Description
The document explains current tax structure in India, different types of indirect taxes like excise duty, custom duty, service tax etc.
Indirect Taxation Assignment
CURRENT TAX STRUCTURE IN INDIA AND TAXES WHICH WILL BE ABSORBED IN GST Group 5 MBA II, Finance
Indirect Taxation System in India
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax. Value Added Tax (VAT), (Sales tax in States where VAT is not yet in force), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc. The Constitution gives the permission to levy a multitude of indirect taxes. But the most important ones are customs and excise duties charged by the Central government and sales tax excepting inter state sales tax to be charged by the state government. The indirect taxes levied by the centre like customs, excise and central sales tax and the major indirect taxes levied by the states and civic bodies like passenger and goods tax, electricity duty and octroi when taken together did not present a rational system. In last 10-15 years, Indian taxation system has undergone tremendous reforms. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. A major thrust of the reform of indirect taxes in India in the last two decades has been to move the tax system towards a regime of value-added tax as the principal instrument of taxing domestic trade and consumption at both levels of government--the Centre and the states. This was felt necessary to attune the tax structure of the country to the requirements of an open economy and recoup the revenue loss from lowering customs tariffs. At the central level, initiatives were taken in the late eighties to recast the Union excises in the VAT mould by moving in the direction of a manufacturers' VAT called MODVAT. Introduced first with a somewhat restrictive application, the operation of MODVAT was subsequently universalized and central excises came to be christened as CENVAT with a basic rate of 16 per cent. The infirmity arising from the exclusion of services from the base was sought to be addressed with a tax on selected services with gradually expanding coverage.
To complement the reforms of the central taxes, initiatives were taken to persuade the states also to replace their complex and archaic sales taxes with a destination-based VAT. After deliberating for over a decade, the majority of the states have now moved over to a system of VAT in place of their sales taxes. The rates, which were many earlier, have been compressed basically into two--12.5 and 4 per cent--and appendages like turnover tax and surcharge and additional sales tax that were in vogue so long have been removed. The tax on interstate sales--the central sales tax--is also in the process of being eased out so that the tax on domestic sales levied by the states gets transformed into a truly destination-based VAT that causes no impediment to the functioning of the common market. Tax reformers can surely take credit for what has been achieved. There are, however, a few anomalies and irrational elements in the system that need attention. First of all, the transformation of Union excises into CENVAT has been carried out through rules framed under the Central Excises Act and so formally CENVAT remains "excise", i.e. a tax on production or manufacture of goods minus its cascading features. It encounters all the problems and limitations such as definition of "manufacturing", determination of assessable value, and so on. While many of the issues have got settled though judicial rulings, the shortcomings of a tax on manufacturing persist. The scope for manipulation in the matter of taxable value has been sought to be reduced by requiring MRP to be adopted wherever available, but since it is still a tax on manufacturing, abatements have to be allowed to take out the post-manufacture value additions. But that cannot take care of all situations. In any case, the value added at the subsequent stages of sale remains outside the tax base. Secondly, contrary to the tenets of a good VAT not all commodities are in the tax base or taxed at a uniform rate. Petrol and diesel are largely outside the CENVAT credit scheme as inputs and so are tobacco products. The rates of tax for both are fairly high. Then there is a plethora of exemptions and concessions. On some commodities, in addition to basic duty there are "special excise duty", "additional duty", "special additional duty", and, in some cases, "additional duty of excise (goods of special importance)". Of course, there can be a case for levying excises on items like petrol and tobacco at high rates on several grounds apart from revenue, such as environmental protection, discouraging consumption of harmful substances, recovering cost from users as in the case of roads, etc. Because of its uses for serving these objectives, besides fetching handsome revenue, excise taxes continue to be levied in the European Union and some other countries on top of VAT and of late there has been a resurgence of interest in excise taxes in the professional literature (vide Theory and Practice of Excise Taxation, edited by Sijbren Cnossen).
In a way, one may say, our CENVAT operates as a general tax on commodities produced in India while excises in the conventional sense apply to only a few products like some of the petroleum items and tobacco. However, as noted earlier, the authority for levying CENVAT is derived from the central excise law and so it remains "excise" with all its limitations. In reforming domestic trade taxation at the Centre, the rational course would have been to go in for a full-fledged VAT, extending to the retail or at least wholesale stage and applicable universally with a single rate covering both goods and services. That would help to cure the infirmities associated with taxation of manufacturing and also to integrate services in the tax base. Such integration has become imperative with the advent of modern technology and the line between goods and services becoming thin. That, however, would call for taking CENVAT out of the excise fold and implementing central VAT through a separate law. Understandably, such a radical reform was not possible to push in the early stages. It is, however, time to take stock and move forward. The state VATs now in operation are also marked by several anomalies and shortcomings. The base does not include services. Allowing industrial inputs to be taxed at the reduced rate of 4 per cent, as is the case, now violates a basic tenet of VAT and negates one of its main virtues, viz. doing away with the need to distinguish between inputs and final products. As in CENVAT, petrol and diesel are left out of the state VATs and suffer taxation under a separate schedule or under the sales tax laws as before. Alcohol and narcotics, for which the tax powers belong to the states, are taxed outside VAT and in some states come under state excises. Then there are several other taxes on goods and services at the state level that continue even after the introduction of VAT, e.g. entry tax, luxury tax, and consumption tax. Thus, the indirect tax field still remains a jungle. Only a unified VAT in the shape of a goods and services tax, as envisioned by the Kelkar Task Force, can clean it up. Excises may be levied selectively on top of VAT. Given some co-ordination, such a tax can be implemented in parallel at both levels of government.
Types of Indirect Taxes
?
? ? ?
