Indirect taxes

INDIRECT TAXES

Difference between direct and indirect taxes

Point of difference

DIRECT TAX INDIRECT TAX

Incidence & Impact

A tax is said to be direct ‘when impact and Incidence of a tax are on one and same

person.

If impact of tax is on one person and incidence on the another, the tax is

called ‘indirect’

Burden

Direct tax is imposed on the individual organisation and

burden of tax cannot be shifted to others.

Indirect tax is imposed on commodities and allows the tax burden to shift.

Viability of

payment

Direct taxes are lesser burden then indirect taxes to

people as direct taxes are based income earning ability

of people.

Indirect taxes are borne by the consumers of

commodities and services irrespective of financial

ability as the MRP includes all taxes.

Administrative

viability

The administrative cost of collecting direct taxes is

more and improper administration may result in

tax evasion.

Cost of collecting indirect are taxes is very less as

indirect taxes are wrapped up in prices of goods and services and

cannot be evaded

Taxpayers

Collected from the people actually earning their

income.

Collected from someone or intermediary other

than the person or entity that would normally be

responsible for the taxes.

Imposed on

Income, wealth and property Goods and services

Classification of TAXES

•DIRECT TAX

• INCOME TAX

• CORPORATION TAX

• PROPERTY TAX

• INHERITANCE TAX

• GIFT TAX

• WEALTH TAX

• INDIRECT TAXES

• CENTRAL EXCISE

• CENTRAL SALES TAX

• CUSTOMS DUTY

• SERVICE TAX

• OCTROI ETC.

• VALUE ADDED TAX (VAT)

• SECURITIES TRANSACTION TAX (STT)

Levy of taxes

CENTRAL GOVERNMENT

• INCOME TAXES(EXCEPT ON AGRICULTURE)

• CUSTOMS DUTY

• EXCISE DUTY (EXCEPT ON LIQUOR)

STATE GOVERNMENT

• TAX ON AGRICULTURE

• EXCISE ON LIQUOR

• BOTH CST AND LST

LOCAL AUTORITIES

• OCTROI

• MUNICIPAL TAXES

• TAXES ON HOUSE PROPERTY

Concept of Central Sales Tax (CST)

• CST is an indirect tax as the burden falls on consumer

• CST act came into force on 1.7.1957

• This act applies to whole of India, including J&K

• It is levied by Central Government on TAXABLE TURNOVER of Inter-state sale of goods made by registered dealer in ordinary course of business.

• It is payable in the state in which movement of Goods commences.

• It is assessed, collected and administered by State Government.

CENTRAL SALES TAX ACT-1956

CONDITIONS

1. There should be A dealer

2. Should be A registered dealer

3. He must carry on any business

4. Sale should take place

5. Sale may be to A regd or unregd buyer

6. The sale should be of goods.

7. The sale can be of also declared goods (goods of specific importance)

8. The sale should take place in course of inter state

9. The sales should not be within the same state.

10.The sale should not be outside India

DEFINITIONS• DEALER U/S 2(b).

He is A person one who is involved in the activities of buying, selling, distributing the goods directly or indirectly either for cash or for deferred payment ,for commission ,brokerage etc.

DEALER INCLUDES

1. Local authorities ,co-operative societies, A company, HUF, association of persons, firms..

2. Suppliers, broker, del creder, commissioner, etc.

3. An auctioneer(govt, agent, etc)

REGISTERED DEALER SEC 7• A person should register himself u/s 7

• The registration may be:

• VOLUNTARY REGISTRATION OR • COMPULSORY REGISTRATION

SALE -2(G)

SALE INCLUDES

• A transfer of goods for money

• Transfer of goods for money’s worth

• Transfer of goods on an agreement to pay on deferred system

• Hire purchase system and installment system.

POINTS TO BE REMEMBERED• Sale may be to a registered buyer or unregistered buyer.• Element of price is essential.• Free supply is not sale.• Quantity discount is not a sale.• Mortgage is not a sale.• Depot transfer is not a sale.

GOODS-2(d)

• Goods means any article, thing, commodity, and which is movable ,however goods

• DOES NOT INCLUDE: Newspapers, actionable Claims, stocks, Shares, Securities.

