By CA Sanjay M. Dhariwal

1. For Composition Works Contractor under KVAT Act

(URD Purchase tax to composition dealers from retrospective effect)

The petition is filed by many petitioners in the High Court of Bangalore and the order is passed on 13-4-2009 by Justice D.V. Shylendra Kumar (Writ petition No. 9757 of 2007)(T-RES) and Others). This article is based on the High Court order passed with reference to writ petition filed against the unregistered purchase tax levied to works contractor under the composition scheme with retrospective effect from 1-4-2006. Gist of the discussion issued has been enumerated in the following paragraphs.

The Writ Petition was filed by the registered dealers under the KVAT Act, 2003 who have opted to pay tax under the composition scheme prescribed under section 15 of the KVAT Act, 2003. The payment of tax under the composition scheme was an option to the registered dealer on fulfilment of certain conditions. The option will be available so long as the dealer fulfils the requirements of section 15 of the KVAT Act.

There was an amendment in the financial year 2007 where it was stated that unregistered purchase tax will be levied to composition dealer in addition to composition tax with retrospective effect from 1-4-2006. Such taxes were additional burden to the works contractor and have also resulted in levy of penalty as envisaged under section 72(2) of the KVAT Act.

For the above reasons many composition dealers filed the writ petition before the High Court. When the composition dealer is compared to regular dealer, they are rid of all responsibilities and liabilities for the payment of taxes and liable to pay the tax as envisaged under section 15 of the KVAT Act.

Petitioners have approached the Court seeking for relief for re-assessment orders and levy of penalties which was levied due to legislative changes in section 15 of the KVAT Act particularly by inserting a new clause (e) to section 15(5) of the Act. It was unconstitutional to levy such taxes from anterior date. It is mainly due to the operation of section 4(3)(d) of the Act No. 6 of 2007. The petitioners have sought for a declaration that this provision is bad in law, unconstitutional and all the consequential sections should be quashed. It is violative of Article 14 of the Constitution of India being a provision which is irrational, impracticable and unworkable. The liability for dealers who pay their taxes in the normal scheme remains the same, the provisions has the effect of enlarging the taxes on dealers who had opted for payment of tax by way of composition by altering the scheme midway after the dealers have chosen to pay the tax by way of composition.

Order

The amendment in 2007 was to attempt the parity between the works contractor under the regular scheme and the composition scheme by levying unregistered tax. It would have been held valid if such provision is inserted retrospectively so accordingly the composition dealers would have analyzed whether such scheme should be opted or not. It was urged that the levy of section 15(5)(e) cannot be characterized as a clarificatory levy, the retrospective levy of this event namely the sale or purchase is over and creating an additional burden would virtually be in the nature of levy on the profit being not at the time of transaction and therefore unconstitutional being beyond the competence of State legislature to levy such taxes. The retrospective operation can be accepted as an unreasonable provision, if it is without any purpose and creating an additional burden and additional hardship to the dealers. There is a liability under section 3(2) of the KVAT Act in addition to the tax as specified under section 15(1) of the KVAT Act. But such taxes are levied only to composition works contract dealer and not to other composition dealers who made unregistered purchase.

Therefore petitioners have confined their challenge to the assessment orders up to the period 31-3-2007 and with the declaration of law that the provisions of section 15(5)(e) of the Act as it operates from 1-4-2007 is valid. Thereafter the amendment in the year 2007 has been declared unconstitutional if it pertains to the deeming provision of section 15(5)(e) operative from 1-4-2006 being an unreasonable provision. Concluding the above deliberations, the taxes on the unregistered purchase from 1-4-2006 to 31-3-2007 cannot be levied to the works contractor under the composition scheme.

