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  IPCC May 2010

IPCC May 2010 Tax Paper Solved

Question 1
Question 2
Question 3
Question 4
Question 5
Question 6
Question 7
Question 8



Question 1

Mr. Dinesh Karthik, a resident individual aged 45, furnishes the following information pertaining to the year ended 31.3.2011 :

  • He is a partner in Badrinath & Co. he has received the following amounts from the firm:
Interest on capital at 15% Rs.300000  

Salary as working partner (at 1% of firm's sales) Rs.90000

  • He is engaged in a business in which he manufactures wheat flour from wheat. The Profit and Loss account pertaining to this business (summarized form) is as under:

To

Rs.

By

Rs.

Salaries

120000

Gross profit

1250000

Bonus

48000

Interest on Bank FD 

45000

Car expenses

50000

(Net of TDS 5,000)


Machinery repairs

234000

Agricultural income

60000

Advance Tax

70000

Pension from LIC Jeevandhara 

24000 

Depreciation :

 

 

 

Car

300000

 

 

Machinery

125000

 

 

Net profit

432000

 

 

 

1379000

 

1379000

Opening WDV of assets are as under:


Rs.

Car

300000

Machinery

650000

(Used during the year for 170 days)

 

Additions to machinery

 

New purchased on 23.09.2010

200000

New purchased on 12.11.2010

300000

Old purchased on 12.4.2010

125000

(All assets added during the year were put to use immediately after purchase)

 

Of the total bonus amount, Rs. 15,000 was paid on 11.10.2010

One-fifth of the car expenses are towards estimated personal use of the assessee.

(iii)  In March, 2009, he had sold a house at Chennai. Arrears of rent relating to this house amounting to Rs.75000 was received in February, 2011.

(iv)  Details of his Savings and Investments are as under:

Rs.

Life Insurance Premium for policy in the name of his major son employed in LMN Ltd. at a salary of Rs.6 lacs p.a. Sum assured Rs.200000    

50000

Contribution to Pension Fund of National Housing Bank (this was met partially from out of premature withdrawal of deposit in Post Office Time Deposit made on 12.3.2007 Principal component Rs.55000 and Interest Rs.5000)    

70000

Medical Insurance Premium for his father aged 70, who is not dependent on him    

22000

You are required to compute the total income of Mr. Dinesh Karthik for the assessment year 2011-12 and the tax payable by him. Also indicate whether interest, if any, under sections 234A and 234B are payable, assuming that the return was filed on 28 th September, 2011 .

Computation of interest, if any, is NOT required. 

Solution

Computation of total income of Dinesh Karthik for A.Y.2011-12

Particulars

Details

Amount

Amount

Income from House Property

 

 

 

Receipt of Arrear Rent

 

75000

 

Less : Standard Deduction u/s 24(a) [being 30% of above]

 

22500

52500

Profit & Gains of Business or Profession

 

 

 

Net profit as per Profit & Loss A/c from Prop. Business

 

432000

 

Add : Expenses disallowed but debited to Profit & Loss A/c

 

 

 

Advance Tax

70000

 

 

Depreciation as per Profit and Loss A/c [Rs.300000 + Rs.125000]

425000

 

 

Unpaid Bonus

33000

 

 

Personal Expenses relating to Car

10000

538000

 

 

 

970000

 

Less : Expenses allowable under the head but not debited to Profit & Loss A/c

 

 

 

Depreciation as per the Act

283750

 

 

Less : Income not taxable under the head but credited to Profit & Loss A/c

 

 

 

Interest on Bank FD

45000

 

 

Pension from LIC Jeevandhara

24000

 

 

Less : Income not taxable under the head but credited to Profit & Loss A/c

 

 

 

Agricultural Income

60000

412750

 

Income from Proprietorship Business

 

557250

 

Add : Interest on Capital from Badrinath & Co. [Rs.300000/15%*12%] [Note 2]

 

240000

 

Add : Salary from Badrinath & Co. [Note 2]

 

90000

887250

Income from Other Sources

 

 

 

Interest on Bank FD [Rs.45000 + Rs.5000 (TDS)]

 

50000

 

Pension from LIC Jeevandhara

 

24000

 

Interest on Post Office Time Deposit

 

5000

79000

Gross Total Income

 

 

1018750

Less : Deduction u/s 80C

 

 

 

LIC (Maximum upto 20% of sum assured)

