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The word tax has two meanings: first, the financial duty or levy contributed to the entity (be it a government or any other
organization) a person or group of persons (say, a business) is part of. The second definition is "a very heavy burden" and can
essentially summarize the first definition.
While there are opposing views on imposing tax, the general idea is that taxes are used to fund projects that can benefit
society as a whole, or at least the majority of it. Businesses are taxed by the state because they use government-owned
infrastructures and services. Individuals are taxed as part of their social contract, i.e., their rights and responsibilities as citizens
of the state. Tax is what John F. Kennedy called "the annual price of citizenship."
India has a well developed Tax structure with a three‐tier federal structure, comprising of the Union Government, the State
Governments, and the urban/rural local bodies. The power to levy taxes and duties is distributed among the three tiers of
governments, in accordance with the provisions of the Indian Constitution
The main taxes/duties that the Union Government is empowered to levy are Income Tax (except tax on agricultural income,
which the State Governments can levy), Customs duties, Central Excise and Sales Tax(CST)(VAT is used in place of sales tax), and
The principal taxes levied by the State Governments are Sales Tax (tax on intra‐State sale of goods), Stamp Duty (duty on
transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue, Duty on Entertainment and Tax on
profession and callings.
Local bodies are empowered to levy tax on properties, Octroi, Tax on Markets, and tax/user charges for utilities like water
supply, drainage, etc.
Types of taxes
1. DIRECT TAXES
1.1 Income tax : An income tax is tax levied on financial income of person co-operation or other legal entity.
1.2 Wealth tax
1.3 Property tax etc.
2. INDIRECT TAXES
2.1 Custom duty : Custom Duty Is A Tax Which A State Collects On Goods Imported Or Exported Out Of The Boundaries Of The
Country In India, Custom Duties Are Levied On The Goods And At The Rates Specified In The Schedules To The Custom Tariff
Customs is an authority or agency in a country responsible for collecting and safeguarding customs duties and for controlling
the flow of goods including animals, personal effects and hazardous items in and out of a country. Depending on local
legislation and regulations, the import or export of some goods may be restricted or forbidden, and the customs agency
enforces these rules.The customs LEBA may be different from the immigration authority, which monitors persons who leave or
enter the country, checking for appropriate documentation, apprehending people wanted by international arrest warrants, and
impeding the entry of others deemed dangerous to the country.
A customs duty is a tariff or tax on the import of or export of goods.
2.2 Excise duty : Excise duty is an indirect tax levied and collected on goods manufactures in india.
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 (but not necessarily in law) 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 cents per gallon), 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 taxes).
2.3 Sales tax/Vat: Sales tax is a tax on the supply of goods and certain services ,it is charged at the time of sale and then
deposited in the Government treasury.
Vat Paid By Dealers On Their Purchases Is Usually Available For Set-off Against The Vat Collected On Sales.
Under The Vat, The Tax Rates Have Been Simplified:
4% For Items Consisting Mainly Of Raw Materials Used In The Manufacturing Process
12.5% For All Goods Unless They Are Listed Under The Other Rates.
Foodgrains Including Pulses, Milk, Vegetables Books are Not Subject To Vat.
WHAT TYPES OF BUSINESS ARE NOT LIABLE FOR SALES TAX?
Most Of Pharmaceutical Products
Educational & Scientific Materials
Equipment For Fighting AIDS & CANCER
3. Service Tax: Service tax is an indirect tax levied under the Finance Act, 1994, as amended from time to time, on specified
services. At present, there are approximately 96 categories (including 15 new services introduced by Budget 2006) of net
services taxable under the service tax.
Basic Concept of VAT(MODVAT &
Value added tax (VAT) is similar to a sales tax. It is a tax on the estimated market value added to a product or material at each
stage of its manufacture or distribution, ultimately passed on to the consumer.
