Direct and Indirect taxes

Direct tax
INTRODUCTION

A tax may be defined as a "pecuniary burden laid upon individuals or

property owners to support the government, a payment exacted by
legislative authority. A tax "is not a voluntary payment or donation,
but an enforced contribution, exacted pursuant to legislative
authority". Taxes consist of direct tax or indirect tax, and may be paid
in money or as its labour equivalent (often but not always unpaid
labour). India has a well developed taxation structure. The tax system
in India is mainly a three tier system which is based between the
Central, State Governments and the local government organizations.
In most cases, these local bodies include the local councils and the
municipalities. According to the Constitution of India, the government
has the right to levy taxes on individuals and organizations. However,
the constitution states that no one has the right to levy or charge
taxes except the authority of law. Whatever tax is being charged has
to be backed by the law passed by the legislature or the parliament.
Article 246 (SEVENTH SCHEDULE) of the Indian Constitution,
distributes legislative powers including taxation, between the
Parliament and the State Legislature. Schedule VII enumerates these
subject matters with the use of three lists;

 List - I entailing the areas on which only the parliament is competent to

makes laws,

 List - II entailing the areas on which only the state legislature can make
laws, and

 List - III listing the areas on which both the Parliament and
the State Legislature can make laws upon concurrently.

Separate heads of taxation are provided under lists I and II of Seventh

Schedule of Indian Constitution. There is no head of taxation in the
Concurrent List (Union and the States have no concurrent power of
taxation). Any tax levied by the government which is not backed by
law or is beyond the powers of the legislating authority may be struck
down as unconstitutional. The thirteen heads List-I of Seventh
Schedule of Constitution of India covered under Union taxation, on
which Parliament enacts the taxation law, are as under:

 Taxes on income other than agricultural income;

 Duties of customs including export duties;

 Duties of excise on tobacco and other goods manufactured or produced

in India except
(i) alcoholic liquor for human consumption, and (ii) opium, Indian
hemp and other narcotic drugs and narcotics, but including
medicinal and toilet preparations containing alcohol or any
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 substance included in (ii);

 Corporation Tax;

 Taxes on capital value of assets, exclusive of agricultural

land, of individuals and companies, taxes on capital of
companies;

 Estate duty in respect of property other than agricultural land;

 Duties in respect of succession to property other than agricultural land;

 Terminal taxes on goods or passengers, carried by railway, sea or

air; taxes on railway fares and freight;

 Taxes other than stamp duties on transactions in stock exchanges and

futuresmarkets;

 Taxes on the sale or purchase of newspapers and on advertisements

published therein;

 Taxes on sale or purchase of goods other than newspapers, where such

sale or purchase
takes place in the course of inter-State trade or commerce;

 Taxes on the consignment of goods in the course of inter-State trade or

commerce.

 All residuary types of taxes not listed in any of the three lists of
Seventh Schedule of Indian Constitution.
Taxes are broadly divided into two parts i.e. direct taxes and indirect
taxes. The tax that is levied directly on the income or wealth of a
person is called direct tax. Income tax is one of the forms of direct
taxes. The levy of income tax in India is governed by the Income Tax
Act, 1961 and Income Tax Rules, 1962. It is charged on the Total
Income and to derive the total income one must know certain concepts
of the Income Tax Act, such as residential status, assessment year,
previous year, assessee etc. Income tax is leviable on the taxable income
and to determine taxable income, ascertainment of the residential
status of the person and scope of total income are required at an initial
level. There are two types of taxpayers from residential point of view -
Resident in India and Non-resident in India. Sourced based income in
India is taxable in India whether the person earning income is resident
or non-resident. Conversely, foreign sourced income of a person is
taxable in India only if such person is resident in India. Therefore, the
determination of the residential status of a person is very significant in
order to find out his / her tax liability. The coverage of the lesson would
include: l Overview of Finance Bill l Some basic concepts like
assessment year, previous year, income, person, assessee, l Distinguish
between capital and revenue receipts etc. l Basic steps in the
calculation of tax liability.
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 For example, deduction for payment of donations under section 80G.
This lesson deals with incomes which do not form part of total income.
Lesson 4 [Computation of Income under Various Heads] The taxability of
income of a person depends on the chargeability of such income under
the Income tax Act 1961. The total income of an assessee (subject to
statutory exemptions) is chargeable under Section 4(1). The scope of the
total income, which varies with the residential status, is defined in
Section 5. Section 14 enumerates the heads of income under which the
income of an assessee will fall. The rules for computing income and the
permissible deductions under different heads of income, are dealt in
different sections of the Act. The coverage of the lesson includes the
heads of income (as mentioned below), along with their corresponding
set of sections for the purpose of computation of income.

Computation of Income under

various Heads Salaries
Income from house property
Profits and gains of business
or profession Capital gains
Income from other sources
Lesson 5 [Clubbing provisions and Set Off and / or Carry Forward of
Losses] In addition to the general provisions which are applicable for
computation of total income, there are special provisions in Sections
60 to 65 of the Income-tax Act which provide for inclusion of income
of other persons in
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Taxation in India

The India Constitution is quasi-federal in nature, and the country has

three tier government structure.

To avoid any disputes between the centre and state the

Constitution envisage following provisions regarding taxation:

Division of powers to levy taxes between centre and state is clearly

defined.
There are certain taxes which are levied by the centre, but their
proceeds are distributed between both centre and the state. Example-
Union Excise Duty.
There are certain taxes which are levied by the centre, but their
proceeds are transferred to the states. Example-Estate duty on
property other than agriculture income.
There are certain taxes which are levied by the central government, but
the responsibility to collect them is vested with the states. Example-
Stamp Duty other than included in the Union List.
There are certain taxes which are levied by the states, and their
proceeds are also kept by states. Example: Erstwhile VAT
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 Classification of Taxes
What is a Tax?

Taxes are generally an involuntary fee levied on individuals and

corporations by the government in order to finance government
activities. Taxes are essentially of quid pro quo in nature. It means a
favour or advantage granted in return for something.

DIRECT TAX and INDIRECT TAX

classification

Basis Direct Tax Indirect

Tax

The tax that is levied by the
government directly on the
Meaning individuals or corporations
are called Direct Taxes.
The tax that is levied by the
government on one entity
(Manufacturer of goods), but is
passed on to the final consumer
by the manufacturer.

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Inciden The incidence and impact The incidence and impact of
ce of the direct tax fall on the tax fall on different
the same person. persons.

Income Tax, VAT, Service tax, GST,

Exampl
Corporation Tax and Excise duty,
es
Wealth Tax. entertainment tax and
Customs Duty.
Nature They are progressive in They are regressive in nature.
nature.

Both Social and

Economical. Social
Only Economical. When an
objective of direct tax is
indirect tax is levied on a
the distribution
product, both rich and poor
Objecti
must pay at the same rate. A
ve of income. A person
person earning 10 lakh a
earning more should
month pays the same tax on
contribute more in the
the Wheat purchase as the
provision of public
person earning 3000 Re a
service by paying more
month. This principle is called
tax. This provision is
regressive taxation.
also known as
progressive taxation.

Impact Not at all Inflationary. Is inflationary.

Understanding Regressive Nature of Indirect Taxes.

Government Levies a tax of 5 percent on a pack of

5KG Rice worth Re1000. Tax Burden on the Pack:

5/100*1000= 50 Re

Rich Individual Case (Monthly Earning 1 Lakh)

He buys the rice pack and pays a tax of 50 Re.

The proportion of his income that went on paying tax on Rice is 0.05
Percent (50/100000) of his total earning.
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 Poor Individual Case (Monthly income 1000 Re)

He buys Rice pack and pays a tax of Re 50.

The proportion of his income that went on paying tax on rice is 5 percent
(50/1000) of his total earning.
As you can clearly see, a poor individual is paying a higher
proportion of his income as indirect tax as compared to the richer
individual.

Ad valorem versus Specific Tax

ADVALOREN TAX SPECIFIC TAX

Ad valorem tax is based on the assessed

Specific tax is a fixed
value of the product. In Fact, ‘Ad Valorem’
amount tax based on the
is a Latin word meaning ‘According to
quantity of unit sold.
Value’.

Most Ad valorem taxes are levied based Specific tax is levied

on the value of the item purchased. based on the volume of
the item purchased.

The tax is usually expressed in The tax is usually

percentage. Example GST in India has 5 expressed in specific sums.
tax rate slabs- 0, 5. 12, 18 and 28 Example: Excise Duty on
percent. Petrol.

Example: Excise duty on

Example: GST, Property tax, sales tax.
petrol and liquor
products.

They are progressive in nature. They are regressive in

nature.

Taxes in India
In India, Taxes are levied on income and wealth. The most important
direct tax from the point of view of revenue is personal income tax and
corporation tax.

Income Tax:

Income tax is levied on the income of individuals, Hindu undivided

families, unregistered firms and other association of people.
In India, the nature of income tax is progressive.

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For taxation purpose income from all sources is added and taxed as
per the income tax slabs of the individual.
The budget of 2017-18 proposed the following slab structure:

Income Slab (less than 60 years) Tax Rate

Up to 2,50,000 No Tax

Up to 2,50,000 to 5,00,000 5%

Up to 5,00,000 to 10,00,000 20%

30%
Excess of 10,00,000

Surcharge of 10% of income tax where the total income exceeds Rs

50 lakh up to Rs 1 Crore. Surcharge of 15% of income tax, where the

total income exceeds Rs 1 Crore.

Corporation Tax
Corporation tax levied on the income of corporate firms and corporations.
For taxation purpose, a company is treated as a separate entity
and thus must pay a separate tax different from personal income
tax of its owner.
Companies both public and private which are registered in India under
the companies act 1956 are liable to pay corporate tax.
The Budget 2017-18 proposed following tax structure for domestic
corporate firms:
For the Assessment Year 2017-18 and 2018-19, a domestic company is
taxable at 30%.
For Assessment Year 2017-18, the tax rate would be 29% where
turnover or gross receipt of the company does not exceed Rs. 5
crores in the previous year 2014-15.
However, for Assessment year 2018-19, the tax rate would be 25%
where turnover or gross receipt of the company does not exceed Rs. 50
crores in the previous year 2015-16.

Tax on Wealth and Capital

Estate Duty: First introduced in 1953. It was levied on the total

property passing on the death of a person. The whole property of the
deceased person constituted his wealth and is liable for the tax. The
tax now stands abolish w.e.f 1985.
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Wealth Tax: First introduced in 1957. It was levied on the excess of
net wealth (over 30,00,00,0 @ 1 percent) of individuals, joint Hindu
families and companies. Wealth tax has been a minor source of
revenue. The tax now stands abolish wef 2015.

Gift Tax: First introduced in 1958. The gift tax was levied on all
donations except the one given by the charitable institution’s government
companies and private companies. The tax now stands abolished wef
1998.

Capital Gain Tax: Ay profit or gain that arises from the sale of the
capital asset is a capital gain. The profit from the sale of capital is
taxed. Capital Asset includes land, building, house, jewellery,
patents, copyrights etc.

Short-term capital asset – An asset which is held for not more than 36
months or less is a short-term capital asset.
Long-term capital asset – An asset that is held for more than 36
months is a long-term capital asset. From FY 2017-18 onwards – The
criteria of 36 months has been reduced to 24 months in the case of
immovable property being land, building, and house property.
For instance, if you sell house property after holding it for a period of
24 months, any income arising will be treated as long-term capital
gain provided that property is sold after 31st March 2017.

But this change is not applicable to movable property such as

jewellery, debt oriented mutual funds etc. They will be classified as a
long-term capital asset if held for more than 36 months as earlier.

