Karnataka HC sets aside 2007 amendment of KVAT

The High Court of Karnataka has set aside an amendment to the Karnataka Value Added Tax Act by a discriminatory taxation which encouraged businesses to make purchases from outside the state.

Setting aside the 2007 amendment by which the clause 15(5)(e) was inserted in the KVAT Act, a division bench of Justices PS Dinesh Kumar and CM Poonacha recently said, “We are of the opinion that the Amendment is discriminatory in nature and also not in favour of the welfare of the economy of the State as it encourages purchases from outside the State.” The 2007 amendment had a retrospective effect from April 1, 2006.

A single-judge bench had upheld the validity of Section 15(5)(e) but ruled it was prospective in nature.

The businesses which had challenged the amendment filed the appeals before the High Court.

“The effect of Amendment of Section 15(5)(e) is that, if a dealer who has opted for the composition scheme, purchases goods from an unregistered dealer, he has to pay tax payable on such purchase in addition to the composition tax,” the court noted.

The businesses contended that when they made purchases from unregistered dealers in Karnataka, they were made to pay the additional tax.

However, if the purchases were made from outside Karnataka, no such additional taxes were imposed.

The state contended that the clause was inserted so that unregistered dealers in Karnataka register under the KVAT.

The HC, however, said that the State should use its officers to enforce the KVAT rather than target registered users.

It said in the judgement, “We find merit in the argument of the assessees, because the object sought to be achieved by the Amendment is to encourage purchase from registered dealers. This object will fail and instead encourage purchase from dealers outside the State since goods purchased within the State are only taxable and therefore, the object sought to be achieved will not be fulfilled.

We may record that the State has all the machinery such as Tax Inspectors, Flying Squads etc. to identify the URDs and to register them as dealers.” Allowing a batch of appeals, the HC said, “Section 15(5)(e) of the KVAT Act is declared ultra vires Constitution of India.”