T.Y.

BBA (2020-21) Indirect Taxes Prepared By: Alka Shah

SEMESTER V Unit - I

T.Y.B.B.A. - SEMESTER V
INDIRECT TAXES
UNIT - I (Part I)

INTRODUCTION TO INDIRECT TAXES

“There are only two things certain - one is death and second is taxes”
- Mr. Benjamin Franklin

“Tax is a price which we pay for civilized society”

- Justice Holmes of US
In developing economy like India, Taxes occupies a strategically important position in the
overall development of the country due to its significant contribution to the national
exchequer, which is ultimately spent on the overall development of different sectors of the
economy. India, being a federal country, variety of direct and indirect taxes are levied both by
Central and State Governments.

 Classification of Taxes:
Taxes are broadly classified into:
1. Direct Taxes and
2. Indirect Taxes

1. Direct Taxes:
Direct taxes are those taxes, which are directly paid by the tax payer to the government. Charge
is on the person concerned and tax burden can not be shifted to other person. It is to be borne
by the person on whom it is imposed. Income Tax is a direct tax. Taxpayer himself has to
register with tax authorities and obtain registration number i.e. Permanent Account Number
[PAN] and has to pay income tax directly to the Government.

2. Indirect Taxes:
Indirect taxes are those taxes, which are not directly paid by the taxpayer to the government
but paid indirectly through intermediaries, while purchasing goods or hiring services which are
taxable. Goods and Service Tax, Excise duty, Customs duty etc. are Indirect Taxes. In case of
indirect taxes, taxpayer pays taxes through dealer of goods and services. For example, in case of
GST, dealer i.e. supplier of goods and services collects GST from the recipient of goods and
services and deposits the same in the Govt. account within specified period. Taxpayers do not
have to register with tax authorities but a dealer has to register with tax authorities. In case of
indirect taxes, tax burden is shifted to the subsequent person and finally it is to be borne by the
consumer.
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 Comparison between Direct Taxes and Indirect Taxes:

Sr. Direct Taxes Indirect Taxes

No.
1 Tax payer pays direct taxes directly to the
Government.
2 Major direct taxes are Income Tax and
Corporate Tax.
3 Tax payer has to register with tax
authorities.
4 Tax on Income.
5 Imposed on the person and determined
on the basis of income of a person.
6 Direct taxes do not have any impact on
cost, price and demand of goods and
services.
7 Direct Taxes are progressive in nature.
High income earner pays higher taxes, and
low income earner pays less or nil Income
Tax.
8 Tax burden can not be shifted. It is to be
borne by the person on whom it is
imposed.
Tax payer pays indirect taxes through
dealer to the Government.
Major indirect taxes are Goods and Service
Tax, Excise Duty and Customs Duty.
Dealer has to register with tax authorities
and not the tax payer.
Tax on Expenditure.
Imposed on goods and services and
determined on the basis of the value of
goods and services.
Any increase in indirect taxes increases cost
and price of goods and services and
reduces its demand.
Indirect Taxes are regressive in nature. It
does not discriminate between rich and
poor i.e. burden of indirect taxes is same on
rich and poor.
Tax burden is shifted to the subsequent
person and finally it is to be borne by the
consumer.

9 Comparatively more tax evasion. Comparatively less tax evasion.

10 Collection cost is comparatively more than Collection cost is comparatively less than
indirect taxes. direct taxes.
11 Number of taxpayers are limited Number of taxpayers are large

 Advantages of Indirect Taxes:

1. Major source of revenue
Indirect Taxes are the major source of revenue for both central and state governments. Large
portion of the Indian tax revenue comes from the levy of indirect taxes.
2. No resistance by taxpayers
Indirect taxes are payable along with prices of goods and services. Consumer gets goods and
services in return for money he spend, so there is no psychological pinch to the consumer for
payment of indirect taxes.
3. Dealers’ psychology favors indirect taxes
Dealer i.e. supplier of goods and services, collects indirect taxes from recipient of the goods and
services. Subsequently dealer deposits these taxes collected in Government account. Dealer is

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just acting as indirect tax collecting agent on behalf of the Government. Dealer is not paying
indirect taxes out of his income so his psychology favors indirect taxes.

4. Easy and simple recordkeeping

The recordkeeping of indirect taxes is easier and simple, which is desirable on the part of
traders and manufacturers. Simultaneously, it also holds good for the tax administrators.

5. Comparatively less tax evasion

The procedure to collect the indirect taxes is simple and easy. Price of the goods and services
includes indirect taxes. Therefore chances of evasion in case of indirect taxes is less as
compared to direct taxes.

