Recording Date: March 16, 2015

CA Intermediate (IPC) Course Paper 4B

Indirect Taxes Chapter 1

CA. Arun K. Agarwal, ACS

The Institute of Chartered Accountants of India

 This lecture has been delivered by faculty members to supplement the
Study Material, Practice Manual and other content
1

The views expressed in this lecture are of the Faculty Member.

2
The content of this video lecture has not been specifically discussed
by the Council of the Institute or any of its Committees and the views
expressed herein may not be taken to necessarily represent the views
3 of the Council or any of its committees

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The e-Lectures, PPT, Podcasts
and Video lectures on ICAI
Cloud Campus aim to
supplement the Study Material,
Practice Manual and
Supplementary Study Material
Due to changes in law, there is
likely to be some time gap
between these changes and the
recording of updated lectures.
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This e-Lecture was Recorded on:
March 16, 2015
The lecture recordings are made
according to the syllabus and
laws existing/ applicable as on
the date of recording.
Hence, students are advised to
refer to the Study Material
including Supplementary Study
Material, if any, and other
relevant legislation for latest
provisions/ amendments
required for forthcoming
examination.
3
 Taxes are the sources of funding the
expenditure of Governments. In the
context of India the following are the
categories of Govt Expenditure:

Establishment Govt Programs

Armed Forces PSU Funding
Costs & Policies

Salaries of Govt
Indian Railways, Food Bill,
Employees &
Posts & Manrega, Road
establishment costs
Telegraph Etc Construction etc

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 Direct Taxes Paid by the
person who bears the incidence
Collected directly from the
persons meant to bear these
taxes
Indirect Taxes Meant to be paid by one
person but incidence on another person
These taxes are collected indirectly from
persons other than those on whom the
incidence of these taxes are meant to fall

Sales Excis
Incom Gift Wealth Servic Custom
Tax / GST e
e Tax Tax Tax e Tax s Duty
VAT Duty

Abolished by
Union Budget
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 An important source of revenue
Account for more than 70% of
total tax revenue.

Linked to consumption No
direct pinch of the tax as the
amount is chargeable in the cost
of goods or services.
Features of Indirect
Taxes
Charged both on goods &
services. Charged at various
stages of producing & selling the
goods or services.

Shifting the burden - Levied on

one and paid by another

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 Tax on manufacture of
Excise Duty
goods in India - by CG

Tax on import of goods

Customs Duty
into India

Tax on services
Major Types of
Service Tax rendered in India by
Indirect Taxes
CG

Tax on inter state sale of

Sales Tax Central goods within India by
CG

VAT Acts of Tax on intra state sale of

respective State goods within India by
Govts States

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 Excise Duty

Customs Duty
GST Goods &
Services Act
Single tax in lieu of
Service Tax

Sales Tax Central &

State

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 1. Central Excise
Act, 1944
Excise Duty 2. Central Excise
Tariff Act, 1985

1. Customs Act,
1962
Customs Duty 2. Customs Tariff
Act, 1975

Chapter V and VA of
Relevant the Fin Act, 1994
Service Tax as amended to
Legislation
date

Central Sales Central Sales Tax

Tax Act, 1956

VAT state Acts passed by

various state
legislatures legislatures

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 Central Excise Tariff Act, 1985: originally
included as schedule to the Central Excise
Act, 1944 was delinked from it and enacted
as Central Excise Tariff Act, 1985
Central Excise Act, 1944: referred to as the
containing the tariff schedule, based on
Act in this lecture contains the basic
international product coding system called
provisions relating to the levy of excise
Harmonized System of Nomenclature
duty, contained in chapters I to VII.
(HSN).The schedules to this Act enlist all
the excisable goods giving the
corresponding rates of Excise Duty for each
good.

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 Annual Union Finance Acts (The Union Budgets): Once the Annual Union
Budget delivered by the Finance Minister is approved by the parliament, it
becomes the Finance Act for that year. Part B of the Finance Act contains
the detailed tax proposals and constitute the most common ways through
which the Central Govt makes amendments to the Central Excise Acts.