Excise Duty Customs Duty Service Tax Securities Transaction Tax
Indirect Taxes Post Reforms
•
Even post reforms, the indirect tax regime in India is still in the early stages of growth. Both the Central and State governments charge a multitude of indirect taxes. The central government charges tax on goods at the point of import (Customs duty), manufacture (Excise duty), interstate sales (Central sales tax or CST) and on provision of services (Service tax).
• The state governments charge tax on goods sold within the state (Sales tax/Value Added Tax or VAT), and on the goods that enter the state (Entry tax). • In the present scenario corporate would have to analyze the tax cost involved in a transaction, have enough backup documentation to support their tax positions and keep looking for ways for tax maximization.
Customs duty The levy and the rate of customs duty in India are governed by the Customs Act 1962 and the Customs Tariff Act 1975. Imported goods in India attract basic customs duty, additional customs duty and education cess. The rates of basic customs duty are specified under the Tariff Act. The peak rate of basic customs duty has been reduced to 15% for industrial goods. Additional customs duty is equivalent to the excise duty payable on similar goods manufactured in India. Education cess at 2% is leviable on the aggregate of customs duty on imported goods. Customs duty is calculated on the transaction value of the goods. Rates of customs duty for goods imported from countries with whom India has entered into free trade agreements such as Thailand, Sri Lanka, BIMSTEC, south Asian countries and MERCOSUR countries are provided on the website of CBEC. Customs duties in India are administrated by Central Board of Excise and Customs under Ministry of Finance. The peak customs duty and education cess maintained at 10 and 3 per cent respectively.
Exemptions
Amendments
• • •
Aerial Passenger Ropeway Projects to attract countervailing duty. Refund allowed on defective goods, including those not made per specification. High Courts can retrospectively condone delay in filing appeals, applications or cross objections. Procedure prescribed for compounding of certain offences. Countervailing duty to be based on tariff value of a like item subject to excise duty. Anti-dumping duty to be based on records maintained by exporter/producer and where no record is made available, on best judgment basis.
• •
•
Change in Customs Duty rates of certain industries
Excise duty Manufacture of goods in India attracts Excise Duty under the Central Excise act 1944 and the Central Excise Tariff Act 1985. Herein, the term Manufacture means bringing into existence a new article having a distinct name, character, use and marketability and includes packing, labeling etc. Most of the products attract excise duties at the rate of 16%. Some products also attract special excise duty/and an additional duty of excise at the rate of 8% above the 16% excise duty. 2% education cess is also applicable on the aggregate of the duties of excise. Excise duty is levied on ad valorem basis or based on the maximum retail price in some cases. Ad-valorem duty rates on majority of the goods have been reduced by 6%, from 14% to 10% (effective 7 December 2008) and thereafter from 10% to 8% (effective 24 February 2009) thereby reducing the effective duty rate from 14.42% to 8.24%. CENVAT rate and education cess maintained at 8 and 3 per cent respectively.
Exemptions • Duty paid high speed diesel blended with upto 20 per cent bio-diesel. • Chapter 68 goods manufactured and used at construction site. • EVA compound manufactured on job work for use in footwear. • Value of packaged/canned software on right to use basis. • Branded jewellery.
Amendments
• Procedure prescribed for compounding of certain offenses. • Chief Commissioner empowered to nominate a chartered accountant for conducting special excise audits. • High Courts can retrospectively condone delay in filing appeals, applications or cross objections. • Process of adding or mixing cardamom, copra, menthol, spices, sweetening agents or any such ingredients other than lime, katha or tobacco to betel nut in any form shall be considered deemed manufacturing.
•
Documents and records seized during investigation and not utilized for issuance of show cause notice to be returned within 30 days. Input not to include cement, angles, channels, CTD or TMT bars and other items used for construction of shed, building or structure for support of capital goods.
•
• Duty reduced from 10 to 5 per cent when books of accounts are not separately maintained in respect of dutiable and exempted goods.
Change in Excise Duty rates of certain industries
Service Tax Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified taxable services provided in India by specified service providers. Service tax on taxable services rendered in India are exempt, if payment for such services is received in convertible foreign exchange in India and the same is not repatriated outside India. The Cenvat Credit Rules allow a service provider to avail and utilize the credit of additional duty of customs/excise duty for payment of service tax. Credit is also provided on payment of service tax on input services for the discharge of output service tax liability. • Tax rate and education cess maintained at 10 and 3 per cent respectively. • Additional 4 services brought within ambit of service tax namely o Transport of goods by rail
o Transport of coastal goods and goods through inland water including national waterways o Legal consultancy services (except in case of individuals) o Cosmetic and plastic surgery (other than trauma or congenital cases) Exclusions • Sub-brokers excluded from definition of stock broker.
•
Process resulting in manufacture of excisable goods excluded from business auxiliary services.
Exemptions • Inter or Intra state transportation of passengers in a vehicle bearing contract carriage permit. • Federation of Indian Export Organizations and specified Export Promotion Councils. • Purchase and sale of foreign currency between scheduled banks. Amendments • Tax reduced from 8 to 6 per cent when books of accounts are not seperately maintained in respect of taxable and exempted services.
•
Cenvat credit to be reversed should input/capital goods get fully written off.
• Works Contract Rules, 2007 modified to allow the benefit of composition scheme where the gross value charged for the works contract is declared.
•
Exporters exempted from service tax when goods transported by road or on commission up to 10 per cent paid to foreign agents.