Tax on long-term capital gain: the Long-term capital gain is taxable at

20% + surcharge and education cess.
Tax on the short-term capital gain when securities transaction tax is
not applicable: If securities transaction tax is not applicable, the
short-term capital gain is added to your income tax return, and the
taxpayer is taxed according to his income tax slab. Tax on the short-
term capital gain if securities transaction tax is applicable: If
securities transaction tax is applicable, the short-term capital gain
is taxable at the rate of 15% +surcharge and education

nineteen heads List-II of Seventh Schedule of the Indian

Constitution covered under State taxation, on which State
Legislative enacts the taxation law, are as under:

 Land revenue, including the assessment and collection of revenue,

the maintenance of land records, survey for revenue purposes and
records of rights, and alienation of revenues;

 Taxes on agricultural income;

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 Duties in respect of succession to agricultural income;

 Estate Duty in respect of agricultural income;

 Taxes on lands and buildings;

 Taxes on mineral rights;

 Duties of excise for following goods manufactured or produced

within the State (i) alcoholic liquors for human consumption, and
(ii) opium, Indian hemp and other narcotic drugs and narcotics;

 Taxes on entry of goods into a local area for consumption, use or sale
therein;

 Taxes on the consumption or sale of electricity;

 Taxes on the sale or purchase of goods other than newspapers;

 Taxes on advertisements other than advertisements

published in newspapers and advertisements broadcast by
radio or television;

 Taxes on goods and passengers carried by roads or on inland

waterways;

 Taxes on vehicles suitable for use on roads;

 Taxes on animals and boats;

 Tolls;

 Taxes on profession, trades, callings and employments;

 Capitation taxes;

 Taxes on luxuries, including taxes on entertainments, amusements,

betting and gambling;

 Stamp duty.

Provisions have been made by 73rd Constitutional Amendment,

enforced from 24th April, 1993, to levy taxes by the Panchayat. A
State may by law authorise a Panchayat to levy, collect and
appropriate taxes, duties, tolls etc. Similarly, the provisions have been
made by 74th Constitutional Amendment, enforced from 1st June,
1993, to levy the taxes by the Municipalities. A State Legislature may
by law authorise a Municipality to levy, collect and appropriate taxes,
duties, tolls etc.
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Direct Taxes:
A Direct tax is a kind of charge, which is imposed directly on the
taxpayer and paid directly to the government by the persons (juristic
or natural) on whom it is imposed. A direct tax is one that cannot be
shifted by the taxpayer to someone else. The some important direct
taxes imposed in India are as under:

Income Tax: Income Tax Act, 1961 imposes tax on the income of the
individuals or Hindu undivided families or firms or co-operative
societies (other tan companies) and trusts (identified as bodies of
individuals associations of persons) or every artificial juridical person.
The inclusion of a particular income in the total incomes of a person
for income-tax in India is based on his residential status. There are
three residential status, viz., (i) Resident & Ordinarily Residents
(Residents) (ii) Resident but not Ordinarily RUnder the Constitution of
India central government is empowered to levy tax on the income.
Accordingly, the central government has enacted the Income Tax Act,
1961. The Act provides for the scope and machinery for levy of Income
Tax in India. The Act is supported by Income Tax Rules, 1961 and
several other subordinate and regulations. Besides, circulars and
notifications are issued by the Central Board of Direct Taxes (CBDT) and
sometimes by the Ministry of Finance, Government of India dealing with
various aspects of the levy of Income tax. Unless otherwise stated,
references to the sections will be the reference to the sections of the
Income Tax Act, 1961.
Income tax is a tax on the total income of a person called the assessee
of the previous year relevant to the assessment year at the rates
prescribed in the relevant Finance Act
4
This phrase sets the tone and agenda of any study on Income Tax Law
This comprises of the understanding of the following: Concept of
assessment year and previous year Meaning of person and assessee
How to charge tax on income What is regarded as income under the
Income-tax Act What is gross total income What is total income or
taxable income Income-tax rates
This chapter seeks to study in details all these aspects which lay
down the basic framework for levy of income tax in India and also
explain the basic concepts and terms used in the income tax
lawesidents and (iii) Non

1
Residents.
There are several steps involved in determining the residential status of a person. All
residents are taxable for all their income, including income outside India. Non residents
are taxable only for the income received in India or Income accrued in India. Not
ordinarily residents are taxable in relation to income received in India or income accrued
in India and income from business or profession controlled from India.

Corporation Tax:
The companies and business organizations in India are taxed on the income from their
worldwide transactions under the provision of Income Tax Act, 1961. A corporation is
deemed to be resident in India if it is incorporated in India or if it’s control and
management is situated entirely in India. In case of non resident corporations, tax is
levied on the income which is earned from their business transactions in India or any
other Indian sources depending on bilateral agreement of that country.

Property Tax:
Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and
imposed on owners. The tax power is vested in the states and it is delegated by law to the
local bodies, specifying the valuation method, rate band, and collection procedures. The
tax base is the annual ratable value (ARV) or area- based rating. Owner-occupied and
other properties not producing rent are assessed on cost and then converted into ARV by
applying a percentage of cost, usually six percent. Vacant land is generally exempted
from the assessment. The properties lying under control of Central are exempted from the
taxation. Instead a 'service charge' is permissible under executive order. Properties of
foreign missions also enjoy tax exemption without an insistence for reciprocity.

Inheritance (Estate) Tax:

An inheritance tax (also known as an estate tax or death duty) is a tax which arises on
the death of an individual. It is a tax on the estate, or total value of the money and
property, of a person who has died. India enforced estate duty from 1953 to 1985. Estate
Duty Act, 1953 came into existence w.e.f. 15th October, 1953. Estate Duty on agricultural
land was discontinued under the Estate Duty (Amendment) Act, 1984. The levy of Estate
Duty in respect of property (other than agricultural land) passing on death occurring on
or after 16th March, 1985, has also been abolished under the Estate Duty (Amendment)
Act, 1985.

Gift Tax:
Gift tax in India is regulated by the Gift Tax Act which was constituted on 1st April,
1958. It came into effect in all parts of the country except Jammu and Kashmir. As per
the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or
others, received from one who doesn't have blood relations with the recipient, were
taxable. However, with effect from 1st October, 1998, gift tax got demolished and all the
gifts made on or after the date were free from tax. But in 2004, the act was again revived
partially. A new provision was introduced in the Income Tax Act 1961 under section 56
(2). According to it, the gifts received by any individual or Hindu Undivided Family (HUF)
in excess of Rs. 50,000 in a year would be taxable.

An indirect tax is a tax collected by an intermediary (such as a retail store) from the
person who bears the ultimate economic burden of the tax (such as the customer). An
indirect tax is one that can be shifted by the taxpayer to someone else. An indirect tax
11
may increase the price of a good so that consumers are actually paying the tax by paying
more for the products. The some important indirect taxes imposed in India are as under:

Customs Duty:
The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.
Besides, all imports are sought to be subject to a duty with a view to affording protection
to indigenous industries as well as to keep the imports to the minimum in the interests
of securing the exchange rate of Indian currency. Duties of customs are levied on goods
imported or exported from India at the rate specified under the customs Tariff Act, 1975
as amended from time to time or any other law for the time being in force. Under the
custom laws, the various types of duties are leviable. (

1) Basic Duty: This duty is levied on imported goods under the Customs Act, 1962
2)
3) (2) Additional Duty (Countervailing Duty) (CVD): This is levied under section 3
(1) of the Custom Tariff Act and is equal to excise duty levied on a like product
manufactured or produced in India. If a like product is not manufactured or produced in
India, the excise duty that would be leviable on that product had it been manufactured or
produced in India is the duty payable. If the product is leviable at different rates, the
highest rate among those rates is the rate applicable. Such duty is leviable on the value
of goods plus basic custom duty payable.

(3) Additional Duty to compensate duty on inputs used by Indian manufacturers: This is
levied under section 3(3) of the Customs Act.

(4) Anti-dumping Duty: Sometimes, foreign sellers abroad may export into India goods at
prices below the amounts charged by them in their domestic markets in order to capture
Indian markets to the detriment of Indian industry. This is known as dumping. In order
to prevent dumping, the Central Government may levy additional duty equal to the margin
of dumping on such articles. There are however certain restrictions on imposing dumping
duties in case of countries which are signatories to the GATT or on countries given "Most
Favoured Nation Status" under agreement
(7) Export Duty: Such duty is levied on export of goods. At present very few articles such
as skins and leather are subject to export duty. The main purpose of this duty is to
restrict exports of certain goods.
(8) Cess on Export: Under sub-section
(1) of section 3 of the Agricultural & Processed Food Products Export Cess Act, 1985 (3 of
1986), 0.5% ad valorem as the rate of duty of customs be levied and collected as cess on
export of all scheduled products.

(9) National Calamity Contingent Duty: This duty was imposed under Section 134 of
the Finance Act, 2003 on imported petroleum crude oil. This tax was also leviable on
motor cars, imported multi-utility vehicles, two wheelers and mobile phones.

(10) Education Cess: Education Cess is leviable @ 2% on the aggregate of duties of

Customs (except safeguard duty under Section 8B and 8C, CVD under Section 9 and anti-
dumping duty under Section 9A of the Customs Tariff Act, 1985). Items attracting
Customs Duty at bound rates under international commitments are exempted from this
Cess. (11) Secondary and Higher Education Cess: Leviable @1% on the aggregate of duties

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of Customs.

(12) Road Cess:

Additional Duty of Customs on Motor Spirit is leviable and Additional Duty of Customs on
High Speed Diesel Oil is leviable by the Finance Act (No.2), 1998. and the Finance Act,
1999 respectively. (13) Surcharge on Motor Spirit: Special Additional Duty of Customs
(Surcharge) on Motor Spirit is leviable by the Finance Act, 2002.

Central Excise Duty: The Central Government levies excise duty under the Central
Excise Act, 1944 and the Central Excise Tariff Act, 1985. Central excise duty is tax which
is charged on such excisable goods that are manufactured in India and are meant for
domestic consumption. The term "excisable goods" means the goods which are specified in
the First Schedule and the Second Schedule to the Central Excise Tariff Act 1985. It is
mandatory to pay Central Excise duty payable on the goods manufactured, unless
exempted eg; duty is not payable on the goods exported out of India. Further various
other exemptions are also notified by the Government from the payment of duty by the
manufacturers.

Various Central Excise are:

(1) Basis Excise Duty: Excise Duty, imposed under section 3 of the ‘Central Excises and
Salt Act’ of 1944 on all excisable goods other than salt produced or manufactured in
India, at the rates set forth in the schedule to the Central Excise tariff Act, 1985, falls
under the category of Basic Excise Duty In India. (2) Special Excise Duty: According to
Section 37 of the Finance Act, 1978, Special Excise Duty is levied on all excisable goods
that come under taxation, in line with the Basic Excise Duty under the Central Excises
and Salt Act of 1944. Therefore, each year the Finance Act spells out that whether the
Special Excise Duty shall or shall not be charged, and eventually collected during the
relevant financial year. (2) Additional Duty of Excise: Section 3 of the ‘Additional Duties
of Excise Act’ of 1957 permits the charge and collection of excise duty in respect of the
goods as listed in the Schedule of this Act. (4) Road Cess: (a) Additional Duty of Excise on
Motor Spirit: This is leviable by the Finance Act (No.2), 1998.

(b) Additional Duty of Excise on High Speed Diesel Oil:

This is leviable by the Finance Act, 1999. (5) Surcharge: (a) Special Additional Duty of
Excise on Motor Spirit: This is leviable by the Finance Act, 2002. (b) Surcharge on Pan
Masala and Tobacco Products: This Additional Duty of Excise has been imposed on
cigarettes, pan masala and certain specified tobacco products, at specified rates in the
Budget 2005-06. Biris are not subjected to this levy. (6) National Calamity Contingent
Duty (NCCD): NCCD was levied on pan masala and certain specified tobacco products vide
the Finance Act, 2001. The Finance Act, 2003 extended this levy to polyester filament
yarn, motor car, two wheeler and multi-utility vehicle and crude petroleum oil. (7)
Education Cess: Education Cess is leviable @2% on the aggregate of duties of Excise and
Secondary and Higher Education Cess is Leviable @1% on the aggregate of duties of
Excise. (8) Cess - A cess has been imposed on certain products.

