SEZ & VAT. Prepared by Mr. HEMANT DESAI Advocate VAT SURAT

Transcription

1 SEZ & VAT Prepared by Mr. HEMANT DESAI Advocate VAT SURAT 1) Dealer who desire to execute indivisible works contract has to obtain registration under the Gujarat Value Added Tax Act, 2003 (for short as Act, 2003 ) as well as the Central Sales Tax Act, 1956 (for short as Act, 1956 ). Such dealer also has to approve their name as developers from the competent authority of Union of India legislation, Special Economic Zone Act, 2005 (for short as Act, 2005 ) vide sub section (10) of section 3 than they become eligible to execute the work in Special Economic Zone (for short as SEZ ). After the said formality assuming such dealer in the State of Gujarat has entered into SEZ unit in written agreement for a price in lump sum, for execution of work various materials they have to procure i.e. cement, steel, electrical goods, sanitary ware, paints, bricks, building materials, etc. All these materials are mostly available within local domestic market as well as outside State. The local domestic vendors charge VAT separately in their commercial invoices also called tax invoice, while as out State vendors do not charge CST against strength Form I. With regard to the Act, 2003 the activity of the dealer is deemed sales, it attract VAT liability. The Act, 2003 provides option, composition scheme and normal scheme. Such dealer should not opt for composition and prefer to remain in normal scheme. Under the indivisible works contract the transfer of property only takes place during execution of contract. The legal fiction is created on such transfer is a deemed sale, hence of those goods is legal fiction has been created to tax sale or purchase of goods involved in the execution of a works contract. In other words such deemed sale are relatable to those goods, i.e. each individual goods transfer of property in which takes place in the execution of a works contract. The transfer of property in goods will takes place on the principle of accretion in the case of immovable property. Such transfer of property in goods will takes place only in respect of goods

2 belonging to the contractor. In the normal circumstances any dealer carrying such activity shall be liable to pay tax but being in the SEZ area which is designated tax and duty free enclave they apprehend that such tax does not attract. Therefore they desirous to know the statutory obligation for deposit of tax and/or refund of tax for purchases to be affected from registered dealer of State Government as such vendors shall collects tax in the invoices at the time of sales of goods and very goods shall be used in the execution of indivisible works contract. 2) Perusal to the facts stated herein above, it is crystal clear that the matter is interconnected, with SEZ Law of State and Union as well as VAT Law. Merely referring to provisions of VAT Law answer would not justify. Therefore to avoid the clash, conjoin reading of relevant provisions under all the three Laws is very much essential. Prima facie, refer to the head note overriding effect of Act, under the Gujarat Special Economic Zone Act, 2004 (for short as Act, 2004 ), expression this act shall have effect notwithstanding anything contained in any other law conveying the idea of a provision yielding place over the other Law to which it is made. In unfold fact the language of Act, 2003 is controlled by Act, 2004 which has come into force on the 10 th February, Its cardinal principle that the fiscal statute shall have to be interpreted on the basis of the language used therein, and it must be enforced. Legislatively Act, 2003 and Act, 2004 stand of same State, under the juxta position which would prevail over other needs to be answer. Under the statutory interpretation non obstante clause expression notwithstanding anything contained in any other law enumerated in Act, 2004 has significant role to play and the scope for levy of VAT becomes limited. It confers the jurisdiction over the Act, The said Act, 2003 does not have the similar non obstante clause. 3) Before I make attempt to deal with the query in interpretation of taxing statute, the well settled principle is that the scheme and spirit of the Act need to be understood first, taxing statue has a fiscal philosophy without a feel of which a correct perspective to gather the intent and effect of

