Most States/UTs yet to frame rules to return security deposits taken from traders for VAT registration

Shishir Sinha New Delhi | Updated on October 08, 2018

Barring Kerala, all other States and Union Territories are yet to finalise rules to return deposits submitted by businesses at the time of obtaining Value Added Tax (VAT)/Central Sales Tax (CST) registrations during the pre-GST regime.

Deposits vary from State to State and it could be up to ₹1 lakh.

Traders feel that any amount pending with the government meant blockage of working capital. “Different States had different threshold for registration under VAT regime ranging between ₹1 lakh and ₹10 lakh. Just imagine what holding of any security deposits means for a small businesses,” a trader said, adding that even bank guarantee has recurring cost, beside fixed ones.

Different States had different provisions for giving security. In most States — Bank Guarantee or Fixed Deposits were prescribed, while in some such as Haryana, there was guarantee by two other registered dealers.

Many of the businesses are still under the impression that deposits or bank guarantees given during the pre-GST regime will continue to have same applicability during the GST regime until and unless businesses go for deregistration. However, Harpreet Singh, Partner (Indirect Tax) at KPMG, said security deposits given at the time of obtaining VAT and CST registrations should be rightfully returned to the dealers, as there is no such requirement under the GST laws.

Pravin Khandelwal, National Secretary General of Confederation of All India Traders (CAIT), said the issue is yet to come to his notice. However, he believes, this certainly causes hardship. States must take immediate steps to return the deposit, he said.

GST was implemented from July 1 last year. In the very first year, the number of registered assessees increased by 72.5 per cent to 1.14 crore. Of these, 66.17 lakh were existing tax payers i.e. registered under previous VAT/Sales Tax, Central Excise or Service Tax regime, while the remaining were new ones. The number of old assessees could go up as many were not required to register due to the threshold of ₹20 lakh (₹10 lakh in some special category States).

Meanwhile, according to tax consultants, many businesses (who were registered under VAT/ CST previously) are approaching respective State Governments seeking refund of security deposits. However, the absence of detailed guidelines was delaying the refund.

Meanwhile, Kerala has become the first State to acknowledge the said issue and issued a circular dated September 25.

The Kerala Government accepted the contention of the migrated dealers that there is no pre-condition to deposit any security to obtain registration under GST. Accordingly it said, the deposits may be refunded to the dealers, subject of compliance of conditions such as annual return for 2017-18 is filed by the dealer, scrutiny of returns up to June 2017 has been completed, no assessments/demands are pending and in the case of cancelled business, the assessing authority shall ensure that closing stock for which Input Tax Credit was availed is reversed, beside others.

However, tax experts find these conditions unnecessary. “Subjecting the release of the deposits to multiple conditions like no pending demands, no pending assessments, scrutiny of all returns etc., may not serve the intended purpose and is likely to lead to blockage of funds,” Singh added.

Published on October 08, 2018

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