Indirect Taxes – a review
Applicability of Duties / Taxes  Excise Duty
 Customs duty.
 VAT / CST
 Service tax
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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 -
Indirect Taxes – a review
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.
Indirect Taxes – a review
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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.)
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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a)
b)
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. 1.50 crores
turnover and pay full duty onwards. Or
Claim Cenvat benefit and pay full duty from
Re.1 sale.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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If the Government has issued specific
notification, the goods will be exempt under
Excise / Customs.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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The contractor is liable to pay service tax as –
Pay full service tax @ 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 tax @ 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)
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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,
CST @ 2% is charged. This is not allowed
Indirect Taxes – a review
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 1.4.2007.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
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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.
Indirect Taxes – a review
Thanks !!!!!