• DECLARED GOODS –SEC2(C)• Declared goods are goods of special importance.If declared goods

are sold there are certain benefits which can be obtained by the dealer, which is not available for the ordinary goods.

• Cereals ,Pulses, Coal Including Coke But Not Charcoal, Cotton Waste , Hand Made Garments, tobacco, Raw Tobacco, Cheroots Of Tobacco ,Jute, Oil Seeds, Cotton In Unmanufactured Form ,Crude Oil,sugar, khandsare Sugar, Aviation Turbine Fuel, refused Tobacco, Cigars ,Hides And Skins, Woven Fabrics Of Wool.

INTER STATE SALE-SEC 3

• Once the goods are taken out of dealers place then final destination should be taken into consideration and not the route through which goods are transferred.

BASIS OF CHARGE• When all these conditions are satisfied then CST will be levied

AT SPECIFIED RATE ON TAXABLETURNOVER WHICH WILL BE

BASED ON SALES AND NOT ON PROFITS.

Rates of CST

• Form C The sales tax on inter-state sale is 4% or the applicable sales tax rate for sale within the State whichever is lower if the sale is to a dealer registered under CST.

• Form DSale to government is taxable  @ 4% or applicable sales tax rate for sale within the State whichever is lower.

• Form E1This form is issued by the dealer who makes the first inter-state sale during movement of goods from one State to another. 

• Form E2This form is issued by the second or the subsequent seller when the goods move from one state to another in a series of inter-state sales by transfer of documents of title.

• Form FThis form is issued when goods are dispatched to another state as a consignment or to the branch of a dealer in another State. The CST is not payable if there is only inter-state stock transfer and there is no sale.

• Form HThis form is issued by an exporter for purchase of goods. The purchase of goods is for an export order or in pursuance of an export order. 

• Form IThis form is issued by a dealer located in a Special Economic Zone (SEZ). No CST is levied when sales is made to a dealer located in SEZ.

Particulars Amount

Price or value of Goods Sold XXX

Less: Goods rejected/ Returns XX

Net Sales XXX

Less: Discounts Insurance charges at request of Buyer Transportation and Freight charges Installation charges

Balance XXX

Add:Packing chargesCentral Excise DutyInsurance charges (borne by seller)Weighing charges

Aggregate Sale Price XXX

Less: CST (Aggregation of Sale price x Rate of tax / 100+Rate of Tax

XX

Taxable turn Over XXX

Value Added Tax

• The value added tax was introduced as an indirect tax into the Indian taxation system from 1 April 2005.

• The existing General Sales Tax Laws were replaced with new Value Added Tax Acts .

• VAT is a tax, which is charged on the “Increase in Value” of good and services at each stage of production and circulation.

• It is charged by registered VAT businesses

Rate of TAX (VAT)

• Rate of Tax:

Schedule ‘A’ – Essential Commodities (Tax free)- NilSchedule ‘B’ – Gold, Silver, Precious Stones, Pearls etc. - 1%Schedule ‘C' – Declared Goods and other specified goods - 4% Other goods w.e.f. 1/5/10 - 5%Schedule ‘D’ – Foreign Liquor, Country Liquor, Motor Spirits, etc. - At specified ratesSchedule ‘E’ – All other goods (not covered by A to D) - 12.5%

Calculation of VAT

Calculation of VAT (tax @10%) Amount

Purchase price 200

Tax paid during purchase (Rs. 20 [input tax]—10% on 200)

Selling price 250

Tax collected on resale (Rs. 25[output tax]—10% on 250)

VAT payable (Output tax – Input Tax) Rs. 5 (25-20)Total tax collected by the Government

At the time of purchase by the dealer----Rs. 20 At the time of resale by the dealer---------Rs. 05

Total----------------------------------------------------Rs. 25

CENTRAL EXCISE ACT

• The law of Central Excise duties is governed by the following :

• Central Excise Act 1994

• Central Excise tariff Act 1985

• Central Excise Rules ,1944

• Central Excise Act ,1994• This is the basic law related to the levy and collection of

duties of central excise. However this Act does not contain the rate at which duties are imposed.