Securities Transaction Tax Securities Transaction Tax (STT) is the tax payable on the value of taxable securities
transaction. STT was introduced in India by the 2004 budget and is applicable with effect from 1st October 2004.STT is not applicable on off-market transactions. Stock market brokers have been seeking the removal of STT ever since it was introduced in the 2004-05 Union Budget. It is a tax imposed on the sale and purchase of securities, which can be shares, derivatives or units of mutual funds traded on a recognized stock exchange. At present, the STT rate is 0.125 per cent of the total volume of the transaction.
Product Equity-Delivery
Transaction Purchase Sell Purchase Sell Purchase Sell Purchase Sell
STT rate 0.125% 0.125% 0.025% 0.017% 0.125% 0.017%
Charged on Turnover Turnover Turnover Turnover Settlement price, on exercise Premium
Equity-Intraday
Future
Option
Although the STT has not been abolished in the current budget but the new direct tax code has suggested abolishing the Securities Transaction Tax.
Objectives of a Tax reform (Goods and Services Tax (GST) )
The basic objective of tax reform would be to address the problems of the current system discussed above. It should establish a tax system that is economically efficient and neutral in its application, distributional attractive, and simple to administer.
In particular, it is important from an administrative perspective that close substitutes should not be taxed at very different rates—to avoid leakages and distortions. Revenue considerations suggest that the tax base should be broad, and comprise all items in the consumer basket, including goods, services, as well as real property. The neutrality principle would suggest that: • the tax be a uniform percentage of the final retail price of a product, regardless of the supply-chain arrangements for its manufacturing and distribution; • the tax on inputs be fully creditable to avoid tax cascading; and • the tax be levied on the basis of the destination principle, with all of the tax on a given product/service accruing in the jurisdiction of its final Multiple VAT rates become a source of complexity, and disputes, for example, over borderlines, adding to the costs of tax administration and compliance. It is for this reason that countries like New Zealand, Singapore, and Japan have chosen to apply the tax at a low and uniform rate, and address any concerns about vertical equity through other fiscal instruments, including spending programs targeted to lower-income households. Another important objective of tax reform is simplification of tax administration and compliance, which is dependent on three factors. The first determining factor for simplicity is the tax design itself. Generally, the more rational and neutral the tax design, the simpler it would be to administer and encourage compliance. If the tax is levied on a broad base at a single rate, there would be few classification disputes and the tax-specific record keeping requirements for vendors would be minimal. The tax return for such a system can be as short as the size of a postcard. It would simplify enforcement, and encourage voluntary compliance.
Implementation of GST
In December 2007, state FMs discussed the road map suggested by the committees of bureaucrats and reached a consensus that India would move to a dual GST: a Central tax and a separate one for states. This strikes a balance between the need for harmonisation of tax rates, and the federal structure of the Indian constitution. Also, the competition in an integrated market will ensure that the GST rates do not diverge unduly among different states. This raises new questions on how this tax will be administered. The common sense suggestion has been to mould what is now the Central Excise department at the Centre and the several sales tax departments in the states to implement the GST. Some areas may have to be exclusively assigned for the central establishment like the taxation of services of an inter-State nature. In all cases, taxes will have to be collected under two heads, pertaining to CGST and SGST. However, with the help of IT systems and effective
compilation and processing capabilities, it should be possible to handle these problems without much difficulty. In pursuance of the proposed switch over, a reduction is expected in the Central Sales Tax rate from the currently applicable rate of 3% to 2%. The phasing out of the CST will also result in an increase of the service tax net. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively.
Expected changes due to GST What happens with GST? - Multiple rates for goods, single rate for services
- Revenue loss to some states as tax collected in the state where goods and services are consumed - Place of consumption and supply needs to be defined in a simple manner - Cumulative incidence of excise and state value-added tax currently at 20-22% of retail sales price - Dual structure – one rate for Centre, another for State - Dual structure passed by the Empowered Committee of State Finance Ministers - GST at Centre may be capped at 10% - Rates may vary in States
Impact:
- Government to compensate loss to states; five-year compensation program being worked out - Cumulative incidence of GST expected to be around 18% - The average for Organization for Economic Co-operation and Development stands at 17.6% - Service may be taxed at both Centre and State level now, currently only services at the Central level are taxed
Implementation of the Taxes under GST
The general structure of VAT often presents a case for a federal VAT with a broad base and few exemptions. Political compulsions and the need to maintain some degree of progressively in the tax system induce deviations from the prescribed coverage. There are very few examples worldwide that incorporate a sub-national VAT.
