The Hon’ble Chief Minister and Finance Minister of Karnataka presented the State Budget for the fiscal year 2016-17 on 18-3-2016 in the Legislative Assembly. The highlights of Value Added Tax and Entry Tax proposals are as under:

A. Karnataka Value Added Tax Act, 2003

1. Tax rates

Changes in tax rates are as under:

1.1 Tax exemption is extended on sale of paddy, rice, wheat, pulses, flour and suji of rice and wheat, maida of wheat and ragi rice (processed ragi) up to March 31, 2017 (Notification No. I FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016).

1.2 Exemption from payment of tax has now been extended to

• Handmade paper and hand-made paper boards including handmade paper products manufactured and sold by a dealer recognised as Khadi and Village Industry by the Khadi and Village Industries Commission or the Karnataka Khadi and Village Industries Board

• Jowar roti and ragi roti

• Aluminium household utensils other than pressure cookers and cutlery (Notification Nos. II and III FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016)

• The rate of tax on sale of Cotton – all kinds of cotton (indigenous or imported) in its un-manufactured state, whether ginned or unginned, baled, pressed or otherwise, but not including cotton waste (Declared goods u/s. 14(ii) of CST Act, 1956) has been reduced to 2% (Notification No. IV FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016)

1.3 The rate of tax on sale of the following goods has been reduced to 5.5% from 14.5% (Notification No. V FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016):

• Chatnipudi prepared from groundnut, nigar seeds, copra, bengal gram, garlic, flax seeds and fried gram

• Office files made of paper and paper boards

• Adult diapers

• Hand operated rubber sheet making machine

• Set top boxes for viewing television content

• Surgical gowns, masks, caps and drapes of single use made of non-woven fabrics

• Helmets

• LED bulbs

1.4 The rate of tax on sale of nickel bars, rods, profiles and wire falling under HSN 7505, nickel plates, sheets, strip and foil falling under HSN 7506 and titanium and articles thereof including waste and scrap falling under HSN 8108 has been reduced to 5.5% from 14.5% (Notification No. VI FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016).

1.5 ‘Multi-media speakers’ which were notified as IT products vide Entry 53 of Third Schedule to the KVAT Act, 2003 would be liable to tax at the rate of 5.5% irrespective of the sale value of such speakers. Hitherto, it was liable to tax at the rate of 5.5% only if the price of the speakers did not exceed
Rs. 1,000/- per set (Notification No. VII FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016).

1.6 Up to 31-3-2016 the following goods were liable to tax at 1% against declaration in Form-C in terms of notification issued by the Government of Karnataka under Section 8(5) of the CST Act, 1956:

• Aluminium ingots, saws, billets, and wire rods;

• Plastic woven sacks and plastic woven sacks laminated coated or laminated with any material; and

• Two wheelers, three wheelers and plastic stitching yarn;

The relevant notifications issued have been rescinded and therefore, the said goods will now be liable to tax at 2% against declaration in Form-C w.e.f. 1-4-2016 (Notification No. IX FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016)

1.7 Tax exemption has been provided to sale of crude oil [declared goods as specified u/s. 14(ii-c) of CST Act, 1956 (Notification No. XI FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016)

1.8 The rate of tax on sale of aerated and carbonated non-alcoholic beverages whether or not containing sugar or other sweetening matter or flavour or any other additive including soft drinks and soft drink concentrates (whether in sealed container or otherwise) has been increased to 20% from 14.5% by introducing Entry 7 to the Fourth Schedule to the KVAT Act, 2003 (Clause 7 of the L.A. Bill No. 12 of 2016).

1.9 Execution of works contract of fabrication and erection of structural works of iron and steel including fabrication, supply and erection of iron trusses, purlines and the like is liable to tax at 5.5%. Hitherto, fabrication and erection of all kinds of structural works were liable to tax at the rate of 5.5% (Clause 8 of the L.A. Bill No. 12 of 2016)

2. Input Tax Credits

2.1 Input tax credit may be claimed within 5 months: By introducing a new proviso to Section 10(3) of the KVAT Act, 2003 the claim of input tax credit within a period of 5 months from the end of the month to which the relevant purchase relates to is made effective from 1-4-2015 (Clauses 2(i) & (ii) of the L.A. Bill No. 12 of 2016).

Additional comment

In Karnataka Value Added Tax (Amendment) Bill, 2015 to alleviate the difficulties on account of the judgment of the Hon’ble Karnataka High Court in the case of Centum Industries (80 KLJ 65), the timelines within which the input tax credit is to be claimed is pegged at 5 months from the end of the month in which the input tax credit accrues. The Hon’ble Karnataka Appellate Tribunal in the case of Bharat Earth Movers Limited – STA No. 369/2015 dated 5-1-2016 (BEML) has held that the said amendment was retrospective. In the recent Karnataka Value Added Tax (Amendment) Bill, 2016 to bring-in clarity with regard to claim of input taxes within a period of 5 months from the end of the month to which the relevant purchase relates to, Section 10(3) of the KVAT Act, 2003 has been amended by introducing new proviso to Section 10(3) of the KVAT Act, 2003 to make it effective from 1-4-2015.

