MODULE 1 [INTRODUCTION]

TAX

It’s a compulsory extraction of money by a public authority for the public purposes. The
purview of public authority in the definition of the tax includes central government, state
government, municipalities, and panchayats. Central government and state governments
derive power to make law for the purpose of levying taxes from Art. 265 read along with Art.
245, 246 & Schedule 7 of the Constitution of India. However, the Municipalities and
panchayats were included later through 73rd Constitutional Amendment Act.

As per Art. 265 of the Indian Constitution, no tax except under the authority of law. Law
making power is provided under Art. 245 read along with Schedule 7 of the Constitution of
India.

Essentials of a tax (provided in the case Govind Saran Ganga Saran v Commissioner of
Sales Tax & Ors)

1. Taxable Event
2. Taxable Person
3. Rate of Tax
4. Measurement of Tax

Excise Duty:

 Taxable Event- manufacture and production of 5 types of goods

 Taxable Person- manufacturer
 Rate of Tax- depends on the type of goods

Customs Duty:

 Taxable Event- import or export of goods

 Taxable Person- importer or exporter
 Rate of Tax- depends on the type of goods

VAT:

 Levied by state governments on the intra-state sale of goods

 Taxable Event- sale of goods
Principles that every tax statute should contain (given by Adam Smith)

1. Equality/equity
2. Certainty
3. Convenience
4. Economy

TYPES OF TAX

1. Direct Tax:
a. It is directly levied on the person
b. Progressive tax rates are levied
c. Tax burden remains on the same person
2. Indirect Tax
a. It is levied on goods and services
b. Constant tax rates are levied
c. Tax burden shifts from one person to another, however, ultimate tax burden
falls upon the consumer of the goods and services

PURPOSE OF GST

The purpose that was sought to be achieved by enacting GST was to avoid double taxation
and cascading effect.

Double Taxation- charging tax on same value on which tax has already been levied.

Cascading Effect- charging tax on tax.

Initially, VAT system of taxation was introduced to avoid double taxation and cascading
effect, however, it proved to be ineffective. GST is also based on the VAT system of taxation.

CONSTITUTIONAL BACKGROUND OF INDIRECT TAXES

1. Excise Duty
 Governed by Central Excise Act, 1944
 Deriving power from Entry 84 of List 1 of Schedule 7 of the Constitution of India
 Levied and collected by the central government
2. Customs Duty
 Governed by Customs Act, 1962
 Deriving power from Entry 83 of List 1 of Schedule 7 of the Constitution of India
  Levied and collected by the central government
3. VAT
 Levied and collected by state governments
 Deriving power from Entry 54 of List 2 of Schedule 7 of the Constitution of India
4. CST
 Governed by the Central Sales Tax Act, 1956
 Deriving power from Entry 92A of List 1 of Schedule 7 of the Constitution of
India
5. Service Tax
 Governed by the Chapter V of the Finance Act, 1994
 Levied and collected by the central government
 Deriving power from Entry 97 of list 1 of Schedule 7 of the Constitution of India
6. GST
 Concurrent power given to both central government and state governments to
impose tax (101st Constitutional Amendment Act)
 Governed by Art. 246A of the Constitution of India
 Subjected to the exception created by Art 246A(2) of the Constitution of India
 Levied on supply of goods and services
 If supply of goods and services are of intra-state nature, then CGST and SGST or
UTGST as the case maybe will apply
 If supply of goods and services are of inter-state nature, then IGST will be
applicable only
 GST has subsumed excise duty, VAT, CST, and Service Tax
 GST (Compensation to States) Act, 2017- When the GST was thought to bring
into force, there were several speculations from the side of the state governments.
One of the speculations was that there will be loss of revenue. Thus, this Act was
enacted to compensate the state governments for loss of revenue for first five
years.

