4. The allottees got the right in the property only on execution of sale deed.

  5. The builder could change the plan and specification.

  6. Construction was not for and on behalf of the prospective buyers.

The Gauhati High Court judgment in Megus Construction Pvt Ltd v Union of India (2008) 15 VST 17 followed the judgment of Assotech Reality Pvt Ltd (2007) 8 VST 738 (All).

Finally the Supreme Court in Larsen & Toubro Ltd vs. State of Karnataka differed with Raheja case (2005) 141 STC 298 (SC) and referred the case to the larger bench for reconsideration of Raheja case.

But it is noteworthy to take into account the observation of the Supreme Court in L&T case as under :

  1. The developer had undertaken the contract to develop the property.

  2. The showcause notice proceeds only on the basis that tripartite agreement is the works contract.

  3. In the show cause notice there is no allegation made by the deptt. That there is monetary consideration involved in the first contract which is the development agreement.

Further it observed as under :

“Be that as it may, apart from the disputes in hand, the point which we have to examine is whether the ratio of the judgment of the Division Bench in the case of Raheja Development Corporation (2005) 5 SCC 162 as enunciated in para 20, is correct. If the development agreement is not a works contract could the department rely upon the second contract, which is the tripartite agreement and interpret it to be a works contract, as defined under the 1957 Act. The department has relied upon only the judgment of this court in Raheja Development Corporation case (2005) 5SCC 162 because para 20 does assist the department. However, we are of the view that if the ratio of Raheja Development Corporation case (2005) 5 SCC 162 is to be accepted then there would be no difference between works contract and a contract for sale of chattel as chattel. Lastly, could it be said that the petitioner-company was the contractor for prospective flat purchaser. Under the definition of the term “works contract” as quoted above the contractor must have undertaken the work of construction for and on behalf of the contractor for cash, deferred or any other valuable consideration. According to the department, development agreement is not works contract but the tripartite agreement is works contract which, prima facie, appears to be fallacious. There is no allegation that the tripartite agreement is sham or bogus.”

Still Vat authorities in States are adamant in issuing notice to developers that they should be registered and pay tax. The allegation is that they are constructing the flats to prospective buyers. But Raheja case is no more a good law and in any case the builders cannot be fastened to tax because :

  1. they are not dealers;

  2. development agreement is not agreement for construction in terms of definition of works contract

  3. the consideration for development agreement is not consideration for works contract;

  4. The consideration is not for “ cash, deferred or for any other valuable consideration “ – the expression used in the definition of “sale price”;

  5. There is no transfer of property in goods involved in the execution of works contract within the meaning under article 366(29A) (b) of the Constitution of India as well as definition of “deemed sale” as given in the State’s Acts.

and Raheja case being no good law, we have to await the decision of the larger Bench of the Supreme court.

  1. Mechanical rejection of ITC

The departmental officers are simply giving a list of unmatched data of cross check giving list of vendors who have allegedly not paid taxes with the government treasury. Thus innocent dealers are enforced to pay the alleged not paid taxes even though the same has already been paid to
the vendors. This may happen particularly in case of :

  1. Refund audit

  2. Issue based business audit

  3. Summons to witness

  4. Enforcement proceeding.

  5. False sale invoice.

The menace of false sale invoice is increasing day by day on account of allurement attached with. This has not only increased manifold in Europe but India is fast enough to copy the evil.

The other minor issues could be :

  1. Tax Invoice not mentioned.

  2. Name, Address, Tin No. mistakes.

  3.  S. No. and date of issue of Tax Invoice.

  4. Minor mistakes mentioning description of goods, quantity and the amount.

  5. Signature of selling dealer/ authorized persons.

Case Laws in support of dealers:

  1. (2009) 19 VST 84 (SC)

  2. (2007) 4 SCC 471.

  3. AIR 1971 Supreme court 2039

  4. 126 STC 436.

  5. AIR 1956 SC 415

  6. (2009) 23 VST 362 (MP)

  7. 14 STC 489 (Ker)

  8. 99 STC 154 (Mad)

  1. Article 286(3)(b) of the Constitution of India

Conflict that remains unresolved - Central Govt inaction – Art. 286(3)(b): Enabling power of Parliament to make law for Works Contract
It may be noted that the Central Government has not done what it ought to have done under enabling power it has under article 286(3) (b) of the Constitution. Under this article the Central Government took upon itself the responsibility of enacting a law subjecting the sales tax laws to such restrictions and conditions in regard to the system of levy, rates and other incidence of tax. It is the grievance of the contractor that the State Governments are still adament of framing offensive assessments which are illegal, arbitrary and there still exists wide disparities.

The Supreme Court observed at Page 230 as under:

“ This does not, however, absolve the Parliament from enacting a law as envisaged by article 286(3)(b). Keeping in view the grievances of the contractors that there is wide disparity in the sales tax legislation of the various states in the matter of imposition, mode of assessment, rates etc, of the tax on deemed sales resulting from transfer of property involved in the execution of works contract referred to in sub-clause (b) of article 366, the need for the law envisaged by article 286(3)(b) cannot be minimized.”

