Description
Documentation about different types of indirect taxes in India.
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 universalised 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), inter state 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 judgement 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 utilised 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 upto 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 recognised stock exchange. At present, the STT rate is 0.125 per cent of the total volume of the transaction.
Product
Transaction Purchase
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-Delivery Sell Purchase Equity-Intraday Sell Purchase Future Sell Purchase Option Sell
Although the STT has not been abolished in the current budget but the new direct tax code has suggested abolishing the Securities Transaction Tax.
doc_578534708.docx
Documentation about different types of indirect taxes in India.
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 universalised 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), inter state 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 judgement 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 utilised 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 upto 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 recognised stock exchange. At present, the STT rate is 0.125 per cent of the total volume of the transaction.
Product
Transaction Purchase
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-Delivery Sell Purchase Equity-Intraday Sell Purchase Future Sell Purchase Option Sell
Although the STT has not been abolished in the current budget but the new direct tax code has suggested abolishing the Securities Transaction Tax.
doc_578534708.docx