2. For Composition Works Contractor under KVAT Act

Restriction of inter-state purchase to the composition dealers other than works contractor

New Taj Mahal Café Private Limited vs. State of Karnataka & Ors. (WP No 10135 of 2006 (T-Res) & Batch

Section 15(1) of the KVAT Act states that subject to such conditions and in such circumstances as may be prescribed, any dealer other than a dealer who purchases or obtains goods from outside the state or from outside the territory of India liable to pay tax as specified in section 4 and

a) Whose total turnover in a period of four consecutive quarters does not exceed, Fifteen lakh rupees or
b) Who is a dealer executing works contract
c) Who is a hotelier, restaurateur, caterer, etc.
d) Who is a mechanized crushing unit producing granite metals

Section 15(5)(a) of the KVAT Act states that notwithstanding anything contained in the above section a dealer executing works contract and who purchases or obtains goods from outside the State or from outside the territory of India shall be eligible to opt for composition under section 15(1) and if the property in such goods (whether as goods or in some other form) is transferred in any works contract executed by him, the dealer shall be liable to pay tax on the value of such goods at the rate prescribed in section 4 and such value shall be deducted from the total consideration of the works contracts executed on which an amount as notified is payable under sub- section (1) by way of composition in lieu of the tax payable under the Act.(with effect from 1-4-2006)

There is a condition or restriction for composition dealers that they should not make purchases from outside the State or from outside the country. Such purchases acted as disqualification for claiming the benefit of composition. But the works contractor can make inter-State purchases subject to certain conditions.

The writ petitions were filed stating that provision is discriminatory making an invidious classification of the dealers who were extended the facility of the composition and it violates the Article 14 of the Constitution of India and should be declared as unconstitutional. It was contended that once the State has decided to provide or extend the facility of composition to the identified class of dealers, there is no justification to keep out some dealers even among the identified class of dealers.

It was also pointed out by learned counsel that making a classification of dealers who have their purchases outside the State and dealers who have their purchases within the state and a provision having the effect of creating a higher liability on dealers who have their purchases from outside the State is a provision which is in contravention of the mandate of Article 301 of the Constitution of India. The provision being one discouraging outside the State purchases is directly infringing upon the provision of Article 301 of the Constitution of India.

The object of the section 15 of the KVAT Act is to provide facility to facilitate certain class of dealers who could have great difficulty in maintaining regular accounts and filing the returns giving full particulars of the turnover, input tax, output tax, net tax liability, etc

The provisions as enforced on the petitioners is not merely making a difference in the tax liability under the Act but also resulted in orders levying penalty under section 72(2) of the Act and such consequences does give cause for the petitioners to seek relief before courts for declaration with regard to constitutional validity and it is because of this reason the petitioners are examined for declaring the validity of section 15 of the KVAT Act.

Order

Section 15 of the Act is not a charging section but a provision providing a facility and alternative scheme for payment and collection of tax in lieu of the liability, under the charging section. It is not a provision for creating any additional liability. The issue is not on the burden of tax liability but it is the matter of classification. Whenever a statutory provision is challenged as discriminatory by differentially treating the person, the question should be whether the person to whom the comparison is made is identically or similarly situated. The classification should be based on an identifiable criteria’s and it should have nexus to the object of the provision. The general scheme of identifying the composition dealers is that their inputs are numerous and in small quantities and maintenance of such details is difficult therefore it cannot be said that the provision does not pass the test of Article 14 of the Constitution of India. A provision would fall foul of Article 301 only if it in reality constitutes an impediment for free movement of trade and commerce. The provision of section 15 is arranged in such a manner that the State has endeavoured to not only maintain the overall revenue to the state from the imposition of levy under the Act but also to the extent possible it is maintained at the same level whether a dealer has opted regular method or composition method and the provision cannot state that it is creating an additional burden on dealers who have opted for composition. Therefore if there is no discrimination by making such distinction and also that there is no additional burden on dealers, who are denied the facility of payment of tax by way of composition, the argument that the provision is violative of Article 301 of the Constitution of India and therefore unconstitutional and accordingly rejected. By examining the provisions of section 72(2) of the KVAT Act, it states that opportunity must be given to the dealer to show cause for the levy of penalty.

Concluding the above deliberations, the composition dealers other than works contractor should not make inter-State purchase from outside the State or outside the country to claim the benefit of composition scheme.