Central Excise Rules: Rules are framed by the Central Govt to carry on
the provisions of the Central Excise Act. The Rules cannot override the
provisions of the Act and should be read with the Act.

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 Notifications: are issued by the Central Government or the
Central Board of Customs and Excise in terms of powers
given by the Excise Act or the Rules framed thereunder.

Notifications are issued to give effect to the amendments to the Act and
the Rules.

Central Excise Circulars and Instructions: The Central

Board of Customs and Excise issues departmental circulars
periodically for the purpose of ensuring uniformity and
clarity in the implementation of the Excise law.
Excise Circulars cannot be in violation of the Excise Act or the Excise
Rule or Notifications. These circulars are binding on the Excise
Department but not on the assesses and the judiciary.

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 Trade notices / Clarifications: Trade notices are issued by the
Excise Departmental Authorities for the purpose of clarifying
various aspects of the Excise Law for the facilitation and
clarification to the members of the public and industry. These
notices are intended to clarify excise issues to the industry so
that proper compliance is made.

Case Laws: constitute an important source of the Excise Duty

Law. It is not possible for the parliament to conceive of all issues
impacting the manufacture of goods. When disputes are referred
to the courts and judgments passed, they become law.
Judgments of the Supreme Court become the law of the land, of
the High Courts become the law of the respective states.

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 The Central Excise Act applies to the whole of India .

The Duty becomes payable on the happening of the taxable event which
means the execution of a transaction which results in a tax consequence for the
party which executes the transaction.
For example the taxable event for the levy of a state level VAT is the sale of
goods in the state. Whenever the sale of goods in a state takes place, the
liability for payment of state level VAT arises.

The taxable event for the levy of excise duty is the manufacture of goods.

All manufacturing processes do not attract excise duty, unless certain

conditions are met;

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 Liability of excise duty arises when a product is manufactured, whether
sold or consumed captivley.

Though excise duty is levied on manufacture of a product it is actually

payable on the removal of goods from the factory or on consumption.
Excise duty is not payable on stocks.

Excise duty is a Value Added Tax, i.e. CENVAT. The offset of excise
duty paid on intermediary products is allowed in the form of modvat
credit from the duty payable on the end product or the finished product.

There is no distinction between goods produced by the Government or a

private manufacturer with regard to the payment of excise duty.

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 Goods manufactured by 100% EOU and brought to Domestic Tariff
Area (DTA) are liable to ED equal to the Customs Duty.

100% EOUs are set up to promote exports and are required to export 100% of their
output;
EOUs are fully exempt from Excise Duty (to make them globally competitive)
However, sometimes, they may sell their products in the domestic market called
Domestic Tariff Area in which case the goods are liable to ED;
In such a case the ED = Total customs duty leviable on like goods manufactured
outside India and imported into India

For charge of Excise Duty, the Goods must satisfy two conditions, they
must be Moveable and Marketable.
Moveable Goods: must be capable of being brought to the market and sold . Excise
Duty cannot be levied on immoveable goods.
Marketable Goods: Unless goods are capable of being marketed, they cannot be
charged to Excise Duty. In case of short shelf life products the salability must be
within the short shelf life of the product.
However, actual sale is not necessary;
Marketability is established even if there is one purchaser

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 Goods which are specified in the
First & the Second Schedule of
the Central Excise Tariff Act,
1985; And

Are specified therein as subject to

Excisable Goods
Excise Duty; AND

Include Salt

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 Manufacture

A Special Economic
Zone (SEZ) is a
geographically
demarcated area within
India where the
Conditions for charge of In India (excluding economic laws for export
ED SEZ) and import are more
liberal than in the rest of
the country. Goods
manufactured in SEZ are
exempt from Excise
Manufacture must Duty.
result in an
excisable product

