Nikita Jain

088528
TAXATION: ASSIGNMENT
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INDIRECT TAXES

General Introduction:

Indirect taxes are the charges that are levied on goods and services. They are of different
types in India like Excise Duty, Customs Duty, Service Tax, and Securities Transaction Tax.
There are a series of Tax laws and regulations in order to control the indirect taxation,
which can be either national law, made by the central government or even can be state
specific laws. As a result these taxes are an important part of the total cost. It is thus
essential to make appropriate planning for such costs.

Nearly all of the activities that are subjected to indirect taxation range from manufacturing
to those required for final consumption. Activities related to trading, imports, and services
are also included in this list. As a result Indirect Tax has an impact on all business lines.

In general, the Indirect Tax in India is a complex system of interconnecting laws and
regulations, which includes specific laws of different states. For this there are many reliable
organizations in India, which employs efficient Indirect Tax professionals to help their
clients

In the following pages is a brief about three of the main kinds of Indirect taxes in India:

1. Sales tax
2. Customs Duty
3. Excise Duty
 SALES TAX

What Sales Tax is and why it is paid:

Sales Tax or the tax on consumption is liable for payment during the purchase for certain
goods and services as they form a part of national GDP. It means every seller of goods and
service provider charges the tax after availing the input tax credit. It is the form of
collecting sales tax under which tax is collected in each stage on the value added of the
goods. In practice, the dealer charges the tax on the full price of the goods, sold to the
consumer and at every end of the tax period reduces the tax collected on sale and tax
charged to him by the dealers from whom he purchased the goods and deposits such
amount of tax in government treasury.

The question of whether they are generally progressive or regressive is a subject of much
current debate. People with higher incomes spend a lower proportion of them, so a flat-rate
sales tax will tend to be regressive. It is therefore common to exempt food, utilities and
other necessities from sales taxes, since poor people spend a higher proportion of their
incomes on these commodities, so such exemptions make the tax more progressive. This is
the classic "You pay for what you spend" tax, as only those who spend money on non-
exempt (i.e. luxury) items pay the tax.

Generally, the sale of imported items as well as sale by way of export is not included in the
range of commodities that require payment of sales tax. Moreover, luxury items (such as
cosmetics) are levied higher sales tax rates.

Who collects Sales Tax:

Sales tax can be levied either by the Central or State Government, Central Sales
tax department. Also, 4 per cent tax is generally levied on all inter-State sales. It is imposed
under Central Government (Central Sales Tax) and the State Government (Sales Tax)
Legislation. State sales taxes - that apply on sales made within a State - have rates that
range from 4 to 15 per cent. Sales tax is also charged on works contracts in most States and
the value of contracts subject to tax and the tax rate vary from State to State. However,
exports and services are exempt from sales tax. Sales tax is levied on the seller who
recovers it from the customer at the time of sale.

Normally, each state has its own sales tax act and levies the tax at various rates. Apart
from sales tax, certain states also impose extra charges such as works contracts tax,
turnover tax & purchaser tax. Thus, sales tax plays a major role in acting as a major
generator of revenue for the various State Governments.

Under the sales tax which is an indirect form of tax, it is the responsibility of seller of the
commodity to collect or recover the tax from the purchaser. The Central Sales Tax (CST)
Act that comes under the direction of Central Government takes into consideration all the
interstate sales of commodities.

However, most of the states in India, from April 01, 2005, have supplemented the sales tax
with the new Value Added Tax (VAT).
 CUSTOMS DUTY

What Customs Duty is and why it is paid:

The Custom Duty in India is one of the most important tariffs. The custom duty in India is
regulated by the Customs Act of 1962. The main purpose of the custom duty in India is the
prevention of the illegal export and import of goods. The rates of the custom duty levied on
the imported and exported goods are assigned in the Custom Act, 1962. This act was
formulated 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. For the purpose of exercising proper surveillance over imports and
exports, the Central Government has the power to notify the ports and airports for the
unloading of the imported goods and loading of the exported goods, the places for
clearance of goods imported or to be exported, the routes by which above goods may pass
by land or inland water into or out of Indian and the ports which alone shall be coastal
ports.

