New MVAT Automation - Returns and CST Forms

Handling tax processes manually can lead to major issues. Considering this, the Maharashtra government replaced manual data entry and VAT & CST filing with New MVAT Automation from financial year 2016-17. These changes are expected to increase efficiency, minimize manual errors, and deliver time management benefits for both department and tax payers. The application is being developed on the SAP platform using the Tax and Revenue Management (TRM) and Customer Relationship Management (CRM) functionalities.

Due to major technical setbacks, the Department of Automation Software System had to postpone return filing dates. Now these technical problems seem to be sorted, and return filing under new system is now functional. To make up for the delay, a new calendar of due dates for returns filing has been created by the department.

Revised due dates apply only for periodical returns pertaining to period from April to Sept. 2016. The due dates for subsequent periodical returns stand unchanged, and are as provided under Rule 17 of MVAT.

Though the plan for automation also includes other aspects of the payment process, such as registrations and appeals, this article will focus on returns and CST declaration forms.

Old Filing Process

Under the manual return filing system (operational until 31 March 2016), taxpayers were required to upload Sales and Purchase Annexures (forms J1 & J2) along with their returns.  However, this system had major problems:

Unattended Mismatches

There was no check for parity between annexures and returns, a problem that resulted in mismatches. Such mismatches may not be acted upon, unless the purchaser vigorously follows up with suppliers to file corrected annexures. When the department detects mismatches, set-off was denied to the purchaser until it was again allowed as per departmental audit or assessment.

No real-time analysis

Departmental action based on cross-verification of sales and purchase annexures was taken after the filing of Form 704 audit reports for the relevant year. This creates a time lag of more than a year to select cases for Computerized Desk Audit (CDA), Issue-Based Audits, and assessments. Due to this, dealers received notices even after 6-8 years. Moreover, old records are not available, resulting in penalties for dealers when documents were absent.

Refunds under bank guarantee affected

Mismatches primarily affect the dealers who claim quarterly refunds against bank guarantees, as a major portion of ITC becomes disallowed when the supplier of the dealer claiming a refund files quarterly or half -yearly returns. This finally results in receiving less refund than actually claimed in Form 501.

Need to obtain revised mismatch report after revised returns

Under the current system, even if a defaulting supplier admits and corrects his annexure, additional set-off credit is not made available to the purchaser automatically. Each purchaser has to establish that credit by running another match report.

Issue of declaration forms

The department had launched an online application for CST forms. According to this process, the Statement of Request (SOR) had to be uploaded on department's website. The department informs the applicant via email in case of any non-compliance (such as return default, outstanding recovery, incorrect/non-disclosure of turnover of interstate purchases, etc.). When online corrections were not successful, the applicant had to respond by visiting and submitting details to the concerned officer. These details often included reconciliation of OMS purchases for previous periods on booking basis, as there was always a time lag between the invoice date and the actual booking date. The service delivery time for this system has historically been very high.

All this resulted in long delays in receipt of declaration forms, leading the supplier of the dealer to issue debit notes on the dealer in some cases. This resulted in differential outflow, due to non-receipt of declaration forms in time. Also, annually-revised returns were not considered, while the issuance of declaration forms by the department led to unnecessary submissions of reconciliations.

New Filing Process

Uploading of annexures and auto-population of returns

The dealer is required to give invoice details in the form of sales and purchase annexures. Returns will then be auto-populated based on the uploaded annexures.  These annexures will be linked to respective MVAT Return Forms, like Form 231, 232, 233, 234, 235 & Form III E under the CST Act.

Dealers can download the "Return Form Bundle Template". This template comprises the annexures of sales and purchases, as well as all VAT return forms. Dealers are required to fill invoice details in the sales and purchase annexures which have been integrated with the returns.

A provision has been made to mention the transaction type of each invoice. Each local taxable, tax-free, exempt, or inter-state transaction type has been allocated specific transaction codes. Also, you need to mention the type of return form which a particular invoice belongs to. On the basis of the transaction codes and the return form mentioned by the dealers in the annexures, the forms will be auto-populated. Dealers will be able to see the auto-populated Excel template of the return. Once this filled-in template is validated, a .txt file ready for upload will be created.

Viewing draft returns in PDF format*

Dealers will be required to upload the .txt extension file of the "Return Form Bundle Template". Once this is done, a program will calculate ITC and carry out other necessary validations. Subsequently, dealers will be able to see the return draft in PDF format. The dealers can take a printout of this PDF return and either file or modify the contents of the return.

Sales and Purchase Annexures

Sales and Purchase Annexures will include the following information that will be required to be incorporated by the dealers for each sale and purchase bill:

  • Sales / Purchase Invoice No.
  • Sales / Purchase Invoice date (dd/mm/yy)
  • 11-digit TIN of the Purchaser/Seller (if TIN is available). This 11-digit TIN No. is important so that the credit for tax paid will be available to the purchaser.
  • Taxable Value or Value of Composition in the case of works contracts.
  • Tax amount (if separately mentioned in the invoice)
  • Value (if) inclusive of tax
  • The value of sales under composition schemes other than works contracts
  • Tax-Free Sales
  • Exempted sales u/s41 & 8
  • Labor charges
  • Other charges
  • Gross Total
  • Action
  • Return Form No. (231/232/233/234/235/CST)
  • Transaction Codes will be different for Sales & Purchase transactions depending upon the type of transaction effected by the dealer

Viewing of Input Tax Credit (ITC) Register*

The dealer will be able to view the ITC registers, annexures filed by suppliers/customers, and monthly credits of TDS amounts on a periodical basis. The ITC Register display is likely to appear on the lines of display currently issued under Form 26AS mechanism of I Tax. It appears that this display, therefore, will be in batch mode (periodical) and not on a real-time basis. It is possible to provide real-time information on purchases and sales if all dealers use billing software provided by the department and such billing data is linked to display of ITC functionality.  The contractors will be able to pass on the TDS credits to the sub contractors.

