IndirectTaxes

Indirect Taxes in India: 

Indirect Taxes in India 1

Indian Taxation System: 

Indian Taxation System If the taxpayer bears its incidence and is not able to pass on the burden, such tax is direct tax. If the taxpayer is just a conduit and every stage the tax-incidence is passed on till it finally reaches the consumer, who really bear the brunt of it, such tax is indirect tax. This presentation is for Indirect Taxes only

How Goods Move: 

How Goods Move 3

DUTIES AND TAXES: 

DUTIES AND TAXES Customs Duty: Duty for importing Goods into the country – levied at the port of entry. Excise Duty: Duty on Manufactured Goods – levied at point of manufacture ( on removal from factory) Sales Tax/VAT: at any sale point of Goods Service Tax: Tax for services rendered Excise Duty is only leviable on the manufacturer. A Trader is only a intermediary and is not required to pay Excise Duty. 4

Customs Duty: 

Customs Duty Customs duty is a kind of indirect tax which is realized on goods of international trade. Duties levied by the government in relation to imported items is referred to as import duty . In the same vein, duties realized on export consignments is called export duty . Tariff which is actually a list of commodities along with the leviable rate (amount) of Customs duty is popularly understood as Customs duty. Each Commodity is levied a different Duty as per Certain policies Mostly dictated by World Trade Organization (WTO) 5

WORLD TRADE ORGANISATON: 

WORLD TRADE ORGANISATON Location: Geneva, Switzerland Established: 1 January 1995 Created by: Uruguay Round negotiations (1986-94) Membership : 153 countries on 23 July 2008. WTO is run by its member governments. The WTO agreements cover goods, services and intellectual property. To enable the objective of Free Market World Economy, individual countries’ are committed to lower customs tariffs and other trade barriers, and to open and keep open services markets. 6

Objectives of Custom Duties: 

Objectives of Custom Duties The customs duty is levied, primarily, for the following purpose : Restricting Imports for conserving foreign exchange. Protecting Indian Industry from undue competition. Prohibiting imports and exports of goods for achieving the policy objectives of the Government. Regulating export. Co-coordinating legal provisions with other laws dealing with foreign exchange such as Foreign Trade Act, Foreign Exchange Regulation Act, Conservation of Foreign Exchange and Prevention of Smuggling Act, etc. 7

Components of Customs Duty: 

Components of Customs Duty Basic Customs Duty All goods imported into India are chargeable to a duty under Customs Act, 1962 . The duty may be a percentage of the value of the goods or at a specific rate. Additional (Countervailing) Duty of Customs This countervailing duty is leviable as additional duty on goods imported into the country and the rate structure of this duty is equal to the excise duty on like articles produced in India. The base of this additional duty is c.i.f. value of imports plus the duty levied earlier. Special CVD This is payable @ 4% on imported goods. This is in lieu of Vat/sales tax to provide level playing field to Indian goods. Restricting Imports for conserving foreign exchange. Protecting Indian Industry from undue competition 8

Duty Calculations: 

Duty Calculations Product A Product B I CIF Value (INR) say 2,34,000.00 31,34,500.00 II Assessable Value (AV) I*AV 1% 2,36,340.00 1% 31,65,845.00 III Basic Duty (BD) II*BD 10% 23,634.00 8% 2,37,438.38 OR III Preferential Duty (PD) II*PD Levied as per trade agreements between nations/blocks IV Countervailing Duty (CVD ) # (II+III)*CVD 10% 25,997.40 10% 3,40,328.34 V Central Excise Educational Cess (EEC ) # IV * EEC 3% 779.92 3% 10,209.85 VI Customs Educational Cess(CEC) (III+IV+V)*CEC 3% 1,512.34 3% 17,639.30 VII Special CVD (S) (II+III+IV+V+VI)*S 4% 11,530.55 4% 1,50,858.43 TOTAL DUTY PAID 63,454.21 7,56,474.29 % of value of CIF 27.12% 24.13% # T his is equal to Excise Duty leviable, if the Product is manufactured in India. 9 More details – see Slide 40

Salient Features of the Import Duty: 

Salient Features of the Import Duty As CIF value includes freight – air freight will have a cascading effect on the final landed price. Thus, % of Basic Customs Duty is misleading figure: 10% BCD in actually translates to an addition of 27.12% on c.i.f 8% BCD in actually translates to an addition of 24.13% on c.i.f Manufacturer who manufactures excise-able goods can claim the CENVAT amt of the Duty paid as a set-off during his payment of Excise Duty. ( explained later) The Manufacturer who is not required to pay excise ( for whatever reason) can not take the CVD set-off and hence has to incur the full affect of 27.12%/24.13% as the case be. Similarly any person/business unit ( includes trader) who are not require d to pay Excise, can not take the CVD set off. 10

