Indian Business Tax Structure

Direct Tax
Income Tax Wealth Tax Gift Tax
Customs
Indirect Tax
Central Excise Service Tax Sales Tax
Other
Commercial
Taxes

Constitutional Background
No tax shall be levied or collected except by authority of
law. Article 265

State Govt. cannot impose tax on sale or purchase during
imports or exports; or tax on sale outside the state. Article
286(1)

Parliament is authorised to formulate principles for
determining when a sale or purchase takes place (a)
outside the state (b) in the course of import and export.
Article 286(2)

Parliament can place restrictions on tax on sale or
purchase of declared as goods of special importance and
the state government can tax such declared goods only
subject to these restrictions. Article 286(3)

Constitution of India
7
th
Schedule
Union List List I
State List List II
Entry 92A Taxes on sale
or purchase of goods other
than newspaper where such
sale or purchase takes
place in the course of
interstate trade or commerce.
Entry no. 54 Tax on sale
or purchase of goods other
than newspaper except on
interstate sale or purchase.


Central Sales Tax Act State VAT Acts
Indian Sales Tax Laws
CST
International cross Border Transactions
involving export and import of Goods through
Indian customs frontiers
Interstate sale involving movement of goods
interstate origin state and destination state
Sale of Goods of special importance
Declared goods, sold any where in India
0%
< or = 2%
< or = 5%
LST
Sale of Goods of special importance
Declared goods, sold any where in India
Other than Declared Goods
unrestricted Sovereign Rights
<or =5%
Any Rate
Interstate Sale
Sale of goods.
movement of goods
interstate that is from
one state to another.
Inseparably connected
Inextricably connected
A
B
Ahmedabad Bangalore
Is there Sale of goods ?
Is there Movement of goods Interstate ?
In which state does the ownership pass?
Which is the appropriate state for collection of
tax ?
He likes the goods.
Provides the visiting card with details
Provides a purchase order
Makes a payment
Requests B to ship the goods to Ahmedabad
Which state is the appropriate state for collection of tax
Illustration 1
Sale
happens in
Karnataka

Karnataka is
the
appropriate
state to
collect CST

A
B
Ahmedabad Bangalore
Is there Sale of goods ?
Is there Movement of goods Interstate ?
In which state does the ownership pass?
Which is the appropriate state for collection of
tax ?
He likes the goods.
Provides the visiting card with details
Provides a purchase order, Makes a payment
Requests B to ship the goods to Ahmedabad
With a condition that goods will be accepted only if the
quality controller in Ahmedabad approves the goods.
Quality controller approves the goods in Ahmedabad
Illustration 2
Sale
happens in
Gujarat

IS Gujarat
the
appropriate
state to
collect CST

ORIGIN
BASED
LAW

Interstate Sale
Sale of goods.
movement of goods
interstate that is from
one state to another.
Inseparably connected
Inextricably connected
ORIGIN
BASED
LAW.

CENTRAL
ENACTMENT
STATE
IMPLEMENTATION
STATE
COLLECTION
STATE
ENJOYMENT.

A B
Ahmedabad
Bangalore
A places order on B at Bangalore for supply of
goods
B delivers the goods from the Hyderabad
factory, as he does not have sufficient stock at
Bangalore.
Which is the appropriate state for collection of
tax

Illustration 3
ORIGIN
BASED
LAW

Andhra
Pradesh is
the
appropriate
state to
collect CST

B
Hyderabad
A
B
Bangalore Bangalore
A is in Bangalore. B is also in Bangalore
They are next door neighbours
A places order on B to supply goods and deliver
at the project site in Madhya Pradesh
Is it an interstate sale?
Illustration 4
ORIGIN
BASED
LAW

Karnataka
is the
appropriate
state to
collect CST

A
Bhopal
Lessons learnt
Whether ownership passes before the movement of goods or after
the movement of goods is irrelevant

Whether the ownership passes at the originating state or the
destination state is irrelevant

The location of the buyer and sellers are also irrelevant

The place where documentation is done is also irrelevant

What is relevant is From which state does the goods originate
from? with respect to the contract of sale?

That Originating state is the appropriate state for collection of taxes.