Generally, any tax is related to selling price of product. In modern production technology, raw material passes through various
stages and processes till it reaches the ultimate stage e.g., steel ingots are made in a steel mill. These are rolled into plates by a
re-rolling unit, while third manufacturer makes furniture from these plates. Thus, output of the first manufacturer becomes
input for second manufacturer, who carries out further processing and supply it to third manufacturer. This process continues
till a final product emerges. This product then goes to distributor/wholesaler, who sells it to retailer and then it reaches the
If a tax is based on selling price of a product, the tax burden goes on increasing as raw material and final product passes from
one stage to other. For example, let us assume that tax on a product is 10% of selling price. Manufacturer ‘A’ supplies his
output to ‘B’ at Rs. 100. Thus, ‘B’ gets the material at Rs. 110, inclusive of tax @ 10%. He carries out further processing and sells
his output to ‘C’ at Rs. 150. While calculating his cost, ‘B’ has considered his purchase cost of materials as Rs. 110 and added Rs.
40 as his conversion charges. While selling product to C, B will charge tax again @ 10%. Thus C will get the item at Rs. 165
(150+10% tax). As stages of production and/or sales continue, each subsequent purchaser has to pay tax again and again on the
material which has already suffered tax. This is called cascading effect.
Cascading effect of conventional system of taxes - A tax purely based on selling price of a product has cascading effect, which
has the following disadvantages - (a) Computation of exact tax content difficult (b) Varying Tax Burden as tax burden depends
on number of stages through which a product passes (c) Discourages Ancillarisation (d) Increases cost of production (e)
Concessions on basis of use is not possible (f) Exports cannot be made tax free.
VAT to avoid the cascading effect – VAT was developed to avoid cascading effect of taxes. In the aforesaid example, ‘value
added’ by B is only Rs. 40 (150–110), tax on which would have been only Rs. 4, while the tax paid was Rs. 15. In VAT, the idea is
that B will pay tax on only Rs 40 i.e. value added by him. Then, it makes no difference whether a product passes through 5 or 10
stages or even 100 stages, as every person will pay tax only on ‘value added’ by him to the product and not on total selling
Tax credit system - VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid
at earlier stage.
Illustration of tax credit system - In the example we saw above, ‘B’ will purchase goods from ‘A’ @ Rs. 110, which is inclusive of
duty of Rs. 10. Since ‘B’ is going to get credit of duty of Rs. 10, he will not consider this amount for his costing. He will charge
conversion charges of Rs. 40.00 and sell his goods at Rs. 140. He will charge 10% tax and raise invoice of Rs. 154.00 to ‘C’. (140
plus tax @ 10%). In the Invoice prepared by ‘B’, the duty shown will be Rs. 14. However, ‘B’ will get credit of Rs. 10 paid on the
raw material purchased by him from ‘A’. Thus, effective duty paid by ‘B’ will be only Rs. 4. ‘C’ will get the goods at Rs. 154 and
not at Rs. 165 which he would have got in absence of Cenvat. Thus, in effect, ‘B’ has to pay duty only on Rs 40, which is the
value added by him.
Following example will illustrate the tax credit method of Cenvat.
Note - 'B' is purchasing goods from 'A'. In second case, his purchase price is Rs 100/- as he is entitled to Cenvat credit of Rs 10/-
i.e. tax paid on purchases. His invoice shows tax paid as Rs 14. However, since he has got credit of Rs 10/-, effectively he is
paying only Rs 4/- as tax, which is 10% of Rs 40/-, i.e. 10% of 'value added' by him.
Advantages of tax credit system - The ‘Tax Credit Method’ has following advantages - (a) Audit control is much better, which
helps in controlling tax evasion. It acts as a self-policing mechanism (b) Flexibility in applying varying tax rates to different
commodities (c) Useful in giving tax benefits on exports or other preferred end-uses like uses by common man etc. Most of the
countries have adopted ‘tax credit’ method for implementation of VAT.
Meaning of ‘Value added’ – In the above illustration, the ‘value’ of inputs is Rs 110, while ‘value’ of output is Rs 150. Thus, the
manufacturer has made ‘value addition’ of Rs 40 to the product. Simply put, ‘value added’ is the difference between selling
price and the purchase price.