3 various clauses cannot be gained. This view is fortified by the apex court decision in Controller of Estate Duty v. Kantilal Trikamlal (1974) 4 SCC 643 at It is further well settled that in order to ascertain the true meaning of the terms and phrases employed, it will be legitimate to call in aid other well-recognised rules of construction. Such as legislative history, the basic scheme and framework of the statute as a whole, each portion throwing light on the rest, the purpose of the legislation, the object sought to be achieved, and the consequences that may flow from the adoption of one in preference to the other possible interpretation. It is settled principle of law that wherever the inference arises for the purpose of interpretation of a statute the entire statute is to be read in its entirety. The purport and object of the Act must be given its full effect and in case of this nature, principles of purposive construction must come into play. The fundamental principle in the construction of statutes is that the whole and every part of the statute must be considered in the determination of the meaning of any of its parts. In construing a statute as a whole two principle results to clear up obscurities and ambiguities in the law and to make the whole of the law and every part of it harmonious and effective. It is presumed that the Legislature intend that the whole of the statute should be significant and effective. Different sections, amendments and provisions relating to the same subject must be construed together and read in the light of each other. Every statute must be construed ex vigoenibus actus, that is, within the four corners of the Act. When the taxing authority is called upon to construe the term of any provision found as a statute, they should not confine its attention only to the particular provision, which falls for consideration. But the authority should also consider other parts of the statute, which throw light on the intention of the Legislature and serve to show that the particular provision ought not to be construed as if it stood alone and apart from the rest of the statute. Every clause of a statute should be construed with reference to the context and other clauses of the statute so as, as far as possible, to make a consistent enactment of the whole statute. This is the settled position of law in CIT v. Amin (1972) ITJ 300, 307 SC (Bhagwati, C.J.); also in Vaddeboyina Tulasamma v. Vaddeboyina Sesha Reddi, AIR 1977

4 SC 1977 at p. 1948: (1977) 3 SCC 99. Warren, C.J. observed in Richards v United States, 7L Ed 2d 492, 499: 359 US 1. "We believe it is fundamental that a section of a statute should not be read in isolation from the context of the whole Act, and that in fulfilling our responsibility in interpreting legislation we must not be guided by a single sentence or a number of sentence, but should look to the provisions of the whole law and do its object and policy". 4) The object of the Act, 2005 is to provide development and management for promotion of exports and for matters connected therewith or incidental thereto. Such law has been thought with a view to augmenting world class infrastructural facility and hassle free environment for export production like separate iceland within country. This legislation has strong root in economic reality of this century. In the reform process SEZ concept has been conceived from China, our Country has adopted model of SEZ to attract the export related foreign direct investment and offered level playing filed. It has been viewed as vehicles for growth of Indian exporter. Concessions and tax exemptions are offered to the operations in SEZ that has appeal businessmen in the Country and abroad to set up manufacturing hubs in country. In succinct facts SEZ is a one stop shop for the exporters, to avail the various fiscal benefits which include exemption from duties of Central Excise, duties of Customs, Income Tax, Service Tax, Central Sales Tax and various State levies. Most of these exemptions are available also to those exporters who are located in the Domestic Tariff Area (for short as DTA ) but they are the procedural simplifications regarding availment of fiscal incentives enumerated above and also the very conscious, deliberate and positive attempt and attitude of the Central Government which make SEZ very attractive destination for the exporters. The desirous of developing SEZ shall benefit to the nation from view point of international trade. Because of the SEZ, other units manufacturing products would be benefited. The infrastructure facilities and amenities like development of land, roads, buildings, railways, port, water supply, entertainment facility, multi-media, transport, production facility, and information technology would be established of international standard. The law provides that the Development

5 Commissioner of SEZ shall ensure speedy development. To set up unit in SEZ, the applicant shall submit a proposal to the said authority with required particulars. In time bound schedule the Approval Committee shall inform the entrepreneur. On approval of proposal the Development Commissioner shall issue Letter of Approval for setting up unit. The entrepreneur or developer than shall execute bond cum legal undertaking with regard to obligations regarding proper utilization and accounts of goods, including capital goods, spare, raw materials, consumables, fuel, and achievements for positive of positive net foreign exchange. In the context of Government of India guideline for establishment of SEZs, the Government of Gujarat also decided to implement the same policy in the similar sprit passed the resolution no. SEZ G dt and promulgated the Ordinance, also upon receiving the assent of the Hon ble President of India the State Government published the Gazette on for the Gujarat Act no. 11 of 2004 i.e. Act, ) The reason for the Act, 2003 welfare State requires money for running the administration as well as for implementation of welfare policies of the Government. The major contribution is raised through indirect taxation. To meet with the object it has been introduced in order to bring uniformity throughout the country with regards to taxation on sales, and also introduced in the State of Gujarat from Salient feature is, input tax credit (for short as ITC ) of tax paid on purchase is to be given against the tax liability incurred on the sale. Briefly the effective tax would become leviable on value addition at every stage of sale transactions. Thus, the ITC is available at the point of purchase of goods itself, if the purchased goods are intended for the specified purposes stated in section 11(3)(a) of the Act, Thus the ITC available in relation to purchases of taxable goods purchased for the intended purposes is neither dependant nor related either to sale of very goods purchased or to the sale of manufactured from the goods purchased. On bare perusal of section 11(3)(a) of the Act, 2003 one will find that the ITC is available only to registered dealer on his sales or deemed sales of any taxable