Claims of Goods Returned

The seller will be able to claim deductions (for instance, on account of goods being returned) in the returns, however, if the buyer does not confirm this transaction through debit note to be shown in the purchase annexure, tax liability will be added by departmental website as liability for the seller's next return.

Filing of Revised Returns

Provision for a filing of revised annexures will be compulsory before revising periodical returns.  As announced in the budget presented on 18 March 2016, there will be no ceiling on the number of times returns can be revised by the dealer before the submission date for VAT audit reports. This means that corrections in the annexures, as pointed out by opposite parties (customers/suppliers), can be made, and returns can be revised automatically by the system any number of times. Since this revision is allowed until the date of submission of the VAT audit report (before 15 January of the next year), all year-end bookings and adjustments made at the time of finalization of accounts and filing of IT Returns can be correspondingly incorporated under VAT returns so that reconciliation will be much easier.

Filing of monthly return in Form 424 by employers (TDS)

Employers shall be required to file a return with Form 424. They will be required to show TIN and the names of contractors and also show the amount of TDS effected from each of the contractors.

Filing annexure of latest bank accounts and closed bank accounts

All dealers will be required to file annexures of their latest bank accounts and also their closed bank accounts with the last return of the financial year.

Billing software*

Demand from trade and industry for GST seems to have been incorporated by Maharashtra Sales Tax Department in their interface. Billing Software that can be used by dealers for generating invoices will be provided for free download. If this billing software is used, sellers will have no need to submit sales annexures. All return-related compliance will be taken care at the stage of transaction processing itself. This seems to be the best feature of the proposed system.

Disclosure of reduction in ITC and non-admissible ITC*

Though ITC will be calculated on a gross level by the departmental interface, net ITC after consideration of retention and negative list items will be calculated by the interface only on the basis of relevant information to be entered by the dealer separately. This generates a compliance burden on a dealer to calculate correctly items on which either full set-off is not available (under rule 53 of MVAT Rules 2005) or there is a denial of set off (under rule 54). Dealers are required to disclose figures of both reduction of ITC and non-admissible ITC.

Merits of New System

Merits of Sales Transactions:

Nature To the Department
To the Dealer
Maintaining books of accounts
Easy completion of assessments as reconciliations will be readily available.
Monthly reconciliation of sales with books will be possible, thereby increasing the efficiency and accuracy level of small dealers.
Correct coding of transactions
Proper bifurcation of sales and linking the codes with financials will result in timely completion of audits and assessments.
Correct coding will lead to the disclosure of correct transactions.
Transactions related to works contract
Able to track dealers who falter to disclose such transactions.
Works Contract transactions (WCT) will be identifiable due to coding system, which will minimize the risk of disallowances during time of assessments
Error free data
Reduced hassle with no errors.
No separate returns will be required as Sales and Purchase annexures will be auto-populated to ensure accuracy and error-free information.

Merits of Purchase Transactions:

Nature To the Department
To the Dealer
Input Tax Credit (ITC) Report
Negative ITC will reduce, as it will be automatically disallowed if the selling dealer shows less ITC to the purchasing dealer.
As the dealers will be able to view the ITC Report, it will result in regular coordination between the two dealers, reducing the probability of Hawala Dealers.
Elimination of short / non-filers
If selling dealer fails to pay taxes, the government recovers from purchasing dealer, reducing the probability of Non/Short filers.
Short Filers and Non- Filers can be easily searched, which will help the dealer to ensure that their vendors are paying their dues on time.
Tracking Hawala dealers
Now, the department can easily identify and track the Hawala dealers on the basis of the transaction Code in returns.
Dealer will be more cautious while choosing his vendors, to avoid the future disallowances of MVAT claim & further unwanted notices.
Fixed Asset Details
Dealer will be time bound to disclose his assets in monthly returns instead of showing them directly in MVAT Audit.
The dealer will have to maintain proper records and disclose it accordingly. This will result in correct calculation with respect to its “Eligibility or Retention” in set-off.
Disclosure of transactions against declaration forms
Department can now keep a check point on such transaction where C Form is issued by the dealer.
Correct codification will be required in case of purchases against declaration forms as incorrect disclosure may attract penalty.

Demerits to dealers
The system is more beneficial to the sales tax department than the dealers, as extensive exercises and cross-checks will be required to be performed by the dealers to receive benefits like set-off on the basis of tax invoices. The department will be more relaxed as the burden shifts to dealers who need to make sure that the taxes are paid by their vendors regularly.

Gearing up for a new system

As the new process is transaction-based, dealers will have to make every effort to ensure accuracy in data entry procedures. Extensive measures to improve data flow and provide proper training to data entry operators will be required to ensure that transactions are correctly recorded at the point of inception, in order to avoid future implications.

Some suggested steps can be followed while programming the software to adapt more easily to the new process:

  • Training staff on entry of tax codes and transaction codes for each and every sales/purchase transaction.
  • Creating new reports/queries as per the desired format of returns in order to synchronize reports with returns.
  • Dealers will now be required to maintain a synchronized database in their accounting software for all customers and suppliers with 11-digit TIN numbers, allowing this information to be captured in the sales and purchase registers to be to be used for return filing. This will reduce errors and mismatches in set-off, which will be auto-generated from the sales tax department website and available in the returns to be filed.

To learn more about how Avalara can help you with New MVAT filing automation, contact us through http://www.avalarabharat.com/contact/

This article is contributed by CA Mukund Abhyankar (mbabhyankar@gmail.com).

* These points in New filing process are subject to change as per state norms.