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Any process specified in
Any process incidental to
relation to any goods, in
or ancillary to the
the section, chapter or
completion of a
notes of the Central
manufactured product
Excise Tariff as amounting
[Section 2(f) (i)
to Manufacture.
Any process, in relation to
goods specified in the
Third Schedule, involving
packaging or labeling or
any other treatment to
render them marketable.
[Section 2(f)(iii)
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The most commonly used test for
ascertaining if manufacture for
levy of ED has taken place was
evolved by the Supreme Court in
the case of Delhi Cloth and
General Mills 1977, which is used
even today. The judge stated:
Manufacture implies a change,
but every change is not
manufacture and yet change of
an article is the result of
treatment, labour and
manipulation. .there must be
transformation; a new and distinct
article must emerge having a
distinctive name and character or
use. Therefore, manufacture
must result in the emergence of a
new commercial product, different
and distinctive from the one with
which the process started.
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 Processes involving manufacture
Conversion of sugarcane to sugar
Conversion of wood to furniture
Rolling of tobacco to make bidis
Conversion of fruit pulp into fruit drink
Making of wheat flour from wheat
Processes not involving manufacture
Stirring cream to make butter;
Upgradation of computer systems to increase storage capacity;
Painting of goods

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 A person who employs hired labour for the manufacture of
excisable goods;

A person who engages in the production or manufacture of

excisable goods in his own account

The understanding of manufacturer is vital as it is the

manufacturer who is liable to discharge the liability of excise on
excisable goods.

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 Classification of excisable goods may be defined as the grouping and sub grouping of
thousands of types of manufactured goods in order to apply a single rate of duty on a sub
group or group. In short classification of excisable goods consists of determining the
headings and sub headings of the Central Excise Tariff Act, 1985 under which all such
goods can be charged to ED.

The Central Excise Tariff Act has based the system of classification on the concept of
Harmonized System of Nomenclature i.e. HSN.

HSN is an internationally accepted product coding system formulated under the General
Agreement of Tariffs and Trade (GATT).

The classification of goods under Central Excise Tariff Act, 1985 is contained in the First &
the Second Schedule of the Act. The First Schedule specifies the rates of basic excise duty
(CENVAT) and the Second Schedule specifies the rate of special excise duty.

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 In the vast majority of cases, ED is levied as a % of the value of the excisable
goods and the rate of duty in such cases is called rate ad valorem.

When excise duty is ad valorem it becomes essential to compute the value of

the excisable goods. The excisable value of a product is called its assessable
value

The valuation of excisable goods is done in accordance with the provisions of

Section 4 A of the Central Excise Tariff Act, 1985, on fulfilment of the following
two conditions:

The excisable goods to be valued are covered under the Legal Metrology Act, 2009 or any other
law which requires declaration of the retail price on the package of such goods; AND
The CG has by notification provided that such goods shall be on the basis of RSP less deductions
as specified by the CG.

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 Assessable value
based on Normal
Price of the goods
which was based on
the WP at which the
upto 30th June 2000 Manufacturer sold
them
Assessable
Value of
Excisable Goods
u/s 4
Transaction Value
WEF 1st July 2000

As per CE Valuation
(Determination of
Price) Rules, 2000

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 Price is the sole consideration for the sale
Conditions for
applicability of
Transaction
The assessee and the buyer of the goods are not related
Value Method

Goods sold for delivery at the time and place of their removal

a. Transaction value the price actually paid or payable for the goods
b. Price includes any amount that the buyer is liable to pay in connection with the sale
c. Price includes, but such inclusion is not restricted to, expenses on advertising or
publicity, marketing & selling, organization expenses, storage, outward handling,
servicing, warranty, commission, but does not include the excise duty , sales tax or
any other tax actually paid or payable on such goods.