Types of CST Transactions
Interstate Sale at concession rates
Sale in transit
Branch transfer and consignment sales
Sale in the course of export
Sale to SEZ units Deemed Exports
Sale to special entities WHO, UNESCO
diplomatic missions, consulate offices.
Form Raj
Form A Application
Form B Registration Certificate
Form C - Declaration of continuing registration status
Form D sale to Governments
Form E Sale-in-transit
Form F Branch Transfers
Form G Indemnity Bond on loss of forms
Form H Sale in the course of Export
Form I Sale to SEZ Units Deemed Export
Form J Sale to Special Entities
IN - TRANSIT - SALE
Maharashtra
Gujrat Gujrat Gujrat
R





R R R
B
A
C D
IN - TRANSIT - SALE
Tamil Nadu
Karnataka Andhra Pradesh Kerala
R





R R R
B
A
C D
C Form C Form C Form
IN - TRANSIT - SALE
Tamil Nadu
Karnataka Andhra Pradesh Kerala
R





R R R
B
A
C D
E2 Form
E2 Form
E1 Form
C Form C Form C Form
Movement of goods otherwise than
by way of sale
Movement of goods interstate for purposes of
Exhibition and return
Repair and return
Job work and return
Stock and future sale of goods in the destination
state
Of generic goods (without customer identity)
Not against pre-existing order of sales (premeditated
sales)
Documentary Proof Form F
Movement of goods otherwise than by way
of sale has to be supported by
F form from the destination state
Lorry receipt from the transporter
Delivery note issued by the sales tax dept
Way bill
Road permit
Delivery note [ VAT 515 in Karnataka]
Loss of Statutory Forms
Indemnity in Form G
Make police complaint for loss of forms
Make newspaper advertisement for loss of forms
One in local vernacular language
One in English Daily
Execute a indemnity document in Form G
Promise to make good any consequential loss that
may arise to the Government due to misuse or abuse
of the lost forms by any body else
Sale in the course of Export Form H
The penultimate sale, preceding the ultimate export sale,
is exempt from tax
The export order should be first received, by the merchant
exporter

The goods should be then purchased for export. This benefit is
not available for manufacturer exporter

The goods purchased and the goods exported must be same.

Export cannot be out of stock, but only from purchases for
purposes of export

Exporter should issue H form

Exporter should provide the proof of physical export, that is bill of
lading, packing list etc attested by customs.

Packing materials purchased for export is also eligible for this tax
exemption
Sale to SEZ Form I
Sale to SEZ or developer of SEZ is deemed to be export.

The sale should be to a unit residing in the special
economic zone

The goods are to be used for export

The buyer should issue form I

The form I should be countersigned by the Export
Commissioner under whose jurisdiction the SEZ is
located.

Even the developer of the SEZ is eligible for the
exemption
Sale to Special Entities Form J
Govt of India has entered into a treaty to exempt
the special entities from consumption tax
[indirect taxes]

Sale to special entities are exempt, against Issue
of form J.

The special entities are
UN organizations like WHO UNESCO etc
Diplomatic missions embassies
Consulate General offices of other countries.

They are not allowed to resell, but they can take
the goods to their own country.

VAT: An Example
A: Supplier of Raw material; B: Manufacturer;
C: Wholesaler; D: Retailer Tax rate = 10%


SALES TAX DEPARTMENT
A B C D
10
10 5
5
100+10 200+20 250+25 300+30
Consumer
Note: Total tax collected = 10+10+5+5 = 30
Which is also equal to 10% of 300 = tax paid by consumer.
B
Manufacturer

Sale Value Rs. 200.00
Gross VAT 10%; Rs. 20.00
Net VAT Rs. 20-10=10.00
Different Stages of VAT
C
Wholesaler

Sale Value Rs. 300.00
Gross VAT 10%; Rs. 30.00
Net VAT Rs. 30-20=10.00
A
Raw Material Producer

Sale Value Rs. 100.00
Gross VAT 10%; Rs. 10.00
Net VAT Rs. 10.00
D
Retailer

Sale Value Rs. 400.00
Gross VAT 10%; Rs. 40.00
Net VAT Rs. 40-30=10.00
Note: Total VAT collected at four point; 10+10+10+10 = Rs. 40.00
Vat Issues
Interstate purchases is not vatable against local sales tax collected.

