Consentia on Law

INTRODUCTION TO INDIRECT TAX

INTRODUCTION

Indirect Tax is a tax collected by an individual by ‘indirect means[1]’ in a pecuniary term on his sale and purchase by the authority of law under Indian constitution[2]. Indirect tax is one of the branch of tax laws and another is direct tax. Indirect tax is also known as consumption tax because they are based on the ability to pay principle which means a tax which is not levied directly on the incomes of earner or consumer. Collection of indirect was custom earlier then afterwards it becomes a law under which state obliges us to pay the tax. For this collection of tax (whether direct or indirect tax) is collected either by government[3] [4] which is authority of law under constitution of India. All these collected tax is utilized for the development of country as a whole by its distribution based on need of that central, state or local authority’s laws to carry on all his activities. Indirect tax is also known as consumption tax because they are based on the ability to pay principle which means a tax which is not levied directly on the incomes of earner or consumer. Collection of indirect was custom earlier then afterwards it becomes a law under which state obliges us to pay the tax.

Indirect Tax and Direct Tax

In case of direct tax, tax is to be collected in pecuniary term by an individual directly out of income they have earned. But in case of indirect tax, tax is paid indirectly by the consumer out of rest of amount of income earned. In case of direct tax, assesses is bound to pay the tax whether his willingness is there or nor but in case of indirect tax, consumer pays the tax voluntarily. Assessee can only be a person who earns his income under income tax act whereas, in case of indirect tax, a 5 year old child can also be the consumer who pays the tax indirectly. In case of direct tax, assesses pays the tax @ x at income earned and he may not pay the tax if he is exempted from paying tax in that financial year under tax slabs whereas in case of indirect tax no exemption if provided by the authority of law and consumer has to pay the tax separately from the amount of actual cost of the product which makes the product more costlier.

Paid tax can be claimed back or adjusted in income tax where as normally it is not always possible in all indirect tax cases. In direct tax, assesses assess his tax to be paid at the end of financial year whereas in case of indirect tax, consumer pays the tax at the time of purchase or sell or rendering of services. As assess directly pays the pays the tax, there is no question of shifting of burden of tax in future but in case of indirect tax , if the goods are transferred from one consumer to the another, the burden of tax is shifted to the subsequent consumer. Indirect tax is a wider concept with regard to direct tax. Indirect tax affects only an individual which does not affect the price or demand of goods directly whereas in case of indirect tax it affects the whole country as well as global market and if the price of goods is increased, the demand of that good may fall down which will indirectly hinder the healthy development of country. Tax evasion is more in direct tax whereas it is comparatively very low in indirect taxation.

 Extent of Taxation under Constitution of India:

            Under Article 246, the authority can levy tax on various subject matter enumerated under Schedule VII of the constitution Central Government under three list that is union list, state list and concurrent list. Union[5] has right to levy tax on Income Tax (Except on Agricultural Income), Excise (Except on Alcohol and Tobacco) and customs. State Government shall levy tax revenue from sales tax, excise from alcoholic and liquor drinks, and tax on agricultural income. The local self government levy tax from entry tax and house property tax.

When union list is inconsistent with the state list, union list will prevail. Under Article 249, parliament can make laws on state list either when 2/3rd member of Rajya Sabha gives its consent or in case of emergency. Even doctrine of eclipse is also applicable in taxation case, which states that all those British law which were prevailing before independence are not illegal. Only those provisions which are inconsistent with our constitution will be struck down for the time being and other will be applicable in same manner. Under Article 255, when there is a controversy between international law and municipal law, international law will prevail in India.

Constitutional Amendment empowers the Panchayat to levy tax[6]. A State may by law be able to authorise a Panchayat to levy, collect and appropriate taxes, duties, tolls etc. Similarly, municipalities are also empowered to levy the taxes[7].

