Indirect Taxes – a review

Indirect Taxes – a review
Applicability of Duties / Taxes - Excise Duty Customs duty. VAT / CST Service tax

Excise duty is manufacture of goods. Customs duty is paid on imported goods. Along with customs duty, other duties like CVD, Addl. Duty are also paid. VAT is applicable for purchase and sale within a state. CST is applicable for inter state purchase and sale. Service tax is applicable for services provided.

Modus operandi of each tax is different and every Act is independent having its own peculiar provisions. The Customs Act, Excise and Service tax are within the jurisdiction of Central Govt while VAT is regulated by respective State Government. These provisions are in the Constitution.- Union List Though every state has its own VAT Act, the rates of VAT have been tried to be kept at uniform level in each state, barring a few items.

Excise duty is payable on Manufacture of products. If the activity does not amount to manufacture, the same will not be covered under Central Excise. Duty payable on manufacture of products, but collected at the time of clearance of goods for the sake of convenience.

Excisable Event : Goods must be marketable – being capable of being brought to the market for being bought and sold. Goods must be movable. Immovable goods are not excisable. Mentioned in the Tariff. Manufactured / produced in India.

Manufacture – Important concept Definition of Manufacture – Sec. 2(f) A)Manufacture includes process Incidental or Ancillary to the completion of manufacture of product. Incidental means occassional or casual process. Ancillary means important processes without which manufacuture is not complete.

B) Deemed manufacture – processes defined in Central Excise Tariff as “amounting to manufacture”. Eg. Labelling / relabelling of containers from bulk packs to retail packs of pan masala, yeast, soups, sauces etc. (Chapter 21 – Note 4). Strictly these are not manufacturing processes. However for the purpose of the goods covered under this chapter these processes are manufacture.

C) In respect of goods covered under the Weights and Measures (Packed commodity Rules) where the goods are covered under Third Schedule of the Tariff and processes like packing, repacking, labelling, relabelling, putting MRP, changing MRP etc. are carried out, the goods will be charged to duty on MRP less abatement.

Assembly of CKD/SKD packs is not manufacture. Assembly of various parts and components may amount to manufacture if new product emerges. Plant and Machinery assembled at site – If emerges as Immovable property – not excisable. Fabrication of steel structure is exempt.

Repairs does not amount to manufacture. However, various judgements are available where it has been held that if the same operations are carried out on the product, the same is treated as manufacture.

Tariff contains list of all goods manufactured / produced in India. Based on HSN – Harmonised system of Nomenclature – Internationally accepted format suitably changed by respective countries. The tariff contains – 20 sections and 96 chapters. Sections divided into chapters and chapters in sub chapters. Tariff contains rates of duty applicable to goods manufactured.

Similarly, the Customs Tariff contains 21 Sections and 99 Chapters. The Central Excise and Customs tariffs are identical except certain items. The Customs tariff gives the rates of customs duties and other duties applicable for goods imported. It also specifies exemptions to specified goods.

Along with manufacturers, the dealers are also registered under the Excise Act if they want to pass on the excise duty benefit. This is useful for manufacturers availing set off benefit (Cenvat Scheme) The dealers do not pay the duty as they are not manufacturers but only pass on the proportionate duty credit.

First Stage Dealers and Second Stage dealers are registered and allowed to pass on cenvat benefit. The Cenvat Scheme allows to claim the set off of duty paid on raw material, capital goods and it is adjusted against the liability of finished goods. Hence, if the final product is not dutiable, the set off is not allowed.

In Defence, wherever manufacturing activity is done, the excise duty is applicable. However, this is exempt vide Notification No. 62/95, 63/95, 64/95, 74/93. The details of these exemption notifications are as under : Notfn. 62/95 – Exemption to goods manufactured in Central Govt. factories – All goods produced in Ordnance Factories, Arms and Ammunition falling under Chapter 93 etc.

Notfn. 63/95 – goods manufactured by specified units / institutions for use by Govt. Departments or defence. Covers goods manufactured by Hindustan Aeronautics Ltd, Bharat Electricals Ltd, Bharat Dynamics Ltd. BEML etc. Notfn. 64/95 – Exemption to goods supplied for defence and other specified purposes -

This covers – All goods donated for welfare of defence personnel, donated to National Defence Fund, All goods other than cigarettes – if supplied as stores for consumption on board a vessel of the Indian Navy or Coastal Guard, Components, raw material, tools etc. meant for launch vehicle project etc.

Notfn. 74/93 – Exemption to goods manufactured in a State Govt factory and intended for use in any of its department – Covers all goods under chapter 86 (Railway, tramway etc.)

Since the final product is exempt, there is no set off benefit available to defence. Apart from manufacturing, the defence units are also procuring the material from various sources and supplying to their organisations for consumption. In such cases, the goods are duty paid and no set off is available.