40000

 

 

Contribution to Pension Fund of National Housing Bank

70000

 

 

 

110000

 

 

Subject to maximum of

 

100000

 

Less : Deduction u/s 80D

 

 

 

Medical Insurance Premium for father, a senior citizen [Maximum Limit]

 

20000

120000

Total Income (Rounded off u/s 288A)

898750

Note

1. Computation of Depreciation as per Income-tax Act

Particulars

Details

Amount

Block 1: Plant and Machinery @ 15%

 

 

W.D.V. as on 1/4/2010

650000

 

Add : Purchase during the year

 

 

- On 12/04/2010

125000

 

- On 23/09/2010

200000

 

- On 12/11/2010

300000

 

 

1275000

 

Less : Sale during the year

-

 

 

1275000

 

Depreciation @ 15% [Rs.300000 * 15% * ½ + Rs.975000 * 15%]

168750

 

Additional depreciation @ 20% [Rs.200000 * 20% + Rs.300000 * 10%]

70000

238750

(No additional depreciation is available on second-hand machinery)

 

 

Block 2: Car @ 15%

 

 

W.D.V. as on 1/4/2010

300000

 

Add : Purchase during the year

-

 

 

300000

 

Less : Sale during the year

-

 

 

300000

 

Depreciation @ 15% [Rs.300000 * 15%]

 

45000

Depreciation allowed u/s 32

 

283750

2. Interest and remuneration to partner shall be taxable in the hands of partner, to the extent it is exempted in the hands of firm. Interest @ 12% is exempted in hands of firm. Further, it is assumed that salary to Mr. Karthik is an allowable expenditure in hands of Badrinath & Co.

 

Computation of tax liability of Mr. Dinesh Karthik for A.Y. 2011-12

Particulars

Amount

Tax on Rs.958750 (i.e. agro income Rs.60000 + non-agro income Rs.898750)

141625

Less : Tax on Rs.220000 (i.e. agro income Rs.60000 + maximum exempted limit Rs.160000)

6000

Tax liability

135625

Add : Education cess & SHEC @ 3%

4069

Tax and cess liability

139694

Less : TDS

5000

Advance tax payable

134694

Less : Advance Tax paid

70000

Tax and cess payable (Rounded off)

64690

 

Levy of interest u/s 234A and 234B

Interest u/s 234A : Under this section interest is payable for non filling of income tax return till the due date mentioned u/s 139(1). We assume that Mr. Dinesh is liable to file his income tax return on or before 30/9/2011. Since he filed his return of income on 28/09/2011 i.e. within due date of furnishing return of income, hence, interest u/s 234A is not applicable.

Interest u/s 234B : Under this section interest is payable if at least 90% of the advance tax due has not been paid till 31 st March of the previous year. In this case Mr. Dinesh is liable to pay advance tax of Rs.121225 but he has paid only Rs.70000, which is less than 90% of Rs.134694. Therefore, he is liable to pay interest u/s 234B @ 1% on Rs.64690 for 6 months i.e. April to September, 2011. Assuming tax alongwith interest has been paid on or before furnishing of return of income.

Note : Assessee is also liable to pay interest u/s 234C


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Question 2(a)

Mr. Tenzingh is engaged in composite business of growing and curing (further processing) Coffee in Coorg, Karnataka. The whole of coffee grown in his plantation is cured. Relevant information pertaining to the year ended 31.3.2011 are given below:

 

Rs.

WDV of Car as on 1.4.2010

2,00,000

WDV of Machinery as on 31.3.2010 (15% rate)

15,00,000

Expenses incurred for growing Coffee

3,10,000

Expenditure for curing Coffee

3,00,000

Sale value of cured Coffee

22,00,000

Besides being used for agricultural operations, the car is also used for personal use; disallowance for personal use may be taken at 20%. The expenses incurred for car running and maintenance are Rs.50000. The machines were used in coffee curing business operations.

Compute the Income arising from the above activities for the assessment year 2011-12. Show the WDB of the assets as on 31.03.2011.

Solution

Computation of income of Mr. Tenzingh for A.Y. 2011-12

Particulars

Rs.

Rs.