Service Tax: The service providers in India except those in the state of Jammu and
Kashmir are required to pay a Service Tax under the provisions of the Finance Act of 1994.
The provisions related to Service Tax came into effect on 1st July, 1994. Under Section 67
of this Act, the Service Tax is levied on the gross or aggregate amount charged by the
service

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Direct taxes are the important sources of raising public finance.
‘Income tax’ is one of the major sources of revenue of the Indian
Govemment. There is no country, which does not make use of
taxation for its economic growth. Maximization of economic
growth is the ultimate objective of the economic, fiscal and
monetary policy of the Govemment. While stimulating the growth
in the desired directions, it is equally necessary to seethat
development percolates into all sections of the society.

2. The Government needs money to maintain law and order in

the country, to safeguard the security of the country from
foreign powers and promote the welfare of the people. Since
our Govemment is wedded to
socialistic pattern of society, it is the foremost duty of the
Government to bring out such welfare and development
programmes, which will bridge the gap between the rich and
poor. Thus it is an important tool in bringing about a balanced
socio-economic growth. During the last 55 years we could have
achieved much more than what we have achieved. The Central
Government has run into a large fiscal deficit and most of the
State Governments are almost bankrupt.

3. Our Social and physical infrastructure is poor. Especially

during last 30 years, we were lagging far behind other
nations like Japan, Singapore, Taiwan and China. There are
many causes for this situation. The collection of revenue
system is one of the major causes. Many professionals,
businessmen industrialists and politicians are not paying tax
on real income,
‘salaried person’ are paying the tax regularly as it is deducted
at source. The Government plays a major role in taking
decisions on economic matters.

4. The Finance Minster has a difficult task of presenting a

balanced budget, keeping in mind the manner in which he
can collect revenue and
utilise the said resources for developmental work. He has to
keep in mind the various sections in our society while
presenting the budget.

TAX DEDUCTION AT SOURCE

Any person responsible for making payment of certain category of incomes is liable to
deduct tax at source at an appropriate occasion. The law prescribes time when the TDS is
to be made, rate at which it should be made and, when TDS should be paid to the
Government and associated administrative responsibilities of payer (tax deductor) and
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payee (tax deductee) have been prescribed. The following chart states at a glance incomes
from which TDS should be made : Section Nature of Income/ Payment Threshold Limit
Person Responsible to Make TDS Nature of payee Rate at which to be deducted 192 Salary
Maximum amount not liable to tax for employee Any person being an Employer Employee
having taxable salary average rate of incometax computed on the basis of rates inforce for
the financial year in which the payment is made, on the estimated salary income of the
employee for that financial year 193 Interest on securities 10,000, if income from 8%
Saving Bonds, 2003 5,000, if interest on debenture Any person issuing the security Any
person Discussed later 194 Dividend Nil Company Any person @10% if PAN is provided
@20% if PAN is not provided 194A Any interest other than interest on securities Exceeding `
5,000 in a year or 10,000 in case payer is banking
individual or HUF Any resident in India @10% if PAN is provided @20% if PAN is not
provided

Deduction and Collection of Tax at Source

DIRECT TAXATION
Section Nature of Income/ Payment
Threshold Limit Person Responsible to
Make TDS Nature of payee
Rate at which to be deducted
194B Winnings from lottery or crossword Puzzle or card game and other game of any sort
including television game
` 10,000 Any person Any person 30%
[Sec. 115BBB] 194BB Winnings from
horse race
` 5,000 Winning from
horse race Any person
30% [Sec. 115BBB]
194C Any Payment in pursuance of any contract for consideration
If a contract exceeds contract ` 30,000 or total in a year contracts with the same contractor
or subcontractor exceed ` 75,000.
Central or State Government, Local Authority, Central/State or Provincial Corpn.,
Company Co- operative Society Housing Board, Trustor University, Firm
Any resident contractor or sub-contractor for carrying out any work including supply of
labour
If the receipient is an individual/HUF = 1% If the recipient is any other person = 2% 20%, if
PAN is not provided (in the both the cases). If the receipt is a transport operator and eligible
to compute in come u/s 44AE and he furnishes his PAN to payer, TDS rate = Nil
194D Insurance commission
` 20,000 Any person Any resident person
10% if PAN furnished 20%, if PAN not furnished
194DA Any person made payment to a resident person under Life Insurance Policy,
including bonus on such policy, except income u/s 10(10D)
` 1,00,000 Any person Any Resident 2%
194E Income for (i) participation in any game or sport in India; (ii) by way of remuneration
for articles on sorts, etc
Nil Any person Any nonresident sportsman (including athlete or an entertainer) who is
not a citizen of India 20%
Guaranteed sum in relation to any game or sport
played in India. Nil Any person Any non- resident
15
association or institution.
20%
194EE Any sum out of National Savings Scheme u/s 80CCCA
` 2,500 Any person Any person 20%
194F Amount on account of repurchase relevant of units
covered u/s. 80CCB Nil Any person Any person 20%
DIRECT TAXATION I 22.3
Section Nature of Income/ Payment
Threshold Limit Person Responsible to
Make TDS Nature of payee
Rate at which to be deducted
194G Commission, remuneration or prize – relating to
lottery tickets Exceeding ` 1,000
Any person Any person stocking, purchasing or selling
lottery tickets. 10%
194H Commission or
Brokerage Exceeding `
5,000 p.a
Other than individual and HUF
Any person 10%, if PAN furnished 20%, if PAN not furnished

Advantages and Disadvantages of Direct Taxes –Advantages of Direct

Taxes:

Direct and indirect taxes have advantages of their

Own. Direct taxes have some merits and so have the

indirect taxes.

Direct taxes have the following advantages in their favour :

(i) Equitable:
The burden of direct taxes cannot be shifted. Hence equality of sacrifice can be
attained through progression. Of course, the very low incomes can be exempted. This
cannot be achieved- by taxes on commodities which fall with equal force on the rich
and the poor. The tax raises the price of the commodity, and the price of a commodity
is the same for every person, rich or poor.

(ii) Economical:
The cost of collection of direct taxes is low. They are mostly collected “at the source”.
For instance,-the income tax is deducted from an officer’s pay every month. This saves
expense. The employer acts as an honorary tax collector. This means great economy.

ADVERTISEMENTS:
16
(iii) Certain:
In the case of a direct tax, the payers know how much is due from them and when. The
authorities also know the amount of revenue they can expect. There is certainty on both
sides. This minimises corruption on the part of collecting officials.

(iv) Elastic:
If the State suddenly stands in need of more funds in an emergency, direct taxes can well
serve the purpose. The yield from income tax or death duties can be easily increased by
raising their rate. People cannot stop dying for fear of paying death duties.

(v) Productive:
Another virtue of direct taxes is that they are very productive. As a community grows in
numbers and prosperity, the return from direct taxes expands automatically. The direct
taxes yield a large revenue to the State.

(vi) A means of developing civic sense.

In the case of a direct tax, a person knows that he is paying a tax, he feels conscious of his
rights. He claims the right to know how the Government uses his money and approves or
criticizes it. Civic sense is thus developed. He behaves as a responsible citizen.

Disadvantages of Direct Taxes

ADVERTISEMENTS:

The great disadvantage of a direct tax is that it pinches the payer. He ‘squeaks’ when a
lump sum is taken out of his pocket. The direct- taxes are thus very inconvenient to pay.
Nobody can help feeling the pinch.
(ii) Evadable:
The assessee can submit a false return of income and thus evade the tax. That is why a
direct-tax is “a tax on honesty.” There is a lot of evasion. Many of those who should be
paying taxes go scot-free by concealing their incomes.

(iii) Arbitrary:
If taxes are progressive, the late of progression has to be fixed arbitrarily; and if
proportional, they fall more heavily on the poor. Thus, both are bad. The rate of taxes
depends upon the whim of the Finance Minister. This is arbitrary.

(iv) Disincentive:
If the taxes are too heavy, they discourage saving-sand investment. In that case the country
will suffer economically. A high level of taxation discourages investment and enterprise in
the country. It inflicts a lot of damage, on business and industry.
17
w
VALUE ADDED TAX (VAT): The practice of VAT executed by State Governments is applied on
each stage of sale, with a particular apparatus of credit for the input VAT paid. VAT in
India classified under the tax slabs are 0% for essential commodities, 1% on gold ingots
and expensive stones, 4% on industrial inputs, capital merchandise and commodities of
mass consumption, and 12.5% on other items. Variable rates (State-dependent) are
applicable for petroleum products, tobacco, liquor, etc. VAT levy will be administered by
the Value Added Tax Act and the rules made there- under and similar to a sales tax. It is
a tax on the estimated market value added to a product or material at each stage of its
manufacture or distribution, ultimately passed on to the consumer. Under the current
single-point system of tax levy, the manufacturer or importer of goods into a State is
liable to sales tax. There is no sales tax on the further distribution channel. VAT, in
simple terms, is a multi-point levy on each of the entities in the supply chain. The value
addition in the hands of each of the entities is subject to tax. VAT can be computed by
using any of the three methods: (a) Subtraction method: The tax rate is applied to the
difference between the value of output and the cost of input. (b) The Addition method: The
value added is computed by adding all the payments that is payable to the factors of
production (viz., wages, salaries, interest payments etc). (c) Tax credit method: This
entails set-off of the tax paid on inputs from tax collected on sales.

Securities Transaction Tax (STT): STT is a tax being levied on all transactions done
on the stock exchanges. STT is applicable on purchase or sale of equity shares,
derivatives, equity oriented funds and equity oriented Mutual Funds. Current STT on
purchase or sell of an equity share is 0.075%. A person becomes investor after payment of
STT at the time of selling securities (shares). Selling the shares after 12 months comes
under long term capital gains and one need not have to pay any tax on that gain. In the
case of selling the shares before 12 months, one has to pay short term capital gains
@10% flat on the gain. However, for a trader, all his gains will be treated as trading
(Business) and he has to pay tax as per tax sables. In this case the transaction tax paid
by him can be claimed back/adjusted in tax to be paid.

The overall control for administration of Direct Taxes lies with the Union Finance
Ministry which functions through Income Tax Department with the Central Board of
Direct Taxes (CBDT) at its apex. The CBDT is a statutory authority functioning under the
Central Board of Revenue Act, 1963. It also functions as a division of the Ministry dealing
with matters relating to levy and collection of Direct Taxes. The Central Excise
Department spread over the entire country administers and collects the central excise
duty. The apex body that is responsible for the policy and formulation of rules is the
Central Board of Excise and Customs which functions under the control of the Union
Finance Ministry. The Central Excise officers are also entrusted with the administration
and collection of Service tax and the Customs duty.

The information contained in this chapter is related to direct and indirect taxes imposed
and collected by the Union Government. The tables giving data from 2000-01 onwards in
respect direct taxes (corporation tax, income tax and other direct taxes) collected by
Central Board of Direct Tax (CBDT) and indirect taxes (customs duties, union excise duties
and service tax) collected by Central Board of Excise and Customs. Customs Collection
Rate used in this chapter is defined as the ratio of revenue collection (basic customs duty
+ countervailing duty) to value of imports (in per cent) unadjusted for exemptions,
expressed in percentage.

18
Highlights of the Direct Taxes:
 The total revenue realization from Direct and Indirect Taxes increased from ` 1881.19
billion in 2000-01 to ` 6076.45
billion in 2008-09. The percentage share of revenue realization from direct taxes to the
total revenue realization increased from 36.3% in 2000-01to 55.7% in 2008-09, whereas,
the percentage share of revenue realization from indirect taxes declined from 63.7% in
2000-01 to 44.3% in 2008-09.

