An Overview of Indirect Taxes

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An Overview of Indirect Taxes

• By
• PROF V.N. PARTHIBAN, FICWA, ACS, FIII, ASM, ADIM,
  MBA, LLM

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• Customs Duty
• Basic Customs Duty Levied under Customs Act,
  1962 on
• Imported goods (means any goods brought
  into India from a place outside India)
• Export goods (means any goods which are
  to be taken out of India to a place outside
  India)
• Additional Duty equal to Excise duty (CVD) and
  Additional duty equal to Sales Tax , local tax or
  any other charges (SAD) is levied under Customs
  Tariff Act, 1975
• Anti dumping duty and safeguard duty , if
  notified, are also levied under Customs Tariff
  Act, 1975

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Central Excise Duty

• Basic conditions which must be satisfied for
  deciding dutiability / Excisability of any
  article
• are
• 1. The article should be Goods and,
• 2. It should have come into existence
  as a result of Manufacture.
• If either of the conditions is not satisfied,
• Central Excise duty can not be levied.

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• CONCEPT OF MANUFACTURE

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• Definitions of Excisable Goods
  Manufacture
• Goods Central Excise Law does not define
  goods.
• An article can be called Goods if
• It is known to the market as such and
• Can ordinarily come to the market for being
  bought and sold.
• Concept of Marketability
• An article to be excisable, it must be
  marketable.
• The aspect of marketability has been further
  emphasized and elaborated by the Hon ble Supreme
  Court in the following cases.
• - Bhor Industries Ltd. vs Collector
  1989 (40) ELT 280(SC)
• - Moti Laminates vs UOI 1995 (76) ELT
  241 (SC)
• Even semi finished articles, sub-standard
  articles, by produce, residues, process scrap,
  articles in unassembled or CKD condition would be
  Goods if it fulfills test of marketability.
• Immovable property or articles embedded to earth,
  structures, erections, installations and turnkey
  projects are not Good because they can not
  ordinarily come to the market to be bought and
  sold

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• Manufacture - The expression Manufacture has
  been defined under Section 2 (f) of Central
  Excise Act, 1944.
• Accordingly to which it includes any process-
• (i) incidental or ancillary to the
  completion of a manufactured product and
• (ii) which is specified in relation to any
  goods in the Section or Chapter Notes of the
  Schedule to the Central Excise Tariff Act, 1985
  as amounting to manufacture
• (iii) which in relation to the goods
  specified in the Third Schedule (MRP goods etc.)
  involves packing or repacking of such goods in
  a unit container or labelling or relabelling of
  containers including the declaration or
  alteration of retail sale price on it or
  adoption of any other treatment on the goods
  render the product marketable to the consumer.

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• The activity or process in order to amount to
  manufacture must lead to emergence of a new
  commercial product, different from the one with
  which the process started. In other words, it
  should be an article with name, character and
  use.
• It is not the nature of the process or activity
  which determines the issue but the end- result of
  that process or activity - Empire Industries Ltd.
  vs UOI 1985 (20) ELT 179 (SC)
• Repair and reconditioning of an article does not
  amount to manufacture because no new goods come
  into existence.
• Repacking of goods from bulk pack to smaller
  packs would not ordinarily amount to manufacture
  unless there is deemed manufacture clause in
  relevant chapter.
• Putting together different duty paid items in a
  kit or box does not amount to manufacture.

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ORGANISATIONAL STRUCTURE OF CBEC
CBEC

ZONE-1
ZONE-III
ZONE-II
Commissionerate-I
Commissionerate-II
Commissionerate-III
Commissionerate-IV
Division-II
Division-I
Range-I
Range-II
Range-III
Range-IV
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Important changes brought in Administration of
Central Excise Duty

• Self removal procedure in 1969
• Central Excise Tariff Act based on HSN in 1985
• MODVAT scheme in 1986
• In 1994, the Gate Pass used for clearances was
  replaced by invoice and consequently filing of
  Price declarations was dispensed with.
• Filing of Classification list dispensed with
  during 1995
• Self Assessment by assessees was introduced
  during the year 1996

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• Fortnightly payment of duty in 2000
• Concept of Valuation of Excisable goods on the
  basis of Transaction value instead of normal
  whole sale price introduced during 2000
• Central Excise Rules, 2001 replacing Central
  Excise Rules,1944 (32 Rules replacing 234 Rules)
• Relaxation in Budget day restrictions
• E-filing of returns from 2004
• Formation of Large Tax payer Units during 2006
• Introduction of ACES- A web based workflow based
  application in 2009

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GST- Overview
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• GST is
• An indirect tax on final consumption of goods and
  services
• Levied on businesses and recovered by them on
  supplies
• Collected at each stage in the commercial and
  production chain by producers and suppliers
• GST is typically charged on registered
  businesses
• Input GST incurred in relation to taxable
  output supplies of goods and
  services is available as an offset
• GST thus operates as a pure Value Added Tax (VAT)

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GST-Global Scenario

• More than 150 countries have already introduced
  GST/National VAT
• Typically GST is a single rate system but
  two/three rate systems are also in use
  depending upon requirements
• The standard GST rate in most countries ranges
  between 15-20
• All sectors are taxed with very few exceptions/
  exemptions
• Full input tax credits on inputs are available.
• Canada and Brazil alone have dual GST
• US does not have a GST but only sales taxes