Advantages of VAT - Advantages of VAT are as follows : (a) Exports can be freed from domestic trade taxes (b) It provides an
instrument of taxing consumption of goods and services (c) Interference in market forces is minimal (d) Aids tax enforcement by
providing audit trail through different stages of production and trade. Thus, it acts as a self-policing mechanism (e) Neutrality
i.e. with minimum distortion in tax structure - as there are few variations in tax rates and exemptions from taxation are very
The disadvantage is that paper work required increases considerably and it is not as simple as a single point sales tax.
CENVAT & MODVAT (India)
Cenvat (Central Value Added Tax) has its origin in the system of VAT (Value Added Tax), which is common in West European
Countries. Concept of VAT was developed to avoid cascading effect of taxes. VAT was found to be a very good and transparent
tax collection system, which reduces tax evasion, ensures better tax compliance and increases tax revenue.
Modvat (modified value added tax) was introduced in India in 1986 (Modvat was re-named as Cenvat w.e.f. 1-4-2000). The
system was termed as Modvat, as it was restricted upto manufacturing stage and credit of only excise duty paid on
manufacturing products (and corresponding CVD paid on imported goods) was available.
System of VAT was introduced to service tax w.e.f. 16-8-2002.
VAT was not extended to sales tax, as sales tax is under jurisdiction of State Governments. However, State Governments have
agreed to introduce sales tax VAT and it is likely to be introduced from April 2005. Haryana Government has introduced sales
tax VAT in April 2004 and the experience is reported to be good.
Taxation of inputs, like raw materials, components and other intermediaries had a number of limitations. In production process,
raw material passes through various processes stages till a final product emerges. Thus, output of the first manufacturer
becomes input for second manufacturer and so on. When the inputs are used in the manufacture of product `A', the cost of the
final product increases not only on account of the cost of the inputs, but also on account of the duty paid on such inputs. As the
duty on the final product is on ad valorem basis and the final cost of product `A' includes the cost of inputs, inclusive of the duty
paid, duty charged on product `A' meant doubly taxing raw materials. In other words, the tax burden goes on increasing as raw
material and final product passes from one stage to other because, each subsequent purchaser has to pay tax again and again
on the material which has already suffered tax. This is called cascading effect or double taxation.
This very often distorted the production structure and did not allow the correct assessment of the tax incidence. Therefore, the
Government tried to remove these defects of the Central Excise System by progressively relieving inputs from excise and
countervailing duties. An ideal system to realize this objective would have been to adopt value added taxation (VAT). However,
on account of some practical difficulties it was not possible to fully adopt the value added taxation.
Hence, Government evolved a new scheme, `MODVAT' (Modified Value Added Tax). MODVAT Scheme which essentially follows
VAT Scheme of taxation. i.e. if a manufacturer A purchases certain components(raw materials) from another manufacturer B
for use in its product. B would have paid excise duty on components manufactured by it and would have recovered that excise
duty in its sales price from A. Now, A has to pay excise duty on product manufactured by it as well as bear the excise duty paid
by the supplier of raw material B. Under the MODVAT scheme, a manufacturer can take credit of excise duty paid on raw
materials and components used by him in his manufacture. It amounts to excise duty only on additions in value by each
manufacturer at each stage.
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 and will, therefore, enable consumer resistance to unethical
attempts on the part of manufacturers to raise prices of final products, attributing the same to higher taxes.
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 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
The term "Input" means: -
1. 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, or 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
2. All goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles,
used for providing any output service;
Explanation 1 : The light diesel oil, high-speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an
input for any purpose whatsoever.
Explanation 2 : Inputs include goods used in the manufacture of capital goods which are further used in the factory of the
The term "Input service" means any service: -
1. Used by a provider of taxable service for providing an output service; or
2. 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,
3. And includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of
provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market
research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting,
auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share
registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of
4. Manufacturer and service providers can avail Cenvat credit of capital goods used by them. The plant and machinery
and allied items are purchased by a manufacturer. Such goods known as capital goods may be duty paid. The capital
goods shall be used in manufacture of final products or for providing output service. The CENVAT credit in respect of
duty paid on capital goods shall be taken only for an amount not exceeding fifty percent of the duty paid in the same
financial year and the credit of balance amount can be take in any financial year subsequent to the financial year in
which the capital goods were received.