6 goods. Therefore precisely, there is no pyramiding effect of tax in trade and commerce. 6) Relevant statutory provisions of Act, 2005 reads as under: 2. Definitions In this act, unless the context otherwise requires, (g) Developer means a person who, or a State Government which, has been garnted by the Central Government a letter of a approval under sub section (10) of section 3 and includes an authority and a co-developer. (h) Development Commissioner means the Development Commissioner appointed fo one or more Special Economic Zones under sub section (1) of section 11. (m) Export means, (i) taking goods, or providing services, out of India from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise, or (ii) supplying goods, or providing services, from the Domestic Tariff area to a Unit or Developer, or (iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone, (o) Import means, (i) brining goods or receiving services, in a Special Economic Zone, by a Unit or Developer from a place outside India by land, sea or air or by any other mode, whether physical or otherwise, or (ii) receiving goods, or receiving services by a Unit or Developer from another zone or a different Special Economic Zone, (za) Special Economic Zone means each Special Economic Zone notified under the proviso to sub section (4) of section 3 and sub section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone. 55. Power to make rules. The Central Government may, by notification, make rules for carrying out the provisions of this Act. 58. Savings All rules made or purporting to have been made or all notifications issued or purporting to have been issued under any Central Act relating to the Special Economic Zones shall, insofar as they relate to matters for which provisions is made this Act or rules made or notification issued there under and are not inconsistent therewith, be deemed to have been made or issued under this Act as if this Act had been in force on the date on which such rules were made or notifications were issued had shall continue to be in force unless and until they are superseded by nay rules made or notifications issued under this Act. 7) Relevant statutory provisions of Union SEZ Rules, 2006: 5. Requirement for establishment of a Special Economic Zone

7 Before recommending any proposal for setting up of a Special Economic Zone, the State Government shall endeavour that the following are made available in the State to the proposed Special Economic Zone Units and Developer, namely: a) exemption from the State and local taxes, levies and duties, including stamp duty, and taxes levied by local bodies on goods required for authorised operations by a Unit or Developer, and the goods sold by a Unit in the Domestic Tariff Area except the goods procured from domestic tariff area and sold as it is. 8) Relevant statutory provisions of the Act, 2004 reads as under: 21. State taxes and Levies. (1) All sales and transactions within the processing area of the Zone shall be exempt from all taxes, cess, duties, fees or any other levies under any State law to the extent specified below: Stamp duty and registration fees payable on transfer of land meant for approval units in the Zone. Levy of Stamp duty and registration fees on loan agreements, credit deeds and mortgages executed by the unit, industry or establishment set up in the processing area of the Zone. Sales Tax, Purchase Tax, Motor Spirit Tax, Luxury Tax, Entertainment Tax and other taxes and cess payable on sales and transactions. (2) Inputs (goods and services) made to Zone Units from Domestic Tariff Area shall be exempted from sales tax and other taxes under the State laws. (3) The Developer shall also be entitled to the benefits of exemption provided in subsections (1) and (2) for the entire Zone. (the above clause has been amended on wherein the motor sprit specified in schedule III of the Act, 2003 has been excluded as the hard copy of text is not available the prior to amended section is reproduced). 22. Overriding effect of Act. The provisions of this Act shall have effect notwithstanding anything contained in any other Law for the time being in force. 9) Relevant statutory provisions of the Act, 1956 reads as under: Section 8, (6) Notwithstanding anything contained in this section, no tax under this Act shall be payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter-state trade or commerce to a registered dealer for the purpose of setting up, operation, maintenance, manufacture, trading, production, processing, assembling, repairing, reconditioning, reengineering, packaging or for use as packing material or packing accessories in an unit located in any special economic zone by the developer of the special economic zone, if such registered dealer has been authorised to establish such unit to develop, operate and maintain such special economic zone by the authority specified by the Central Government in this behalf. (7) The goods referred to in sub-section (6) shall be the goods of such class or classes of goods as specified in the certificate of registration of the registered dealer referred to in that sub-section.