 Revenue collection from direct taxes increased from ` 683.05 billion in 2000-01 to `
3382.12 billion in 2008-
09. The percentage share of revenue realization from corporation tax to the total revenue
realization from direct taxes increased from 52.3% in 2000-01to 63.2% in 2008-09,
whereas, the percentage share of revenue realization from income tax decreased from
46.5% in 2000-01 to 36.7% in 2008-09.

 Revenue collection from indirect taxes increased from ` 1198.14 billion in 2000-01 to `
2446.67 billion in 2009-10. The percentage share of revenue realization from customs
duties to the total revenue realization from indirect taxes decreased from 39.7% in
2000-01 to 34.5% in 2009-10, whereas, the percentage share of revenue realization from
excise duties declined from 57.2% in 2000-01 to 42.1% in 2009-10. , However, the
percentage share of revenue realization from service tax to the total revenue realization
from indirect taxes increased substantially from 2.2% in 2000-01 to 23.5% in 2009-10.

19
Income from House Property
Illustration 3. Mr. Shyam owns two houses, which are occupied by him for his own
residence.
The detailed particulars of houses and his other incomes for the Previous Year 2015-
16 are given below:

Particul House A House B

ars ` `
Fair Rent 5,00, 5,00,0
Municipal 000 00
Value 4,20, 4,50,0
Standard 000 00
Rent 4,50, 6,20,0
Municipal taxes paid 000 00
Interest on loan for the 50,0 60,0
00 00
FY 2015-16 Date of loan 1,60, 2,20,0
000 00
Date of completion
1.12.2 1.04.2
Certificate of interest attached with return of income 004 005

Mr. Shyam earns income from other sources amounting 31.03.2 31.03.2
to ` 2,00,000 006 008

No Yes

Compute his Total Income and advise him which house should be opted for self-
occupation.

20
Solution : Computation of Income from House Property under different options

Particul House A House B

ars ` `
(a) Assuming both properties are self-occupied (SO)
Annual Value Nil Nil
Less : Interest on loan (-) (-)
30,000 2,00,000
Loss from House Property (-) 30,000 (-)
2,00,000
(b) Assuming both properties as deemed let out (DLO)
Gross Annual Value 4,50,000 5,00,000

Less : Municipal taxes paid (-) (-)

50,000 60,000
Net Annual Value 4,00,000 4,40,000

Less : Permissible deduction :

(i) Statutory deduction : 30% of Net Annual Value (-) (-)

1,20,000 1,32,000
(ii) Interest on loan (- (-)
)1,60,000 2,20,000
Income from House Property 1,20,000 88,000
(c) Criteria for selection of house for self- Option I Option
occupied : Lowest taxable income II
Income from house A (-)30,000 1,20,000
(SO) (DLO)
Income from house B 88,000 (-
)2,00,000
(DLO) (SO)
Income from Other Sources
2,00,00 2,00,0
0 00
Total Income 2,58,000 1,20,000

Conclusion : House B should be treated as self-occupied.

Illustration 5. Mr. Ranjit Sinha is employed with HUD Co. Ltd. @ ` 25,000 p.m.
He is the owner of a house
property construction of which was completed on 1st April 2006. Since
then, it has been in his self-occupancy for residential purposes. The
particulars in respect of the house for financial year 2015-2016 are given
below:
`
 Municipal Valuation 2,00,000
Municipal tax paid 20,000
Ground rent outstanding 5,000
Insurance premium paid 3,000

Interest on loan, taken on 1-6-2014 for renovation of the house, is `

75,000 for the year 2015-2016. However, he could pay only, ` 45,000
during the year. He is transferred in February 2016 to the Nagpur
Branch of the Company. He intends to allow his sister to occupy the
house free of rent in his absence. He seeks your advice in this
connection. Compute his total income for AY 2016-2017.
Solution :
Computation of Total Income
Assessee : Mr. Ranjit Sinha A. Y : 2016-
17

Case I Case II
House House is
Particul kept occupied
ars vacant by his
sister in
` his
absence
`
Income from House Property :
Gross Annual Value Nil 2,00,000
Less : Municipal taxes paid Nil (-) 20,000
Net Annual Value Nil 1,80,000
Less : Permissible deduction (Sec. 24)
(i) Statutory deduction – 30% of Net annual value Nil (-) 54, 000
(ii) Interest on loan for renovation (-) 30,000 (-) 75,000
Income from House Property (-) 30,000 51,000
Statement of Total Income :
Income from Salary 3,00,000 3,00,000
Income from House Property (-) 30,000 51,000
Total Income 2,70,000 3,51,000

Advise : From tax angle it is not advisable to allow his sister to occupy the
house in his absence.

Income from House Property

Illustration 11. Mr. Suman owned a house property at Chennai which was
occupied by him for his residence. He was transferred to Mumbai in June
2015 and therefore he let out the property with effect from 1.7.2015 on
 a monthly rent of ` 5,000. The corporation tax payable in respect of the
property was ` 10,000 of which 50% was paid by him before 31.3.2016.
Interest on money borrowed for the construction amounted to
`20,000. Compute the income from house property for the A.Y. 2016-17.
Solution :
Assessee : Mr. Suman Previous Year : 2015-2016 Assessment
Year : 2016-17 Computation of Income from
House Property

Particul ` `
ars
Annual Value u/s 23(1)(a)/(b) – Rent receivable for the 60,0
whole year 00
Less : Municipal Taxes paid ` 10,000 × 50% (5,00
0)
Net Annual 55,0
Value Less : 00
16,5
Deduction 00
u/s 24 20,0
(a) 30% of Net Annual Value ` 55,000 × 30% (36,50
00
(b) Interest on borrowed Capital 0)
Income from House Property 18,5
00

INDIRECT TAXES

OBJECTIVES
After studying this lesson, you will be able to:
● acquaint yourself with the sources of revenues of the government;
● define direct taxes and indirect taxes;
● distinguish between direct taxes and indirecttaxes;
● state merits and demerits of direct taxes and indirect taxes;
● enumerate sources of direct taxes and indirect taxes;
● define various types of indirect taxes like, excise duty,
customs duty(import and export),production linked tax, and
Value Added Tax (VAT); and
● distinguish between sales tax and value added tax.

EXPECTED BACKGROUND KNOWLEDGE

● Concept of percentage and its applications
 40.1 SOURCES OF REVENUE
As we know that government has to perform its various functions for the welfare of
the society,

Indirect Tax
. The income of government from all sources is called public
income or public revenue
. Public revenue include s income from taxes, income from goods
and service s supplie d by
public enterpr ises, revenue from the admini strative activiti es,
such
as fees, fines, etc., gifts and grants, while public receipts include all T
the income of the government which it may have during a given
period of time
i.e. public receipts = public revenue + income from all other sources,
such as, a public borrowing from individuals and banks and income
from public enterprises. Local bodies like Municipal Corporation,
Municipal Committees, Town Panchayat, Cantonment Board, etc can
also levy certain taxes like property tax, professional tax, octroi,
education cess, etc.
Thus, taxes are contributions made by the citizens of the country
towards its development and expenditure, which the government has
to incur in its social and economic activities. Taxes are paid by the
individuals, corporate houses of trade and industry etc. There are
different types of taxes like income tax, wealth tax, gift tax,
property tax, sales tax, excise and custom duty etc.

Tax
A tax is legally compulsory payment levied by the government on
the persons or companies to meet the expenditure incurred on
conferring common benefits upon the people of a country. In other
words a tax can also be describe as a compulsory levy where those
who are taxed have to pay the sums irrespective of any
correspondingreturn of services or goods by the government.

Fee
Fee is also compulsory payment made by a person who receives in
return a particular benefit or services from the government.

Fines
These are compulsory payments without any quid pro que but are
different from taxes because fines are imposed to curb certain
offences and discipline people and not to get revenue for the State.
In this sense, fines are not taxes.

Surcharges
It is an additional charge or an extra fee for a special service. It is
also called tax on tax e.g. a 10% surcharge is applicable on income
tax for incomes above Rs. 10 lakh. In other words surcharges are
often a charge in addition to a charge, or a tax added to the
original tax.
Two aspects of tax follow from the definition:
1. A tax is a compulsory payment and no one can refuse to payit.
2. Proceeds from taxes are used for common benefits or general
purposes of the state. It means there is no direct quid pro que
involvement in the payment of a tax.
DIRECT TAXES
Those taxes whose burden cannot be shifted to
others and the person who pays these to the
government has to bear it are called direct
taxes. In other words direct tax is imposed on
an individual or a group of individuals, which
affects them directly i.e, which they have to
pay to the government directly. The direct tax
can be of different
 Income Tax
The tax imposed on an individual or a group of individuals on their
annual incomes is known as income tax. Every individual whose
annual income exceeds a certain specified limit is required, under the
Income Tax Act, to pay a part of his income in the form of income
tax. Its rates are announced in the beginning of each financial year
by the centralgovernment.

Financial Year: The period from 1st April to 31st march is taken
as a financial year i.e. every financial year begins on 1st April and
ends on 31st march of the consecutive year.

Assessment Year: The year next to a particular financial year is

called the assessment year for that financial year, e.g. for financial
year 2005-06, the assessment year is 2006-07.
Permanent Account Number: An individual is given a permanent
account number (PAN) by the income tax department. He or she is
obliged to file an income tax return of the financial year by a
specified date of the subsequent financial year.

Wealth Tax
The tax imposed on the wealth (property as well as money) of an
individual is called wealth tax. The exemption limit for wealth tax is
Rs 5, 00,000. In addition one residential house or a part thereof is
exempted from the wealth tax.

Gift Tax
If an individual transfers any of his movable or immovable property
voluntarily to any other individual it is called a gift. If the value of a
gift exceeds a specified limit then the person giving the gift has to pay
gift tax to the government where as the person receiving the gift need
not pay any tax.
A controversial issue in public finance is concerned with whether in
the tax structure of an economy, direct or indirect tax should be
preferred. Indeed both direct taxes and indirect taxes have their
merits and demerits and therefore a good tax system should contain
a proper mix of these two types of taxes.
Direct taxes, it may be recalled are those which are levied directly on
the individuals and firms and their burden is borne by those on
whom these are levied.

Merits of Direct Taxes

The larger burden of the direct taxes falls on the rich people who have
capacity to bear these and the poor people with would try to avoid or
even evade the taxes.
The practice
and possibility of tax evasion and avoidanc e
Demerits of Direct Taxes
1. In the direct taxation, people are aware of their tax liability and therefore they
is more in direct taxes than in case of indirect taxes
2. even in advance and become quite inconvenient.
3. Another demerit of direct taxes is their supposed effect on the
will to work and save. It is assessed that work (given Income)
and leisure are two alternatives before any taxpayer. If
therefore, a tax is imposed say on income, the taxpayer will
find that the return from work has decreased as compared
with return from leisure. He therefore tries to substitute leisure
for work.

INDIRECT TAXES
Indirect taxes are those whose burden can be shifted to others so
that those who pay these taxes to the government do not bear the
whole burden but pass it on wholly or partly to others. Indirect
taxes are levied on production and sale of commodities and
services and small or a large part of the burden of indirect taxes
are passed on to the consumers. Excise duties on the product of
commodities, sales tax, service tax, customs duty, tax on rail or bus
fare are some examples of indirect taxes.

Excise Duty
The tax imposed by the government on the manufacturer or
producer on the production of some items is called excise duty. The
liability to pay excise duty is always on the manufacturer or
producer of goods. The duty being a duty on manufacture of goods,
it is normally added to the cost of goods, and is collected by the
manufacturer from the buyer of goods. Therefore it is called an
indirect tax. This duty is now termed as "Cenvat". There are three
types of parties who can be considered as manufacturers-
● Those who personally manufacture the goods in question
● Those who get the goods manufactured by employing hired labour
● Those who get the goods manufactured by other parties
For example, excise duty on the production of sugar is an indirect
tax because the manufacturers of sugar include the excise duty in
the price and pass it on to buyers. Ultimately it is the consumers on
whom the incidence of excise duty on sugar falls, as they will pay
higher price for sugar than before the imposition of thetax.
In order to attract Excise duty liability, following four conditions
must be fulfilled:
a) The duty is on "goods".
b) The goods must be "excisable"
The goods must be "manufactured" or produced
c) Such manufacture or production must be "in India".