• Central Excise Tariff Act ,1985 • This Act classifies various goods on which central excise

duties are levied and prescribes the rates at which the duty is payable.

• Central Excise Rules ,1944• All manufacturers of excisable goods are required to register

under these rules .The registration is valid as long as production activity continues and no renewals are necessary

Taxable event for charge of duty of central excise is the manufacturer or production of goods in India.

In this context ,the Supreme Court has observed: Excise duty is not directly on the goods, but manufactured thereof.

Though both excise duty and sales duty levied with reference to goods, the two are very different imposts.

In one case, the imposition is on the act of manufactured or production, while in the other it is on the act of sale.

Taxable event for central excise duty

1. 1.The duty is on goods

2. 2.The goods must be excisable

3. 3 .The goods must be manufactured or produced

4. 4.Such manufacture or production must be take place in India

Liability for central exciseFor condition must be present for the charge of central excise duty:

Movability

Goods must be movable. Duty cannot be levied on immovable property .Central excise duty cannot imposed on plant and machinery

Marketability

Goods must be marketable .The goods must be known in the market and must be capable of being bought or sold

1.GOODSFor an item to be considered goods for the purpose of the levy of central excise duty ,it must satisfy two requirements:

2.Excisable goods For the liability of duty of central excise to arise, the item in

question should not only be goods it should also be excisable goods.

A goods become excisable if and only if it is mentioned in the Central Excise Tariff Act 1985

The third condition that must be satisfied for becoming liable to pay duties of central excise is that the goods must be manufactured or produced.

3.Goods must be manufactured or produced

4. Manufactured or production must in India Finally ,for the liability to pay central excise duty to arise the

goods must be manufactured or produced in India.

5. Who is liable to pay central excise duties? The central excise duty is a tax on manufacture or production of

goods. Hence, the liability to pay excise duty lies on manufacturer or the producer

1. Specific duty

2. Tariff duty

3. Maximum retail price

4. Ad -valorem basis

Basis for valuation of goods

The duty of central excise is charged on four bases:

• 1.Specific duty

• 2.Tariff duty

• 3.Maximum retail price

• 4.ad -valorem basis

Basis for valuation of goods

• It is the duty payable on the basis of some physical feature of the product unit like weight, length, volume, thickness, etc.

• Some of the goods on which duty is charged on the basis are as follows

item Basis

Cigarette Length

Matches Box of 100

Sugar Quintal

Cement Per tonne

1.Specific duty

1. The government has the power to declare a value on the basis of which duty of central excise will be charged.

2. When the government declare the value, the duty is charged on the value and the actual value of the goods is ignored.

2.Tariff value

Some manufactures had started the practice of central excise by resorting to some questionable practices. In order to check these malpractices, a new basis of valuation was introduced, that is, the maximum retail price(MRP)-based valuation.

E.g.: television sets, DVD players, Cosmetics, Toilet preparations and chocolates

3.MRP –based valuation

The first three bases of valuation are applied for only a few goods. In a large majority of cases the duty of central excise is payable on the basis of the value of the goods, called the assessable value.

4.Ad Valorem duty

Meaning of customs duty

1. Duty or tax, which is levied by central govt.

2. Collected from the importer or exporter of goods.

3. Duties are usually “ad –valorem rates”

4. “Ad –valorem rates”

5. Duty as a percentage of the value of goods

Scope and coverage of customs law

1. Basic act for levy and collection of customs duty.

2. Contain various provisions relating to imports and exports of goods and merchandize as well as baggage of persons.

3. The main purpose of customs act, 1962.

4. Prevention of illegal imports and exports.

5. The act extends to the whole of the India.

6. Two acts.1. The customs act, 19622. The customs tariff act, 1975

Objects of customs duty

• The customs duty is levied, primarily, for the following purpose:1. To raise revenue.2. To regulate imports of foreign goods into India.3. To conserve foreign exchange, regulate supply of

goods into domestic market.4. To provide protection to the domestic industry from

foreign competition by restricting import of selected goods and services, import licensing, import quotas, and outright import ban.