Types of Indirect Tax

            We all knew that Tax law is divided into two parts that is direct and indirect tax. This direct and indirect tax are further classified as Direct tax includes Income Tax Act and Wealth Act, where as Indirect tax is classified as Central Excise duty, Customs duty, Service tax, Central sales tax, Value added tax, and miscellaneous. Almost each and every branch of law is classified into different sub-heads, likewise taxation is classified as follows in form of this chart:-

Capture

It is an indirect tax levied and collected on the excisable goods manufactured or produced in India (excluding alcohol and tobacco) which has its marketability and which is known to the market or which already exists in the market. Central excise duty is also being levied to ores and minerals which are extracted from the earth. Manufacturer of marketable goods is liable to pay the excise duty to the government on the day when the goods are taken out the door of manufacturing unit[8]. He is bound to pay to pay duty on all goods manufactured or produced in India unless and until it is exempted by the law. Exemption is given to develop the country is that; manufacturer is not bound to pay the excise duty on the goods exported out of India provided that specified quantum of quality and quantity is too maintained. This was done to increase the exportation in India. The duty of Central Excise is levied if the following conditions are satisfied:

(1) The duty is on goods.

(2) The goods must be excisable.

(3) The goods must be manufactured or produced.

(4) Such manufacture or production must be in India.

Unless and until these above conditions are not satisfied, excise duty cannot be levied upon excisable goods. Manufacture is liable to pay the duty and for this he need not necessarily be an Owner of raw material[9].  Law related to central excise Act:

  1. Central Excise Act, 1944(CEA): The basic Act which provides the constitutional power for charging of duty, valuation etc.
  2. Central Excise Tariff Act, 1985 (CETA): This classifies the goods under 96 chapters with specific codes assigned.
  3. Central Excise Rules, 2002: It deals with the procedural aspects of excise duty. The rules given under rules are implemented or come into force after issue of notification.
  4. Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: This rule deals with the provisions of valuation of excisable goods.
  5. Cenvat Credit Rules, 2004: This rule deals with provisions relating to Cenvat Credit and its utilization.

The Central Excise Tariff Act 1985 defines the term “excisable goods” which means the goods which are specified in the First Schedule and the Second Schedule. It is mandatory to pay Excise duty on the goods manufactured, unless and until exempted by law[10]. Other exemptions are also notified by the Government from the payment of duty by the manufacturers. The following persons shall be liable to pay excise duty:

  1. A person, who produces or manufactures any excisable goods,
  2. A person, who stores excisable goods in a warehouse,
  3. In case of molasses, the person who procures such molasses,
  4. In case goods are produced or manufactured on job work,

                                                              i.      The person on whose account goods are produced or manufactured by the job work, or

                                                            ii.      The job worker, where such person authorizes the job worker to pay the duty leviable on such goods.

  • Service Tax

The interesting thing about Service Tax in India is that the Government depends heavily on the voluntary compliance of the service providers for collecting Service Tax in India[11]. When it was introduced initially there were three services which were liable but over the years various other services have been added and today more than a hundred services are liable under service tax. One of the main reasons for the services to be taxed is the fact that the manufacturing sector can be taxed only to a certain extent and if we want to maintain the healthy completion and growth, all the activities are to be taxed which is also important for justice and equity.[12]The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax under the provisions given in Chapter V and VA of the Finance Act of 1994 for the time being. Service Tax Act enacted on 1994[13]. Under this Act, service tax is levied on gross or aggregate amount of service on receiver by the service provider[14]. Under rule 6, tax is to be paid on the value received and central government can also grant exemptions[15] long with making rules[16] under this rule[17] with the span of time for the time being.

 The service tax act is not applicable to the state of Jammu and Kashmir. This act has defined service provider as well as service receiver. This tax can only be levied if the service transaction takes place between these two defined service provider and service receiver and not in another case. The concept of service receiver has been widened to cover all kinds of service receivers in last couple of years as many service providers has been emerged in this global market and now it is a matter of academic interest. The service provider is bound to pay the tax on the service provided by him to the service receiver, when he collects value of service from service receiver[18].

 

  • Value Added Tax

VAT is kind of indirect tax. It is paid at each state of sale on the value added to a product. Value Added Tax Act is enacted to levy VAT. For an instance, A extracted iron ore, so a will pay tax on quantum of iron ore sold to B. this iron ore becomes raw material for B and if B manufactures steel sheets, then a new product it invented with new purpose and if b sells this sheet to C and c manufactures steel good then again a new product with new use is invented. In this case B and C both have to pay VAT at different rates as their final product is different. Thus, it can said that VAT is imposed if a new goods is invented which has different purpose, different name and different characteristics. If any of these essential elements is not fulfilled then, VAT cannot be imposed. Thus, it is multi point levy of VAT on supply chain upon each entity.VAT rates vary from state to state on petrol, tobacco, alcohol etc. VAT rates are administered by state governments and it is similar to sales tax. VAT is levied or charged as soon as some value is added to the raw material. The value addition in the hands of each of the entities is subject to tax. VAT can be computed by using any of the three methods:

  1. Subtraction method: Difference between the value of output and the cost of input is taken out and tax is applied on that difference.
  2. The Addition method: All the payments that is payable to the factors of production[19] are added and thud value added is computed.
  3. Tax credit method: This entails set-off of the tax paid on input[20].