40.3.1 Additional Information on Excise Duty

Goods : These are the entities, which can be weighted, measured
and marketed. e.g. steel, cloth, computer software, gas, etc. Those
commodities having very short life are not goods, if not marketable
in that short period, even if
 20%, the duty @
20% will be
Sl. Type of Goods Excie Cess payable on Rs 25
No Duty (i.e after
. allowing 50%
1. Unprocessed fabrics of cotton, man-made 10 2% abatement of
(synthetic) and woolen other than (2) given below. % MRP of Rs 50).
2. Unprocessed knitted or crocheted fabric of 8% 2% Thus duty
cotton not containing any other textile payable per
materials. pack will be Rs.
3. If readymade garments are made up of 100% 8% 2% 5.
cotton fabrics and also knitted or crocheted
4. Readymade garments other than (3) above 10 2%
%
5. All types of clothing accessories if made up of 8% 2%
100% cotton and also knitted or crocheted.
6. Clothing accessories other than (5) above. 10 2%
%
Valuation for Excise Duty
Specific duty: It is the duty payable on the basis of certain unit
e.g. duty on cigarettes is on length basis, sugar per quintal basis,
matches per 100 boxes, marble slabs and tiles per square meter
basis and colour TV by screen size in cm, if MRP is not written on
the carton.
Tariff Value: Government from time to time fixes tariff value.
Government can fix different tariff values for different classes of
goods manufactured by different classes or sold to different classes
of buyers.
MRP based valuation : The provisions are as follows:
i) The goods should be covered under provisions of Standards
of Weights and Measures Act.
ii) Central Government can permit reasonable abatement
(deductions) from the retail sale price.
iii) Central Governmenthas to issue a notification in Official
gazette specifyingthe commodities for which the provision
is applicable and the abatement permissible.
For example, government had issued a notification to reduce the excise
duty on cosmetics and toilet preparations on MRP basis printed on the
carton after allowing abatement of 50%. In such cases, if MRP printed on
carton is Rs 50 and if the duty on cosmetics & toilet preparations is
Payment of excise duty : In case of Non-SSI (Small Scale
Industries) i.e., normal assesses the excise duty is payable monthly,
and for SSI (availing exemption based on turnover) it is payable
quarterly. The duty on the goods removed from the factory or the
warehouse during the month shall be paid by the 5th of the following
month in case of Non-SSI and by 15th for SSI. In case of delayed
payment, interest should also be deposited at the rate of 13% p.m or
Rs 1,000 per day for the period of delay after 5th or 15th whichever
is applicable, whichever is higher, along with the duty.
Payment by debit in Cenvat credit account: Under the Cenvat
credit scheme, the assessee is allowed credit of duty paid on inputs
or capital goods, which are used in or in relation to manufacture of
the final products, and the credit can be utilized towards payment of
duty on the final products. Credit is allowed on inputs and capital
goods except LDO (light diesel oil), HSD (high speed diesel) and motor
spirit. Also, instant credit is allowed immediately on the inputs being
received into the factory. However credit is not allowed if final
products are exempted from duty.
Following example will illustrate the credit method of Cenvat.
Let the price of the commodity be Rs 100, When the transaction
takes place without cenvat, B purchases from A at Rs 110,(10% as
excise duty). After addition a value of Rs 40, the subtotal is Rs
150.He pays 10% tax on it (i.e Rs15) then total is 165. As against
this, in the second case, when transaction takes place with Cenvat, B
purchases from A at Rs 100 because he got credit on that amount.
After adding the same value of Rs 40, the sub total is Rs 140, He has
to pay 10% of excise on Rs 140,i.e Rs 14, then total becomes Rs.
154. Here you can observe easily that transaction with Cenvat is
clearly beneficial. The details are exhibited in the following tabular
form:

Transaction Transaction
without Cenvat with Cenvat
Details A B A B
Purchases - 110 - 100
Value added 100 40 100 40
Sub-total 100 150 100 140
Add-tax 10% 10 15 10 14
Sales Tax
Tax paid by the consumer on the purchase of some items is called the
sales tax. Rates of sales tax depend upon the nature of the goods
purchased by the consumer.

Value Added Tax

Under the Indian constitution, the States have the exclusive powers to
levy tax on the sales of goods. The tax on the inter-state trade is
levied by central government, and is called Central Sales Tax (CST). It
is proposed to abolish CST in phased manner. Due to various defects
in the Sales Tax System, the Govt, has introduced a new system
called Value Added Tax (VAT) in place of State Sales Tax.
VAT is a multi-point tax levied and collected on the value added to
goods at different stages of sale. It is a method of taxing by stages.
The method consists of levying a tax on the value added to a
product at each stage of production or distribution. It is another
form of sales tax where tax is collected in stages rather than
collection of the tax at the first or last point. VAT, in simple terms,
is a multi-point levy on each of the entities in the supply chain
with the facility of set-off of input tax i.e. that is, the tax paid at
the stage of purchase of goods by a trader and on purchase of raw
materials by a manufacturer. Only the value addition in the hands
of each of the entities is subject to tax. For instance, if a dealer
purchases goods for Rs 100 from another dealer and a tax of Rs
10 has been charged in the bill, and he sells the goods for Rs 120
on which the dealer will charge a tax of Rs 12 at 10 per cent, the
tax payable by the dealer will be only Rs 2, being the difference
between
CHARACTERISTICS OF VAT

1. It is simple, modern and transparent taxsystem.

2. It is a multipoint tax with credit for the tax paid at
precedingstage.
3. Small traders (whose turnover is up to Rs10 lakhs) are outside
VAT.
4. VAT replaces a number of taxes like turnover tax, luxury tax,
surcharge etc.
5. VAT being efficient is considered to be better than sales tax.
6. VAT has four rates instead of the large number of rates under
sales tax.
7. Composition scheme for small dealer having turnover above
taxablequantum of Rs 10 lakhs but below 50 lakhs.
8. credit of taxes paid on inputs and only taxing value
addition.

Calculation of Tax Liability under VAT

Suppose a TV dealer sells TV worth Rs. 20,000 and VAT is 4%, he
will collect Rs. 800 (20,000×0.04) as VAT. If the dealer had
purchased the TV for Rs. 19,000 and at that time he had already
paid Rs. 760 as VAT. So the VAT payable by the dealer will be 800
760 = 40. He will pay to the government only Rs. 40.00 the tax
payable is tax rate multiplied by valuation addition. In this case it
would be 0.04 × (20000 19000) = 40.
VAT liability for any tax period, is calculated by decreasing total
input tax from total output tax. The output tax is calculated by
multiplying the turn over (Sales) by applicable VAT rates.
Net tax = output tax input tax
If difference is (+) pay this amount to government.
If differenceis ( ) applyexcesscreditagainstyour VAT liability
andclaimrefundforanyremaining balance OR the excess credit can be
carried forward to the next period.

Advantages of VAT
1. Self-assessment by dealers.
2. Higher revenue growth from states.
3. Set off for input tax paid on previous purchases.
4. Other taxes to be eliminated.
5. Fairness in the taxation system. Visits to tax department will
reduce.
6. Help to reduce tax evasion andcorruption.
7. Uniform rates of VAT will boost fair trade.
8. VAT does not lead to price rise.
9. VAT is easier to enforce.

Disadvantages of VAT
1. Record keeping systems and procedure will need to re-
strengthen with Tax Authorities in order to claim input
tax credit.
2. VAT may lead to tax evasion if false input credits are submitted by
dealers.
 Tax Credit: A dealer who is registered shall be entitled to a tax
credit in respect of the turnover of purchases occurring during the
tax period where the purchase arises in the course of his activities
as a dealer and the goods are to be used by him directly or
indirectly for the purpose of making sale.
No tax credit shall be allowed
i) in the case of the purchase of goods from a person who is not
a registered dealer.
ii) for the purchase of goods which are to be incorporated into the
structure of a building owned or occupied by the person.
iii) when a dealer has purchased goods and the goods are to be
used partly for the purpose of making the sales, the amount of
the tax credit shall be reduced proportionately.
Net Tax: The net tax payable by a dealer for a tax period shall be
determined by the formula:
Net tax = O I C

● Government has to perform many functions in the

discharge of its duties, to meet these requirements they
require capital. So, government collects money from the
public in the form of fees, fines, surcharge and taxes.
● Taxes are the most important sources of revenue.
● The income of government through all sources is called
public income or public revenue.
● Different tiers of government levies different taxes like,
Central government levies-income tax, education cess,
wealth tax, central excise and customs duty, central sales
tax, etc, State government- Sales taxes (Now VAT), state
excise duty, entertainment tax, agriculture revenue tax etc.
Local bodies- property tax, professional tax, octroi,
education cess, etc.
● Fines are compulsory payments, which are imposed to curb
certain offences, and discipline people and fee is also
compulsory payment, which are made when a person
receives in return a particular benefit or services from the
government. Whereas tax is legally compulsory payment
levied by the government on the persons or companies to
meet the expenditure incurred on conferring common
benefits upon the people of a country.
Direct taxes are those taxes whose burden cannot be shifted to others
and the person who pays it to the government has to bear it. Indirect
taxes are those whose burden can be shifted to others so that those who
pay these taxes to the government do not bear the whole burden but
pass it on wholly or partly to others
● Excise duty can only be levied on those items which are
manufactured in India (excluding goods produced or
manufactured in special economiczones).
● Generally 16% of excise duty and 2% cess are imposed on most
of the all goods, except few exceptions like In case of delayed
payment, interest should also be deposited at the rate of 13%
p.m or Rs 1,000 per day for the period of delay after 5th or
15th as the case may be, whichever is higher, along with the
duty.
● Exemptions: Central excise rules grant exemption from duty if
goods are exported under bond, except exports to Nepal and
Bhutan. Similarly, goods manufactured in special economic
zones (SEZ) are not excisable goods and hence no excise duty
can be levied on goods manufactured.
● Tax imposed by the government on the import and export of
items (goods) is called customs duty.
● Tax paid by the consumer on the purchase of some items is
called salestax.
● VAT will replace the present sales tax in India. Under the
current single-point system of tax levy, the manufacturer or
importer of goods into a State is liable to sales tax. There is no
sales tax on the further distribution channel. VAT, in simple
terms, is a multi-point levy on each of the entities in the supply
chain with the facility of set-off of input tax i.e. the tax paid at
the stage of purchase of goods by a trader and on purchase of
raw materials by a manufacturer.
● RATES OF VAT: There are four slabs of VAT imposed on
the different goods, i.e. 1%, 4%, 12.5%, and 20%.
● TAX CREDIT: A dealer who is registered shall be entitled to a
tax credit in respect of the turnover of purchases occurring
during the tax period where the purchase arises in the course of
his activities as a dealer and the goods are to be used by him
directly or indirectly for the purpose of making sale.
● NET TAX: The net tax payable by a dealer for a tax period
shall be determined by the formula:
Net tax = O I C whereO = the amount
of tax payable by the person at rates stipulated in
respect of the taxable turnover arising in th I =
the amount of the tax credit arising in the
tax period to which the person is
entitled for adjustment to the tax credit
required by this Act.
C = the amount if any brought forward from the
previous tax period.
● If same rate of sales tax
and VAT are imposed on the
 ales tax, government collects
more than in the case of
VAT. However the coverage
from VAT is more because in
VAT there is very little
chances of tax evasion.
A
G
5%
10%
F B
15% 20%

C
E 15%
25% D
10%

ASSESSMENT STRATEGY
There will be written examination paper of three hours.
OBJECTIVES
To provide an in depth study of the various
provisions of indirect taxation laws and their
impact on business decision-making
Learning Aims
1. Canons of Taxation – Indirect Taxes 5%
2. Central Excise 20
%
3. Customs Laws 15
%
4. EXIM POLICY 10
%
5. Service Tax 25
%
6. Central Sales Tax Act & VAT Act 15
%
7. Basic Concepts of International Taxation & Transfer Pricing in 10
the context of Indirect Taxation %

