Published Editorial

No VAT on distribution of prizes

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The Financial Express

by

Amit Bhagat
Associate Director - Tax & Regulatory Services
EY

We have recently launched a new product in the market. Under a promotional scheme, we will be distributing free prizes to buyers of our products under a lucky draw scheme. Please clarify whether we need to pay

VAT on distribution of such free prizes?

Value added tax (VAT) is levied on sale of goods. The term ‘sale’ has been defined under the Central Sales Tax Act, 1956 and other state VAT legislations as transfer of property by one person to another for a valuable consideration. One of the essential conditions for a transaction to qualify as sale is that it should be for a valuable consideration.

We understand that you would be distributing the prizes free of cost i.e. no consideration/price has been charged or received with respect to the distribution of the goods. Further, the distribution of the prizes is not integrally connected with the sale of the products originally sold by you (since the sale of the original product only entitles the purchaser to a lucky draw coupon). Since there is no sales consideration, the distribution of prizes should not qualify as ‘sale’. So, VAT should not be applicable .
Service tax exemption for restaurants

We own an air-conditioned hotel, with a restaurant within its premises. The restaurant is an open air one which also serves liquor. The restaurant is not air-conditioned. Our accountant has informed us that the w.e.f April 1, 2013, service tax would be levied on services provided from the restaurant. Please clarify.

Prior to April 1, service tax was applicable on services provided by a restaurant having an air conditioned facility and a licence to serve liquor in its premises. Hence, prior to April 1, service tax was applicable on restaurants having both a licence to service liquor and air-conditioning facility.

However, w.e.f from April 1, exemption from service tax has been provided to only services offered by a restaurant other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year.

Hence, the service tax exemption has been restricted to restaurants having no air conditioning facility in any part of the premises. It appears that in case any part of the establishment of a restaurant is air-conditioned, the benefit of the service tax exemption will not be available.

In your case, even though the restaurant is not air-conditioned, since the establishment (the hotel) in which the restaurant is situated is air-conditioned, service tax exemption may not be available to you. However, since this is a new change in the law and there is a lack of clarity, a representation may be filed with the authorities for obtaining clarification on the same.

Excise duty on deferred VAT

We manufacture and sell catalytic converters. In one of the states of operation we had obtained a VAT incentive scheme under which we were required to charge the full amount of VAT but pay only half of the VAT to the department. The remaining half was payable upon termination of the scheme. The excise authorities have issued a notice demanding excise duty on the amount of VAT payment deferred. Is the view of the excise department correct?

In cases where the goods are sold to unrelated entities and the goods are sold for delivery at the place of removal, excise duty is payable on the transaction value.

Transaction value includes the price actually paid or payable but does not include the amount of excise, VAT and any other taxes actually paid or actually payable for such goods. The definition does not provide for the date or period of payment of such taxes, to be excluded from the transaction value.

In the present case, the total amount of VAT charged from the customers is not paid to the VAT department. Half of the amount charged is paid at the prescribed due date. The balance half is payable, but upon termination of incentive the scheme. It is important to bear in mind that the balance half of tax (payment of which is deferred) is actually payable to the VAT department but only after a prescribed milestone i.e. termination of scheme.

The amount of VAT (payment of which is deferred as per the incentive scheme) is actually payable by the company. Accordingly, the contention of the excise authorities that the said amount should be considered as transaction value is incorrect..

(The replies do not constitute professional advice. Neither EY nor FE is liable for any action taken on the basis of these replies.)