Anti Dumping Duty: 

Anti Dumping Duty Dumping is said to occur when the goods are exported by a country to another country at a price lower than its normal value. This is an unfair trade practice which can have a distortive effect on international trade. Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect. Anti Dumping Duty is in addition to any other Import Duties levied and some time levied on Rs /Kg basis. If the above is leviable then the impact can be 200 to 250% of the normal duty – thus making the product prohibitively expensive. India has many goods from china falling under this category. ADD is very complicated and has WTO guidelines, which all signatories of WTO are required to follow. 11

CUSTOMS PRODUCT CODE: 

CUSTOMS PRODUCT CODE For the purpose of assessment of Customs duty, products are given an identification code that has come to be known as the Harmonized System code . This code has been evolved and assigned by the World Customs Organization based in Brussels. H. S. Code may be from four to ten digits. In India it is 8 digit code: For instance Chapter 85 is related to Electrical Equipment 8504 relates to transformers – further digits represent subcategories Chapter 39 relates to Plastics 3918 relates to Floor coverings http://www.cybex.in/HS-Codes/ 12

Excise Duty: 

Excise Duty Excise duty is a tax on manufacture or production of goods. Excise duty on alcohol, alcoholic preparations, and narcotic substances is collected by the State Government and is called "State Excise" duty. The Excise duty on rest of goods is called "Central Excise" duty and is collected in terms of Section 3 of the Central Excise Act, 1944. Sales Tax is different from the Excise duty as former is a tax on the act of sale while the latter is a tax on the act of manufacture or production of goods. 13 http://www.eximguru.com/excise-duty/default.aspx

Components of Excise Duty: 

Components of Excise Duty Basic Excise Duty – also known as CENVAT AED : Additional Excise Duty ( for goods of special importance) Education Cess on Excise Duty Higher Education cess on Excise Duty Example Product A Product B Assessable Value 20,000 15,000 CENVAT 10% 2,000 1,500 Edn Cess 2% 40 30 S H. Edn Cess 1% 20 15 Total Duty 2,060 1,545 Total Cost 22,060 16,545 14 Pl note that the Cess not on assessable value but on Duty

Cascading effect of Duties and Taxes: 

Cascading effect of Duties and Taxes 15 + Sales tax + Sales tax To avoid the above, the concept of value added tax is introduced

CENVAT: 

CENVAT What is the facility for mitigating the cascading effect of duty? Subject to prescribed conditions, the assessee ( manufacturer2) has to obtain a duty paid invoice from the consignor ( manufacturer1) and then he can take credit of such duty amount in the account maintained for this purpose and the same can be utilized by him for the payment of the duty on the goods from his factory. This credit is called CENVAT. 16 This in effect means the second and subsequent manufacturers pay on the value added .- An example will clear the concept

CENVAT - EXAMPLE: 

CENVAT - EXAMPLE 17 product price is reduced from 162.70 to 151.11 – without affecting his value addition 1 Raw Material from Manufacturer 1 ( freight also dutiable if shown in the Invoice ) Basic Price 100.00 Freight 2.00 Duty 10.30% 10.51 2 Input Cost to Manufacturer 2 Invoice Value 112.51 3 Value addition by Manufacturer 2 ( incl his profit margin) 35.00 4 Sent of Freight to pay Not shown in Invoice NIL 5 Total ex-factory Invoice Price 147.51 6 Add: + Excise Duty Duty 10.30% 15.19 7 Total Invoice Value of Manufacturer 2 Sale Price 162.7 0 8 Duty Payable by Manufacturer 2 After CENVAT Credit 4.69 How the CENVAT can be used to our Competitive Advantage 3 Value Addition by Manufacturer 2 35 less Duty paid i.e 10.51 24.49 4 Sent of Freight to pay Not shown in Invoice NIL 5 Total ex-factory Invoice Price 112.51+24.49 = 137.00 6 Add: + Excise Duty Duty 14.11 7 Total Invoice Value of Manufacturer 2 151.11 8 Duty Payable by Manufacturer 2 After CENVAT Credit 3.61

CENVAT – UNDER IMPORTS: 