In a recent judgment of Sonal Apparel Private Limited W.P. Nos. 22483-22494 of 2015 dated 29-3-2016, the Hon’ble Karnataka High Court has distinguished the case of Centum Industries and held as follows:

‘The Revenue’s reliance on the said judgment is however, wholly misplaced as that was a case where the dealer, having apparently accounted his purchases in June 2006, claimed credit of tax paid on purchases in the month of February 2007. Noting that credit ought to have claimed in the month of June 2006 an error that could have been rectified by filing a revised return within six months, that is by December 2006, the Court disapproved the dealer’s action in claiming credit in the month of February 2007. Therefore, the facts of the said case are entirely different from the case of the petitioners, wherein they have claimed consistently claimed in the month in which they have accounted for the purchases.

Moreover there is nothing sacrosanct about the date of the seller’s invoice as section 10(3) does not, in any way, suggest that input tax credit must be availed in the return filed for the month in which the selling dealer raised his invoice. Despite the same, relying on the judgment in Centum Industries, the Revenue started passing reassessment orders from the end of 2014 denying input tax credit claimed by dealers to the extent it was availed in a month other than the month in which the purchase invoice were raised.’

However, with the amendment of section 10(3) of the KVAT Act, 2003 it is now clear that the claim of input taxes must be made within a period of 5 months from the end of the month to which the relevant purchase relates to.

2.2 Disallowance of input tax credit for non-uploading of e-UPaSS: Input tax credit will be disallowed in respect of a dealer who is mandatorily required to furnish purchase and sales statement and who fails to furnish or furnishes incorrect and incomplete particulars electronically (i.e. e-UPaSS) in the commercial tax department website by issuing a demand notice. However, upon completion of an assessment if the dealer subsequently furnishes particulars in the prescribed form or furnishes correct and complete particulars electronically the jurisdictional Local VAT Officer or VAT Sub-Officer shall withdraw the assessment but the dealer will be liable to penalty at
Rs. 50 per day of default under Section 72(3-A) of KVAT Act, 2003 (Clause 2(iii) of the L.A. Bill No. 12 of 2016).

2.3 Restriction of input tax on inter-State sale of cigarettes: Input tax credit in excess of 2% is to be restricted on inter-State sale of cigarettes against the declaration in Form–C (Notification No. VIII FD 34 CSL 2016 dated 31-3-2016 w.e.f. 1-4-2016).

3. Returns and assessments

3.1 It has now been mandated that the monthly returns shall be filed electronically (Clause 4 of the L.A. Bill No. 12 of 2016).

3.2 In respect of those dealers who file incorrect or incomplete return the Commissioner is empowered to notify the dealers for assessment by a prescribed authority (Clause 5 of the L.A. Bill No. 12 of 2016).

4. Filing of Audit

4.1 It is now been mandated to file the audited statement of accounts and other documents in Form VAT – 240 electronically through the notified website i.e., http://vat.kar.nic.in/ (Clause 3 of the L.A. Bill No. 12 of 2016).

4.2 Non-submission of audited statements and other prescribed documents in Form VAT 240 electronically will be liable to penalty of Rs. 50 for each day of default (Clause 6(ii) of the L.A. Bill No. 12 of 2016).

5. Penalty for revised return

A revised return which either understates a dealer’s tax liability or overstates a dealers entitlement to input tax credit by more than 5% of the actual liability to tax or actual tax credit in comparison with the original return will be liable to penalty equal to 10% of the tax/input tax credit which is understated or overstated (Clause 6(i) of the L.A. Bill No. 12 of 2016).

Additional comment

This amendment has been made to overcome the judgment of the Hon’ble Karnataka High Court in the case of Indus Towers Ltd. 2015 (5) TMI 339 wherein it was held that penalty under section 72(2) of the KVAT Act, 2003 cannot be levied in case where revised return is filed.

‘Imposition of penalty under S. 72(2) of the KVAT Act – Understatement of tax liability – Held that:- Imposition of penalty under S. 72(2) of the KVAT Act was not warranted in the present case – Once a revised return has been filed and accepted by the Department, the original return gets obliterated and the only return which remains for consideration would be the revised return, as there cannot be two live returns pending consideration of the Department. In the present case, as a matter of fact, not only the revised return had been filed by the petitioner, but the same was also accepted by the respondents, and the validity of the revised return is not in question or in dispute. Once the revised return has been accepted and acted upon by the parties, then it is only the revised return which has to be taken as the sole return for the purpose of sub-section (2) of S. 72.

For the prescribed tax period, the return to be considered was the revised return filed on 16-3-2009 and not the original return filed on 20-2-2009, which had been nullified or obliterated after the filing and acceptance of the revised return. Then, it cannot be said that there was any understatement of the tax liability by the petitioner to any extent in its revised return (which was the only return to be considered), as in terms of the said revised return, the entire tax along with interest, had been paid. In such view of the matter, we are of the opinion that in the facts of the present case, the provision of sub-section (2) of S.72 of the KVAT Act would not be attracted.’

B. Karnataka Tax on Entry of Goods Act, 1979

• Mandatory payment of disputed tax, interest and penalty for preferring appeal before First Appellate Authority and Karnataka Appellate Authority is reduced to 30% from 50% to bring it at par with the VAT laws.

• Online filing of Appeals: The website on which the appeals shall be filed may be notified by the Commissioner.

(Clause 6 of the L.A. Bill No. 11 of 2016 w.e.f. 1-4-2016)

The above comments / analysis are based on Karnataka State Budget 2016-17. Every effort has been made to avoid errors or omissions in this write-up. Inspite of this, errors may have crept in. Any mistake, error or discrepancy noted may be brought to the notice of the paper writers.