VAT helps in avoiding problem of double taxation of goods and services. There is no incidence of cascading effect in VAT as it is imposed on value added at every stage. Thus, final consumer pays tax only on the value added which tend to make this tax system simple with absolute transparency.

  • Central sales Tax

Central sales tax is levied upon a dealer on sale of all goods during their transaction in inter-state trade or commerce or in outside state trade transaction. This transaction can be inter-state sale even if the seller and buyer are from same state but goods are transferred from one state to another under contract of sale during their transition by transfer of documents. The state from where the goods are moved out, tax will be levied on that sate based on that state sales rate. Sales tax cannot be levied upon the sale or purchase of good outside that state and import and export of any goods outside the India. If sale is made to reseller and tax exempted institutions are two conditions where this Central Sales Tax is exempted[21].

Sales Tax are of two kinds- Central Sales Tax[22] which is to be levied on inter-state sale and purchase of goods by the parliament and another is Sales Tax[23] which is to be levied on commerce trade sales at various rates under Sales Tax Act by the State government who can also impose additional tax charge as purchase tax, turnover tax etc. Thus, Sales Tax helps in generating major revenue for different State governments. In India, most of states have supplemented their Sales Tax with VAT[24]. There are some instances wherein the goods are moved out of the selling state and yet they are not considered interstate sales:-

  1. Intra-state sales
  2. Stock transfer from head office to branch & vice versa
  3. Import and Export sales or purchases
  4. Sale through commission agent / on account sales
  5. Delivery of Goods for executing works contract

 

  • Customs duty

In India, Custom duty is one of the most important branch of Indirect Tax. Customs Act[25] and Foreign Trade Order[26] are two main acts under Custom duty. This Act was enacted to prevented illegal imports and exports of the goods[27]. It is also subjected to secure Indian Currency exchange rate by minimizing imports in India and to secure indigenous industries[28]. The rate at which this custom duty is to be levied upon imported or exported goods from India are specified under Custom Tariff Act[29].

Under the custom laws, the various types of duties are leviable.

  1. Basic Duty:
  2. Additional Duty (Countervailing Duty) (CVD)
  3. Additional Duty to compensate duty on inputs used by Indian manufacturers
  4. Anti-dumping Duty
  5. Protective Duty
  6. Duty on Bounty Fed Articles
  7. Export Duty
  8. Cess on Export
  9. National Calamity Contingent Duty
  10. Education Cess
  11. Secondary and Higher Education Cess
  12. Road Cess
  13. Surcharge on Motor Spirit

Central Government has power to issue any notification regarding import and export in port and airports in India by deciding the routed of goods to be imported or exported inside or outside India respectively. Central Board of Excise Customs (CBEC) has issued “Indian Customs Tariff Guide” where Custom duty goods have been classified and various tariff rulings are included. It also includes imported and manufactured goods of warehousing. If a person brings any baggage from abroad, he has to pay tax on that baggage.

  • Expenditure Tax

Expenditure tax is levied to hotels having room charges of more than Rs 1,200 per day per person under Expenditure Tax Act, 1987 and not below that. It is collected at the rate of 10 percent towards food, room, beverages and other services from customers and the collected amount is deposited by owner to the central government.

  • Stamp Duties

Stamp duties are paid on rates basis. This “rates” are mainly prescribed by central government legislation under The Indian Stamp Act 1899, and some documents rates are revised by state government legislation. This duty is levied on documents (promissory notes, insurance policies, bill of exchange etc.), contracts affecting both transfer of shares and transfer of immovable property. Purchaser normally pays stamp duties contracts affecting transfer of shares and transfer of immovable property.