COMPENSATORY & REGULATORY TAX

Tax & Fees

1. To levy tax there must be a Constitutional backing, whereas there is no such

requirement for levying fees.
 2. There is no element of quid pro quo present in the case of tax as no special benefits
are conferred on the one paying the tax i.e., there is neither direct nor indirect
connection between the taxpayer and benefits, whereas there is quid pro quo in case
of fees as special services are given to the person paying the fees. So, in case of fees
there must be a proximate quid pro quo or even remote quid pro quo will suffice.
3. Primary objective behind imposing taxes is revenue generation, whereas primary
objective behind levying fees is rendition of services.
4. Tax is a source of revenue generation, whereas fees can never be a source of revenue
generation i.e., it must be charged proportionately to the cost incurred in providing
service. It is well settled that the fees can either be regulatory or compensatory.

Background:

 At the time of Independence, one of the objectives was to consolidate the Indian
Economy. Therefore, trade barriers were diluted i.e., many different taxation laws
which were prevalent at that time were struck down.
 In the Constitution of India, Art. 301 in the Part 13 of the Constitution of India was
introduced which provides for freedom to trade, commerce, and intercourse.
 However, it is not an absolute right. It is subject to certain exceptions provided under
Art. 302 to 307.

Issue arose in multiple cases due to the introduction of such provision in the Constitution i.e.,
whether imposition of taxes goes against part 13 of the Constitution of India, and hence
unconstitutional. So, in order to harmonize the taxing power of the state vis-à-vis freedom of
trade and commerce guaranteed under Art. 301 of the Constitution, the concept of
compensatory and regulatory tax was propounded. However, when the concept of
compensatory tax was evolving through judicial precedents, the concept of fee changed from
the traditionally accepted definition. Soon, it became very hard to distinguish between the
two. But, in the case of Jindal Steel v State of Haryana, a line was drawn between the two
concepts.

Following are the cases which led to the problem described above:

Atiabari Tea Co v State of Assam- In this case, it was held that the imposition of tax curbs
freedom to trade, commerce, and intercourse. In this case, the test of direct & immediate
effect on trade and commerce was laid down.
Automobile Transport v State of Rajasthan- In this case, the compensatory and regulatory
tax concept was laid down. According to this concept, any tax which is levied and collected
for the purpose of providing services which will help the person from whom tax is collected
in carrying on and growing his trade, commerce like building roads, state highways,
streetlights, etc. However, there must be a proximate or immediate link between the service
being provided and the trade activity. From this decision, the distinction between tax and
fees on the basis of quid pro quo was diluted. In this case, the imposition of tax was held to
be constitutional.

Bhagatram v Bihar Chamber of Commerce- In this case, it was held that the distant link
between the service being provided, and the trade activity is enough to impose tax.

Jindal Steel v State of Haryana (2006)- this case overruled Bhagatram case and held that
the Automobile Transport v Sate of Rajasthan lays down proper law.

Jindal Steel v State of Haryana (2016)- this case struck down the concept of compensatory
and regulatory tax.
 MODULE 2 [PRE-GST INDIRECT TAXES]

EXCISE DUTY:

 This duty is governed by the Central Excise Act of 1944.