Duty Paying Documents against which CENVAT credit can be availed are:-
Invoice issued by
A manufacture of inputs or capital goods.
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.
The final products shall not be exempt from whole of duty or chargeable to nil rate of duty.
Tax in Oracle Apps
Prior to release 12, tax was defined in Accounts Payables module. A tax component on the document total could be associated
with the purchasing documents for portion of the tax which was non recoverable. Purchasing would default taxes based on
hierarchy defined either in Oracle Payables (Setup > Options > Payables > Tax code defaults) or in Oracle Purchasing (Setup >
Organization > Purchasing Options > Tax Default Alternate Region) if "Enforce Tax From Purchase Order" box in Payable Options
(Setup > Options > Payables > Tax code defaults) was checked.
Taxes were associated with rates, non-recoverable ratio and recovery rules. Taxes were then defined in at least one of the
levels (also called the tax source) for e.g. Item, Supplier, Supplier Site, and Location etc. The order of defaulting was decided by
the hierarchy defined in the Payables/Purchasing options discussed previously. Tax calculation was called on a Requisition/
Standard Purchase order or a Blanket release based on the hierarchy, recovery rules and rates. Tax calculation is performed
using the AP Tax Engine, which was called from the distribution, or PO/Requisition. Once the tax is defaulted and saved tax
cannot be redefaulted even on changing the tax source in the document.
It was possible to override the tax defaulted on Purchasing documents prior to receipt or prior to reservation on funds on the
document incase of encumbrance accounting. To override tax we need to have the profile option Tax: Allow
Override of Tax Code set to Yes. Profile "Tax: Allow Override of Recovery Rate" allows override of recovery rate if the values of
this profile is set to "Yes".
Due to complexity of the tax specifications based on country/product, Oracle used to provide certain country/product specific
solutions for diverse tax related requirements. (For e.g. Latin Tax Engine in GTE, Brazil AP/PO Tax Engine, India R11i
E-business tax design was completely new for release 12. Most of the features available in 11i have been accommodated in
release 12 e-business tax. Following are some of the features that will not be available in release 12 e-business tax as compared
the 11i features:
1. Tax Code is removed from the ‘Enter Purchase Order’ form. Instead tax classification field will be available in tax page
available through ‘Manage Tax’ link. Users can no longer make a purchase order shipment nontaxable by removing the tax code
from the PO shipment.
2. Recovery Rate field at the distributions level will no longer be defaulted based on the Tax Code and will no longer display the
default recovery rate of the transaction. Override of recovery rate will be subject to controls setup within e-business tax.
3. User updated Tax Code on the requisition lines will no longer be carried over to the PO document during autocreate. The Tax
Classification will always be re-defaulted on the PO document.
4. Summarized tax information on purchase order has been eliminated. Only detailed tax line can be viewed on the purchase
5. Tax Code cannot be populated through the purchase order Preferences form.
6. Tax cannot be modified through AutoCreate requisition 'Modify' action, as the tax is re-defaulted on the PO regardless of the
tax in the requisition.
7. Detailed tax information based on tax classification will not be available in the requisition. For requisitions, users will only be
able to view the tax amounts (total, recoverable and non-recoverable).
8. Tax code has been removed from RFQs and Quotations form. Tax will be defaulted when a quotation is autocreated to a
standard purchase order.
9. PO documents cannot be reserved or submitted for approval if tax calculation error has occurred.
10. While importing documents in the interface with Authorization status ‘Approved’ using PDOI, a tax calculation error will
result in creation of a document with ‘Incomplete’ status or in updating of an already ‘Approved’ document to ‘Requires
Reapproval’ status, if the ‘Initiate Approval’ parameter was set to ‘Yes’.
11. Tax calculation error in Requisition Import will create imported requisitions with interface authorization status in ‘Approved’
status as ‘Incomplete’.
12. Withholding tax will no longer be supported. Withholding Tax does not affect any taxes that organizations owe the tax
authority, so there is no significance to the organization’s accounts/budgeting. It serves more as a way to direct payment of
portion of the taxes already owed.
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