CENVAT – UNDER IMPORTS Import Purchase ( Customs Duty) comprises of CVD ( Protecting Indian Industry from undue competition) . This CVD is also CENVATABLE can taken as Set-off in the similar fashion as cenvatable EXCISE-DUTY as being shown in case of DOMESTIC Purchase Order . 18 Note: Thus a “ level playing field “ is ensured for the importer as well as domestic manufacturer

Sales Tax: 

Sales Tax 19 Sales Tax in India is a form of tax that is imposed by the government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales Tax) Legislation. As and from 1 st April,2005 a new tax system called Value Added Tax will has come into force throughout India has replaced totally existing sales tax system where under tax was levied and collected at every stage of sale or purchase of goods or at specified points Whoever sells goods , have to collect the tax from purchaser and pay to Government

SALES TAX VAT: 

SALES TAX VAT 20 Just as Excise Duty has been made CENVATABLE, Sales Tax also can be taken as set off for subsequent Sales, subject to certain conditions For our understanding let us define Trader as the one who simply sells goods Manufactured by others

VAT: 

VAT The practice of VAT executed by State Governments is applied on each stage of sale, with a particular apparatus of credit for the input VAT paid . VAT in India can be classified under the following tax slabs: 0% for essential commodities 1% on gold ingots and expensive stones 4% on industrial inputs, capital merchandise and commodities of mass consumption 4% to 16% on other items ( state-dependent) Variable rates (state-dependent) are applicable for petroleum products, tobacco, liquor etc. 21

CST: 

CST Under the Constitution of India, State Governments do not have propriety to levy sales tax/VAT on sales that are effected in the course of inter-State trade or commerce Section 3 of the CST Act provides that a sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase occasions the movement of goods from one State to another; or is effected by a transfer of documents of title to the goods during their movement from one State to another 22

CST VS VAT: 

CST VS VAT 23 Re-sale within a State only can be taken as set-off. Central Sales Tax is not set-off’able Not an usual transaction

INTER STATE SALE: 

INTER STATE SALE The first sale must be an interstate sale The movement of goods is not interrupted and the middle buyer should not take delivery of the goods Sale is effected by ‘transfer of document of title to the goods’ Such transfer should take place during the movement of goods 24 If the VAT rate within the state, is higher than CST then the above transaction is required to be adopted.

Slide 25: 

SCOPE It is leviable on taxable service provided or to be provided by the service provider. RATE 10% of the value of taxable service as per section 66 (including EC & HSEC 10.30%) TAXABLE SERVICE Taxable service are those services defined under section 65(105) of the Finance Act 1994 – since expanded far and beyond. SERVICE TAX The Service Tax is administered by Excise Department

EFFECTIVE RATE OF SERVICE TAX: 

EFFECTIVE RATE OF SERVICE TAX The above effective rate of Service Tax is 10.3% which comprises of Service Tax @10% payable on the “gross value of taxable service”, Education Cess @ 2% on the service tax amount, and Secondary and Higher Education Cess @ 1% on the service tax amount. Taxable value has to be determined as per the provisions of the Section 67 of the Finance Act, 1994, read with Service Tax (Determination of Value) Rules, 2006 . Issue of Invoice/ Bill / Challan by a Service Tax assessee is mandatory as per Rule 4A of the STR, 1994. The same should be issued within 14 days from the date of completion of taxable service or receipt of payment towards the service, whichever is earlier

WORKS CONTRACT TAX: 

WORKS CONTRACT TAX Work contract is a term used for those contracts under which the Vendor or the Supplier undertakes to execute the work by supplying the materials as well as executing the work - it is in the nature of indivisible contract between supply value and execution value. WCT is not mandatory: One can opt depending on the convenience Options being: VAT +Service tax or WTC

TYPES OF WORKS CONTRACT: 

TYPES OF WORKS CONTRACT Contracts involving Supply and Erection ( mentioned separately in the Contract) Supply portion – VAT as per the commodity tariff ( 4% to 16%) Erection portion – Service Tax as per the definition of service ( 10.3%) Indivisible contracts, where the parties agree for lump-sum consideration for the entire contract. The sale consideration of the materials used in the contract and remuneration for labour is not separately identifiable – flat rate of 4.12% is chargeable + VAT (4%)

CENVAT CREDIT FOR WCT ( Composite scheme – Indivisible Works Contract): 