Constitutional assignment of tax powers in India and the current political environment, however, purely federal VAT is not considered feasible, even though it may be considered desirable in a number of circles. The options left therefore are a dual VAT, an integrated VAT, or a state level VAT. Each of these regimes has certain advantages and some costs. It would be useful to look at these in some detail. In contrast to a federal VAT, a state VAT transfers the entire power to tax to the provincial governments. The revenue balance in such a regime can be ensured by a reduction in the transfers to the provinces from the union government. However, there are two major difficulties in implementing such a regime. First, since one of the purposes of central transfers is to induce some redistribution of resources, a reduction in the transfers can reduce the leverage the union government has in effecting such regional redistribution. Second, since the strength of the Indian economy would lie in its forging a single common market, form of treatment and monitoring of inter-state transactions would be critical in determining the success of such a regime. While destination principle is considered appropriate, success of a pure zero-rating mechanism is contingent on are liable and timely information system to record and monitor inter-state transactions. It is possible to find solutions to the second problem; however, the first would remain a constraint. A dual VAT proposes two parallel taxes – one by the union government and the other by the state governments. In principle, the taxes can be completely unrelated to each other and can be run by two or more unrelated tax administrations. In the context of India, this would represent some improvement in the tax base for the governments, since both the union government and the state governments in India currently work with comparatively smaller tax bases. Cascading would be minimized provided provincial taxes are not levied on a base inclusive of central taxes. However, the tax system would remain as complex as it is today, with 30 different tax laws and the corresponding administrations. The changes in coverage and the implied expansion in incidence of tax would induce a considerable resistance to such a change. Further, there remains the need to put in place a reliable system to monitor inter-state transactions, as in the case of the state VAT alternative. An integrated VAT as opposed to the above, attempts to design an integration of the tax bases for the centre and the states so that together, the taxes cover a comprehensive base for VAT. This model would eliminate the duality of taxes on all segments of the tax base,
however, it would retain the complexity of the dual VAT, provided the states are allowed to determine their own rates of tax and maintain separate administrations. Further, there would arise need for tax credit to flow across taxes, which would make tracking transactions essential and difficult. Another potential difficulty with any such design is, with differential growth rates for different segments of the economy, any assignment of tax powers would be perceived as unfair by one or the other level of government. For instance, if services are allocated to the union government, since this sector of the economy is known to grow faster than the other sectors, states would perceive this as an unfair assignment of tax powers. Clearly, any model that is adopted needs to be modified to suit the needs of the hour. A dual VAT with corrections for the problems mentioned would provide a model closest to satisfying the needs of both levels of government. This is the model that has found support in academic circles and is now being endorsed by the Empowered
Analysis of the tax structure under various models of GST Implementation
The rest of the discussion therefore, focuses on this broad structure and attempts to identify the details of any model that can be adopted. As the discussion above suggests, a dual VAT empowers both levels of government to tax the entire available tax base. In defining the tax base, there will arise some exemptions. A conservative picture of the likely exemptions in the proposed regime would be as follows: Unprocessed agricultural goods could remain exempt from taxes –for reasons of convenience and to present a picture of progressivity in the tax. In the present regimes, the central tax does not extend to the agricultural sector and the state regimes exempt a number of agricultural commodities – only crops considered to be of commercial nature are usually brought under tax.3 Government services are likely to be exempt and so would personal and social services like education and health care. Given the rising demand for the latter category of services in India, where it is often perceived that the responsibility for the same rests with the government, introducing a tax on the same may not be acceptable, at least in the short run. Furthermore, given the well-documented difficulties in taxing financial services, to being with, it is fair to assume that this sector too would remain largely untaxed. In order to ensure a level playing field, it is important that exports are zero-rated and imports are subject to GST, i.e., to both central and state VAT. The rest of the activities, it is expected, would come within the ambit of GST, at both levels of tax. In implementing such a regime, it is important to clearly specify a regime for taxation of inter-state transactions. This is even more important in the context of services which span more than one state. The other important issue that needs to be discussed is the nature of administration of such a tax – if the tax base is synchronised/ homogenised across the taxes, there is great merit in exploring the options for a unified administration. These issues remain as yet unresolved. The options in the same are discussed in the following section. The other major issue that remains to be discussed is the rate of tax that would make this regime revenue neutral. There are three distinct issues in any discussion on the
rates of tax. First, should there be a single rate of tax or multiple rates. While it is generally accepted that a regime with a single rate of tax is easier to administer and comply with, multiple rates are introduced to address issues of progressively. Apart from issues such as classification disputes and accounting difficulties in a multi-rate regime, such regimes introduce perverse incentives. In the present regime of state VAT for instance, inputs have been taxed at 4 percent while 12.5 percent is the regular rate on goods of final consumption. Such a big divergence between taxes on inputs and final products undermines the incentive mechanism of VAT – the manufacturer would not be induced to report all his sales since a substantial part of the tax is to be paid at this stage. A GST regime with an acceptable tax rate might provide the scope for moving away from multi-rate regime to a single rate regime. Second, since high rates would induce noncompliance, are there mechanisms available to ensure that the rates of GST rates remain modest and yet generate the required resources? It is often argued that any tax less than 20 percent would not raise the resources required. VAT is often complemented by some non-relatable excises. These excises could be satisfying a number of other objectives like environmental issues, discouraging the consumption of tobacco and alcohol, and/or imposing “luxury tax” unselect goods associated with relatively higher incomes. In India, no specific emphasis has-been placed on environmental issues in determining tax structures – however, for reasons of ease of collection, petrol and diesel have been subject to high rates of tax, especially at the state level. The state VAT regimes have kept these two products outside the purview of VAT. It is feasible therefore to construct regimes which integrate these commodities into the general VAT/GST structure and introduce a separate non-relatable excise over and above this rate. In the case of tobacco products, especially, cigarettes and bidis, the state governments have now introduced a state VAT at 12.5percent and the central government imposes specific taxes on these products. The central taxes alone contribute anywhere between 17 to 59 percent of the retail prices of these products. There is therefore, room to reorganise these regimes into a generalised GST and some non-rebatable excises. This would not disturb the government’s overall concern to discourage the consumption of tobacco products. For luxury taxes, it is impossible to identify a number of commodities which satisfy this description. However, in order to capitalise on the benefits of introducing a simple and comprehensive VAT, it is important to keep this list small. For illustration, we limit this list to include only passenger cars and multi-utility vehicles. With these three categories subject to non-rebatable excises, Section 4 explores the rates of tax required to ensure revenue neutrality. Depending on the relative distribution of revenues within the new regime, the non-rebatable excises can be assigned to either the union government or the state governments. Third, would there be uniform taxes across all states? States, till now, have autonomy in determining tax rates on bases within their jurisdiction. Since 2000, some consensus has been worked out to ensure a degree of harmonisation in the rates. While complete harmonisation has not been achieved, it does not appear to be an impossible task. It may however, be worthwhile to allow for a degree
of autonomy in rates within a narrow band so as to address local concerns of individual states. Harmonisation in the base however is essential and highly desirable.
doc_462044795.doc
The document explains current tax structure in India, different types of indirect taxes like excise duty, custom duty, service tax etc.
