State bound to Recover differential VAT from dealers: Kerala High Court upholds Validity of Demand Notices [Read Judgment]

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The Kerala High Court while upholding the validity of the demand notices ruled that the state is bound to recover differential Value Added Tax (VAT) from dealers.

When the compounded tax for dealers in ornaments or articles of gold, or other metals were retrospectively amended for the year 2011-12, the dealers raised a challenge against the collection of differential tax. Several writ petitions were filed before the Court. 

The Single Judge allowed all the writ petitions after concluding that the differential tax attempted to be collected from the writ petitioners for the assessment year 2011-12 was legally unsustainable and accordingly quashed all the impugned orders/demand notices. The department has come up in these appeals contending that the retroactive operation of the compounded rate of tax was within the scope of the Government’s authority and the consequential collection of differential tax was legally valid.

The writ petition was preferred when the dealer was directed to pay the balance tax due under the newly introduced compounded rate of tax. It was contended that the compounded tax being in the nature of a contract, the Government was estopped from demanding compounded tax at a higher rate sanction was granted by the assessing officer to pay tax under the compounded scheme, that too in instalments.

The division bench of Justice S.V. Bhatti and Justice Bechu Kurian Thomas held that the retrospectivity of tax or its collection brought in by the Finance Act 16 of 2011 is not controlled by the validation clause in section 12 of that Act.

“We are of the view that the State was bound and entitled to recover the differential tax from the dealers and the demand notices were issued in valid exercise of power,” the court ruled.

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