Syllabus
UNIT - III
Direct&IndirectTaxes
(MODVAT),(CENVAT),Competition Act 2002
&
FEMA Acts ,Business Ethics, Corporate Governance,
Philosophy and strategy of planning in India
Taxation
The act of levying taxes is called taxation.
 A tax is a compulsory charge or payment imposed by
government on individuals or corporations.
The persons who are taxed have to pay the taxes
irrespective of any corresponding return from the goods
or services by the government.
The taxes may be imposed on the income and wealth
of persons or corporations.
The rate of taxes may vary.
A tax "is not a voluntary payment
or donation, but an enforced
contribution, exacted pursuant to
legislative authority”
Canons of Taxation
 A good tax system should adhere to certain principles
which become its characteristics. A good tax system is
therefore based on some principles. Adam Smith has
formulated four important principles of taxation. A
few more have been suggested by various other
economists. These principles which a good tax system
should follow are called canons of taxation.
Adam Smith’s four canons of taxation
Canon of Equality
Canon of Certainty
Canon of Convenience
Canon of Economy
 Canon of Equality
This states that persons should be taxed according to their
ability to pay taxes. That is why this principle is also known as
the canon of ability. Equality does not mean equal amount of
tax, but equality in tax burden. Canon of equality implies a
progressive tax system.
 Canon of Certainty
According to this canon, the tax which each individual is
required to pay should be certain and not arbitrary. The time
of payment, the manner of payment and the amount to be
paid should be clear to every tax payer. The application of
this principle is beneficial both to the government as well as
to the tax payer.
 Canon of Convenience
According to this canon, the mode and timings of tax
payment should be convenient to the tax payer. It means that
the taxes should be imposed in such a manner and at the
time which is most convenient for the tax payer. For example,
government of India collects the income tax at the time when
they receive their salaries. So this principle is also known as
‘the pay as you earn method’.
 Canon of Economy
Every tax has a cost of collection. The canon of economy
implies that the cost of tax collection should be minimum.
TYPES OF TAXES
Taxes can be classified into various types on the basis of
form,nature,aim and method of taxation. the most common
and traditional classification is to classify into :
• Direct Tax
• Indirect tax
 Direct taxes
A direct tax is that tax whose burden is borne by the same
person on whom it is levied. The ultimate burden of
taxation falls on the person on whom the tax is levied. It is
based on the income and property of a person. Thus
income tax, corporation tax on company’s profits, property
tax, capital gains tax, wealth tax etc are examples of direct
taxes.
 Indirect taxes
An indirect tax is that tax which is initially paid by one
individual, but the burden of which is passed over to some
other individual who ultimately bears it. It is levied on the
expenditure of a person. Excise duty, sales tax, custom
duties etc are examples of indirect taxes.
On the basis of degree of progression of tax, it
may be classified into:
•
•
•
•
Proportional tax
Progressive tax
Regressive tax
Degressive tax
 Proportional tax
A tax is called proportional when the rate of taxation remains
constant as the income of the tax payer increases. In this
system all incomes are taxed at a single uniform rate,
irrespective of whether tax payer’s income is high or low. The
tax liability increases in absolute terms, but the proportion of
income taxed remains the same.
 Progressive tax
When the rate of taxation increases as the tax payer’s income
increases, it is called a progressive tax. In this system, the
rate of tax goes on increasing with every increase in income.
 Regressive taxation
A regressive tax is one in which the rate of taxation decreases
as the tax payer’s income increases. Lower income is taxed at
a higher rate, whereas higher income is taxed at a lower rate.
However absolute tax liability may increase.
 Degressive taxation
A tax is called degressive when the rate of progression in
taxation does not increase in the same proportion as the
increase in income. In this case, the rate of tax increases upto
a certain limit, after that a uniform rate is charged. Thus
degressive tax is a combination of progressive and