 It derives power from Entry 84 of List 1 of Schedule 7 of the Constitution of India.
 Excise duty can be levied on tobacco and any other goods. On tobacco central excise
duty is charged, and if under the category of any other goods its alcohol, liquor, opium,
hemp 5, narcotics and they are being used for either medicinal or toiletries, then also
central excise duty is charged, however if these goods are being used for other purposes
then state excise duty will be charged. In addition, under the category of any other
goods, new goods can be added and on such goods central excise duty will be charged.
 Central Excise Act, 1944 was amended in 2016 for bringing in GST and Entry 84 of List
1 of Schedule 7 of the Constitution of India was also amended in 2016- after these
amendments i.e., after GST came into force- excise duty is levied on
manufacturing/production of petroleum products, HSD, motor spirit, natural gas, ATF,
tobacco, and tobacco products.
 Section 3 of the Central Excise Act, 1944 is the charging section.
 Taxable event: Manufacturing of goods in India.
 The term “India” includes- States + Union Territories + Territorial Waters (12nm from
the base line + notified areas in the exclusive economic zone)
 Goods:
 For a thing to be considered as a “good”, it must be both movable and marketable
(came through judicial evolution), however, in order to levy excise duty on the
manufacturing of goods, such goods must be excisable too.
 The term “excisable goods” is defined under section 2(d) of the Central Excise
Act, 1944. As per this provision, a good will be excisable if it is mentioned in
Schedule 1 of the Central Excise Tariff Act, 1985 (pre-GST)/ Schedule 4 of the
Central Excise Tariff Act, 1985 (post-GST) and against which a rate of duty must
be provided.
 Union of India v Delhi Cloth Mills- In this case, the court provided for the
elements/characteristic for a thing to be a good are: (1) the good must be
movable; and (2) the day when it comes into existence, it must be marketable.
 Movability Test:
  Solid & Correct Engineering Works & Ors v Commissioner of Central
Excise- Movability test.
 Triveni Engineering Works v Commissioner of Central Excise-
Movability test.
 Marketability Test:
 The product must be capable of being sold in the market. Thus, actual sale
is not needed to pass the test. In addition, it must be marketable in the
present form.
 If a thing passes trade parlance theory i.e., the good must be identifiable in
the market, then, in such a case, it will pass the marketability test.
 No such requirement of wide consume base is required to pass the test,
even if there is only a single buyer, it will suffice the requirement to pass
the marketability test.
 If the product is illegal to buy/sell or there is a statutory prohibition, it will
still be considered to be marketable however it must be capable of being
bought and sold in the market.
 Medley Pharmaceuticals Case- Marketability test.
 Nicholas Piramal v Commissioner of Central Excise- In this case, it was
held that the actual sale is not needed to pass the marketability test. In
addition, mere fact that the product has a short shelf life won’t affect the
marketability if it is capable of being bought and sold during its short
shelf life, and, in addition, it must be commercially viable to sell such
product having short shelf life.
 Manufacturing:
 General definition: input is put through a process and out of which an output is
produced having new identity, characteristics, utility (ICU test).
 Statutory definition: Section 2(f) of the Central Excise Act defines manufacturing.
 Commissioner of Central Excise v JG Glass Industries
 Sony Music India v Commissioner of Central Excise
 Win Enterprises v Commissioner of Central Excise
 So, an input put through a process producing an output having new identity,
characteristic, and utility + if such output having ICU is movable and marketable, then it
 will be a good + if such good is excisable under section 2(d) of the Central Excise Act,
1944, then excise duty can be levied on manufacturing of such good.
 The time of removal and place of removal of goods must be taken into account for
determining rate of duty and value of goods respectively.

Date of MFG Rate of Duty Excisable or Time of Rate of Duty

Not Removal
Excisable
1/1/2020 7% Excisable 1/4/2020 5% (will be
taxed @ 5%)
1/1/2020 0% Excisable 1/4/2020 10% (will be
taxed @ 10%)
1/1/2020 - Not Excisable 1/4/2020 7% (can’t be
taxed)
1/1/2020 7% Treat it like 1/4/2020 -
0%

 Excise duty is levied:

 Specific Duty
 Compounded Levy Scheme/Capacity of production scheme
 Ad Valorem
 Tariff Value
 Pre-GST- Section 3(2) of Central Excise Tariff Act
 Post-GST- Section 3(3) of Central Excise Tariff Act
 Certain goods notified by the government against which tariff
value has been fixed in the gazette
 MRP Based Valuation
 Section 4A of the Central Excise Act
 Notified by the government that on which goods will be calculated
through this method
 Goods on which fixation of MRP is mandatory as per Legal
Metrology Act, 2009
 Transaction Value
 Section 4 of the Central Excise Act
 Residual method for levying excise duty
 Assessable value is the transaction value: (1) goods are sold by the
assessee; (2) delivery at the time and place of removal; (3) assessee
and buyer are not related; and (4) price charged is the sole
consideration of sale.
 If these conditions are not fulfilled, then the Central Excise
(Determination of Price of Tax of Excisable Goods) Rules should
be referred.