Slide 13
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Objectives of GST

• Lowered tax rates due to broadening of the tax
  base and minimizing exemptions exclusions
• Creation of a common market across the country
• Redistribution of the burden of taxation
  equitably between manufacturing and services
• Reduction in transaction and compliance costs.
• Facilitation of business decisions on purely
  economic considerations
• Enhanced efficiencies productivity through the
  supply chain

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Dual GST - Current State of Play latest
developments

• States have agreed to have two basic rates of
  GST.
• CGST will also be in conformity with the SGST
• Standard rate in the range of 8 to 9
• Lower rate for essential commodities in the range
  of 4 to 5
• Special rate for precious metals is expected to
  be at 1
• Small set of specified products will be exempt
  from the GST
• The Central Government and State Governments have
  agreed to evolve a mechanism for compensating
  States for revenue losses.

Slide 15
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Dual GST Structure

• Dual GST will comprise
• the Central GST and the State GST
• Both taxes to operate in parallel and to apply on
  every transaction
• Stamp duty, toll tax, passenger tax and road tax
  not subsumed under dual GST
• Coverage
• Tobacco products to be subjected to GST, Centre
  to levy excise duty over and above the GST ?
• Alcoholic beverages to be kept out of the purview
  of GST ?
• Petroleum products also to be kept out of the
  purview of GST ?

Slide 16
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Proposed dual GST Model

• Figures are only indicative

Dual GST
Goods
Services
Existing Rate 19-20
Existing Rate 10
GST 16
GST 16
8- CGST 8- SGST
8- CGST 8- SGST
Slide 17
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Taxes subsumed in dual GST
Dual GST
Central Taxes CGST
State Taxes SGST

• VAT
• Entertainment tax
• Luxury tax
• Lottery taxes
• State cesses and surcharges
• Entry tax not in lieu of octroi

• Central Excise
• CVD
• SAD
• Service Tax

CST will be phased out
Slide 18
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Significant features of proposed dual GST Model

• Taxable Events in GST
• The Federal and State GST will both be leviable
  on supply of goods and services
• Hence, the present taxable events of manufacture,
  for central excise, and sale of goods for State
  VAT, will have no relevance
• Rules for determining the place and time of
  supply of goods and services to be formulated

Slide 19
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• GST on Imports
• Central State GST on imports to replace
  Countervailing duty (CVD) and Additional Duty of
  Customs (SAD) currently levied on import of goods
  as part of customs duties
• GST paid on imports available as input tax
  credits
• Place of supply rules to determine the State in
  which the SGST on imports is payable
• Input tax credits
• Full credits under the CGST and SGST
  that will operate in parallel
• Cross-utilization of credits between
  CGST and SGST not permitted
• Refund of unutilized accumulated ITC
• Exports to be zero rated

Slide 20
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• Inter-State supplies of goods and services
• Integrated GST (IGST) model to be adopted for
  taxing all inter-State supplies of goods and
  services including stock / branch transfers
• Centre alone to tax inter-State supplies
• Centre to levy IGST which would be aggregate of
  CGST and SGST
• Input credits of IGST, CGST SGST will be
  available as offsets
• Central agency to act as a clearing house for
  funds transfer amongst the States
• Elegant and business friendly model of taxing
  inter-State supplies

Slide 21
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• Treatment of Services
• Any economic activity which is not a supply of
  goods is a supply of services
• All services to be taxed with few exceptions
• Central GST on services relatively easy to
  collect
• Services to be taxed in the State of consumption
• Supply rules to determine the place of
  consumption for cross-border services
• State GST could be charged based on the location
  of the recipient of services

Slide 22
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• Procedures
• Allotment of a PAN-linked taxpayer
  identification number with 13/15 digits.
• Uniform procedure for collection of both CGST
  SGST to be prescribed in the respective
  legislations.
• Single tax invoice for charging and collecting
  both taxes.
• Submission of periodical returns, in common
  format, to both the CGST SGST authorities.

Slide 23
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• Taxation of inter-State transactions IGST model

State 1
State 2
Invoice
Invoice
Dealer
Value 100 CGST Nil State 1 GST
Nil IGST 16 ------------------------
116 ------------------------
Value 200 CGST 16 State 2 GST
16 -------------------
232 --------------------
Final Consumer
IGST, CGST SGST can be used to offset IGST
liability

• Input SGST used to pay IGST to be paid by
  exporting States to Central Govt.
• Central Govt to pay input IGST used to pay SGST
  in the importing State to the importing State
  Govt.
• Central Clearing agency will manage the
  allocation of funds between States

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Key Issues Challenges

• Federal GST law to be drafted
• Uniform State GST law model State GST code to
  be adopted
• Constitutional amendments required
• - to enable Central Government to tax beyond
  manufacturing stage
• to enable States to charge service tax
• to enable levy of GST on imports
• Rates
• Integration of a large number of Central State
  Taxes
• Multiplicity of taxes and tax rates
• Thresholds
• Continuation of area specific exemptions
  Central GST and State GST