1. Canons of Taxation – Indirect Taxes

(a) Features of Indirect Tax, Constitutional Validity
(b) Indirect Tax Laws, administration and relevant procedures
2. Central Excise
(a) The Central Excise Law – Goods, Excisable Goods, Manufacture
and manufacturer, Classification, Valuation, Related Person,
Captive Consumption, CAS 4 CENVAT, Basic Procedure,
Export, SSI,
Job Work
(b) Assessments, Demands, Refund, Exemptions, Power of Officers
(c) Adjudication, Appeals, Settlement Commission, Penalties.
(d) Central Excise Audit and Special Audit under 14A and 14AA of
Central Excise Act
(e) Impact of tax on GATT 94, WTO, Anti Dumping processing
(f) Tariff Commission and other Tariff authorities
3. Customs Laws
(a) Basic concepts of Customs Law
(b) Types of customs duties, Anti-Dumping Duty, Safeguard Duty
(c) Valuation, Customs Procedures, Import and Export Procedures,
Baggage, Exemptions,
Warehousing, Demurrage, Project Import and Re-imports
(d) Penalties and Offences
4. EXIM POLICY
(a) EXIM Policy
(b) Export Promotion Schemes, EOU
(c) Duty Drawback
(d) Special Economic Zone
5. Service Tax
(a) Introduction, Nature of Service Tax, Service Provider and Service
 Receiver
(b) Registration procedure, Records to be maintained
(c) Negative List of Services, Exemptions and Abatements
(d) Valuation of Taxable Services
(e) Payment of service Tax, Returns of Service Tax
(f) CENVAT Credit Rules, 2004
(g) Place of Provision of Service Rules, 2012
(h) Other aspects of Service Tax
(g) Special Audit u/s 72A of the Finance Act, 1994 for Valuation of
Taxable Services
6. Central Sales Tax Act & VAT Act
(a) Central Sales Tax
(i) Introduction, Definitions, salient features of CST Act
(ii) Stock Transfer, Branch transfer, Inter State Sale
(iii) Various forms for filing of returns under CST
(iv) Procedures under Central Sales Tax (CST)

(b) Value Added Tax (VAT)

(i) Introduction, definitions, salient features of Sate VAT Act
(ii) Treatment of stock & branch transfer under State VAT Act
(iii) Filing of return under State VAT Act
(iv) Accounting & Auditing VAT
7. Basic Concepts of International Taxation & Transfer Pricing in the context of
Indirect Taxation
(a) International Taxation & Transfer Pricing issues in the context of Indirect
Taxation
(b) Indirect Taxation issues in cross-
border services General Anti-Avoidance
Rule (GAAR)

Amendments relating to Central Excise

1. Amendment to section 3A
In the Central Excise Act, 1944 (1 of 1944) (hereinafter referred to as the
Central Excise Act), in section 3A, after Explanation 2, the following
Explanation shall be inserted, namely :-
‘Explanation 3.–– For the purposes of sub-sections (2) and (3), the word “factor”
includes “factors”.’.
2. Amendment of section 11A
In the Central Excise Act, in section 11A,-
 (i) sub-sections (5), (6) and (7) shall be omitted;
(ii) in sub-sections (7A), (8) and clause (b) of sub-section (11), the words,
brackets and figure “or sub- section (5)”, wherever they occur, shall
be omitted;
.”;
3. Substitution of new section for section 11AC
In the Central Excise Act, for section 11AC, the following section shall be
substituted, namely : -
“11AC. Penaltyfor short-levyor non-levyof dutyin certain cases.— (1) The
amount of penalty for non-levy or short-levy or non-payment or short-
payment or erroneous refund shall be as follows :-
(a) where any duty of excise has not been levied or paid or has been
short -levied or short-paid or erroneously refunded, for any reason
other than the reason of fraud or collusion or any wilful mis-
statement or suppression of facts or contravention of any of the
provisions of this Act or of the rules made thereunder with intent to
evade payment of duty, the person who is liable to pay
(c) – concept and application

Amendments brought in by the Finance Act, 2015

duty as determined under sub-section (10) of section 11A shall also
be liable to pay a penalty not exceeding ten per cent. of the duty so
determined or rupees five thousand, whichever is higher :
Provided that where such duty and interest payable under section
11AA is paid either before the issue of show cause notice or within
thirty days of issue of show cause notice, no penalty shall be
payable by the person liable to pay duty or the person who has
paid the duty and all proceedings in respect of said duty and
interest shall be deemed to be concluded;
(b) where any duty as determined under sub-section (10) of section
11A and the interest payable thereon under section 11AA in
respect of transactions referred to in clause (a) is paid within
thirty days of the date of communication of the order of the
Central Excise Officer who has
determined such duty, the amount of penalty liable to be paid by
such person shall be twenty- five per cent. of the penalty
imposed, subject to the condition that such reduced penalty is
also paid within the period so specified;
.”.
4. Amendment of section 37
In the Central Excise Act, in section 37, in sub-sections (4) and (5), for the
words “two thousand rupees”, the words “five thousand rupees” shall be
substituted.
5. Amendment of notification issued under section 5A of the Central Excise Act
(1) The notification of the Government of India in the Ministry of
 Finance (Department of Revenue) number G.S.R. 163 (E), dated the 17th
March, 2012, issued under sub-section (1) of section 5A of the Central
Excise Act, 1944 (1 of 1944) (hereinafter referred to as the Central
Excise Act), shall stand amended and shall be deemed to have been
amended, retrospectively, in the manner specified in column (2) of the
Third Schedule, on and from and up to the date specified in column
(3) of that Schedule.
(2) For the purposes of sub-section (1), the Central Government shall
have and shall be deemed to have the power to amend the
notification with retrospective effect as if the Central Government
had the power to amend the said notification under sub-section (1)
of section 5A of the Central Excise Act, retrospectively, at all
material times.
6. Amendment of Third Schedule
In the Central Excise Act, the Third Schedule shall be amended in the
manner specified in the Fourth Schedule.

Amendments relating to Central Excise

Tariff

7. Amendment of First Schedule

In the Central Excise Tariff Act, 1985 (hereinafter referred to as Central Excise
Tariff Act), the First
(a) ted.

[Notification No. 6/2015-C.E.(N.T.) dated

01.03.2015] Amendments w.e.f. 1.3.2015

1. Education Cess and Secondary & Higher Education Cess leviable on all
excisable goods are fully exempted. Simultaneously the standard
advalorem rate of duty of Excise, i.e. CENVAT is being increased from
12 to 12.5% w.e.f. 1.3.2015.
2. As per earlier provisions of sub-rule (1) of Rule 4, if inputs were directly
delivered from supplier to job worker, the credit can be availed by the
manufacturer only on receipt of the processed goods from the job
worker. The said rule has now been amended to provide that even if
the inputs are directly sent to the job worker on the directions of the
manufacturer, credit can be availed immediately and the
manufacturer need not wait for the processed goods to be received
from the job worker.
Similarly, if the capital goods are sent directly to a job worker on the
directions of a manufacturer or the service provider, the credit can
be taken immediately to the extent of the 50% of the total duty paid
on such capital goods in the same financial year.
3. As per the earlier provisions, CENVAT Credit was allowed to be availed
 on inputs and input services within six months from the date of
invoice. This restriction have been extended to one year from the

Amendmend relating to CENVAT Credit Rules

4. The earlier provisions of Rule 4(5)(a), were applicable to both inputs
and capital goods. As per the new provisions, separate provisions are
made applicable for inputs and capital goods as under:
5. Provisions applicable for inputs - 4(5)(a)(i)
The credit shall be allowed on inputs if the inputs are sent to a job worker
or even from one job worker to another job worker and likewise and the
time limit for receiving the processed goods back by the manufacturer is
within 180 days from the date of sending the inputs from the factory.
Similarly, inputs can also be directly sent to a job worker without being
first brought to the premises of a manufacturer subject to the condition
that the processed goods should come back within 180 days from the date
of receipt of the inputs by the job worker.
6. Provisions applicable for capital goods - 4(5)(a)(ii)
The credit on capital goods shall be allowed even if they are sent as
such to a job worker for further processing subject to the condition
that the same is received back within two years from the date of
sending the capital goods from the factory. Similarly, capital goods
can also be directly sent to a job worker without being first brought
to the premises of a manufacturer subject to the condition that the
capital goods should come back within two years from the date of
receipt of the capital goods by the job worker.
7. For claiming refund of CENVAT credit under Rule 5 of CENVAT Credit
Rules, 2004, the term “Export Goods” has been defined as any
goods which are to be taken out of India to a place of out of India.

not include the activity specified in Explanation 2 to clause (44) of section

65B;’;
(1) clause (j) shall be omitted.

CANON 0F TAXATION – INDIRECT TAX

1.1 BASIS FOR TAXATION

India is a socialist, democratic and republic country. Constitution of India is
supreme law of land. All other laws, including the Income Tax Act, are subordinate to the
Constitution of India. The Constitution provides that ‘no tax shall be levied or collected
except by Authority of Law’. The Constitution includes three lists in the Seventh Schedule
providing authority to the Central Government and the State Governments to levy and
collect taxes on subjects stated in the lists.
 DIRECT TAXES AND INDIRECT TAXES

A) Direct Taxes: They are imposed on a person’s income, wealth,

expenditure, etc. Direct Taxes charge is on person concern and burden
is borne by person on whom it is imposed.
Example- Income Tax.
B) Indirect Taxes: They are imposed on goods/ services. The Immediate
liability to pay is of the manufacturer/ service provider/ seller but its
burden is transferred to the ultimate consumers of such goods/
services. The burden is transferred not in form of taxes, but, as a part
of the price of goods/ services.
Example- Excise Duty, Customs Duty, Service Tax, Value-Added Tax (VAT), Central
Sales Tax (CST).
Government need funds for various purposes like maintenance of law
and order, defence, social/ health services, etc. Government obtains
funds from various sources, out of which one main source is taxation.
Justice Holmes of US Supreme Court, has, long ago, rightly said that
tax is the price which we pay for a civilized Society.
Central Excise Act, 1944
To solve the prac tical problems regarding the calculation of excise duty, the
general rate of 12.50% is considered here irrespective of the name and nature of
the product. However, the product specific rates of excise duty are mentioned
in CETA.

LAWS RELATING TO CENTRAL EXCISE

Central Excise Act,1944(CEA) : The basic act which provides the constitutional power for
charging of duty, valuation , powers of officers, provisions of arrests, penalty, etc.
Central Excise Tariff Act, 1985 (CETA): This classifies the goods under 96 chapters with
specific codes assigned.
Central Excise Rules, 2002: The procedural aspects are laid herein. The rules are
implemented after issue of notification.
Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: The
provisions regarding the valuation of excisable goods are laid down in this rule.
Cenvat Credit Rules, 2004: The provisions relating to Cenvat Credit available and its
utilization are mentioned.
Central Excise law extended to ‘’designated areas’’ in continental shelf and
exclusive Economic Zone of India i.e., upto 200 nautical miles from the base line
of India and represents the limit till which India can be engaged in economic
exploitation.

2.3 CENTRAL EXCISE ACT, 1944

The duty of Central Excise is levied if the following conditions are satisfied:
(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.
In other words, unless all of these conditions are satisfied, Central Excise Duty cannot be
levied. Ownership of rawmaterial is not relevant for duty liability - Hindustan General

Example 44: A manufacturer having a factory at Mumbai has uniform price of ` 2,000
per unit (exclusive of taxes and duties) for sale anywhere in India. During the financial
year 2015-16, he made the following sales:

Particulars Quantity sold in units Cost of transportation (`)

Goods sold at factory in Mumbai 1,000 Nil
Goods sold from New Delhi 500 12,000
Goods sold from Chennai 600 48,000
Goods sold from Kolkata 900 30,000
Find assessable value per unit and total excise duty payable by the manufacturer. Excise
duty @12.5%.