6. Less collection cost.

As compared to direct taxes, collection cost of indirect taxes is less.

7. Encourages industrial growth in undeveloped areas

Government can plan industrial growth with the help of indirect taxes in underdeveloped or
undeveloped areas. It can provide facilities and tax exemptions for starting the industrial units
in backward areas. An exemption from Indirect tax reduces cost of production and industrial
units in backward area may become viable. More industrial units may be attracted and can
result in industrial growth.

8. Regulate international trade

Demand for imported consumer goods and export of scarce goods can be restricted by levy of
customs duty. Anti Dumping duty can be levied on the goods dumped at a very low price in
India by any other country. Protective duties and Safeguard duties can be levied on imports, if
import of any specific product is causing injury to Indian industry.

9. Promotes and protects domestic industries

Indirect tax holidays, tax concessions and tax exemptions can lower the price and increase the
sale of domestic goods in Indian market compared to sale of imported goods. Lower prices of
the goods and services can compete in international market. Product of other countries
become costly compared to Indian product, so Indian products get promoted in international
market also. Any increase in custom duty on import of goods and services make them costly
compared to domestic product. Thus, Indian industry may get protected.

 Disadvantages of Indirect Taxes:

1. Regressive in nature
Indirect taxes are regressive in nature i.e. no discrimination between rich and poor. Each and
every person purchasing goods or using services has to pay an equal amount of indirect taxes.
Even beggars and Governments are liable to pay indirect taxes. It is the Government paying
indirect taxes to itself i.e. one Government Department paying indirect tax to the other
department.

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2. Increases price of goods and services

Law of Demand states that increase in price reduces the demand for goods and services.
Indirect tax, always add to the price of the goods and services, as a consequence demand for
goods and services reduce. It has been observed that Government gives concession or
exemptions in case of indirect taxes to control inflation. Indirect taxes are perceived as
inflationary.

3. Protects inefficient local industry

Government of India protects Indian industry manufacturing specific product by levying
additional custom duty on import of similar goods. Imported product become costly compared
to domestic product. The domestic product gets protected from competition with imported
product. Protected domestic industry may loose the competitiveness and become inefficient. It
does not improve the quality or increase production. Even it may not adopt means to reduce
cost of production and make efforts to compete in international market.

4. Higher rates of indirect taxes give rise to smuggling and tax evasions
High incidences of indirect taxes and duties gives rise to smuggling. Tax evasions are also result
of high rates of duties, which ultimately cost high to the taxpayers only.

 Indirect Tax Structure existing up to 30.06.2017 and Constitutional Validity:

Article 265 of the Constitution of India, states that, “No tax shall be levied or collected except
by Authority of Law”. Tax imposed beyond the power of law is illegal and required to be
refunded.
The Constitution of India is the supreme law of land of the country, from which all other laws
emanate. It serves as the foundation, on which the entire legislative and judicial system is
structured.
Article 246(1) of the Constitution of India states that Parliament has exclusive powers to make
laws with respect to any of matters enumerated in List I (called Union List) of the Seventh
Schedule of Constitution.
As per Article 246(3), State Government has exclusive powers to make laws for State with
respect to any matter enumerated in List II of the Seventh Schedule of Constitution.
List III (concurrent list) contains matters where both Union and State Governments can exercise
power to make laws.
Major taxes covered in list I (Union List as existing up to 30-06-2017) were - Income Tax (tax on
income), Central Excise Duty (tax on manufacture or production of goods in India), Service Tax
(tax on services provided), Customs Duty (tax on import and export of goods), Central Sales Tax
(Tax on sale of goods from one state to another) etc.
Major Taxes covered in list II (State List as existing up to 30-06-2017) were - State VAT (Tax on
sale of goods within the state), Excise Duty on alcoholic liquor, Entertainment Tax, Entry Tax
etc.

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Indirect Tax Structure existing up to 30.06.2017

Till 30.06.2017, the structure of indirect taxes was as follows:

(a) Central Excise Duty on manufacture or production of goods in India, levied and collected
by Central Government.
(b) Service Tax on services levied by Central Government
(c) Customs Duty on import and export of goods levied and collected by Central Government
(d) State VAT on sale of goods within state, levied and collected by respective State
Government
(e) Central Sales Tax on inter state sale of goods i.e. sale from one state to another. The tax
was levied by Central Government but collected and retained by state government at place
from where goods were dispatched outside the state.
(f) Entry tax on entry of goods within state, levied and collected by State Government.
Besides, there were many cesses.