In all other cases (where any of the three conditions have not been fulfilled), the
assessable value to be determined under the CE Valuation (Determination of Price)
Rules, 2000

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 Determine if the goods are
subject to Excise Duty

Determine the correct

classification of the goods

Determine the correct rate of

CENVAT ED payable on the goods as
per their classification

Apply the rate of ED on the

value of the excisable goods,
both basic ED + special ED

Deposit the ED in the

prescribed manner before
moving out the goods from the
Excise Godown
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 A tax imposed by the CG on
import of goods into or goods
exported from India
What is Customs
Duty? Customs Duty is an Indirect Tax
imposed by the CG

Basic Custom Duty

Countervailing Duty
(CVD)
Special Countervailing
Duty
Types of Customs
Protective Duty
Duty

Safeguard Duty

Anti Dumping Duty

CVD on subsidized
articles
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 Customs Act, 1962
applicable to the whole of
India including its territorial
waters

Sources of Customs Tariff Act, 1975

Customs Duty

Rules & Regulations

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 Except as Duties of Custom shall be levied
provided in
this Act or any
At such rates as may be specified under the Customs Tariff Act,
other law in
1975 of any other law in force
force

On goods imported into or exported from India

For the purpose of levy of Customs Duty goods belonging to the Government shall be
treated at par as goods not belonging to the Govt.

The rates at which Customs Duty is levied are specified in the Customs Tariff Act, 1975
and contained in the First & the Second Schedule of the said Act

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 The First Schedule of the Customs Tariff Act, 1975 lays down the rates of
custom duty applicable to goods imported into India;

The Second Schedule of the Act lays down the rates of custom duty on goods
exported from India;

Preferential Rates of CD: at lower or concessional rates are applicable in

respect of goods imported from areas categorized as preferential areas (as
notified by the CG) and subject to the fulfillment of specified conditions;

In respect of goods imported from any area not specified as a preferential area
the custom duty that will be levied will be at the standard rate of duty.

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 Derelict Goods: refer to any vessel
or cargo abandoned at sea without
hope of recovery;
Derelict Goods,
Jetsam, flotsam Jetsam: refers to goods jettisoned
and wreck from a vessel to prevent it from
brought or sinking;
coming into
India shall be
dealt with, as if Flotsam: refers to jettisoned goods
they were continuing to float in the sea
imported into
India
Wreck: refers to cargo or vessel or
any property which are cast ashore
after shipwreck

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 Classification of import / export goods may be defined as the grouping and sub grouping of
thousands of types of goods in order to apply a single rate of duty on a sub group or group.
In short classification of goods consists of determining the headings and sub headings of
the Customs Tariff Act, 1975 under which all such goods can be charged to CD.

The scheme of classification under the Customs Duty law is similar to the classification
under the Central Excise Tariff Act which is based the system of classification on the
concept of Harmonized System of Nomenclature i.e. HSN.

HSN is an internationally accepted product coding system formulated under the General
Agreement of Tariffs and Trade (GATT).

Classification of imported goods determines the type and rate of custom duty to be levied
on them such as applicability of import restrictions, applicability of anti dumping duty or
grant of benefits of exemption from CD etc.

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 Sec 13: No duty on imported goods pilfered after
unloading but before clearance for home
consumption or deposit in warehouse. However, if
goods restored to the importer, CD will become
payable.

Exemptions Sec 22: Reduced duty on goods damaged

from
Customs
Duty Sec 23(1): Remission of duty on goods proved to
be lost or destroyed before clearance for home
consumption

Sec 23(2): No duty on relinquishment of the title

to the imported goods by the owner before the
order for their clearance for home consumption
or for their deposit in a warehouse.

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 General Exemption: The CG may, by notification in public
interest, exempt wholly or subject to fulfillment of
Exemptio conditions specified therein, exempt generally the custom
ns from duty, in whole or in part, on goods specified in the
Customs notification.
Duty
Special Exemption: The CG may (as a special case), by a
special order exempt the duty on goods which are
otherwise chargeable to CD if it is in public interest do so.

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