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TAXATION-II

CIA-I

INDIRECT TAX

GOWTHAMAN N

1020211

SECTION F2

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1) Explain the role of Indirect taxes in Indias economic

development

1. Resource Mobilization

Taxation enables the government to mobilize a substantial amount of revenue.

The tax revenue is generated by imposing: Direct Taxes such as personal

income tax, corporate tax, etc., Indirect Taxes such as customs duty, excise

duty, etc.

In 2006-07, it is estimated that the tax revenue of the central government

(India) was 81% of the total revenue receipts, whereas, non tax revenue was

only 19%.

2. Reduction in Inequalities of Income

Taxation follows the principle of equity. The direct taxes are progressive in

nature. Also certain indirect taxes, such as taxes on luxury goods are also

progressive in nature. This means the rich class has to bear the higher

incidence of taxes, whereas, the lower income group is either exempted from

tax (direct taxes) or has to pay lower rate of duty (indirect taxes) on goods

consumed by the masses. Thus, taxation helps to reduce inequalities of

income and wealth.

3. Social Welfare

Taxation generates social welfare. The social welfare is generated due to

certain undesirable products like alcoholic products, tobacco products and

such other products are heavily taxed, which restricts their consumption,

which in turn facilitates social welfare.

A part of the tax revenue is utilised for social development activities, such ashealth, education and family welfare, which also improve social welfare as

well as social order in the society.

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4. Foreign exchange

Taxation encourages exports and restricts imports. Generally, developing

countries and even the developed countries do not impose taxes on export

items. For instance, in India, exports are exempted from excise duty, VAT,customs duty and other duties.

However, there is customs duty on imported goods. Therefore, taxation helps

to: Earn foreign exchange through the promotion of exports.

5. Regional Development

Taxation plays an important role in regional development; Tax incentives such

as tax holiday for setting up industries in backward regions, which induces

business firms to set up industries in such regions, Tax revenue collected by

government is also utilised for development of infrastructure in backward

regions.

6. Control of Inflation

Taxation can be used as a tool of controlling inflation. Through taxation, the

Government can control inflation as follows :-

If inflation is due to high rise in prices of essential items, then the Governmentmay reduce the rate of indirect taxes.

If inflation is due to increase in demand, the Government may try to cut down

the effective demand by increasing the tax rate. Increase in tax rate may

restrict consumption, which may reduce demand, and subsequently inflation

may be controlled.

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2) Explain in detail the condition for levy of excise duty

According to Section 3 of Central Excise Act there are four basic conditions

for levy of Central Excise duty.

(1) The duty is on goods.

(2) The goods must be excisable.

(3) The goods must be manufactured or produced

(4) Such manufacture or production must be in India. Unless all of these

conditions are satisfied, Central Excise Duty cannot be levied.

3) Explain in detail the various basis of excise duty

calculation

MRP BASED VALUATION [SECTION 4A]

Products covered under MRP provisions: In case of about 110 products,duty is payable u/s 4A of Central on basis of MRP printed on the package, after

allowing abatement at specified rates. MRP should be inclusive of all taxes andduties.

The provision applies only when product is package intended for retail

sale andis specified in a notification issued u/s 4A

MRP provisions are overridingMRP provisions u/s 4A are overriding provisions.

Assessable value when MRP not applicableEven in case of products covered u/s 4A, where MRP provisions are not

applicable, valuation will be on basis of value u/s 4 i.e. Assessable Value.

MRP provisions do not apply to free samples, package less than 10gm/10

ml, wholesale package or package above 25 Kg (50 Kg in some cases)

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Deemed manufacture of products u/s 4AIn case of goods covered under section 4A, packing or repacking and re-

labelling is deemed manufacture.

Incorrect MRPDepartment can ascertain MRP if MRP not declared or incorrectly declared

or obliterated. Penalty can be imposed [section 4A(4)(a) of Central Excise

Act].

BASIC REQUIREMENT OF ASSESSABLE VALUE [SECTION 4]

Transaction value as assessable valueWhen duty is payable on ad valorem basis, it is payable on assessable value

as defined in section 4 of Central Excise Act.