Who collects Customs Duty:

The national authority that is entrusted the task of realizing taxes on international trade is
often referred to as Customs department. Normally the Customs department operates
under a national law and is authorized to examine the cargo in order to ascertain actual
description, specification volume or quantity, so that the assessable value and the rate of
duty may be correctly determined and applied. In India this department is called the
Central Board of Excise and Customs (CBEC).

In order to give a broad guide as to classification of goods for the purpose of duty liability,
the CBEC brings out periodically a book called the "Indian Customs Tariff Guide" which
contains various tariff rulings issued by the CBEC. The Act also contains detailed provisions
for warehousing of the imported goods and manufacture of goods is also possible in the
warehouses.
 EXCISE DUTY

What Excise Duty is and why it is paid:

An excise is an indirect tax, meaning that the producer or seller who pays the tax to the
government is expected to try to recover the tax by raising the price paid by the buyer (that
is, to shift or pass on the tax). Excises are typically imposed in addition to another indirect
tax such as a sales tax or VAT.

In common terminology, an excise is distinguished from a sales tax or VAT in three ways:
(i) an excise typically applies to a narrower range of products;
(ii) an excise is typically heavier, accounting for higher fractions (sometimes half or
more) of the retail prices of the targeted products; and
(iii) an excise is typically specific (so much per unit of measure; e.g. so many rupees
per quintal), whereas a sales tax or VAT is ad valorem, i.e. proportional to value
(a percentage of the price in the case of a sales tax, or of value added in the case
of a VAT).
Typical examples of excise duties are taxes on gasoline and other fuels, and taxes
on tobacco and alcohol (sometimes referred to as sin tax).
The Central Excise duty is levied in terms of the Central Excise Act, 1944 and the rates of
duty are prescribed under the Schedule I and II of the Central Excise Tariff Act, 1985. The
taxable event under the Central Excise law is ‘manufacture / production’ and the liability of
Central Excise duty arises as soon as the goods are manufactured or produced. As per the
Central Excise Act, duty is leviable only on excisable goods. i.e., Goods specified in Central
Excise Tariff Act, 1985.

The rates of the Excise Tax vary depending on the nature of commodity. Sometimes, even
for the similar commodity the tax rates are different depending on circumstances. Factors
like end-use and taxability of inputs are responsible for this. The Excise Tax rates are
notified in the Central Excise Tariff Act but can be revised accordingly by the annual
Finance Acts. However, the former Acts should be considered to determine the applicable
excise duty rate for any commodity. According to the Central Excise Tax provisions, such
excise duty can be imposed on any goods either produced or manufactured, although the
payment can be done during the time of removing the goods.

In India, the revenue from the Excise Tax is the biggest single financial source. The main
objective of the central Government is to achieve different socio-economic policies by
making suitable adjustments regarding the scope, nature, and quantum of levy of the
Central Excise Tax. Such schemes of the Excise Tax taken by the central government
modifies and serves various purposes of price control, adequate supply of essential
commodities, promotion of small scale industries and industrial growth.

Who collects Excise Duty:

Like Customs Duty, the Central Excise law is also administered by the Central Board of
Excise and Customs (CBEC or Board) through its field offices, the Central Excise
Commissionerates. For this purpose, the country is divided into 10 Zones and a Chief
Commissioner of Central Excise heads each Zone. There are total 61 Commissionerates in
these Zones headed by Commissioner of Central Excise. Divisions and Ranges are the
subsequent formations, headed by Deputy/Assistant Commissioners of Central Excise and
Superintendents of Central Excise.

For enforcing the central excise law and collection of Central Excise duty the following
types of procedures are being followed by the Central Excise Department:

 Physical Control – Applicable to cigarettes only. Here assessment precedes clearance

which takes place under the supervision of Central Excise officers;

 Self-Removal Procedure – Applicable to all other goods produced or manufactured

within the country. Under this system, the assessee himself determines the duty liability
on the goods and clears the goods.

The Central Excise Officers are also entrusted to collect other types of duties levied under
Additional Duties (Goods of Special Importance) Act, Additional Duties (Textiles and
Textiles Articles) Act, and Cess etc.