Also kindly see 88 STC 204 (SC) at Page 225 bottom as under :

“When such a law is enacted by the Parliament the legislative powers of the States under entry 54 in the state list has to be excercised subject to the restrictions and conditions specified in that law. No law has , however, been made by the Parliament in exercise of its power under article 286(3)(b).”

  1. Resolving Conflict in regards to Sec.3 transactions – States adamancy.

Inspite of well settled principle by Supreme Court and various High Courts, the States have been adamant and rule of law is not observed by putting extra constitutional and illegal objections which are beyond the formulation of principle under section 3 of CST Act. These objections could be of following natures :

S. No.

Conflicts created by States

Conflicts resolved by Courts but States still adamant


There cannot be more than one transaction in the course of inter-State trade or commerce.

No. There can be more than one sale in the course of inter
state trade or commerce u/s 3(a) CST Act.

Pl see Supreme Court in A & J Project Technologies Ltd v State of Karnataka (2009) 19 VST 230 (SC). Also see other cases as listed at Item No. 4.5 hereinabove.


There are two sales, one between supplier in other state and the Contractor which is inter state sale and the other between the Contractor and the awarder which is local sale
taxable in the State of delivery.

1. No, it is one sale because the two sales are so integrated and interlinked that it is really one sale. See –

State of Maharashtra vs Embee Corporation (1997) 107 STC 196 (SC).

Also see State of Karnataka v Azad Coach Builders Pvt Ltd (2010) 36 VST 1 (SC) and

The Inure Ltd vs CTO (2010) 34 VST 509 (SC)

2. It is cause and defect theory.

Pl. see CST UP vs Bakhtawar (1992) 87 STC 196 (SC).

3. “In the course of” interpreted” See Bengal Immunity 6 STC 446 (SC) Travancore Cochin 3 STC 434 (SC)

Bengorm Nilgiri (1964) 15 STC 753(SC)

Movement of goods supercedes principle of accretion/accession.

Elgi Tyres 120 STC 261 (Kar)

Movement of goods is dependent upon the contract.

Kelvinator case (1973) 32 STC 629 (SC)

K. B. Saha (2007) 7 VST 214 (SC)

CST Selhi vs DCM (2009) 23 VST 10 (STAAA)


There is no privity of contract between supplier and the ultimate purchaser i.e the awarder.

There is no such condition in the formulation of principle u/s 3(a) CST Act except the twin condition.

On facts see following cases :

BHEL case (1996) 102 STC 373 (SC)

Ircon Case CST U.P. vs Ircon International (2007) 6 VST 374 (Alld).


Second sale is covered under section 3(b) of CST Act.

No. To be under section 3(b) conditions should be satisfied which is not applicable if transaction is sec. 3(a) transaction.

See A&G Project case ( 2009) 19 VST 239 at Page 247 Para 11.


The goods purchased against “C” form by the contractor directly dispatched to awarder cannot be appropriated to ultimate buyer.
This contention is wrong for

following reasons :

  1. Contractor can always issue “C” form. See umpteen number of cases on this issue.

  2. “C” form is not determinative of nature of transaction for which it is section 3 alone.

  3. If there is any mis-user of “C” form, authorities can take penal action u/s 10(d) of CST Act but that will not alter the nature of transaction.



Property passes on principle of accretion/accession BAI 73 STC 370

In Delhi in Rule 3 no deduction is prescribed.

State of AP vs Larsen & Toubro (2008) 17 VST 1 (SC)

Property in goods transferred only by sub-contractor to contractee. Contractor not liable to VAT on turnover of sub-contractor.


Material supplied by the

  1. Jamshedpur Contractors Association (1989) 75 STC 132 (Pat).

  2. Cooch Behar Contractor Ass. (1996) 103 STC 477

  1. Whether in terms of mandamus of article 366(29A) (b) only transfer of property in goods involved in the execution of works contract is taxable and no other element.

A combination of reading of article 366(29A) (b) of the Constitution read with bodily adopting the same in local Acts is achieved only if the charge is confined to the property in goods involved in the execution of works contract and nothing more than that. Thus even depreciation on plant and machinery owned and used by the contractor , interest, postage, telephone and telex expenses are allowable deduction.

Cases relied upon :

  1. Larsen & Toubro Ltd vs State of Karnataka (2010) 34 VST 53 (Kar)

Relying upon:

  1. Builders Association (1989) 73 STC 370(SC)

  2. Cooch Behar Contractors Association (1996) 103 STC 477(SC)

  3. Ganon Dunkerley (1993) 88 STC 204 (SC) Paras 22 to 26, 32,35,36,41,43,44.

  4. Karya Palak Engineers (2004) 136 STC 641(SC)

  5. Ganon Dunkerley (1958) 9 STC 353 (SC)

Veer Constructions vs State of A.P. [2011} 45 VST 352 (AP) State of JharKhand vs Voltas Ltd. (2007) 7 VST 317 (SC)

A works contractor is entitled for deduction of amounts pertaining to the depreciation on trippers, maintenance expenses of trippers and consumables, used in the execution of works contract under rule 6(2) of APGST Act, 1957 because it used the words “or otherwise”

Deduction claimed for labour, services, and other like charges

“Other like charges” has been explained by Supreme Court in Ganon Dunkerley case 88 STC 204. It affirms the point that whatever is not transfer of property in goods involved in the execution of works contract is not taxable.

