Indirect Taxes – a review_Defence

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Applicability of Duties / Taxes -

Excise Duty

Customs duty.

VAT / CST

Service tax


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Excise duty is manufacture of goods.

Customs duty is paid on imported goods. Along with

customs duty, other duties like CVD, Addl. Duty are

also paid.

VAT is applicable for purchase and sale within a

state.

CST is applicable for inter state purchase and sale.

Service tax is applicable for services provided.


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Modus operandi of each tax is different and everyAct is independent having its own peculiar

provisions. The Customs Act, Excise and Service tax are within

the jurisdiction of Central Govt while VAT isregulated by respective State Government.

These provisions are in the Constitution.- Union List Though every state has its own VAT Act, the rates of

VAT have been tried to be kept at uniform level ineach state, barring a few items.


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Excise duty is payable on Manufacture of

products. If the activity does not amount to

manufacture, the same will not be covered

under Central Excise.

Duty payable on manufacture of products,but collected at the time of clearance of

goods for the sake of convenience.


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Excisable Event :

Goods must be marketable being capableof being brought to the market for being

bought and sold.

Goods must be movable. Immovable goods

are not excisable.

Mentioned in the Tariff.

Manufactured / produced in India.


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Manufacture Important concept

Definition of Manufacture Sec. 2(f) A)Manufacture includes process Incidental or

Ancillary to the completion of manufacture of

product.

Incidental means occassional or casual

process. Ancillary means important

processes without which manufacuture is not

complete.


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B) Deemed manufacture processes

defined in Central Excise Tariff asamounting to manufacture. Eg. Labelling /

relabelling of containers from bulk packs to

retail packs of pan masala, yeast, soups,

sauces etc. (Chapter 21 Note 4). Strictlythese are not manufacturing processes.

However for the purpose of the goods

covered under this chapter these processes

are manufacture.


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C) In respect of goods covered under the

Weights and Measures (Packed commodityRules) where the goods are covered under

Third Schedule of the Tariff and processes

like packing, repacking, labelling, relabelling,

putting MRP, changing MRP etc. are carriedout, the goods will be charged to duty on

MRP less abatement.


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Assembly of CKD/SKD packs is not

manufacture. Assembly of various parts and components

may amount to manufacture if new product

emerges.

Plant and Machinery assembled at site Ifemerges as Immovable property not

excisable.

Fabrication of steel structure is exempt.


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Repairs does not amount to manufacture.

However, various judgements are availablewhere it has been held that if the same

operations are carried out on the product, the

same is treated as manufacture.


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Tariff contains list of all goods manufactured /

produced in India.

Based on HSN Harmonised system of

Nomenclature Internationally accepted format

suitably changed by respective countries.

The tariff contains 20 sections and 96 chapters.

Sections divided into chapters and chapters in sub

chapters.

Tariff contains rates of duty applicable to goods

manufactured.


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Similarly, the Customs Tariff contains 21 Sections

and 99 Chapters.

The Central Excise and Customs tariffs are identical

except certain items.

The Customs tariff gives the rates of customs duties

and other duties applicable for goods imported.

It also specifies exemptions to specified goods.


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Along with manufacturers, the dealers are

also registered under the Excise Act if theywant to pass on the excise duty benefit.

This is useful for manufacturers availing set

off benefit (Cenvat Scheme)

The dealers do not pay the duty as they arenot manufacturers but only pass on the

proportionate duty credit.


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First Stage Dealers and Second Stagedealers are registered and allowed to passon cenvat benefit.

The Cenvat Scheme allows to claim the setoff of duty paid on raw material, capitalgoods and it is adjusted against the liability offinished goods.

Hence, if the final product is not dutiable, theset off is not allowed.


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In Defence, wherever manufacturing activity is done,

the excise duty is applicable. However, this is

exempt vide Notification No. 62/95, 63/95, 64/95,74/93. The details of these exemption notifications

are as under :

Notfn. 62/95 Exemption to goods manufactured in

Central Govt. factories All goods produced inOrdnance Factories, Arms and Ammunition falling

under Chapter 93 etc.


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Notfn. 63/95 goods manufactured by

specified units / institutions for use by Govt.Departments or defence.

Covers goods manufactured by Hindustan

Aeronautics Ltd, Bharat Electricals Ltd,

Bharat Dynamics Ltd. BEML etc. Notfn. 64/95 Exemption to goods supplied

for defence and other specified purposes -


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This covers All goods donated for welfare

of defence personnel, donated to NationalDefence Fund, All goods other than

cigarettes if supplied as stores for

consumption on board a vessel of the Indian

Navy or Coastal Guard, Components, rawmaterial, tools etc. meant for launch vehicle

project etc.


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Notfn. 74/93 Exemption to goods

manufactured in a State Govt factory andintended for use in any of its department

Covers all goods under chapter 86 (Railway,

tramway etc.)


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Since the final product is exempt, there is no

set off benefit available to defence. Apart from manufacturing, the defence units

are also procuring the material from various

sources and supplying to their organisations

for consumption. In such cases, the goodsare duty paid and no set off is available.