Indirect Taxation Assignment
CURRENT TAX STRUCTURE IN INDIA AND TAXES WHICH WILL BE ABSORBED IN GST Group 5 MBA II, Finance
Indirect Taxation System in India
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax. Value Added Tax (VAT), (Sales tax in States where VAT is not yet in force), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc. The Constitution gives the permission to levy a multitude of indirect taxes. But the most important ones are customs and excise duties charged by the Central government and sales tax excepting inter state sales tax to be charged by the state government. The indirect taxes levied by the centre like customs, excise and central sales tax and the major indirect taxes levied by the states and civic bodies like passenger and goods tax, electricity duty and octroi when taken together did not present a rational system. In last 10-15 years, Indian taxation system has undergone tremendous reforms. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. A major thrust of the reform of indirect taxes in India in the last two decades has been to move the tax system towards a regime of value-added tax as the principal instrument of taxing domestic trade and consumption at both levels of government--the Centre and the states. This was felt necessary to attune the tax structure of the country to the requirements of an open economy and recoup the revenue loss from lowering customs tariffs. At the central level, initiatives were taken in the late eighties to recast the Union excises in the VAT mould by moving in the direction of a manufacturers' VAT called MODVAT. Introduced first with a somewhat restrictive application, the operation of MODVAT was subsequently universalized and central excises came to be christened as CENVAT with a basic rate of 16 per cent. The infirmity arising from the exclusion of services from the base was sought to be addressed with a tax on selected services with gradually expanding coverage.
To complement the reforms of the central taxes, initiatives were taken to persuade the states also to replace their complex and archaic sales taxes with a destination-based VAT. After deliberating for over a decade, the majority of the states have now moved over to a system of VAT in place of their sales taxes. The rates, which were many earlier, have been compressed basically into two--12.5 and 4 per cent--and appendages like turnover tax and surcharge and additional sales tax that were in vogue so long have been removed. The tax on interstate sales--the central sales tax--is also in the process of being eased out so that the tax on domestic sales levied by the states gets transformed into a truly destination-based VAT that causes no impediment to the functioning of the common market. Tax reformers can surely take credit for what has been achieved. There are, however, a few anomalies and irrational elements in the system that need attention. First of all, the transformation of Union excises into CENVAT has been carried out through rules framed under the Central Excises Act and so formally CENVAT remains "excise", i.e. a tax on production or manufacture of goods minus its cascading features. It encounters all the problems and limitations such as definition of "manufacturing", determination of assessable value, and so on. While many of the issues have got settled though judicial rulings, the shortcomings of a tax on manufacturing persist. The scope for manipulation in the matter of taxable value has been sought to be reduced by requiring MRP to be adopted wherever available, but since it is still a tax on manufacturing, abatements have to be allowed to take out the post-manufacture value additions. But that cannot take care of all situations. In any case, the value added at the subsequent stages of sale remains outside the tax base. Secondly, contrary to the tenets of a good VAT not all commodities are in the tax base or taxed at a uniform rate. Petrol and diesel are largely outside the CENVAT credit scheme as inputs and so are tobacco products. The rates of tax for both are fairly high. Then there is a plethora of exemptions and concessions. On some commodities, in addition to basic duty there are "special excise duty", "additional duty", "special additional duty", and, in some cases, "additional duty of excise (goods of special importance)". Of course, there can be a case for levying excises on items like petrol and tobacco at high rates on several grounds apart from revenue, such as environmental protection, discouraging consumption of harmful substances, recovering cost from users as in the case of roads, etc. Because of its uses for serving these objectives, besides fetching handsome revenue, excise taxes continue to be levied in the European Union and some other countries on top of VAT and of late there has been a resurgence of interest in excise taxes in the professional literature (vide Theory and Practice of Excise Taxation, edited by Sijbren Cnossen).
In a way, one may say, our CENVAT operates as a general tax on commodities produced in India while excises in the conventional sense apply to only a few products like some of the petroleum items and tobacco. However, as noted earlier, the authority for levying CENVAT is derived from the central excise law and so it remains "excise" with all its limitations. In reforming domestic trade taxation at the Centre, the rational course would have been to go in for a full-fledged VAT, extending to the retail or at least wholesale stage and applicable universally with a single rate covering both goods and services. That would help to cure the infirmities associated with taxation of manufacturing and also to integrate services in the tax base. Such integration has become imperative with the advent of modern technology and the line between goods and services becoming thin. That, however, would call for taking CENVAT out of the excise fold and implementing central VAT through a separate law. Understandably, such a radical reform was not possible to push in the early stages. It is, however, time to take stock and move forward. The state VATs now in operation are also marked by several anomalies and shortcomings. The base does not include services. Allowing industrial inputs to be taxed at the reduced rate of 4 per cent, as is the case, now violates a basic tenet of VAT and negates one of its main virtues, viz. doing away with the need to distinguish between inputs and final products. As in CENVAT, petrol and diesel are left out of the state VATs and suffer taxation under a separate schedule or under the sales tax laws as before. Alcohol and narcotics, for which the tax powers belong to the states, are taxed outside VAT and in some states come under state excises. Then there are several other taxes on goods and services at the state level that continue even after the introduction of VAT, e.g. entry tax, luxury tax, and consumption tax. Thus, the indirect tax field still remains a jungle. Only a unified VAT in the shape of a goods and services tax, as envisioned by the Kelkar Task Force, can clean it up. Excises may be levied selectively on top of VAT. Given some co-ordination, such a tax can be implemented in parallel at both levels of government.
Types of Indirect Taxes
?