Interstate sale is vatable against the local purchase tax paid. Govt
loose.

Input tax is allowed to be rebated only if you collect out put tax. Other
wise input tax will become your cost. In VAT Law Exemption means
punishment

Exporter is refunded the input taxes paid on inputs relatable to
export. This is called zero rating of input taxes

Zero Rating of input taxes is allowed even to persons selling against
H form or I form.

With respect to Branch transfer, input tax credits are allowed even
though there is no output tax. Input tax only to the extent of 2% is not
Vatable. Input taxes paid in excess of 2 % are VATABLE.

VAT Rates
Schedule of Exempted goods 0%

Schedule of Vulnerable goods 1%

Schedule of Concessional goods 5%
Industrial inputs to the extent notified
Information technology goods as notified
Capital goods to the extent notified
Goods of Local Importance

Declared goods 5%


Goods not covered above 14%

Works contract, lease of goods, 14%

Non VAT goods no input credit any rate of output tax

Input tax restricted goods

Input tax restricted goods
Motor Vehciles and their parts
Stationery items
Food and food articles
Cutlery & crockery etc
Building materials
Electrical goods and their parts
Capital Goods
They are used in the business of the dealer for
resale, or use in the manufacture for sale
Plant and equipment
Goods carriage vehicle
Material handling equipment
Pollution control equipment
Cold storage equipment, storage equipment
Billing equipment, including computers

The input taxes paid on purchase of such
equipment is allowed to be used for payment of
output tax liabilities.


Works contracts
Works contracts are composite, indivisible contracts,
containing cost elements such as goods, services and
also profit.

These indivisible works contracts are allowed to be
artificially divided into goods services and profits, so as
to arrive at the taxable value of goods that can be
subject to levy of VAT.

46
th
Constitutional amendment has introduced the
concept of deemed sales, wherein, the Governments are
allowed to divide the contracts so as to arrive at the
value of goods and put them to tax.
Works contacts can be broadly divided into
two parts
Works Contracts
Goods Non-Goods
i) COST OF Labour
ii) COST OF Outsourced labour (contract labour)
iii) COST OF Labour Like Charges/establishment
iv) COST OF Designs, Drawings, etc
v) COST OF Testing fees, certification fees etc
vi) COST OF Architect fees /Eng fees
vii) COST OF Consumables which cease to Exist
i) Local Purchases
ii) Interstate Purchases
iii) Imported Purchases
iv) Sale-in-transit
v) Inter state movement of
contractors own goods
PLUS FAIR SHARE OF PROFITS
vi) Free Supplies
Works contracts
Owner

contractee
Contractor
Local Purchases
Inter-State Purchases
Imported Purchases
Interstate movement of own goods
Free Supplies from owner
Principle of accretion
Registered In the local State
Used or consumed
in the execution
of the works contract
Assessable Value Merit I approach


6,000 Taxable value of goods used in the works contract 5.
720 Tax at 12% 6.
120 Less Input tax credits on local purchases 7.
600 Net out put tax payable 8.
4,000 Less: Actual cost of labour together with share of profits 4.
10,000 Revised Gross Value 3.
2,000 Less: Assessable in Originating State (Exclusion) 2.
12,000 Gross Value of Contract 1.
Rs. Value in Crores
Assessable Value Merit II approach


7,000 Taxable value of goods used in the works contract 5.
840 Tax at 12% 6.
120 Less Input tax credits on local purchases 7.
720 Net out put tax payable 8.
3,000 Less: Standard Deduction as per prescribed say @30% 4.
10,000 Revised Gross Value 3.
2,000 Less: Assessable in Originating State (Exclusion) 2.
12,000 Gross Value of Contract 1.
Rs. Value in Crores
Composition


10000 Taxable value of goods used in the works contract 5.
400 Tax at 4% composition rate 6.
NIL
Less Input tax credits on local purchases 7.
400 Net out put tax payable 8.
NIL Less: Labour deductions 4.
10,000 Revised Gross Value 3.
2,000 Less: Assessable in Originating State (Exclusion) 2.
12,000 Gross Value of Contract 1.
Rs. Value in Crores
Input tax credit not allowed
Output tax cannot be collected
Tax invoice cannot be issued
No interstate purchases or import purchases.
No interstate or export sale