Transaction Value is taken as Assessable Value only if goods are sold at

the time and place of removal, buyer is unrelated and price is sole

consideration [Section 4(1)(a) of Central Excise Act].

Transaction value is the price paid or payable for the goods at the time andplace of removal, by reason of, or in connection with sale, inclusive of all

expenses but excluding taxes [section 4(3)(d) of Central Excise

Act].Transaction value does not include duty of excise, sales tax and any

other taxes on goods. Only taxes actually paid or payable are allowed as

deduction

Inclusions and exclusions in transaction valueBy reason of or in connection with sale of such goods.Any amount charged

is includible in assessable value if it is by reason of or in connection withsale of such goods.

Packing and design chargesDuty is payable on packing charges and design charges related to

manufacture.

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Price escalationDuty is payable in case of price escalation after clearance, but not when

price was final at the time of clearance. If there is price rise after clearance

of goods from factory, differential excise duty and interest @ 13% is

payable

Trade discountsTrade discount is allowable as deduction from assessable value. Cash

discount is allowable. Discount need not be uniform.

Notional interest on advances

Notional interest on advances is includible only if there is evidence that it

has depressed the selling price

VALUATION IN CASE OF SALE FROM DEPOT/BRANCH

Transport charges after depotTransport charges upto depot and depot expenses are not allowable as

deduction (These are already included in depot price). Transport chargesfrom depot onwards are not includible in assessable value

Value addition done at depotAny value addition done at depot is not includible in assessable value, if

activity is not manufacture (the reason is that goods are to be assessed in

the condition in which they are removed from factory)

Transport charges after depotTransport charges upto depot and depot expenses are not allowable as

deduction (These are already included in depot price). Transport charges

from depot onwards are not includible in assessable value.

Value addition done at depot

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Any value addition done at depot is not includible in assessable value, if

activity is not manufacture (the reason is that goods are to be assessed in

the condition in which they are removed from factory).

VALUATION WHEN SALE THROUGH RELATED PERSON

Price to unrelated buyer relevantIf goods are sold through related person, value for purpose of excise will be

the price at which the related buyer sales goods to unrelated buyer

Inter connected undertakingAn inter-connected undertaking will be treated as related person for

excise valuation only if there is holding subsidiary relationship [Inter-connected undertaking means 25% common control]

Holding and subsidiaryA holding and subsidiary are related persons,

Rate legal entitiesA mere distributor is not a related person.A company or firm is a separatelegal entity and cannot be a related person of other company or firm.

Supply of goods to related person for captive consumptionIf goods are supplied to related person for captive consumption, valuation

will be on basis of cost of production plus 10%.

Partial sale through related personIf sale is partly to related person and partly to unrelated person, valuationshall be done on reasonable basis by residual method under rule 11.If

related person is only one of the buyers and substantial sales are made to

unrelated persons at same price, that price can be considered for valuation

in respect of sale to related person also.

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Tariff value [section 3(2) of Central Excise Act]In some cases, tariff value is fixed by Government from time to time. This is a

Notional Value for purpose of calculatingthe duty payable. Once tariff value

for a commodity is fixed, duty is payable as percentage of this 'tariff value' andnot the Assessable Value fixed u/s 4.

4) Explain the inclusions and exclusions from assessable

value

Customs value inclusionsSome costs, services and expenses are to be added to the price paid or

payable,

if these are not already included in the invoice price. Rule 9 of Customs

Valuation Rules provide that following cost and services are to be added

Commission and brokerage

Cost of container, which are treated as being one with the goods for

customs purposes

Cost of packing whether labour or materials

Materials, components, tools, dies etc. supplied by buyer

Royalties and license fees

Value of proceeds ofsubsequent sales

Other payment as condition of sale of goods being valued

Cost of transport up to place of importation

Landing charges

Cost of insurance.

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Exclusions from assessable value

Note to rule 4 provide that following charges shall be excluded:

Charges for construction, erection, assembly, maintenance or technical

assistance undertaken after importation of plant, machinery or

equipment

Cost of transport after importation

Duties and taxes in India