? ? ?
Excise Duty Customs Duty Service Tax Securities Transaction Tax
Indirect Taxes Post Reforms
•
Even post reforms, the indirect tax regime in India is still in the early stages of growth. Both the Central and State governments charge a multitude of indirect taxes. The central government charges tax on goods at the point of import (Customs duty), manufacture (Excise duty), interstate sales (Central sales tax or CST) and on provision of services (Service tax).
• The state governments charge tax on goods sold within the state (Sales tax/Value Added Tax or VAT), and on the goods that enter the state (Entry tax). • In the present scenario corporate would have to analyze the tax cost involved in a transaction, have enough backup documentation to support their tax positions and keep looking for ways for tax maximization.
Customs duty The levy and the rate of customs duty in India are governed by the Customs Act 1962 and the Customs Tariff Act 1975. Imported goods in India attract basic customs duty, additional customs duty and education cess. The rates of basic customs duty are specified under the Tariff Act. The peak rate of basic customs duty has been reduced to 15% for industrial goods. Additional customs duty is equivalent to the excise duty payable on similar goods manufactured in India. Education cess at 2% is leviable on the aggregate of customs duty on imported goods. Customs duty is calculated on the transaction value of the goods. Rates of customs duty for goods imported from countries with whom India has entered into free trade agreements such as Thailand, Sri Lanka, BIMSTEC, south Asian countries and MERCOSUR countries are provided on the website of CBEC. Customs duties in India are administrated by Central Board of Excise and Customs under Ministry of Finance. The peak customs duty and education cess maintained at 10 and 3 per cent respectively.
Exemptions
Amendments
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Aerial Passenger Ropeway Projects to attract countervailing duty. Refund allowed on defective goods, including those not made per specification. High Courts can retrospectively condone delay in filing appeals, applications or cross objections. Procedure prescribed for compounding of certain offences. Countervailing duty to be based on tariff value of a like item subject to excise duty. Anti-dumping duty to be based on records maintained by exporter/producer and where no record is made available, on best judgment basis.
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Change in Customs Duty rates of certain industries
Excise duty Manufacture of goods in India attracts Excise Duty under the Central Excise act 1944 and the Central Excise Tariff Act 1985. Herein, the term Manufacture means bringing into existence a new article having a distinct name, character, use and marketability and includes packing, labeling etc. Most of the products attract excise duties at the rate of 16%. Some products also attract special excise duty/and an additional duty of excise at the rate of 8% above the 16% excise duty. 2% education cess is also applicable on the aggregate of the duties of excise. Excise duty is levied on ad valorem basis or based on the maximum retail price in some cases. Ad-valorem duty rates on majority of the goods have been reduced by 6%, from 14% to 10% (effective 7 December 2008) and thereafter from 10% to 8% (effective 24 February 2009) thereby reducing the effective duty rate from 14.42% to 8.24%. CENVAT rate and education cess maintained at 8 and 3 per cent respectively.
Exemptions • Duty paid high speed diesel blended with upto 20 per cent bio-diesel. • Chapter 68 goods manufactured and used at construction site. • EVA compound manufactured on job work for use in footwear. • Value of packaged/canned software on right to use basis. • Branded jewellery.
Amendments
• Procedure prescribed for compounding of certain offenses. • Chief Commissioner empowered to nominate a chartered accountant for conducting special excise audits. • High Courts can retrospectively condone delay in filing appeals, applications or cross objections. • Process of adding or mixing cardamom, copra, menthol, spices, sweetening agents or any such ingredients other than lime, katha or tobacco to betel nut in any form shall be considered deemed manufacturing.
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Documents and records seized during investigation and not utilized for issuance of show cause notice to be returned within 30 days. Input not to include cement, angles, channels, CTD or TMT bars and other items used for construction of shed, building or structure for support of capital goods.
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• Duty reduced from 10 to 5 per cent when books of accounts are not separately maintained in respect of dutiable and exempted goods.
Change in Excise Duty rates of certain industries
Service Tax Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified taxable services provided in India by specified service providers. Service tax on taxable services rendered in India are exempt, if payment for such services is received in convertible foreign exchange in India and the same is not repatriated outside India. The Cenvat Credit Rules allow a service provider to avail and utilize the credit of additional duty of customs/excise duty for payment of service tax. Credit is also provided on payment of service tax on input services for the discharge of output service tax liability. • Tax rate and education cess maintained at 10 and 3 per cent respectively. • Additional 4 services brought within ambit of service tax namely o Transport of goods by rail
o Transport of coastal goods and goods through inland water including national waterways o Legal consultancy services (except in case of individuals) o Cosmetic and plastic surgery (other than trauma or congenital cases) Exclusions • Sub-brokers excluded from definition of stock broker.
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Process resulting in manufacture of excisable goods excluded from business auxiliary services.
Exemptions • Inter or Intra state transportation of passengers in a vehicle bearing contract carriage permit. • Federation of Indian Export Organizations and specified Export Promotion Councils. • Purchase and sale of foreign currency between scheduled banks. Amendments • Tax reduced from 8 to 6 per cent when books of accounts are not seperately maintained in respect of taxable and exempted services.
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Cenvat credit to be reversed should input/capital goods get fully written off.
• Works Contract Rules, 2007 modified to allow the benefit of composition scheme where the gross value charged for the works contract is declared.
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Exporters exempted from service tax when goods transported by road or on commission up to 10 per cent paid to foreign agents.
