Nikita Jain

088528

TAXATION: ASSIGNMENT

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INDIRECT TAXES

General Introduction:

Indirect taxes are the charges that are levied on goods and services. They are of different

types in India like Excise Duty, Customs Duty, Service Tax, and Securities Transaction Tax.

There are a series of Tax laws and regulations in order to control the indirect taxation,

which can be either national law, made by the central government or even can be state

specific laws. As a result these taxes are an important part of the total cost. It is thus

essential to make appropriate planning for such costs.

Nearly all of the activities that are subjected to indirect taxation range from manufacturing

to those required for final consumption. Activities related to trading, imports, and services

are also included in this list. As a result Indirect Tax has an impact on all business lines.

In general, the Indirect Tax in India is a complex system of interconnecting laws and

regulations, which includes specific laws of different states. For this there are many reliable

organizations in India, which employs efficient Indirect Tax professionals to help their

clients

In the following pages is a brief about three of the main kinds of Indirect taxes in India:

1. Sales tax

2. Customs Duty

3. Excise Duty

SALES TAX

What Sales Tax is and why it is paid:

Sales Tax or the tax on consumption is liable for payment during the purchase for certain

goods and services as they form a part of national GDP. It means every seller of goods and

service provider charges the tax after availing the input tax credit. It is the form of

collecting sales tax under which tax is collected in each stage on the value added of the

goods. In practice, the dealer charges the tax on the full price of the goods, sold to the

consumer and at every end of the tax period reduces the tax collected on sale and tax

charged to him by the dealers from whom he purchased the goods and deposits such

amount of tax in government treasury.

The question of whether they are generally progressive or regressive is a subject of much

current debate. People with higher incomes spend a lower proportion of them, so a flat-rate

sales tax will tend to be regressive. It is therefore common to exempt food, utilities and

other necessities from sales taxes, since poor people spend a higher proportion of their

incomes on these commodities, so such exemptions make the tax more progressive. This is

the classic "You pay for what you spend" tax, as only those who spend money on non-

exempt (i.e. luxury) items pay the tax.

Generally, the sale of imported items as well as sale by way of export is not included in the

range of commodities that require payment of sales tax. Moreover, luxury items (such as

cosmetics) are levied higher sales tax rates.

Who collects Sales Tax:

Sales tax can be levied either by the Central or State Government, Central Sales

tax department. Also, 4 per cent tax is generally levied on all inter-State sales. It is imposed

under Central Government (Central Sales Tax) and the State Government (Sales Tax)

Legislation. State sales taxes - that apply on sales made within a State - have rates that

range from 4 to 15 per cent. Sales tax is also charged on works contracts in most States and

the value of contracts subject to tax and the tax rate vary from State to State. However,

exports and services are exempt from sales tax. Sales tax is levied on the seller who

recovers it from the customer at the time of sale.

Normally, each state has its own sales tax act and levies the tax at various rates. Apart

from sales tax, certain states also impose extra charges such as works contracts tax,

turnover tax & purchaser tax. Thus, sales tax plays a major role in acting as a major

generator of revenue for the various State Governments.

Under the sales tax which is an indirect form of tax, it is the responsibility of seller of the

commodity to collect or recover the tax from the purchaser. The Central Sales Tax (CST)

Act that comes under the direction of Central Government takes into consideration all the

interstate sales of commodities.

However, most of the states in India, from April 01, 2005, have supplemented the sales tax

with the new Value Added Tax (VAT).

CUSTOMS DUTY

What Customs Duty is and why it is paid:

The Custom Duty in India is one of the most important tariffs. The custom duty in India is

regulated by the Customs Act of 1962. The main purpose of the custom duty in India is the

prevention of the illegal export and import of goods. The rates of the custom duty levied on

the imported and exported goods are assigned in the Custom Act, 1962. This act was

formulated to prevent illegal imports and exports of goods. Besides, all imports are sought

to be subject to a duty with a view to affording protection to indigenous industries as well

as to keep the imports to the minimum in the interests of securing the exchange rate of

Indian currency.

Duties of customs are levied on goods imported or exported from India at the rate specified

under the customs Tariff Act, 1975 as amended from time to time or any other law for the

time being in force. For the purpose of exercising proper surveillance over imports and

exports, the Central Government has the power to notify the ports and airports for the

unloading of the imported goods and loading of the exported goods, the places for

clearance of goods imported or to be exported, the routes by which above goods may pass

by land or inland water into or out of Indian and the ports which alone shall be coastal

ports.