  1. Procedural Aspects

  1. The maintenance of records as envisaged in DVAT are complicated and some of the prescribed forms are lengthy time consuming and involve huge expense. Take for example form DVT-51 is completely out of tune with the law and is incompatible with DVAT. The form is meaningful only under Central Sales Tax Law and not DVAT.

  2. There is glaring discrepancy in prescribing surety. The dealer having a huge turnover of say a crore or more was treated at par with trader having small and meager turnover. Both are placed under the same category to a maximum surety of Rupees one lakh (under certain conditions). The provision needs a recast to be equitable and not to harass the small and marginal tax payers. The department insists on taking surety from one and all the dealers without assuring the efficacy.

  3. Heavy penalties have been prescribed in case of defaults. The DVAT authorities have no discretionary powers to reduce or waive penalties. We see a complete departure from the established norms. The fundamental principles of natural justice must be observed before imposing a penalty. The law is faulty and defective. Before an adverse action is taken for any infraction of law, the person affected must be given a reasonable opportunity to defend and be heard i.e., Audi Alteram Partem – this is what the Hon’ble Supreme Court has repeatedly pronounced. In such matters some discretion must be vested with the authorities to dilute its rigor and that is conspicuous by its absence. We do not feel such provision could withstand, if challenged in superior courts.

  1. Advantages of Bribes – A short cut method to avoid deficiencies in VAT Laws – Procedural and legal

The aforesaid is not the end of the matter, and all the deficiencies in VAT laws cannot be listed here because an article has limitation of certain number of pages and the subject chosen by the organizer is such that it requires atleast two days seminar on this subject alone but the total time is 1 hour and 45 minutes

In view of the aforesaid difficulties, deficiencies in VAT Laws – Procedural and Legal, the unfortunate but inevitable short cut method wherein the professionals, departmental officers and the dealers feel most happy is to give bribe and get the work done instead of prolonged litigation and uncertainties for a number of years being in limbo involving huge amount of money and time. There are many advantages and a few valid points in this dishonest behaviour and system are as under:-

  1. Speedy Money: Most of the people are short of time. They are prepared to pay for getting the things faster. If there is no official way out they do it unofficially. There is no taint of immorality. It is simply speed money. Time savings can be devoted for some better purposes than to wait in line.

  2. Hassle free business: Our Constitution guarantees freedom of trade to all its citizens. But the moment we decide to set up business, it is realized you are not free. You are bound by innumerable rules, regulations, laws, bye-laws, circulars, instructions, etc for setting up even a small business. But there is an advantage of bribe inasmuch as you can do hassle free business.

  3. Friendship: Everyone wants to be a straightforward, law abiding successful businessman. Was it not common in old days to keep good relations with the kings and their sardars by offering them Nazrana, gift and such other things from time to time being a part and parcel of business activities for centuries. It is a genuine business expenditure. After all what we do on Diwali cannot be tainted as bribe. At least this develops friendship with the people at position of power which is essential for doing business. If you don’t do this Govt officers with exceptions will not prefer you but rather hate you. In 99% of times one can be shocked that his genuine difficulty and honesty is of no use.

  4. Sense of Authority: The extra earnings and investments made out of corrupt money as well as spending gives you the kick of the sense of power and the sense of being powerful. Power of authority is no substitute for power of money.

  5. Extra money for increased needs and luxuries: The salaries of Government servants are based on national price index which is impracticable in big cities. Therefore, he has to earn extra income. Once he is used to the spoils of power, may be for necessities, then he thinks why not for little luxuries and finally why not for lavish living. Their wives nag their honest husbands for not bringing enough money and not accepting bribes as others do.

  6. Secular, Casteless, Classless Society: Our Constitution has given us the aim of creating a society which is secular, casteless and classless, where the barriers of religion, caste and class should be reduced. Corruption is secular, cuts across all castes and classes. Corruption does not ask for gender bias. It is done silently and does not create any law and order problem. Corruption thus follows the guiding principles of our Constitution.

Plato says: “The penalty good men pay for being indifferent is to be ruled by evil men”. Thus it is short cut to success.

I remember the lyrics of Sahir Ludhianavi in film “Pyasa” Zara Mulk ke Rahbaron ko Bulao AND FINALLY WE PRAY AND HOPE “WO SUBAH KABHI TO AIAGI”

[Source : Article published in souvenir at National Tax Conference held on 17th & 18th March, 2012 at Guwahati]