Securities Transaction Tax Securities Transaction Tax (STT) is the tax payable on the value of taxable securities
transaction. STT was introduced in India by the 2004 budget and is applicable with effect from 1st October 2004.STT is not applicable on off-market transactions. Stock market brokers have been seeking the removal of STT ever since it was introduced in the 2004-05 Union Budget. It is a tax imposed on the sale and purchase of securities, which can be shares, derivatives or units of mutual funds traded on a recognized stock exchange. At present, the STT rate is 0.125 per cent of the total volume of the transaction.
Product Equity-Delivery
Transaction Purchase Sell Purchase Sell Purchase Sell Purchase Sell
STT rate 0.125% 0.125% 0.025% 0.017% 0.125% 0.017%
Charged on Turnover Turnover Turnover Turnover Settlement price, on exercise Premium
Equity-Intraday
Future
Option
Although the STT has not been abolished in the current budget but the new direct tax code has suggested abolishing the Securities Transaction Tax.
Objectives of a Tax reform (Goods and Services Tax (GST) )
The basic objective of tax reform would be to address the problems of the current system discussed above. It should establish a tax system that is economically efficient and neutral in its application, distributional attractive, and simple to administer.
In particular, it is important from an administrative perspective that close substitutes should not be taxed at very different rates—to avoid leakages and distortions. Revenue considerations suggest that the tax base should be broad, and comprise all items in the consumer basket, including goods, services, as well as real property. The neutrality principle would suggest that: • the tax be a uniform percentage of the final retail price of a product, regardless of the supply-chain arrangements for its manufacturing and distribution; • the tax on inputs be fully creditable to avoid tax cascading; and • the tax be levied on the basis of the destination principle, with all of the tax on a given product/service accruing in the jurisdiction of its final Multiple VAT rates become a source of complexity, and disputes, for example, over borderlines, adding to the costs of tax administration and compliance. It is for this reason that countries like New Zealand, Singapore, and Japan have chosen to apply the tax at a low and uniform rate, and address any concerns about vertical equity through other fiscal instruments, including spending programs targeted to lower-income households. Another important objective of tax reform is simplification of tax administration and compliance, which is dependent on three factors. The first determining factor for simplicity is the tax design itself. Generally, the more rational and neutral the tax design, the simpler it would be to administer and encourage compliance. If the tax is levied on a broad base at a single rate, there would be few classification disputes and the tax-specific record keeping requirements for vendors would be minimal. The tax return for such a system can be as short as the size of a postcard. It would simplify enforcement, and encourage voluntary compliance.
Implementation of GST
In December 2007, state FMs discussed the road map suggested by the committees of bureaucrats and reached a consensus that India would move to a dual GST: a Central tax and a separate one for states. This strikes a balance between the need for harmonisation of tax rates, and the federal structure of the Indian constitution. Also, the competition in an integrated market will ensure that the GST rates do not diverge unduly among different states. This raises new questions on how this tax will be administered. The common sense suggestion has been to mould what is now the Central Excise department at the Centre and the several sales tax departments in the states to implement the GST. Some areas may have to be exclusively assigned for the central establishment like the taxation of services of an inter-State nature. In all cases, taxes will have to be collected under two heads, pertaining to CGST and SGST. However, with the help of IT systems and effective
compilation and processing capabilities, it should be possible to handle these problems without much difficulty. In pursuance of the proposed switch over, a reduction is expected in the Central Sales Tax rate from the currently applicable rate of 3% to 2%. The phasing out of the CST will also result in an increase of the service tax net. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively.
Expected changes due to GST What happens with GST? - Multiple rates for goods, single rate for services
- Revenue loss to some states as tax collected in the state where goods and services are consumed - Place of consumption and supply needs to be defined in a simple manner - Cumulative incidence of excise and state value-added tax currently at 20-22% of retail sales price - Dual structure – one rate for Centre, another for State - Dual structure passed by the Empowered Committee of State Finance Ministers - GST at Centre may be capped at 10% - Rates may vary in States
Impact:
- Government to compensate loss to states; five-year compensation program being worked out - Cumulative incidence of GST expected to be around 18% - The average for Organization for Economic Co-operation and Development stands at 17.6% - Service may be taxed at both Centre and State level now, currently only services at the Central level are taxed
Implementation of the Taxes under GST
The general structure of VAT often presents a case for a federal VAT with a broad base and few exemptions. Political compulsions and the need to maintain some degree of progressively in the tax system induce deviations from the prescribed coverage. There are very few examples worldwide that incorporate a sub-national VAT.