Answer:
(Rule 5 of valuation rule)
Selling price per unit = ` 2,000
Less: cost of equalized = ` 30
freight
Assessable value per unit = ` 1,970
Total excise duty payable = ` 7,38,750 (3,000 units x ` 1 ,970 per unit ×
12.5%)
Working note:(1)

Particulars Quantity sold in units Costoftransportation (`)

Goods sold at factory in 1,000 Nil
 Mumbai
Goods sold from New Delhi 500 12,000
Goods sold from Chennai 600 48,000
Goods sold from Kolkata 900 30,000
Total 3,000 90,000
(2) Cost of equalized freight = ` 30 (` 90,000/3,000 units)
(3) The aforesaid equalized freight has to be certified by the Cost
Accountant/Chartered Accountant/ Company Secretary in practice.

Example 48: R & Co. furnish the following expenditure incurred by them and want you
to find the assessable value for the purpose of paying excise duty on captive
consumption. Determine the cost of production in terms of rule 8 of the Central Excise
Valuation (Determination of Price of Excisable Goods) Rules 2000 and as per CAS – 4
(Cost Accounting Standard):
(i) Direct material cost per unit inclusive of excise duty at 12.5% ` 880
(ii) Direct wages ` 250
(iii) Other direct expenses ` 100
(iv) Indirect materials ` 75
(v) Factory overheads ` 200
(vi) Administrative overhead ` 100
(25% relating to production capacity)
(vii) Selling and distribution expense ` 150
(viii Quality control ` 25
)
(ix) Sale of scrap realised ` 20
(x) Actual profit margin 15%

Answer:
Cost of production is required to be computed as per CAS -4. Material cost is
required to be exclusive of Cenvat creditavailable.

Particular Total Cost (`)

1. Material Consumed (Net of Excise duty) [` (880 -97.77)] 782.23
2. Direct Wages 250.00
3. Other Direct Expenses 100.00
4. Works Overhead [indirect material (` 75) plus factory overhead (` 275.00
200)
5. Quality control cost 25.00
6. Administrative Overhead (25% relates to production activity) 25.00
Less : Sale of Scrap (20.00)
Cost of Production 1,437.23
 Add : 10% profit margin on cost of production (`) 426.23 x 10%) 143.72
Assessable value as per Rule 8 of the valuation rules 1,580.95
Note : Actual profit margin is not relevant for excise valuation.

Tax Planning

Example 8 : M/s X Ltd (a unit of 100% EOU) sold goods to M/s A Ltd. for ` 20 lac. BCD
@10%, CVD 12.5% and Spl. CVD @4% (VAT exempted) are applicable.
Find the total duty of excise. How much Cenvat Credit allowed to M/s A Ltd.
Answer:

Particulars Value in ` Workings

Assessable value 20,00,000
Add: Basic Customs Duty 10% 1,00,000 20,00,000 10% 50%
Balance 21,00,000
Add: CVD @12.5% 2,62,500 21,00,000 12.5%
Balance 23,62,500
Add: 2% CESS on (` 1,00,000 + ` 2,62,500) 7,250 3,62,500 2%
Add: 1% SAH CESS on (` 1,00,000 + ` 2,62,500) 3,625 3,62,500 1%
Balance 23,73,375
Add: SPL. CVD 4% 94,935 23,73,375 4%
Value of import 24,68,310
Cenvat Credit allowed is ` 3,57,435 (i.e. CVD + Spl. CVD)

EXPORT TURNOVER OFGO ODS & SERVICE

REFUND AMOU NT = × Net CENVATCREDI T
TOTAL TURNOVER

EXPORT TURNOVER VALUE (`)

DUTIABLE F.G. EXPORTED DURING XXXX
THE RELEVANT PERIOD
INTERMEDIATE PRODUCTS CLEARED XXXX
FOR EXPORT DURING RELEVANT
PERIOD
TOTAL XXXX
EXEMPTED GOODS EXPORTED REMAINS
CALLED AS EXEMPTED GOODS ONLY

Export Turnover of Service Value (`)

Payments received during the relevant period for export service XXXX
Export services whose provision has been completed for which XXXX
payment had been received in advance
Less: Advance received for export of services for which services not XXXX
completed during the relevant period
 Total XXXX

Total Turnover Amount (`)

Dutiable goods cleared during relevant period for export as well as XXXX
for D.T.A
Exempted goods cleared during relevant period for export as well as XXXX
for D.T.A
Export of services and services provided in D.T.A XXXX

(i) Example 7: Mr. X an importer imported certain goods CIF value was US $20,000
and quantity 1,000 Kgs. Exchange rate was 1 US $ = ` 50 on date of presentation
of Bill of Entry. Customs Duty rates are— (i) Basic Customs Duty 10%, (ii)
Education Cess 2%, (iii) SAH Education Cess – 1%. There is no excise duty payable
on these goods if manufactured in India. As per Notification issued by the
Government of India, anti- dumping duty has been imposed on these goods. The
anti -dumping duty will be equal to difference between amount calculated @ US
$30 per kg and ‘landed value’ of goods. Compute Customs Duty liability and
anti-dumping liability.
(ii) Answer:
(iii)
Part I Amount in `
Total CIF Price US $ 20,000 x ` 50 10,00,000
Add: Landing charges @ 1% x `10,00,000 10,000
Assessable Value 10,10,000
Basic duty @ 10% 1,01,000
Sub total 11,11,000
Add: Education cess 2% on ` 1, 01,000 2,020
Add: Secondary and Higher Education 1,010
Cess [@1% on ` 1,01,000]
BCD, CVD & Spl. CVD and CENVAT CREDIT:
Service Taxliability onreceiptbasis for Individuals and Partnership Firms includingLLP’s (w.e.f. 1-4-2012)
It is pertinent to note point of taxation in case of individuals and partnership firms
whose aggregate value of taxable services provided from one or more premises is
` 50 lakhs or less in the previous financial year, the service provider shall have the
option to pay tax on taxable services provided or to
be provided by him up to a total of ` 50 lakhs in the current financial year, by the
dates specified in the Rule 6 of Service Tax Rules, 1994, with respect to the relevant
quarter, in which payment is received.

(a)
(b) Rule 2(b): section means the section of the Act;
(c) Rule 2(c): value shall be the meaning assigned to it in section 67;
(d) Rule (d): words and expressions used in these rules and not defined but defined in
the Act shall have
(e) the meaning respectively assigned to them in the Act.
(f) Rule 2A: Determination of value of service portion in the execution of a works contract.
(g) In case of works contract service provider has two options for payment of service tax.
Once any one
(h) Example 14: Compute net VAT liability of Mr. Ram from the following information:
(i)
Particulars (`) (`)
Raw material from the foreign market 1,20,000
(Including duty paid on imports @20%)
Raw material purchased from local market
Cost of material 2,50,000
Add: Excise duty 12.5% 31,250
2,81,250
Add: VAT @4% 11,250 2,92,500
Raw material purchase from neighboring State (includes CST 51,000
@2%)
Storage and transportation cost 9,000
Manufacturing expenses 30,000

Goods sold Goods sold Goods sold

Mr. W Mr. X Mr. Y Mr. Z

Example 13: A dealer effected following inter-state sales during the quarter July, 2015-
September, 2015. (a) Invoice No. 25 dated 5th July, 2015: ` 1,12,400 (tax not shown
separately), (b) Invoice No. 26, dated 13th August, 2015: ` 50,000 plus tax @ 5% i.e. `
2,500. Total ` 52,500, (c) Invoice No. 27 dated 18th September, 2015:
` 20,000 plus tax @ 5% ` 1,000 i.e. Total ` 21,000, (d) Invoice No. 28 dated 27th
September, 2015:
` 31,200. Tax not shown separately. Goods returned within 6 months were ` 8400
(inclusive of taxes). Sales Tax rate is 5% if goods are sold within the State.
(a) What is the turnover and what is tax payable, if the buyers did not issue C Form?
(b) What is the impact of VAT on CST?

ATION
 Determination of turnover for CST purposes (`)
Turnover including CST asper books 38,76,000
Less: CST included in above 38,76,000 x 2/102 76,000
-------------
Turnover as per books excluding CST 38,00,000
Add: Packing Charges 45,000
Marine insurance 32,000
-------------
Taxable turnover 38,77,000
Add: CST @2% on

Answer :
-------------
Total 38,77,000 Turnover 39,54,540
74500
========
The dealer has recorded the following amount in separate folios in the ledger:
(i) .
Answer :
(a) Statement showing total turnover, taxable turnover and central sales tax payable for the quarter
July 2015 to September 2015:

Date Invoice Total TaxableTurnover Central Sales Working

No. Turnover (`) (`) Tax payable (`) s
5th July 2015 25 1,12,400 1,07,0 5,352 ` 1,12,400 x
48 5/105=
`
(1,12,400 – 5,352
5,532)
13th Aug 2015 26 52,500 50,000 2,500 ` 50,000 x
5%
=
`2,500
18th Sep 2015 27 21,000 20,000 1,000 ` 20,000 x
5%
=
`1,000
27th Sep 2015 28 31,200 29,714 1,486 ` 31,200 x
5/105
(31,200 – 1,486) =
`1,486
Sub-total 2,17,100 2,06,762 10,338
Less: sales 8,400 8,000 400 ` 8,400 x 5/105=
return within `400
six months
 from the
date of sale

Net amount 2,08,700 1,98,762 9,938

(b) The impact of VAT on CST:

(i) If goods are purchased from another state, Input Tax Credit (ITC) of CST paid
in other state will not be granted by the State where the goods are consumed
or sold.
If goods are sent to another State on stock transfer basis, only restricted input
credit will be given. It me

Goods and Services Tax (India)

.
Goods and Services Tax (GST) is an indirect tax (or consumption tax) levied in India on the supply of goods and
services. GST is levied at every step in the production process, but is meant to be refunded to all parties in the various stages of
production other than the final consumer.
Goods and services are divided into five tax slabs for collection of tax - 0%, 3%, 5%, 12%,18% and 28%. However, Petroleum
products, alcoholic drinks, electricity, are not taxed under GST and instead are taxed separately by the individual state governments,
as per the previous tax regime.[citation needed] There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on
gold.[1] In addition a cess of 22% or other rates on top of 28% GST applies on few items like aerated drinks, luxury cars and tobacco
products.[2] Pre-GST, the statutory tax rate for most goods was about 26.5%, Post-GST, most goods are expected to be in the 18% tax
range.
The tax came into effect from July 1, 2017 through the implementation of One Hundred and First Amendment of the Constitution of
India by the Indian government. The tax replaced existing multiple cascading taxes levied by the central and state governments.
The tax rates, rules and regulations are governed by the GST Council which consists of the finance ministers of centre and all the
states. GST is meant to replace a slew of indirect taxes with a unified tax and is therefore expected to reshape the country's 2.4 trillion
dollar economy, but not without criticism.[3] Trucks' travel time in interstate movement dropped by 20%, because of no interstate
check posts.[4]

Contents

1History
o 1.1Formation
o 1.2Launch
2Tax
o 2.1Taxes subsumed
o 2.2HSN code in GST no
o 2.3Rates
o 2.4E-Way Bill
 2.4.1Intra-State e-Way Bill
o 2.5Reverse Charge Mechanism
o 2.6Goods kept outside the GST
3GST Council
4Goods and Services Tax Network (GSTN)
5Statistics
o 5.1Collections
o 5.2Returns
6Criticism
7See also
8References
9External links