Sale value of cured Coffee

 

2200000

Less :

 

 

Expenses incurred for growing Coffee

310000

 

Expenditure for curing Coffee

300000

 

Expenses on running & maintaining car incurred in business [Rs.50000 – Rs.10000]

40000

 

Depreciation on Car [80% of [Rs.300000 * 15%] [Note 1]

36000

 

Depreciation on machine [Rs.1500000 * 15%]

225000

911000

 

 

1289000

Less : Agricultural Income [75% of above]

 

966750

 Profit and Gains of Business or Profession

322250

Computation of Written Down Value as on 31.03.2011

Particulars

Car

Machine

W.D.V. as on 1/4/2010

300000

1500000

Add : Purchase

Nil

Nil

 

300000

1500000

Less : Sale

Nil

Nil

 

300000

1500000

Less : Depreciation for the year ending on 31.03.2011

45000

225000

Opening WDV for the next year

255000

1275000

Notes:

1. Depreciation on car is Rs.45000 but only 80% of this would be considered as a business expense.

2. As per amendment to section 43(6), where the income of the assessee is derived, partly from agriculture and partly from business and asset are used for both of said purposes then amount of depreciation shall be calculated as if entire income is derived from the business of the assessee under the head of Profit and Gains of Business or Profession and depreciation so computed shall be deemed to be the depreciation actually allowed.


 

Question 2(b)

Mr. Raj Kumar sold a house to his friend Mr. Dhuruv on 1 st November, 2010 for a consideration of Rs.2500000. The Sub-Registrar refused to register the document for the said value, as according to him, stamp duty had to be paid of Rs.4500000, which was the Government guideline value. Mr. Raj Kumar preferred an appeal to the Revenue Divisional Officer, who fixed the value of the house as Rs.3200000 (Rs.2200000 for land balance for building portion).The differential stamp duty was paid, accepting the said value determined. Assuming that the fair market value is Rs.3200000, what are the tax implications in the hands of Mr. Raj Kumar and Mr. Dhuruv for the assessment year 2011-12? Mr. Raj Kumar had purchased the land on 1 st June, 2007 for Rs.519000 and completed the construction of house on 1 st October, 2008 for Rs.1400000.

Cost inflation indices may be taken as 551 for the financial year 2007-08, 582 for the financial year 2008-09 and 711 for the financial year 2010-11.

Solution

Tax Treatment in hands of Mr. Dhuruv

Acquisition of immovable property below stamp duty value is not considered as income in hand of the purchaser, hence nothing shall be taxable in hands of Mr. Dhuruv.  

Tax Treatment in hands of Mr. Raj Kumar

Computation of Capital Gain for A.Y.2011-12

Particulars

Land

Building

Sale consideration

2200000

1000000

Less : Expenses on transfer

Nil

Nil

Net sale consideration

2200000

1000000

Less : Indexed cost of acquisition

 

 

519000 * 711/551    

669708

 

Less : Cost of acquisition

 

1400000

Less : Indexed cost of improvement

Nil

 

Less : Cost of improvement

 

Nil

Long term capital gain

1530292

 

Short term capital gain

 

(400000)

Note: It is to be noted that in the given case land is a long term capital asset however building is a short term capital asset.


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Question 3

From the following particulars of Income furnished by Mr. Anirudh pertaining to the year ended 31.3.2011, compute the total income for the assessment year 2011-12, if he is:

(i) Resident and ordinary resident;

(ii) Resident but not ordinarily resident;

(iii) Non-resident:

 

Particulars

Amount (Rs.)

(a)

Profit on sale of shares in Indian Company received in Germany

15000

(b)

Dividend from a Japanese Company received in Japan

10000

(c)

Rent from property in London deposited in a bank in London, later on remitted to India through approved banking channels

75000

(d)

Dividend from RP Ltd., an Indian Company

6000

(e)

Agricultural income from lands in Gujarat

25000

Solution

Computation of total income of Mr. Anirudh for the A.Y.2011-12

Particulars

Resident & Ordinarily resident

Resident but not ordinarily resident

Non-resident

Profit on sale of shares in Indian Company received in Germany

15000

15000

15000

Dividend from a Japanese Company received in Japan

10000

-

-

Rent from property in London deposited in a bank in London, later on remitted to India through approved banking channels

75000

-

-

Dividend from RP Ltd., an Indian Company

-

-

-

Agricultural income from lands in Gujarat

-

-

-

Income liable to tax in India

100000

15000

15000

Note:

1. Dividend from an Indian company is exempt u/s 10(34)

2. Agricultural income from a land situated in India is exempt u/s 10(1).


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Question 4

Answer the following questions with regard to the Provisions of the Income tax Act,1961:

a.