proportional taxation. This type of taxation is often used in
case of income tax. This is the case of income tax in India as
well.
DIRECT TAXES
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 than 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 Residents and (iii) Non 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.
SERVICE TAX
 Service tax is a part of Central Excise in India. It is a tax levied on services
provided in India, except the State of Jammu and Kashmir. The
responsibility of collecting the tax lies with the Central Board of Excise and
Customs(CBEC). Service Tax is a form of indirect tax imposed on specified
services called "taxable services". Over the past few years, service tax been
expanded to cover new services and recently list of negative services has
been introduced. The objective behind levying service tax is to reduce the
degree of intensity of taxation on manufacturing and trade without forcing
the government to compromise on the revenue needs. For the purpose of
levying service tax, the value of any taxable service should be the gross
amount charged by the service provider for the service rendered by him.
EXCISE
 Central Excise duty is an indirect tax which is levied
and
collected
on
the
goods/commodities
manufactured in India. The Central Excise Act, 1944
and other connected rules- which provide for levy,
collection and connected procedures. 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.
SALES TAX
VAT
 “Value Added Tax” (VAT) is a tax on value addition and a
multi point tax, which is levied at every stage of sale. It is
collected at the stage of manufacture/resale and
contemplates rebating of tax paid on inputs and purchases.
 It is a tax levied on a firm as a percentage of its value added,
to avoid the multiplying effect of taxes as the product
passes through different stages of production. The tax is
based on the difference between the value of the output
and the value of the inputs used to produce it. The aim is to
tax a firm only for the value added by it to the inputs it is
using for manufacturing its output.
MODVAT
 Modified value added tax is a concept in central excise law
introduced with effect from 1-3-1986. It has gained
momentum with more and more industries beginning to
avail this facility.
 Modified Value Added Tax, introduced in 1986, is a tax for
allowing relief to final manufacturers on the excise duty
borne by their suppliers for goods manufactured by them.
It has now been replaced by the CENVAT scheme.
 Even though the term MODVAT is not defined in central
exercise act 1944 or rules made there under.
CENTRAL VALUE ADDED TAX
DEFINITION
The Modvat Scheme has been replaced by a new set of rules called
CENVAT Credit Rules 2002.
The definition of Capital Goods, Exempted Goods, Final products and the
inputs has been provided in Rule 2 of CENVAT Credit Rules, 2002. It also
included the list of items eligible for Capital Goods as well as for the
inputs.
DUTIES ELIGIBLE FOR CENVAT
• A manufacturer or producer of final product is allowed to
take CENVAT credit of duties specified in the Cenvat Credit
Rules , 2002.
CENVAT CREDIT RULES
In order to remove the cascading effect of excise duty and
•
service tax, the Excise Duty paid on the inputs,
capital goods and input services, which are used in or in
•
relation to the manufacture of final product or for providing
output services is permissible to be set-off against the excise
duty liability on the final products or paying service tax under
the CENVAT Credit Rules, 2004.
These rules have been notified to regulate the availment and
•
utilization of the CENVAT credit.
WHEN AND HOW MUCH CREDIT CAN BE TAKEN
The Cenvat Credit in respect of inputs may be taken immediately on receipt of the
inputs.
The Cenvat credit in respect of Capital Goods received in a factory at any point of time
in a given financial year shall be taken only for an amount not exceeding fifty percent
of the duty paid on such capital goods in the same financial year and the balance of
Cenvat Credit may be taken in any subsequent financial year.
The Cenvat credit shall be allowed even if any inputs or capital goods as such or after
being partially processed are sent to a job worker for further processing, testing, repair
etc.
The salient features are as follows:
“Capital goods”
Input
Input service
Input service distributor
Under the cenvat credit rules, 2004, the credit of following
duties/tax is allowed
The cenvat credit may be utilised for payment of —

