Lessons from Supreme Court judgment on Nokia VAT Case to Small and Medium Enterprises

Larger companies may have the financial strength to withstand unexpected Tax Shocks. With my experience of dealing with Small and Medium Enterprises (SME) over the last 2 decades, I can confidently say that these companies will have sudden death in situations like the Nokia VAT issue (Read Supreme Court judgment says Mobile phone charger is an accessory subject to different tax rate | Read this judgment to know more)

1. All goods and Services Taxable – The basic assumption should be that ‘all goods and services sold by me are taxable’

2. Taxable at higher tax brackets – The second assumption should be that ‘all goods and services sold by me are taxable at highest tax bracket/General Tax bracket” For example, in case of Karnataka VAT, one has to assume that the goods attract 14.5% tax

3. Exemption from Tax – If you have a reasonable understanding that the goods /services are exempt from tax; you have to double check this aspect.  Even if it costs a fee, obtain a written opinion from subject experts. (The subject experts normally will give an aggressive view. You have to insist on them giving a conservative view also) Get the written opinion checked by the VAT authorities (VAT audit officers). This process may be time consuming and expensive, but in the long run it will shield you from shocks.

4. Lower rate of Tax – If you are informed that your products attract lower rate of tax, before applying it, double check. Preferable get a written opinion from subject experts or get it checked by the department.

5. Check Industry trends– Better to check the industry rates charged on similar products. Check tax charged by your vendors. In case of variance in tax rates/ slabs, get into the details and make sure that you are rightly charging your clients.

6. Go for conservative view– Regarding all taxes which can be collected from the customers, please go for conservative tax rates. Anyway you will collect it from the customers and pay it to the department. Is it not common sense to collect and pay on conservative basis?  

7. Personally involve in tax matters – Don’t ignore the areas of tax and compliance matters. Your consultants will play a limited role. It is you who spends 10 hours a day in the office, it is your hard earned money at stake, it is your future at stake and it is your collateral (property) at stake. The way you show interest in acquiring the client, production etc. you have to show the same interest in tax and compliance matters.

Blaming your consultants may not help. You mean to say that the large companies (like in the above cited case) are not having experienced and qualified professionals and consultants? Wouldn’t they have taken written opinion? So, let’s realize that Indian Tax Laws are complicated. That is why, the foreign companies think ten times before they invest in India. I suggest all SME to adopt most conservative approach when it comes to Tax matters. Whenever you are in doubt, go for higher tax brackets; collect and pay it.  Revenue department will always resort to ‘creative thinking’ and the companies will look for ‘creative accounting’. So, this conflict will continue to stay with or without GST!

Thought for the day

When life gets blurry, adjust your focus.

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