History[edit]
Formation[edit]
The reform of India's indirect tax regime was started in 1985 by Vishwanath Pratap Singh, Finance Minister in Rajiv Gandhi’s
government, with the introduction of the Modified Value Added Tax (MODVAT). Subsequently, Prime Minister P V Narasimha
Rao and his Finance Minister Manmohan Singh, initiated early discussions on a Value Added Tax (VAT) at the state level.[5] A single
common "Goods and Services Tax (GST)" was proposed and given a go-ahead in 1999 during a meeting between the Prime
Minister Atal Bihari Vajpayee and his economic advisory panel, which included three former RBI governors IG Patel, Bimal
Jalan and C Rangarajan. Vajpayee set up a committee headed by the Finance Minister of West Bengal, Asim Dasgupta to design a
GST model.[6]
The Ravi Dasgupta committee which was also tasked with putting in place the back-end technology and logistics (later came to be
known as the GST Network, or GSTN, in 2017). it later came out for rolling out a uniform taxation regime in the country. In 2002,
the Vajpayee government formed a task force under Vijay Kelkar to recommend tax reforms. In 2005, the Kelkar committee
recommended rolling out GST as suggested by the 12th Finance Commission.[6]
After the defeat of the BJP-led NDA government in the 2004 Lok Sabha election and the election of a Congress-led UPA government,
the new Finance Minister P Chidambaram in February 2006 continued work on the same and proposed a GST rollout by 1 April
2010. However, in 2011, with the Trinamool Congress routing CPI(M) out of power in West Bengal, Asim Dasgupta resigned as the
head of the GST committee. Dasgupta admitted in an interview that 80% of the task had been done.[6]
In the 2014 Lok Sabha election, the Bharatiya Janata Party-led NDA government was elected into power. With the consequential
dissolution of the 15th Lok Sabha, the GST Bill – approved by the standing committee for reintroduction – lapsed. Seven months
after the formation of the Modi government, the new Finance Minister Arun Jaitley introduced the GST Bill in the Lok Sabha, where
the BJP had a majority. In February 2015, Jaitley set another deadline of 1 April 2017 to implement GST. In May 2016, the Lok
Sabha passed the Constitution Amendment Bill, paving way for GST. However, the Opposition, led by the Congress, demanded that
the GST Bill be again sent back for review to the Select Committee of the Rajya Sabha due to disagreements on several statements in
the Bill relating to taxation. Finally in August 2016, the Amendment Bill was passed. Over the next 15 to 20 days, 18 states ratified the
Constitution amendment Bill and the President Pranab Mukherjee gave his assent to it.[7][8]
A 21-member selected committee was formed to look into the proposed GST laws.[9] After GST Council approved the Central Goods
and Services Tax Bill 2017 (The CGST Bill), the Integrated Goods and Services Tax Bill 2017 (The IGST Bill), the Union Territory
Goods and Services Tax Bill 2017 (The UTGST Bill), the Goods and Services Tax (Compensation to the States) Bill 2017 (The
Compensation Bill), these Bills were passed by the Lok Sabha on 29 March 2017. The Rajya Sabha passed these Bills on 6 April 2017
and were then enacted as Acts on 12 April 2017. Thereafter, State Legislatures of different States have passed respective State Goods
and Services Tax Bills. After the enactment of various GST laws, Goods and Services Tax was launched all over India with effect
from 1 July 2017.[10] The Jammu and Kashmir state legislature passed its GST act on 7 July 2017, thereby ensuring that the entire
nation is brought under an unified indirect taxation system. There was to be no GST on the sale and purchase of securities. That
continues to be governed by Securities Transaction Tax (STT).[11]
Launch[edit]
The GST was launched at midnight on 1 July 2017 by the President of India, Pranab Mukherjee, and the Government of India. The
launch was marked by a historic midnight (30 June – 1 July) session of both the houses of parliament convened at the Central Hall of
the Parliament. Though the session was attended by high-profile guests from the business and the entertainment industry
including Ratan Tata, it was boycotted by the opposition due to the predicted problems that it was bound to lead for the middle and
lower class Indians.[12][13] It is one of the few midnight sessions that have been held by the parliament - the others being the declaration
of India's independence on 15 August 1947, and the silver and golden jubilees of that occasion.[13] After its launch, the GST rates have
been modified multiple times, the latest being on 18 January 2018, where a panel of federal and state finance ministers decided to
revise GST rates on 29 goods and 53 services.[14]
Members of the Congress boycotted the GST launch altogether.[15] They were joined by members of the Trinamool
Congress, Communist Parties of India and the DMK. The parties reported that they found virtually no difference between the GST
and the existing taxation system, claiming that the government was trying to merely rebrand the current taxation system.[citation
needed]
They also argued that the GST would increase existing rates on common daily goods while reducing rates on luxury items, and
affect many Indians adversely, especially the middle, lower middle and poorer income groups.[16]

Tax
Taxes subsumed
The single GST subsumed several taxes and levies which included: central excise duty, services tax, additional customs
duty, surcharges, state-level value added tax and Octroi.[17][18] Other levies which were applicable on inter-state transportation of
goods have also been done away with in GST regime.[19][20] GST is levied on all transactions such as sale, transfer, purchase, barter,
lease, or import of goods and/or services.
India adopted a dual GST model, meaning that taxation is administered by both the Union and State Governments. Transactions
made within a single state are levied with Central GST (CGST) by the Central Government and State GST (SGST) by the State
governments. For inter-state transactions and imported goods or services, an Integrated GST (IGST) is levied by the Central
Government. GST is a consumption-based tax/destination-based tax, therefore, taxes are paid to the state where the goods or services
are consumed not the state in which they were produced. IGST complicates tax collection for State Governments by disabling them
from collecting the tax owed to them directly from the Central Government. Under the previous system, a state would only have to
deal with a single government in order to collect tax revenue.[21]
HSN code in GST no
HSN (Harmonized System of Nomenclature) is an 8-digit code for identifying the applicable rate of GST on different products as per
CGST rules. If a company has turnover up to ₹1.5 Crore in the preceding financial year then they need not mention the HSN code
while supplying goods on invoices. If a company has turnover more than ₹1.5 Crore but up to ₹5 Cr then they need to mention the
first 2 digits of HSN code while supplying goods on invoices. If turnover crosses ₹5 Cr then they shall mention the first 4 digits of
HSN code on invoices.[22]
Rates
The GST is imposed at variable rates on variable items. The rate of GST is 18% for soaps and 28% on washing detergents. GST on
movie tickets is based on slabs, with 18% GST for tickets that cost less than Rs. 100 and 28% GST on tickets costing more than
Rs.100 and 5% on readymade clothes.[23] The rate on under-construction property booking is 12%.[24] Some industries and products
were exempted by the government and remain untaxed under GST, such as dairy products, products of milling industries, fresh
vegetables & fruits, meat products, and other groceries and necessities.[25]
Checkposts across the country were abolished ensuring free and fast movement of goods.[26]
The Central Government had proposed to insulate the revenues of the States from the impact of GST, with the expectation that in
due course, GST will be levied on petroleum and petroleum products. The central government had assured states of compensation for
any revenue loss incurred by them from the date of GST for a period of five years. However, no concrete laws have yet been made to
support such action.[27] GST council adopted concept paper discouraging tinkering with rates.[28]
E-Way Bill[
An e-Way Bill is an electronic permit for shipping goods similar to a waybill. It was made mandatory for inter-state transport of
goods from 1 June 2018. It is required to be generated for every inter-state movement of goods beyond 10 kilometres (6.2 mi) and the
threshold limit of ₹50,000 (US$700).[29]
It is a paperless, technology solution and critical anti-evasion tool to check tax leakages and clamping down on trade that currently
happens on a cash basis. The pilot started on 1 February 2018 but was withdrawn after glitches in the GST Network. The states are
divided into four zones for rolling out in phases by end of April 2018.
A unique e-Way Bill Number (EBN) is generated either by the supplier, recipient or the transporter. The EBN can be a printout,
SMS or written on invoice is valid. The GST/Tax Officers tally the e-Way Bill listed goods with goods carried with it. The mechanism
is aimed at plugging loopholes like overloading, understating etc. Each e-way bill has to be matched with a GST invoice.
The official Android mobile app can be used for generating an e-way bill, with powerful features for easy generation and for
maintaining records. The e-way bill can also be generated or cancelled through an SMS.
Transporter ID and PIN Code now compulsory from 01-Oct-2018.
It is a critical compliance related GSTN project under the GST, with a capacity to process 75 lakh e-way bills per day.
 Intra-State e-Way Bill
The five states piloting this project are Andhra Pradesh, Gujarat, Kerala, Telangana and Uttar Pradesh, which account for 61% of
the inter-state e-way bills, started mandatory intrastate e-way bill from 15 April 2018 to further reduce tax evasion.[30] It was
successfully introduced in Karnataka from 1 April 2018.[31] The intrastate e-way bill will pave the way for a seamless, nationwide
single e-way bill system. Six more states Jharkhand, Bihar, Tripura, Madhya Pradesh, Uttarakhand and Haryana will roll it out from
20 April 18. All states are mandated to introduce it by May 30, 2018.
Reverse Charge Mechanism
Reverse Charge Mechanism (RCM) is a system in GST where the receiver pays the tax on behalf of unregistered, smaller material
and service suppliers. The receiver of the goods is eligible for Input Tax Credit, while the unregistered dealer is not.
The Payment of Tax Under RCM (Reverse Charge Mechanism) on Purchase from unregistered dealer is suspended due to pressure
from the industry until 30 September 2019.
Goods kept outside the GST

 Alcohol for human consumption.

 Petrol and petroleum products (GST will apply at a later date) viz. Petroleum crude, High speed diesel, Motor
Spirit (petrol), Natural gas, Aviation turbine fuel.[30]

GST Council
GST Council is the governing body of GST having 33 members.[32] It is chaired by the Union Finance Minister.

Goods and Services Tax Network (GSTN)

The GSTN software is developed by Infosys Technologies and the Information Technology network that provides the computing
resources is maintained by the NIC. "Goods and Services Tax" Network (GSTN) is a nonprofit organisation formed for creating a
sophisticated network, accessible to stakeholders, government and taxpayers to access information from a single source (portal). The
portal is accessible to the Tax authorities for tracking down every transaction, while taxpayers have the ability of connect for their
tax returns.
The GSTN's authorised capital is ₹10 crore (US$1.4 million) in which initially the Central Government held 24.5 percent of shares
while the state government held 24.5 percent. The remaining 51 percent were held by non-Government financial
institutions, HDFC and HDFC Bank hold 20%, ICICI Bank holds 10%, NSE Strategic Investment holds 10% and LIC Housing
Finance holds 11% .[33][34]
However, later it was made a wholly owned government company having equal shares of state and central government.[1]

Statistics[edit]
Collections[edit]

Month 2018-19 2017-18

Collections Change Collections Change

April ₹103,459 crore (US$14 billion) NA

May ₹94,016 crore (US$13 billion)[35] NA

June ₹95,610 crore (US$13 billion)[35] NA

July ₹96,483 crore (US$13 billion)[35] NA

August ₹93,960 crore (US$13 billion) [35] ₹93,590 crore (US$13 billion)

September ₹94,442 crore (US$13 billion)[35] ₹93,029 crore (US$13 billion)

October ₹100,710 crore (US$14 billion)[35] ₹95,132 crore (US$13 billion)

November ₹85,931 crore (US$12 billion)

December ₹83,716 crore (US$12 billion)

January ₹88,929 crore (US$12 billion)

February ₹88,407 crore (US$12 billion)

March ₹89,264 crore (US$12 billion)

Returns
Around 38 lakh new taxpayers have registered under GST regime and the total count has crossed one crore if we include the 64 lakh
earlier ones.[36] Total number of taxpayers were above 1.14 crore in October 2018.[37]

2018-19 2017-18

Month No. of returns Change No. Change

March

February

January

December 67 lakh[36]
 2018-19 2017-18

Month No. of returns Change No. Change

November 64 lakh[36]

October 67.45 lakh[35] 65 lakh[36]

September 69 lakh[36]

August 67 lakh[36]

July 63 lakh[36]

June

May

(ii)