8 (8) The provisions of sub-sections (6) and (7) shall not apply to any sale of goods made in the course of inter-state trade or commerce unless the dealer selling such goods furnishes to the prescribed authority referred in sub-section (4) a declaration in the prescribed manner on the prescribed form obtained from the authority specified by the Central Government under sub-section (6) duly filled in and signed by the registered dealer to whom such goods are sold. Explanation: For the purpose of sub section (6), the expression special economic zone has the meaning assigned to it in clause (iii) to Explanation 2 to the proviso to section 3 of the Central Excise Act, 1944 (1 of 1944). 10) Relevant statutory provisions of the GVAT Rule, 2006: Proviso in Rule 37, to sub rule (5), Provided that the Commissioner may grant provisional refund for an amount not exceeding ninety percent of the amount claimed in the return furnished by the specified dealer, developer or co-developer of the Special Economic Zone in the circumstances specified above. 11) Perusals to above enactments which are in field, except the Act, 2003 the enactment of the Act, 2005 and Act, 2004 contain non obstante clause stating that notwithstanding anything contained in any other law. The centred controversy can be resolved by looking at purpose and policy. The test be applied is that of the two enactments of same State, Act, 2004 is special one, therefore cardinal principle of law is that for answer the special law will prevail over general law. Another test is object and policy of the relevant statute be observed. Refer to the preamble of the policy regarding establishment of SEZ in Gujarat it has been announced with view to augmenting infrastructure facilities for export production. To meet the object, rules are farmed by the Union Government, precisely it is framed by virtue of section 55. Rule 5, refers that before recommending the proposal the State Government shall endeavour the exemption from State taxes in determined circumstances. Abide by the said Rule the State Government in enacting the Act, 2004 vide section 22 provided a non obstante clause, it is drawn out by a section with a view to give the enacting part of the section in case of conflict, an overriding effect over other Acts is mentioned. It is equivalent to say that besides two Acts, the Act in which mentioned of the non obstante clause, the provision shall have full operation or the provisions embraced with the non obstante clause will not be an impediment for the operation of the enactment or the other Act as there is no clause occurs

9 of non obstante. Refer to Principles of Statutory Interpretation 10 th Edition page 349, Justice G.P. Singh; O.N.Bhatnagar V. Rukibai Narsindas (Smt), AIR 1982 SC 1097 the Court had occasion to resolve the conflict of Rent Act and Society Act. Section 28 of Rent Act, which opens with the words notwithstanding anything contained in any law, which confers jurisdiction over small causes Bombay to entertain any try suits for recovery of rent and possession between a landlord and tenant. Section 91 of the Co-operative Society Act, which also open with similar non obstante clause, provides that any dispute touching the business of society shall be referred to the Register if both the parties thereto are one or other of the following namely, a present or past member, or a person claiming through member. Construing the provisions of two Acts, it has been held that even in respect of tenant co-partnership type the housing society whose business includes acquiring and letting out building to its members, a claim by society to eject a deemed tenant who was let in by a member would be entertain able by court of small causes under the Rent Act and not by the Registrar under Co-operative Societies Act was the latter Act, the Rent Act was special law relating to protection and eviction or tenants and so must prevail over the provisions of the Cooperative Society Act. The said settled principle would squarely apply to the case in hand as the facts and circumstances are quite parallel. 12) Normally the use of a phrase by the Legislature in a statutory provision like notwithstanding anything contained in any other law is very rare. Use of such expression is another way of saying that the provision in which the non obstante clause occurs would wholly prevail over other provisions of the other Acts. Non obstante clauses are to be regarded as clauses which remove all obstructions which might arise out of the provisions of any other law in the way of the operation of principle enacting provision to which the non obstante clause is attach. 13) On a natural and ordinary meaning being accorded and on a fair construction of the words used in the enacted section 21of the Act, 2004 it is clear even after the amendment all sales and transactions within the