CENVAT CREDIT FOR WCT ( Composite scheme – Indivisible Works Contract) In the case of contractor executing works contract he can opt for composition scheme under Service Tax. Under composition scheme he can pay 4.12% service tax on the gross consideration received or gross amount charged for works contract. If the assessee opts for composition scheme he cannot avail CENVAT Credit of inputs on the excise duty of the goods purchased However, the assessee can avail CENVAT credit of input of services ( subcontracting). It he contractor opts for composition scheme in respect of a contract he cannot change the option until the completion of the said work contract. Service Tax treatment in WCT has more options and it is best left to the experts to handle the same. Hence under the composite scheme, the assessee pays VAT at 4% to State Govt and Service Tax @ 4.12% to Central Govt Two Examples will clear the above

Slide 30: 

30 Final Product Sold in the same State as the Component 2 Divisible Contract Indivisible Contract Input Cost 2,90,074 Input Cost 2,90,074 Value Addition 34,000 Value Addition 34,000 Profit 40,000 Profit 40,000 CENVAT Credit -25,750 CENVAT Credit - NA VAT Credit -6,618 VAT Credit -6,618 Total Ex-Factory 3,31,706 Total Ex-Factory 3,57,456 Freight( billed in Invoice) 4,500 Freight( billed in Invoice) 4,500 Total Assessable Value 3,36,206 ETC 45,000 Excise Duty 10.30% 34,629 TOTAL Indivisible Contract Basic 4,06,956 Vat 4% 14,833 WCT Service Tax 4.12% 16,767 Total Supply Invoice 3,85,669 VAT 4.00% 16,949 ETC 45,000 TOTAL CONTRACT VALUE 4,40,671 Service Tax on ETC 10.30% 4,635 Total ETC Invoice 49,635 TOTAL CONTRACT VALUE 4,35,304 Note: CST can't be set-off Note: NO CENVAT credit Item Location INR Component 1 Outside State Basic Price Ex-factry 1,00,000 Excise Duty 10.30% 10,300 Central State Tax 2% 2,206 Freight 3,200 Component 2 Within the State Basic Price Ex-factry 1,50,000 Excise Duty 10.30% 15,450 VAT 4% 6,618 Freight 2,300 TOTAL Input Cost 2,90,074 Both the components are purchased from directly from manufacturers ( hence ED Invoice is obtainable)

Slide 31: 

31 Final Product Sold in the same State as the Component 2 Divisible Contract Indivisible Contract Input Cost 2,90,074 Input Cost 2,90,074 Value Addition 34,000 Value Addition 34,000 Profit 40,000 Profit 40,000 CENVAT Credit -25,750 CENVAT Credit -25,750 NA VAT Credit -6,618 VAT Credit -6,618 Total Ex-Factory 3,31,706 Total Ex-Factory 3,57,456 Freight( billed in Invoice) 4,500 Freight( billed in Invoice) 4,500 Total Assessable Value 3,36,206 ETC 45,000 Excise Duty 10.30% 34,629 TOTAL Indivisible Contract Basic 4,06,956 VAT 14.5% 53,771 WCT Service Tax 4.12% 16,767 Total Supply Invoice 4,24,606 VAT 4.00% 16,949 ETC 45,000 TOTAL CONTRACT VALUE 4,40,671 Service Tax on ETC 10.30% 4,635 Total ETC Invoice 49,635 TOTAL CONTRACT VALUE 4,74,241 Note: CST can't be set-off Note: NO CENVAT credit Item Location INR Component 1 Outside State Basic Price Ex-factry 1,00,000 Excise Duty 10.30% 10,300 Central State Tax 2% 2,206 Freight 3,200 Component 2 Within the State Basic Price Ex-factry 1,50,000 Excise Duty 10.30% 15,450 VAT 4.0% 6,618 Freight 2,300 TOTAL Input Cost 2,90,074 Both the components are purchased from directly from manufacturers ( hence ED Invoice is obtainable)

SUMMARY OF THE EXAMPLES: 

SUMMARY OF THE EXAMPLES 32 Final Product Sold in the same State as the Component 2 Final Product VAT 4% Final Product VAT 14.5% Divisible Contract (DC) In-divisible Contract (IDC) Divisible Contract (DC) In-divisible Contract (IDC) Input Cost 290074 290074 290074 290074 Value addition 34000 34000 34000 34000 Profit 40000 40000 40000 40000 Total Contract Value 435304 440671 474241 440671 One case the VAT is lower, Then DC is advantageous than IDC One case the VAT is higher, Then IDC is advantageous than DC