State the concessions granted to transport operators in the context of Cash payments under section 40A(3) and deduction of tax at source under section 194-C.

b.
What are the conditions to be fulfilled by a Charitable Trust under section 12A for applicability of exemption provisions contained in sections 11 and 12?
c.
What are the particulars required to be furnished with the return of income, as per section 139(6)?

Solution

a. Amendment u/s 40A(3)

Any expenditure in respect of which payment has been made in excess of Rs.20000 in a day otherwise than by an account payee cheque or account payee bank draft shall be disallowed. However, w.e.f. 01-10-2009 , i n the case of payment made for plying, hiring or leasing goods carriages (hereinafter referred to as Road Transport), the limit of Rs.20000 has been increased upto Rs.35000.  

Amendment u/s 194C

When following conditions are satisfied then tax cannot be deducted:
  1. Amount is paid or payable to a resident contractor during the course of plying, hiring or leasing goods carriage (here-in-after referred to as transport operator).
  2.    
  3. Such operator furnishes his Permanent Account Number (PAN) to the payer.
  4.    
  5. Payer shall furnish prescribed details in prescribed form and within prescribed time to the prescribed income tax authority.
  6.  

b. Following conditions as specified u/s 12A are required to be satisfied for claiming exemption u/s 11 and 12:

(i) Trust should be registered with the Commissioner of Income tax; 

(ii) Trust should submit an application for registration in the Form 10A to the Commissioner of Income Tax; 

(iii) Such application shall be submitted before the expiry of 1 year from the date of creation of trust.; 

(iv) Commissioner can condone the delay if he is satisfied that there were sufficient reasons for not filling application within the time period of 1 year.

c.  The assessee is required to furnish the following particulars in the return of income:

i. Income exempt from tax, 

ii. Assets of the prescribed nature

iii.  Value and belonging to him, 

iv. His bank account and Credit card held by him 

v. Expenditure exceeding the prescribed limits incurred by him under prescribed heads and such other outgoings as may be prescribed. 


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Question 5

Provide brief answer to the following questions on Service tax:

a.  Is Service tax payable in respect of services provided in the Indian territorial waters?

b.  Is Service tax leviable on fee collected by Public authorities while performing statutory functions under the provisions of law?

c.  Can an assessee file a revised Service tax return?

d.  Explain the term “Commercial training or Coaching centre”.

Solution

a.  The sovereignty of India extends to the territorial waters of India and to the seabed and subsoil underlying, and the airspace over, such waters. The law of service tax is applicable to the territorial waters of India and it has been extended to installations, structures and vessels in the territorial waters

b.  Services provided by public authorities are not covered under definition of taxable services provided u/s 65(105) therefore no service tax will be imposed on the fees collected by them while performing statutory functions under the provision of any law.

c.  As per rule 7B of Service Tax Rules, 1994, a service provider may submit the revised return in Form ST-3 in triplicate to correct a mistake or omission, within a period of 90 days from the date of submission of original return.

d. Commercial training or coaching centre: 

i.  means any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the sports , with or without issuance of a certificate and includes coaching or tutorial classes
ii.  but does not include -   
- pre-school coaching and training centre or

- any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for the time being in force


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Question 6(a)

Virat Kholi & Co., a partnership firm, is providing taxable legal consultancy services, for the second consecutive assessment year. The firm furnishes the following information relating to the services rendered, bills raised, amounts received relating to this service, for the year ended 31.3.2011.

 

 

Rs.

(i)

Free services rendered to poor people (value of the services computed on comparative basis)

40000

(ii)

Advances received from clients for which no taxable service has been rendered so far

500000

(iii)

Service billed to clients Gross Amount (Service tax has been charged separately in all the bills; the firm follows mercantile system of accounting)

1200000

(iv)

The firm has received the following amounts during the year: Relating to taxable services rendered in March, 2009 (excluding service tax at applicable rates and TDS under section 194-J of the IT Act,1961 to the tune of Rs.45320)

544680

       

 

Relating to taxable services rendered in current year 2010 (excluding Service tax at applicable rates and TDS under section 194-J or the IT Act,1961 to the tune of Rs.120000) (*includes Rs.50000 for appearance fee before Labour Court received from another firm)

980000*

Service tax has been separately received for applicable items in (iv) above.

