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FAQs on Treatment of cotton under VAT System of Taxation

Cotton Ginning Mills engaged in the ginning of cotton purchase raw cotton from within the State of Punjab through commission agents (kacha Aartias). The commission agents would not be liable to pay VAT on cotton on the first purchase but the liability to pay purchase tax under VAT will be of the ginning mill. The Ginning mill will be liable to pay purchase tax u/s 19 of VAT Act, 2005 at the rate applicable as per Schedule H. The purchase tax paid is allowable as set off against the Output Tax liability. However, this set off is available only if the goods are sold within State or are used for manufacture of taxable goods in the State for the sale or are sold in the course of interstate trade or in the course of export of India. The ITC, on goods liable i.e. tax u/s 19(i) when sold in interstate trade shall be available only to the extent of CST chargeable under CST Act, 1956. The business activities of cotton ginners (single units and composite units) under the VAT Act will attract provision of VAT as under.

For example the position of A & Co. with following purchase and sale figures is taken:

i. Purchase of raw cotton 25 Lacs

ii. After ginning the following products are obtained:

Cotton : 21 lacs

Cotton seed : 6 lacs

iii. After crushing cotton seed, the products obtained are,

Oil 3.75 lacs

Oil cake 3.25 lacs

Situation 1

The ginning unit purchased raw cotton of 25 lacs and after ginning had obtained cotton worth Rs. 21 lacs and cotton seed worth Rs. 6 lacs. The cotton and cottonseed so produced were sold in the State. In this case tax liability works out as under:

Purchase tax on raw cotton = 25 lac x 4% = 1,00,000/-

VAT on sales of Ginned cotton = 84,000

VAT on sale of cotton seeds = 24,000

Total VAT = 1,08,000

Less Purchase tax paid = 1,00,000

VAT payable = 8,000

Total tax liability:

Purchase tax on raw cotton 1,00,000

VAT on sale of cotton and cotton seed 8,000

1,08,000

After adjustment of ITC the balance payable will be Rs. 8,000/- and total liability including purchase tax will be 1,08,000/-

Situation 2

When ginned cotton is sold within the state but cotton seed is sent on consignment sale / branch transfer then

Purchase tax 100000 Output tax on sale of cotton = 84000

Cotton Seed = Nil

Output Tax = 84000

Retention of ITC on account or branch / consignment transfers of cotton seed worth Rs. 6 lacs is calculated according following formula: -

I.P X BT X 4

(GT + BT) X 100

where I.P is purchase price of the goods excluding the tax amount in respect of which ITC is considered above.

GT is gross turnover of sales (including interstate sales)

during the tax / return period but excluding the tax amount

BT is the total value of branch / consignment transfer of

taxable goods in the course of interstate trader of commerce made in the tax / return period.

2500000 x 600000 x 4

2100000 = 600000) x 100 = 22222

ITC retention = 22222

Available ITC 100000 22222 = 77778

Output tax = 84000

ITC = 77778

Balance payable = 6222

Tax payable 100000 (Purchase Tax)

+ 6222 (VAT on sales)

106222

Situation 3

Composite unit i.e. a unit which after ginning raw cotton is also crushing cotton seed.

Raw cotton valued at Rs. 25 lac purchased & ginned. Ginned cotton so produced was sold for Rs. 21 lacs in the State. Cotton seed produced worth Rs. 6 lac was crushed. Cotton seed oil was sold in the state / or interstate sale for Rs. 3.75 lac & the oil cake valued at Rs. 3.25 lac was sent in branch / consignment transfer. The tax liability is calculated as under: -

Purchase tax 100000 output tax on sale of cotton 84000

Output tax on sales of oil 15000

99000

In this case ITC available shall be reduced on account of branch transfer or consignment transfer of oil cake bu a sum calculated in accordance with the following formula: -

I P X BT X 4

(GT = BT) X 100

2500000 X 3.25000 X 4

(2475000 X 3.25000) = 12037/-

ITC available = 100000 12037 (Retention) = 87963/-

VAT payable on sales = 99000

Less ITC available = 87963

Balance VAT payable 11037

Purchase tax payable 100000

Total tax payable 111037

Terms IP, BT, GT denote the same term as given in situation 2.