  • Securities Transaction Tax (STT)

STT is the stock exchange transaction based tax. It is applied in case of purchase and sell of equity (equity shares, equity oriented funds and equity oriented mutual funds) and derivatives. Person has to pay the STT only in one condition, whereby he becomes investor. He only has to pay the STT @10 % flat on gain by selling his shares before 12 months which is short term capital gain. If he sells his shares after 12 month, then it is long term capital and he is not required to pay the tax. However, these gains are treated as business or trading tax and it can be claimed back or can be adjusted in tax to be paid.

Conclusion

 At last I would like conclude this article by stating that taxation is a branch of law which is connected with our day to day life. Taxation law is branch of law which changes every year with introduction of new finance budget. Tax revenue collected by authority of law is deposited into government fund which if used for maintenance of law and order, defense, social/ health services, administration etc. Taxation is not only the source of government fund indeed it is the main source. Justice Holmes of US Supreme Court had said that tax is the price which we pay for a civilized society. The Central Excise Department (CED) levy and collects tax from both direct as well as indirect taxation. These officers have all power for enforcement of law[30]. Although taxation have many branches and sub- branches, but in all kinds of indirect tax, tax levy and collection procedure are almost similar.


[1] Suppose A recharged his reliance mobile with recharge voucher worth Rs 20. He will pay Rs 2.20 as service tax, Rs 2 as processing fee and Rs 15.80 will be his talk time value, out of that Rs 20.

[2] Under Article 265 no tax shall be levied or collected by the authority of law.

[3] central government, state government or any local authority (which includes local councils and municipalities)

[4] (which includes local councils and municipalities)

[5] Under Article 83 and 84 tax and custom duty can be imposed on any goods and services by union except alcohol, tobacco etc respectively.

[6] Provisions have been made by 73rd Constitutional Amendment which was enforced from 24th April, 1993 to levy tax by Panchayat.

[7] Provisions have been made by 74th Constitutional Amendment which was enforced from 1st June, 1993 to levy tax by municipalities.

[8] http://www.tharunraj.com/Chennai/ Maruti Suzuki India Ltd. v. CCE 2010 (Tri. – LB)

[9] Hindustan General Industries v. CCE 2003 (155) ELT 65 (CEGAT), also refer CCE v. Mahindra & Mahindra 2001(132) ELT 632 (CEGAT).

[10]E.g; duty is not payable on the goods exported out of India.

[11] http://www.tharunraj.com / Chennai / CST v. Lincoln Helios (India) Ltd. 2011 (Kar.)

[12] http://www.legalservicesindia.com/article/ Goods And Services Tax- Feasibility In India

[13] Service Tax came into effect on 1st July, 1994

[14] Under Section 67 of this Act, the Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver.

[15] The Central Government has also been empowered to grant exemptions from Service Tax u/s 93.

[16] The Central Government has also been empowered to make rules to carry out the provisions of this Chapter, through section 94

[17] Service Tax Rules, 1994

[18]The service provider providing taxable services shall be required to pay service tax. However, the service provider does not have to pay service tax until he collects the value of service, from the service receiver towards the taxable services provided by virtue of Rule 6 of Service Tax Rules 1994.

[19] (viz., wages, salaries, interest payments etc)

[20] From tax collected on sales.

[21] Sales Tax is exempted in two conditions that if the sales are made to resellers such as wholesalers and retailers that have a valid state resale certificate or if the sales are made to tax-exempt institutions such as schools or charities.

[22] Enacted by Central Government legislation

[23] Act enacted by State Government legisla

[24]From 10th April, 2005, most of the States in India have supplemented sales tax with a new Value Added Tax (VAT).  Not all dispatches of goods from one state to another result in interstate sales rather the movement must be on account of a covenant or incident of the contract of sales.

[25] Customs Act, 1962

[26] Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993

[27] The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.

[28] Reliance Industries Ltd. v. Designated Authority 2006 (202) ELT 23 (SC), it was held that 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.

[29] 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.

[30] Section 14 of Central Excise Act which makes provisions in respect of summons has been made applicable to service tax. Provisions relating to search and seizure (of documents or books or things) have been made applicable to service tax vide Section 82 of Finance Act, 1994. However, provisions relating to seizure of goods and provisions relating to arrest are not applicable to service tax.

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