You are required to compute the value of taxable services for the year ended 31.3.2011 and Service tax payable, briefly explaining the treatment of each item above.

Solution

Computation of value of taxable service and tax thereon

Particulars

Details

Amount

Free services rendered to poor people

 

Nil

Advances received from clients

 

500000

Service billed to clients

 

Nil

Receipt of value of taxable services provided in March, 2009

 

Nil

Receipt of value of taxable services provided in current year 2010

 

 

Net Receipt

980000

 

Add : TDS

120000

 

 

1100000

 

Less : Fee for appearance before Labour Court, an authority

50000

1050000

Value of taxable services

 

1550000

Service Tax thereon [Rs.1550000 * 10.3%]

 

159650

- Service tax

 

155000

- Education Cess

 

3100

- SHEC

 

1550

Note:

1. Free service is not taxable.

2. Service tax is payable on receipt of value of taxable service provided or to be provided. Thus, advance received shall be taxable.

3. Legal Consultancy service is covered under the purview of taxable service from 01-09-2009, hence receipt against services provided before such date is not taxable.

4. It is to be noted that service tax is separately charged in the bill and accordingly received.

 

Question 6(b)

Answer the following questions on Service tax:

a.  What is the scope of taxable service in respect of membership of Clubs or Associations? State the exception to the same.

b.  Does a service provider have an option to pay Service tax at a rate different from the general rate applicable on gross value of taxable services, in the case of purchase and sale of foreign currency?

c.  What is the late fee payable for delay in furnishing the Service tax return? Can the same be waived?

Solution

a.  Scope of taxable service in respect of membership of clubs or associations

Any service provided or to be provided to its members , by any club or association in relation to provision of services, facilities or advantages for a subscription or any other amount. [Sec. 65(105)(zzze)] E.g. services provided by a club in relation to games, sports, swimming pool, etc. is taxable.

Exemption

i.  Resident Welfare Association : Service provided or to be provided by Resident Welfare Association (Housing Co-operatives Societies in Mumbai) to its member is exempt provided

ii.  The monthly contribution of a member does not exceed Rs.3000 per month; and

iii.  Membership is restricted to members of the residential complex or locality. [Notification No. 8/2007 – ST dt. 1-3-2007 ]

iv.  FIEO and Export Promotion Council : Any service provided or to be provided by the prescribed associations, is exempted upto 31-03-2010:

v.  Membership fees paid to the association without any benefit in return is not taxable as there is no service is rendered to the member.

 

b. Option to money changer

Money changer shall have the option to pay an amount calculated @ 0.25% (plus education cess and SHEC) of the gross amount of currency exchanged. However, such option shall not be available in cases where the consideration for the service provided or to be provided is shown separately in the invoice, bill or, as the case may be, challan issued by the service provider. In that case, tax is paid @ 10.30% on the value of consideration.

 

c.  Late Fees for delayed filing of return may be charged as per following schedule (subject to maximum of Rs.2000):

Delay

Penalty

Up to 15 days

Rs.500

16 to 30 days

Rs.1000

31 days onward

Rs.1000 plus Rs.100 per day from 31 day onwards (subject to max of Rs.2000)

Where the gross amount of service tax is nil, the Central Excise Officer may, on being satisfied that there is sufficient reason for not filing the return, reduce or waive the aforesaid penalty.


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Question 7

Answer the following question on VAT:

a.  What are the items aggregated in the Addition method to calculate the VAT payable? When is this method mainly used?

b.  Is any threshold exemption limit fixed for dealers to obtain VAT registration, as per the White Paper? If yes, why is the same provided?

c. Is the Vat chain continued when a purchasing dealer opts for VAT composition scheme? What is the loss to the seller and buyer opting for the composition scheme, and the subsequent buyers?

d. Can it be said that VAT brings about certainty to a great extent in the matter of interpretational issues? If so, how?

