The Supreme Court of India upheld the decision of the High Court of Judicature at Madras has dismissed a batch of writ petitions which challenged the constitutional validity of the provisions of the Tamil Nadu Value Added Tax Act, 2006.
A White Paper released by the Committee of Finance Ministers in 2005 proposed that Input Tax Credit (ITC) would be available to set-off against tax liability on all intra-state and inter-state sales. However, the Tamil Nadu Legislative Assembly passed the Tamil Nadu Value Added Tax Act, 2006, under which one of the provisions laid down that ITC would not be allowed on the purchase of goods sold as such or used in the manufacture of other goods and sold in the course of inter-State trade or commerce, to an unregistered dealer under another State. Moreover, a notification issued by the Government of Tamil Nadu mandated the necessity of a Form ‘C’ in order to avail ITC.
The Central Sales Act, 1956 makes this distinction between registered and unregistered dealers. In this case, the State Government was the dealer, and the question was whether the Government was a registered or unregistered dealer.
The High Court had noted the specific stand taken by the State Government to the fact that in respect of unregistered dealer in other States, the State of Tamil Nadu has no mechanism to prevent evasion of tax and loss of revenue cost by trade with such unregistered dealers in the State of Tamil Nadu. Therefore, the provision was aimed at achieving a specific and justified purpose and could not be treated as discriminatory, and thus not unconstitutional. The purpose of inserting provisions denying ITC was to protect the Government Revenue against clandestine transactions resulting in the evasion of tax.
With regards to Form ‘C’, the Supreme Court bench comprising of Justice held that in those cases where a dealer makes sales exclusively to the other State Government(s), benefit of ITC would be allowed without insisting on the furnishing of Form ‘C’. The Supreme Court clarified that when dealers who are making sales exclusively to the other State Governments (i.e. outside the State of Tamil Nadu), the said States would be deemed as registered dealers for the purposes of availing benefits of ITC.
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