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The taxation depends upon one important

factor from whom the goods are procured ?A manufacturer, a dealer registered under

central excise or simply a dealer not

registered under central excise.

If the goods are purchased from amanufacturer, he will charge excise duty over

the basic price.


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If the goods are procured from a dealer

registered under central excise, he will passon proportionate credit. However, this is a

cost to Defence.

If the goods are procured from a

manufacturer working under SSI benefit, thetaxation will depend upon whether he is

paying full tax or claiming exemption.


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In Central Excise, the SSI units are thosewho have achieved their turnover less than4 crores during the preceding year.

If this condition is fulfilled, the SSI unit hastwo options

a) To claim exemption upto Rs. 1.50 croresturnover and pay full duty onwards. Or

b) Claim Cenvat benefit and pay full duty fromRe.1 sale.


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The above provisions will definitely make a

difference on cost of material procured fromdifferent sources.

The Customs duty is paid if the goods are

imported. Calculation of Duties is very

important. CVD, Additional duty are alsoadded and all this becomes a cost because

no set off is available.


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If the Government has issued specific

notification, the goods will be exempt underExcise / Customs.


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Similar to Excise Tariff, there is Customs

Tariff which determines the rates of customs

duty applicable for various products

imported.

If Defence is purchasing the goods from a

dealer, he will recover the duties and taxespaid by him from defence. It is a cost to

defence.


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Taxation with reference to Defence :

All goods are inclusive of all taxes, duties.

No set off benefit available.

If taxes are not charged, the reasons shouldbe analysed. The supplier may charge duty

subsequently. In such cases, the suppliershould not be compensated subsequently.The comparison should be with all inclusivetaxes.


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Service tax

Service tax is levied on services provided. About 125 services are taxable.

Major services are Repairs and

maintenance, Telephone, Consultants,

Works Contract, General Insurance, Banking

and Financial services etc.


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Service tax paid Cenvat credit is availableas set off.

The set off is available only after payment ofservices.

Service tax is also applicable for Government

organisations. Service tax on Goods Transport Agencies

The liability is on Govt. organisations.


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Service tax on Information Technology services Inthe budget for 2008, services relating to IT Software

such as development, designing, programming,upgradation, providing advice etc. were broughtunder service tax. However, it was limited to ITsoftwares used in the course of business orcommerce. However, in the budget for 2010, this has

been extended to all cases whether for business ornot. Hence, the softwares are chargeable to servicetax on the total value of service.


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Works Contract

Works Contract is chargeable under Service tax and

under VAT.

Works Contract means a contract wherein transfer of

property in goods involved in the execution of

contract is leviable as sale of goods and such

contract is for carrying out erection, commissioning,installation of plant, machinery, construction of new

building, repairs, alteration etc.


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The Works Contract is a composite contractfor supply of goods and services. A

Composite works contract is vivisected and(i) VAT / sales tax is leviable on transfer ofproperty and (ii) service tax is levied onservices provided.

The essential part is that the contractorshould be able to bifurcate the contract intwo parts material and service.


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The contractor is liable to pay service tax as

Pay full service tax @ 10.30% on the gross amount

charged less value of transfer of property in goods

involved. He is allowed to claim set off on inputs,

input services and capital goods, Alternatively

Pay service tax @ 4.12% on the total value. No set

off is allowed on inputs. Set off is allowed on inputservices and capital goods used. (Composite

Scheme)


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The value will include labour charges,

amount paid to sub-contractor, charges for

planning, designing etc., charges for

obtaining hire purchase, cost of consumables

viz. water, electricity, fuel used in execution

of works contract, cost of establishment,profit earned by service provider relating to

supply of labour and services.


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VAT is charged as per the state VAT Act.

Whenever the sale of goods is within thestate, state VAT is charged as per prescribedrate. Set off is available to the dealer /manufacturer of such VAT which is adjustedagainst the liability. Similar to Cenvat

Scheme.

When the sale of goods is outside the state,CST @ 2% is charged. This is not allowed


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as set off to the buyer. It is a cost to the buyer.

C Form The buyer can procure the goodsat concessional rate in respect of inter state

transactions. Not allowed for defence as

there is no sale of goods.

D form For Govt. purchases. Not allowedafter 1.4.2007.


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Works Contract under VAT

Where a dealer is liable to pay tax on sales effected

by way of transfer of property in goods involved in

execution of works contract, he is liable to pay lump

sum by way of composition

- Equal to 5% of the total contract value in case of

construction contracts and

- Equal to 8% in other contracts.


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Octroi It is levied on material received within the

Corporation limits. It is mandatory for all material.

The rates vary from Corporation to Corporation.PMC Rates

- 3% on all machinery parts and castings.

- 2% on stationery, diesel.

- 4% on oils.

- Exempted for material purchased for social activities

as per notified list.


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Corporation can grant exemption to material

purchased by Defence. An application to the

authorities be made and the facts should be

explained to the authorities. The Corporation

will grant exemption and this certificate can

be given to the supplier and no octroi will becharged when the material is received within

corporation limits.


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Indirect Taxes – a review_Defence

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