Solution

a.  Addition method or Income Approach

This method aggregates all the factor payments such as wages, rent, interest and profits to arrive at the total value addition on which the rate is applied to calculate the tax. Under this method tax is imposed on exempted goods as well. This method is mainly used with income variant of VAT.

b.  In order to provide relief to the small dealers, small dealers with annual turnover not exceeding Rs 10 lakhs (earlier, limit was 5 lakhs) will not be liable to VAT. It is to be noted that States will have the flexibility to fix threshold limit within Rs 10 lakhs.

c.  If a dealer elects to pay tax under composition scheme then the VAT chain is not continued. Selling dealer who has chosen composite scheme will not be allowed to claim any credit for input tax paid on purchases made by him. Further, he will not be entitled to issue tax invoices to the buyer due to which buyer would not be entitled to claim credit of any input tax from his own output tax.

d.  VAT is simple, rational and uniform in its applicability. The mechanism of VAT is based on transactions. The VAT is also broad-based and applicable to all sales leaving very little room for different interpretations. Thus, this system brings certainty to a great extent


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Question 8(a)

Mr. X. a dealer in Mumbai dealing in consumer goods, submits the following information pertaining to the Month of March, 2011:

i.  Exempt goods ‘A' purchased for Rs.200000 and sold for Rs.250000.

ii.  Goods ‘B' purchased for Rs.225000 (including VAT) and sold at a margin of 10% profit on purchases (VAT rate 12.5%);

iii.  Goods ‘C' purchased for Rs.100000 (excluding VAT) and sold for Rs.150000 (VAT rate 4%);

iv.  His unutilized balance in VAT input credit on 1.3.2011 was Rs.1500.

Compute the turnover, Input VAT, Output VAT and Net VAT payable by Mr. X.

Solution

Computation of turnover

Particulars

Working

Turnover



Exempted

12.5%

4%

Goods A

Exempted

Nil

 

 

Goods B

[Rs.225000/112.5% * 100%] * 110%

 

220000

 

Goods C

 

 

 

150000

Turnover

 

Nil

220000

150000

Output tax

 

Nil

27500

6000

Computation of VAT Payable

Particulars

Amount

Amount

Opening balance of unutilized Input Credit

 

1500

Add : Input Credit availed during the period

 

 

On purchase of Goods A, being exempted

Nil

 

On purchase of Goods B [Rs.225000/112.5% * 12.5%]

25000

 

On purchase of Goods C [Rs.100000/104% * 4%]

4000

29000

Input credit available

 

30500

Less : Output VAT

 

 

On sale of Goods B

27500

 

On sale of Goods C

6000

33500

VAT Payable to the Government

3000


 

Question 8(b)

Answer the following questions on VAT:

a.  What are the merits of VAT in the context of tax evasion, neutrality and transparency?

b.  State the importance of VAT invoice/tax invoice in administering VAT.

c.  Discuss the tax consequences of Stock transfer under the VAT scheme

Solution

a.  Merit of VAT

Tax evasion

It eliminates not only sales tax evasion but also reduces income tax evasion. The input tax credit system encourages trades to collect invoice which will lead to more transparency and shall allow several tax departments to apply “cross check”.

Neutral in decision making

As it eliminates cascading effect which makes decision of a investor tax-neutral. In other words, where all other things remain unchanged, the issue of tax liability does not vary the decision about the source of purchase.

Transparency

VAT mechanism encourages the maintenance of proper records and transparency for availing benefit of input credit. In the mechanism, buyer knows the tax component in the total consideration. Further, Government also knows the amount of tax at each stage which is beneficial in avoiding tax evasion.

 

b.  The invoice plays a vital role in the mechanism of VAT. In the absence of invoice, VAT paid by the dealer earlier cannot be claimed as set-off. In other words, in the absence of invoice, input tax credit is not available to the dealer. Thus, it is helpful in: 

i. availing and determining the amount of input tax credit 

ii. preventing cascading effect of taxes; 

iii. charging tax on value additions 

iv. Facilitating multi-point tax 

v. performing audit and investigation effectively 

vi. cross-checking

vii.  checking evasion of tax.

 

c.  Inter-State transfer to branch offices is not a sale; hence they are not subjected to tax under VAT. However, the tax paid on:   

  • Inputs used in the manufacture of finished goods which are stock transferred; or
  •      
  • Purchases of goods which are stock transferred
will be available as input tax credit after retention of 4% of such tax by the State Governments.  

E.g. If Mr. X of Orissa, transferred goods of Rs.100000 to its Karnataka branch, then input tax credit availed of on purchase of such goods (say Rs.12500/-) is required to be reversed to the extent of Rs.4000 and Mr. X of Orissa will enjoy the credit of Rs.8500/-. This is called ‘Reversal of Input tax Credit'


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