Who collects Customs Duty:

The national authority that is entrusted the task of realizing taxes on international trade is

often referred to as Customs department. Normally the Customs department operates

under a national law and is authorized to examine the cargo in order to ascertain actual

description, specification volume or quantity, so that the assessable value and the rate of

duty may be correctly determined and applied. In India this department is called the

Central Board of Excise and Customs (CBEC).

In order to give a broad guide as to classification of goods for the purpose of duty liability,

the CBEC brings out periodically a book called the "Indian Customs Tariff Guide" which

contains various tariff rulings issued by the CBEC. The Act also contains detailed provisions

for warehousing of the imported goods and manufacture of goods is also possible in the

warehouses.

EXCISE DUTY

What Excise Duty is and why it is paid:

An excise is an indirect tax, meaning that the producer or seller who pays the tax to the

government is expected to try to recover the tax by raising the price paid by the buyer (that

is, to shift or pass on the tax). Excises are typically imposed in addition to another indirect

tax such as a sales tax or VAT.

In common terminology, an excise is distinguished from a sales tax or VAT in three ways:

(i) an excise typically applies to a narrower range of products;

(ii) an excise is typically heavier, accounting for higher fractions (sometimes half or

more) of the retail prices of the targeted products; and

(iii) an excise is typically specific (so much per unit of measure; e.g. so many rupees

per quintal), whereas a sales tax or VAT is ad valorem, i.e. proportional to value

(a percentage of the price in the case of a sales tax, or of value added in the case

of a VAT).

Typical examples of excise duties are taxes on gasoline and other fuels, and taxes

on tobacco and alcohol (sometimes referred to as sin tax).

The Central Excise duty is levied in terms of the Central Excise Act, 1944 and the rates of

duty are prescribed under the Schedule I and II of the Central Excise Tariff Act, 1985. The

taxable event under the Central Excise law is ‘manufacture / production’ and the liability of

Central Excise duty arises as soon as the goods are manufactured or produced. As per the

Central Excise Act, duty is leviable only on excisable goods. i.e., Goods specified in Central

Excise Tariff Act, 1985.

The rates of the Excise Tax vary depending on the nature of commodity. Sometimes, even

for the similar commodity the tax rates are different depending on circumstances. Factors

like end-use and taxability of inputs are responsible for this. The Excise Tax rates are

notified in the Central Excise Tariff Act but can be revised accordingly by the annual

Finance Acts. However, the former Acts should be considered to determine the applicable

excise duty rate for any commodity. According to the Central Excise Tax provisions, such

excise duty can be imposed on any goods either produced or manufactured, although the

payment can be done during the time of removing the goods.

In India, the revenue from the Excise Tax is the biggest single financial source. The main

objective of the central Government is to achieve different socio-economic policies by

making suitable adjustments regarding the scope, nature, and quantum of levy of the

Central Excise Tax. Such schemes of the Excise Tax taken by the central government

modifies and serves various purposes of price control, adequate supply of essential

commodities, promotion of small scale industries and industrial growth.

Who collects Excise Duty:

Like Customs Duty, the Central Excise law is also administered by the Central Board of

Excise and Customs (CBEC or Board) through its field offices, the Central Excise

Commissionerates. For this purpose, the country is divided into 10 Zones and a Chief

Commissioner of Central Excise heads each Zone. There are total 61 Commissionerates in

these Zones headed by Commissioner of Central Excise. Divisions and Ranges are the

subsequent formations, headed by Deputy/Assistant Commissioners of Central Excise and

Superintendents of Central Excise.

For enforcing the central excise law and collection of Central Excise duty the following

types of procedures are being followed by the Central Excise Department:

Physical Control – Applicable to cigarettes only. Here assessment precedes clearance

which takes place under the supervision of Central Excise officers;

Self-Removal Procedure – Applicable to all other goods produced or manufactured

within the country. Under this system, the assessee himself determines the duty liability

on the goods and clears the goods.

The Central Excise Officers are also entrusted to collect other types of duties levied under

Additional Duties (Goods of Special Importance) Act, Additional Duties (Textiles and

Textiles Articles) Act, and Cess etc.