10 processing area of zone or in demarcated area or between the inter unit of zone be exempted from all taxes, cess, duties, fees, or any other levies under the State Law. It is true that implementation of Act, 2003 in the present case, the levy of tax, on the deemed sale attracts schedule rate of tax but reading together with the Act, 2004 the exemption has also been declared by non obstante clause. In view of conjoin reading of the parallel Laws the non obstante clause contained in Act,2004 the enacted part of section 21 of the Act, 2004 shall, in the case of conflict, have an overriding effect over the provisions of section 7 of the Act, As stated supra the scheme and spirit of the Act need to be understood first, taxing statue has a fiscal philosophy. In order to ascertain the true meaning of the legislative history, the basic scheme requires to be kept in mind otherwise the object will be defeated. To avoid the clash, both the statutes are to be read in harmonious manner in its entirety together the purport and object of the Act, the expression used in overriding effect must be given its full effect to reach to purposive. In parameter the SEZ policy is aimed to provide internationally competitive and hassle free environment for export production. SEZ is meant to be a designated duty free enclave. It is universal knowledge that exporters have to export in a competitive foreign market even by incurring loss, even then to encourage them they needed incentives. Duty and tax is one of the areas which only allow them hassle free environment and by relief they will concentrate to produce quality product with lower cost. 14) Keeping in mind the above stated principles and refer to above statutory position of law, in order to give full meaning and to determine a correct legislative intent, SEZ has been specifically delineated duty free enclave. It has been deemed to be foreign territory for the purpose of manufacturing operations, duties and tariffs. Goods going into SEZ area from DTA shall be treated as exports. Similarly, the goods coming from the SEZ area into DTA shall be treated as if these are being imported in India. In important feature zone shall be set up by private sector or by State Government in association with private sector. State Government shall have lead role in setting up of SEZ.

11 15) Another way of looking is that where there is an apparent conflict between two Acts, one must try to ascertain the pith and substance or the true nature and character of the conflicting provisions. It is a fundamental canon of law that whilst it is possible for both the Centre and the State to interpret upon and explain certain words or expressions used in taxing statutes amongst others, a certain uniformity should prevail in order to avert inconvenience and harassment resulting to the persons affected by such an interpretation or ruling. Article 261 of the Constitution of India is a pointer to this effect and provides that full faith and credit shall be given throughout the territory of India to public acts of the Union. It cannot be disputed that the opinions and the decisions taken by the Government of India under the Indian Tariff Act and the Excise Acts are such public acts then it is not open to State to treat it otherwise. This view is fortified by decision reported in (1968) 21 STC Kishanchand Chellaram and Others v. JCTO and others. That the goods namely fabrics are subject to the additional duty of excise under the Additional Duties of Excise (Goods of Special Importance) Act, 1957, and there has not been any controversy about the character of the goods at any time. The appellant were of the view that by virtue of the agreement between the State and the Central Government, the Centre is collecting the additional excise duty on the fabrics and distributing a portion of the same out of the consolidated fund to the State, and that in respect of these fabrics the State cannot levy sales tax. It is also significant to note that the Additional Duties of Excise (Goods of Special Importance) Act was passed after a deep consideration of the mutual interests and benefits the Centre and the States should and ought to derive by such an imposition. This can be seen from the Finance Commission's Report preceding the passing of the Additional Duties of Excise (Goods of Special Importance) Act and this has been referred in the counteraffidavit filed on behalf of the Central Government. Such being the essence of the bargain between the Centre and the States, when the additional excise duty was imposed on artificial silk, it is not ordinarily open to the State, who did not at any time choose to impose a levy on