The taxation depends upon one important factor – from whom the goods are procured ? A manufacturer, a dealer registered under central excise or simply a dealer not registered under central excise. If the goods are purchased from a manufacturer, he will charge excise duty over the basic price.

If the goods are procured from a dealer registered under central excise, he will pass on proportionate credit. However, this is a cost to Defence. If the goods are procured from a manufacturer working under SSI benefit, the taxation will depend upon whether he is paying full tax or claiming exemption.

In Central Excise, the SSI units are those who have achieved their turnover less than 4 crores during the preceding year. If this condition is fulfilled, the SSI unit has two options – To claim exemption upto Rs crores turnover and pay full duty onwards. Or Claim Cenvat benefit and pay full duty from Re.1 sale.

The above provisions will definitely make a difference on cost of material procured from different sources. The Customs duty is paid if the goods are imported. Calculation of Duties is very important. CVD, Additional duty are also added and all this becomes a cost because no set off is available.

If the Government has issued specific notification, the goods will be exempt under Excise / Customs.

Similar to Excise Tariff, there is Customs Tariff which determines the rates of customs duty applicable for various products imported. If Defence is purchasing the goods from a dealer, he will recover the duties and taxes paid by him from defence. It is a cost to defence.

Taxation with reference to Defence : All goods are inclusive of all taxes, duties. No set off benefit available. If taxes are not charged, the reasons should be analysed. The supplier may charge duty subsequently. In such cases, the supplier should not be compensated subsequently. The comparison should be with all inclusive taxes.

Service tax – Service tax is levied on services provided. About 125 services are taxable. Major services are – Repairs and maintenance, Telephone, Consultants, Works Contract, General Insurance, Banking and Financial services etc.

Service tax paid – Cenvat credit is available as set off. The set off is available only after payment of services. Service tax is also applicable for Government organisations. Service tax on Goods Transport Agencies – The liability is on Govt. organisations.

Service tax on Information Technology services – In the budget for 2008, services relating to IT Software such as development, designing, programming, upgradation, providing advice etc. were brought under service tax. However, it was limited to IT softwares used in the course of business or commerce. However, in the budget for 2010, this has been extended to all cases whether for business or not. Hence, the softwares are chargeable to service tax on the total value of service.

Works Contract – Works Contract is chargeable under Service tax and under VAT. Works Contract means a contract wherein transfer of property in goods involved in the execution of contract is leviable as sale of goods and such contract is for carrying out erection, commissioning, installation of plant, machinery, construction of new building, repairs, alteration etc.

The Works Contract is a composite contract for supply of goods and services. A Composite works contract is vivisected and (i) VAT / sales tax is leviable on transfer of property and (ii) service tax is levied on services provided. The essential part is that the contractor should be able to bifurcate the contract in two parts – material and service.

The contractor is liable to pay service tax as – Pay full service 10.30% on the gross amount charged less value of transfer of property in goods involved. He is allowed to claim set off on inputs, input services and capital goods, Alternatively Pay service 4.12% on the total value. No set off is allowed on inputs. Set off is allowed on input services and capital goods used. (Composite Scheme)

The value will include – labour charges, amount paid to sub-contractor, charges for planning, designing etc., charges for obtaining hire purchase, cost of consumables viz. water, electricity, fuel used in execution of works contract, cost of establishment, profit earned by service provider relating to supply of labour and services.

VAT is charged as per the state VAT Act. Whenever the sale of goods is within the state, state VAT is charged as per prescribed rate. Set off is available to the dealer / manufacturer of such VAT which is adjusted against the liability. Similar to Cenvat Scheme. When the sale of goods is outside the state, 2% is charged. This is not allowed

as set off to the buyer. It is a cost to the buyer. C Form – The buyer can procure the goods at concessional rate in respect of inter state transactions. Not allowed for defence as there is no sale of goods. D form – For Govt. purchases. Not allowed after

Works Contract under VAT – Where a dealer is liable to pay tax on sales effected by way of transfer of property in goods involved in execution of works contract, he is liable to pay lump sum by way of composition – Equal to 5% of the total contract value in case of construction contracts and Equal to 8% in other contracts.

Octroi – It is levied on material received within the Corporation limits. It is mandatory for all material. The rates vary from Corporation to Corporation. PMC Rates – 3% on all machinery parts and castings. 2% on stationery, diesel. 4% on oils. Exempted for material purchased for social activities as per notified list.

Corporation can grant exemption to material purchased by Defence. An application to the authorities be made and the facts should be explained to the authorities. The Corporation will grant exemption and this certificate can be given to the supplier and no octroi will be charged when the material is received within corporation limits.

Thanks !!!!!

Indirect Taxes – a review

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