Constitutional assignment of tax powers in India and the current political environment, however, purely federal VAT is not considered feasible, even though it may be considered desirable in a number of circles. The options left therefore are a dual VAT, an integrated VAT, or a state level VAT. Each of these regimes has certain advantages and some costs. It would be useful to look at these in some detail. In contrast to a federal VAT, a state VAT transfers the entire power to tax to the provincial governments. The revenue balance in such a regime can be ensured by a reduction in the transfers to the provinces from the union government. However, there are two major difficulties in implementing such a regime. First, since one of the purposes of central transfers is to induce some redistribution of resources, a reduction in the transfers can reduce the leverage the union government has in effecting such regional redistribution. Second, since the strength of the Indian economy would lie in its forging a single common market, form of treatment and monitoring of inter-state transactions would be critical in determining the success of such a regime. While destination principle is considered appropriate, success of a pure zero-rating mechanism is contingent on are liable and timely information system to record and monitor inter-state transactions. It is possible to find solutions to the second problem; however, the first would remain a constraint. A dual VAT proposes two parallel taxes – one by the union government and the other by the state governments. In principle, the taxes can be completely unrelated to each other and can be run by two or more unrelated tax administrations. In the context of India, this would represent some improvement in the tax base for the governments, since both the union government and the state governments in India currently work with comparatively smaller tax bases. Cascading would be minimized provided provincial taxes are not levied on a base inclusive of central taxes. However, the tax system would remain as complex as it is today, with 30 different tax laws and the corresponding administrations. The changes in coverage and the implied expansion in incidence of tax would induce a considerable resistance to such a change. Further, there remains the need to put in place a reliable system to monitor inter-state transactions, as in the case of the state VAT alternative. An integrated VAT as opposed to the above, attempts to design an integration of the tax bases for the centre and the states so that together, the taxes cover a comprehensive base for VAT. This model would eliminate the duality of taxes on all segments of the tax base,
however, it would retain the complexity of the dual VAT, provided the states are allowed to determine their own rates of tax and maintain separate administrations. Further, there would arise need for tax credit to flow across taxes, which would make tracking transactions essential and difficult. Another potential difficulty with any such design is, with differential growth rates for different segments of the economy, any assignment of tax powers would be perceived as unfair by one or the other level of government. For instance, if services are allocated to the union government, since this sector of the economy is known to grow faster than the other sectors, states would perceive this as an unfair assignment of tax powers. Clearly, any model that is adopted needs to be modified to suit the needs of the hour. A dual VAT with corrections for the problems mentioned would provide a model closest to satisfying the needs of both levels of government. This is the model that has found support in academic circles and is now being endorsed by the Empowered
Analysis of the tax structure under various models of GST Implementation
The rest of the discussion therefore, focuses on this broad structure and attempts to identify the details of any model that can be adopted. As the discussion above suggests, a dual VAT empowers both levels of government to tax the entire available tax base. In defining the tax base, there will arise some exemptions. A conservative picture of the likely exemptions in the proposed regime would be as follows: Unprocessed agricultural goods could remain exempt from taxes –for reasons of convenience and to present a picture of progressivity in the tax. In the present regimes, the central tax does not extend to the agricultural sector and the state regimes exempt a number of agricultural commodities – only crops considered to be of commercial nature are usually brought under tax.3 Government services are likely to be exempt and so would personal and social services like education and health care. Given the rising demand for the latter category of services in India, where it is often perceived that the responsibility for the same rests with the government, introducing a tax on the same may not be acceptable, at least in the short run. Furthermore, given the well-documented difficulties in taxing financial services, to being with, it is fair to assume that this sector too would remain largely untaxed. In order to ensure a level playing field, it is important that exports are zero-rated and imports are subject to GST, i.e., to both central and state VAT. The rest of the activities, it is expected, would come within the ambit of GST, at both levels of tax. In implementing such a regime, it is important to clearly specify a regime for taxation of inter-state transactions. This is even more important in the context of services which span more than one state. The other important issue that needs to be discussed is the nature of administration of such a tax – if the tax base is synchronised/ homogenised across the taxes, there is great merit in exploring the options for a unified administration. These issues remain as yet unresolved. The options in the same are discussed in the following section. The other major issue that remains to be discussed is the rate of tax that would make this regime revenue neutral. There are three distinct issues in any discussion on the
rates of tax. First, should there be a single rate of tax or multiple rates. While it is generally accepted that a regime with a single rate of tax is easier to administer and comply with, multiple rates are introduced to address issues of progressively. Apart from issues such as classification disputes and accounting difficulties in a multi-rate regime, such regimes introduce perverse incentives. In the present regime of state VAT for instance, inputs have been taxed at 4 percent while 12.5 percent is the regular rate on goods of final consumption. Such a big divergence between taxes on inputs and final products undermines the incentive mechanism of VAT – the manufacturer would not be induced to report all his sales since a substantial part of the tax is to be paid at this stage. A GST regime with an acceptable tax rate might provide the scope for moving away from multi-rate regime to a single rate regime. Second, since high rates would induce noncompliance, are there mechanisms available to ensure that the rates of GST rates remain modest and yet generate the required resources? It is often argued that any tax less than 20 percent would not raise the resources required. VAT is often complemented by some non-relatable excises. These excises could be satisfying a number of other objectives like environmental issues, discouraging the consumption of tobacco and alcohol, and/or imposing “luxury tax” unselect goods associated with relatively higher incomes. In India, no specific emphasis has-been placed on environmental issues in determining tax structures – however, for reasons of ease of collection, petrol and diesel have been subject to high rates of tax, especially at the state level. The state VAT regimes have kept these two products outside the purview of VAT. It is feasible therefore to construct regimes which integrate these commodities into the general VAT/GST structure and introduce a separate non-relatable excise over and above this rate. In the case of tobacco products, especially, cigarettes and bidis, the state governments have now introduced a state VAT at 12.5percent and the central government imposes specific taxes on these products. The central taxes alone contribute anywhere between 17 to 59 percent of the retail prices of these products. There is therefore, room to reorganise these regimes into a generalised GST and some non-rebatable excises. This would not disturb the government’s overall concern to discourage the consumption of tobacco products. For luxury taxes, it is impossible to identify a number of commodities which satisfy this description. However, in order to capitalise on the benefits of introducing a simple and comprehensive VAT, it is important to keep this list small. For illustration, we limit this list to include only passenger cars and multi-utility vehicles. With these three categories subject to non-rebatable excises, Section 4 explores the rates of tax required to ensure revenue neutrality. Depending on the relative distribution of revenues within the new regime, the non-rebatable excises can be assigned to either the union government or the state governments. Third, would there be uniform taxes across all states? States, till now, have autonomy in determining tax rates on bases within their jurisdiction. Since 2000, some consensus has been worked out to ensure a degree of harmonisation in the rates. While complete harmonisation has not been achieved, it does not appear to be an impossible task. It may however, be worthwhile to allow for a degree
of autonomy in rates within a narrow band so as to address local concerns of individual states. Harmonisation in the base however is essential and highly desirable.
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