a order issued by High Court, Bombay in the case of M/s. Mahalaxmi Cotton Ginning Pressing & Oil Industries, pertaining to Maharashtra Value Added Tax. The court held that in case of any default by the seller on payment of sales tax the buyer shall also not be eligible for the VAT credit. Indirectly the buyer will suffer due to defaults done by seller.

There is a recent  order issued by High Court, Bombay in the case of M/s. Mahalaxmi Cotton Ginning Pressing & Oil Industries, pertaining to Maharashtra Value Added Tax.  The court held that in case of any default by the seller on payment of sales tax the buyer shall also not be eligible for the VAT credit. Indirectly the buyer will suffer due to defaults done by seller.

As per order, the Sales Tax department will be disallowing the set-off of Input VAT available to a dealer in respect of purchases made from a registered seller, if that seller does not pay the amount of VAT so collected from the purchaser to the account of Government Treasury. Though seller has collected VAT from the purchaser but have not paid to the Government, therefore no set-off is available to the purchaser upto the amount not so paid by the seller. This implies even in case no return is filled by the Defaulting dealer.

However interestingly the department filed an affidavit in the court saying that the full machinery of the Act will be invoked by the Sales Tax Department wherever possible against Defaulters with a view to recover the amount of tax due from them, notwithstanding the above. Once there is final recovery from the Defaulter, in whole or part, a refund will be given (after the end of that financial year) to the dealer(s) claiming set off to the extent of the recovery. Refund will be given by the Sales Tax Department even without any refund application having been filed by the dealers, since the Sales Tax Department will reconcile the payments, inform the dealer of the recovery from the Defaulter concerned and grant the refund

The controversy in the cases turns around Sec 48 of MVAT Act, which specifically mentions that “ No set-off will be provided to the dealer in respect of any purchases unless the claimant dealer produces a invoice of seller, containing certificate that the registration certificate of the selling dealer is valid and the due tax is paid by the seller.”

Though the decision has been issued in the context of MVAT, but we suggest you all to kindly look in existence rules & regulations of respective states also.