12 the products under consideration ever since the passing of the Madras General Sales Tax Act, 1959, to take up a view contrary to that practice and understanding and arbitrarily decide to levy sales tax on the goods in question on the foot that they are not artificial silk. The Court relying upon the referred Constitution held that levy of tax is illegal. Herein Act, 2005 is public Act enacted by Union, hence as per Constitution Article 261 effect thereof is must and full faith be given that the object of it not frustrated. If the State intended to levy tax than it becomes contrary to the nations object. It is true that after implementing the Act, 2003 the State Government till date has failed to issue corresponding necessary notification to grant exemption and provide deduction for claming smooth refund. In absence of such amendment it will be ridiculous to demand tax from SEZ Unit. 16) On 30 th August 2007 GVAT Rule 2006 has been amended. A proviso has been added to Rule 37, to sub rule (5), thereby the intention can be gathered of State Government that specified dealer, developer or codeveloper of the SEZ in the circumstances specified like tax credit remains unadjusted in the return continuously in each month of the quarter than such dealer shall make application in Form 306 for claiming refund. Though the rule speaks for refund but in absence of necessary amendment in section 5(2) of the Act, 2003 granting of refund is not simple, the amendment in rule cannot fasten the liability. It appears that the rule making authority has misinterpreted the Act, It has been vitiated. The basic thing is that Rule cannot override the Act, hence for granting the exemption or refund the Act must spell something, that in absence of amended under the existing provisions of law the deduction from sales or deemed sale cannot be given effect and taxable balance is not reduced the claim of refund can not be asked or authority would not pass any order. For the implementation of rule to avail the refund, deemed sales deduction be granted under the Act, 2003 is must. By amendment in Rule only clear intention of the Government becomes transparent that positive sign is indicated and nothing more.

13 17) To give effect to the above Rule till the desired amendment is not made in the present circumstances the statutory compliance be made by asking deduction under section 5(2) of the Act, A shelter is possible, certificatory letter of understanding of the provisions of Law and sought deductions in tax returns be filed to avoid the consequences of offences and penalties. Such application will avoid allege statement of falsely, knowingly, fails to furnish returns incorrect return or pay tax. Briefly, the understanding of Law must reflect on paper. To resolve the issue early the poser also can be made through asking question vide section 80 (e) of the Act, Since there being no proceeding at the movement under section 33, 34 or 35 or before the Court the Commissioner shall pass order determining such question. 18) To extend the benefit of exemption from payment of CST to individual units in SEZ for setting up, operation, repairing, reconditioning, packing and maintenance of such units and also to developers of SEZ who develop, operate and maintain such SEZ sub section (6) of section 8 of the Act, 1956 has been brought in to statute by Clause 118 of Finance (No.2) Act, By this amendment dealer selling goods in the course of inter State trade or commerce to registered dealer under the aforesaid sub section or sub section (8) of section 8 or under sub section (1) of section 5 of the Act, 1956 shall obtain Form I duly signed by SEZ dealer himself. This is the position after the rule 12(11) which has been amended on read with section 8(8) of the Act, ( Prior to said amendment Form I was to be issued countersigned and certified by the authority specified by the Union Government authorising the establishment of the unit in the SEZ under section 76A of the Customs Act, 1962 that the sale of goods is for the purpose of establishing a unit in such zone). Goods which the developer or SEZ unit requires are to be specified in the registration certificate vide section 8(7) of the Act, This clause also begins with notwithstanding anything contained in this Act. This with view to give effect over other provisions of Act. This is non obstante clause. Such enacted part cannot cut down the scope and ambit when phrase is used by non obstante clause. Its legislative devise to modify the ambit of the provision.

14 19) However in case of doubt or dispute, it is well settled, that construction has to be made in favour of the taxpayer and against the revenue. See Sneh Enterprises v. CC, New Delhi (2006) 7 SCC 714. In Ispat Ind. Ltd. v. CC Mumbai, (2006) 12 JT 379; (2006) 9 SCALE 652, the Supreme Court opined that: if there are two possible interpretations of rule, one which sub serve the object of a provision in the present statute and the other which does not, we have to adopt the former, because adopting the latter will make the rule ultra vires the Act. In the backdrop of above, through sufficient guideline for determination of turnover in the hands of dealer, my answer is an emphatic that they shall not be liable to pay VAT. Section 21 and 22 of the Act, 2004 is of wide amplitude, it confers powers over the Act, 2003 and hence scope of levy of VAT becomes limited, if demanded shall be ultra vires. SURAT HEMANT DESAI ADVOCATE