INDIVISIBLE CONTRACT: 

INDIVISIBLE CONTRACT Useful only when there is scope clarity Additions later can create problems for taxation Documentation to show that the “offer” and contract match No where in the documentation shall we show the break-up between supply and ETC. Cooperation from Owner would be required for answering queries during assessment time 33

Trader Vs Manufacturer: 

34 Trader Vs Manufacturer

CHECK LIST FOR PROJECT COSTING ( for taking care of duties and taxes): 

CHECK LIST FOR PROJECT COSTING ( for taking care of duties and taxes ) Final location of the Project Within the State ( VAT) Outside the State ( sale in transit/that state laws!) Outsourcing Material: From manufacturer or trader? ( CENVAT or no) From Trader/manufacturer who can’t give ED invoice, then ED is a cost! From within the state or outside the state(VAT or CST) Outsourcing Services: Is the Service Provider Service Tax registered ? ( ST set-off possibility) Labor law compatibility ( especially in civil works) Sale Contract: Divisible or Indivisible? 35 If the Final Product is not excise-able ( for what ever reason) then . CENVAT credit can not be claimed. Therefore, ED is a cost!

SUMMARY: 

SUMMARY Import Duty consists of two components – of which the CVD component is cenvatable ( set-off) to a excise registered manufacturer Excise Duty paid while buying goods, can be taken as credit ( set-off) by another manufacturer – but not by Trader. VAT is imposed by a given state – hence resale within that state can take VAT paid earlier as set-off Central Sales Tax (CST) can not be taken as a set-off. Sales across the state attracts only CST and not VAT. Service tax is on services – installation etc. ( labor related) Works Contract Tax is optional – in lieu of VAT + Service Tax If the Re-seller is not paying excise duty ( for whatever reason) then he is not entailed to claim CENVAT. 36 However, confusion continues – whether inter-State purchases by Contractor for execution of work should be subject to local taxes or CST

Glossary of Terms: 

Glossary of Terms 37

What is not covered!: 

What is not covered! SEZ’s purchases/Sales Documentation - Returns Penalties/Searches and Seizures CT- 3 forms and Deemed Exports Cenvat for Traders ( in exceptional cases) Bonded Ware house Inland Container Depots PROPOSED TAX REFORMS : GOODS AND SERVICE TAX ACT 38

Slide 39: 

Thank You Compiled by: V B Ramarao, Marketing Consultant Asabhanu Technical Services, Hyderabad Tel: +91 98661 90912/ email: ramarao_velury@yahoo.co.uk

Slide 40: 

40 Procedure of Calculation of Import Duty and Cenvat Change figure in Pink column for your calculation (A) Cost of Goods $ * 1,000.00 (B) Actual Freight $ * 120.00 (C) Insurance $ * 0.0450% (* Figure given for example) S. No. Calculation Description Description Rate Currency Amount Duty Amount 1 1 Cost $ * 1,000.00 2 2 Freight $ * 120.00 3 3=(1*Rate) Insurance 0.0450% $ * 0.45 4 4=(1+2+3) CIF Value $ * 1,120.45 5 5=(4*Rate) Exchange Rate * 48.21 INR 54,016.89 6 6=(5*Rate) Landing Charges 1.00% INR 540.17 7 7=(5+6) Total Assessable Value INR 54,557.06 8 8=(7*Rate) Basic Custom Duty @* 10.00% INR 5,455.71 9 9=(7+8) Excisable Value INR 60,012.77 10 10=(9*Rate) C.V.Duty (Basic Excise Duty) 10.00% INR 6,001.28 11 11=(10*Rate) Edu.Cess on CVD 2.00% INR 120.03 12 12=(10*Rate) Sec. & Hr. Edu.Cess on CVD 1.00% INR 60.01 13 13=(8+10+11+12) Total Value for Custom Edu. Duty 11,637.03 INR 14 14=(13*Rate) Custom Edu. Cess 2.00% INR 232.74 15 15=(13*Rate) Sec. & Hr. Custom Edu. Cess 1.00% INR 116.37 16 16=(7+8+10+11+12+14+15) Total Value for Additional Duty INR 66,543.20 17 17=(16*Rate) Additional Duty 4.00% INR 2,661.73 TOTAL LANDED COST 69,204.93 18 Total Import Duty INR 14,648.00 IMPACT OF ALL BURDEN 27.12% 19 Total Cenvatable Amount INR 8,843.05