“CAPITAL GOODS” means
The following goods, namely:—
All goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90,

heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the
Excise Tariff Act;
Pollution control equipment;

Components, spares and accessories of the goods specified ad (i) and (ii)

Moulds and dies, jigs and fixtures;

Refractories and refractory materials;

Tubes and pipes and fittings thereof; and

Storage tank.

“Input” means —
All goods, except light diesel oil, high speed diesel oil and motor spirit,
•
commonly known as petrol, used in or in relation to the manufacture of final
products whether directly or indirectly.
And whether contained in the final product or not and includes lubricating, oils,
•
greases, cutting oils, coolants, accessories of the final products cleared along with
the final product, goods used as paint, or as packing material, or as fuel,
•
For generation of electricity or steam used in or in relation to manufacture of
final products or for any other purpose, within the factory of production.
Definition of Input Service
“Input service” means any service, —
Used by a provider of taxable service for providing an output
service; or
Used by the manufacturer, whether directly or indirectly, in
or in relation to the manufacture of final products and
clearance of final products from the place of removal,
INPUT SERVICE DISTRIBUTOR
Meaning of Input Service Distributor
“Input service distributor” means an office of the manufacturer or
•
producer of final products or provider of output service, which receives
invoices issued under rule 4A of the Service Tax Rules, 1994 towards
purchases of input services and issues invoice, bill or, as the case may be,
challan for the purposes of distributing the credit of service tax paid on
the said services to such manufacturer or producer or provider.
UNDER THE CENVAT CREDIT RULES, 2004, THE CREDIT OF FOLLOWING
DUTIES/TAX IS ALLOWED
The duty of excise specified in the First Schedule to the Tariff Act,
•
leviable under the Act;
The duty of excise specified in the Second Schedule to the Tariff Act,
•
leviable under the Act;
The additional duty of excise leviable under section 3 of the
•
Additional Duties of Excise (Textile and Textile Articles) Act, 1978 (40
of 1978);
The additional duty of excise leviable under section 3 of the
•
Additional Duties of Excise (Goods of Special Importance) Act, 1957
(58 of 1957);
THE CENVAT CREDIT MAY BE UTILISED FOR
PAYMENT OF —
Any duty of excise on any final product; or
•
An amount equal to CENVAT credit taken on inputs if such inputs are
•
removed as such or after being partially processed; or
An amount equal to the CENVAT credit taken on capital goods if such
•
capital goods are removed as such; or
An amount under sub-rule (2) of rule 16 of the Central Excise Rules; 2002
•
Service Tax on any output services: Provided that while paying duty, the
•
CENVAT credit shall be utilised only to the extent such credit is available
on the last day of the month for payment of duty relating to the month.
Duty Paying Documents against which CENVAT
credit can be availed are:Invoice issued by
A manufacture of inputs or capital goods.
An importer
An importer from his depot or premises of consignment agent,
Provided the depot/ premises is registered with central excise
A first/second stage dealer.
A supplementary invoice
A bill of entry.
A certificate issued by appraiser of customs
An invoice/bill/challan issued by providers of input service.
A challan evidencing payment of service tax.
Credit of duty is allowed only if all the
conditions given below are met:The basic criteria for availment of credit of duty
paid on inputs or capital goods is that the goods
shall be used in manufacture of final products.
The goods shall be accompanied with proper
prescribed documents.
`MODVAT' (Modified Value Added Tax)
The modvat scheme is regulated by Rules 57A to 57U of the Central Excise
Rules and the notifications issued there under (The Central Excise
Rules, 2002 (Section 143 of the Finance Act, 2002).
Modvat Scheme ensures the revenue of the same order and at same time
the price of the final product could be lower.
Apart from reducing the costs through elimination of cascade effect, and
bringing in greater rationalization in tax structure and also bringing in
certainty in the amount of tax leviable on the final product, this scheme
will help the consumer to understand precisely the impact of taxation on
the cost of any product.
MODVAT and CENVAT
Subsequently, MODVAT scheme was restructured into CENVAT( Central
Value Added Tax) scheme. A new set of rules 57AA to 57AK , under The
Cenvat Credit Rules, 2004,
Were framed and whatever restrictions were there in MODVAT Scheme were
put to an end and comparatively, a free hand was given to the assesses.
Under the Cenvat Scheme, a manufacturer of final product or provider of
taxable service shall be allowed to take credit of duty of excise as well as of
service tax paid on any input received in the factory or any input service
received by manufacturer of final product.