 Major defects in earlier structure of Indirect Taxes (as existing up to 30.06.2017)

 Central Sales Tax was payable @ 2% for every movement of goods from one State to other.
However, input tax credit of the same was not available, which results into increase in the
cost of goods.

 VAT dealers were not allowed to take credit of excise duty charged by manufacturers as well
as service tax charged by the service provider on various input services.

 Cascading effect of taxes (tax on tax) could not be avoided due to CST and Entry Tax. State
VAT was payable on Central Excise Duty portion also.

 Each State had its own State VAT Laws with different provisions, different VAT rates,
different forms and different procedures. Thus, taxable person having business in more than
one States found it extremely difficult to keep pace with tax laws of each State.

 India did not have a national uniform market due to invisible barriers of Central Sales Tax,
Entry Tax and State VAT and visible barriers of check posts.

 Millions of man hours and truck hours were lost at check posts. Besides, huge corruption
was involved.

 Over the years, distinction between goods and services had become hazy, due to which
there is overlapping of State VAT and Central Service Tax on transactions like works contract,
restaurant and outdoor catering, software etc. In some cases, same transaction was taxed
both by Central and State Government which created confusion, litigation and double
taxation.

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T.Y. BBA (2020-21) Indirect Taxes Prepared By: Alka Shah
SEMESTER V Unit - I

GOODS AND SERVICE TAX (GST)

The introduction of Goods and Services Tax (GST) is a landmark tax reform in the history of
India. GST has consolidated all major indirect taxes of centre and state into a single
comprehensive indirect tax levied on both goods and service. GST is a tax on supply of goods or
services or both. It is a tax on the value addition at every stage of the production-distribution
chain, with applicable set offs in respect of the tax paid at previous stages. It is basically a tax on
final consumption. Being the last person in the supply chain the end consumer of such goods
and services has to bear ultimately the burden of GST.

The main objectives of GST are ………

(A) To replace multiple taxes levied on goods and services by the centre and state,
(B) To overcome the limitations of earlier indirect tax structure. Under GST seamless Input
Tax Credit will be allowed throughout the supply chain, which will eliminate cascading
effect of taxes and double taxation.
(C) To bring efficiency and transparency in tax administration.

Example: How VAT/GST system works?

Particular Sale by Manufacturer Sale by Wholesaler to Sale by Retailer

to Wholesaler Retailer to Consumer

Cost 70 100 150

Profit Margin 30 50 50
Sale Price 100 150 200
VAT/GST (@10%) 10 15 20
Total 110 165 220

Output Tax 10 15 20
Collected
Less: Input Tax Nil 10 15
Credit available
and Utilised
Net tax payable 10 5 5
to Govt.

Total Tax received by Government = 10 + 5 + 5 =20

 Taxable Event for GST:

Taxable event is the event occurrence of which attracts the liability to pay tax. New Article
366(12A) of the Constitution of India, defines Goods and Services Tax (GST) to mean “any tax on
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supply of goods or services or both except taxes on the supply of the alcoholic liquor for human
consumption”. Thus, taxable event for GST is ‘supply of goods’ and / or ‘supply of services’.
The word used is ‘supply’ and not ‘sale’. So, stock transfers, branch transfers and even free
supplies will also come under GST net. It will also include ‘Deemed Supply’ of goods and
services as specified in the Act.

Under earlier system of taxation, there was a lot of litigation relating to taxable event like
whether a particular process amounted to manufacture or not, whether a particular transaction
was a sale of goods or rendering of services etc. The GST laws resolve these issues by lying
down one comprehensive taxable event i.e.: “Supply” - supply of goods or services or both. In
the GST regime, the entire value of supply of goods and or services is taxed in an integrated
manner, unlike the earlier indirect taxes, which were charged independently either on the
manufacture or sale of goods, or on the provisions of services.

 Salient Features of GST Regime in India:

 The GST law has been made applicable w.e.f. 01.07.2017.

 GST is levied on ’supply’ of goods or services or both in India. It is a tax on the supply of
goods and services, right from manufacturer to the consumer. Under GST credit of taxes
paid at previous stages is available as set-off. Thus, tax is only on value addition at each
stage. Entire burden of tax is ultimately to be borne by the final consumer.
 GST is based on the principle of destination based consumption taxation.
 In India, dual GST model is adopted wherein GST will be levied by both Central Government
and State Government. Dual GST is a system wherein GST would be levied simultaneously
both by Centre and State on each transaction of supply of goods and services, except
exempted goods and goods out of purview of GST Law.
 On intra-state supply of goods and services, GST would be levied as follows:
(a) Central GST (CGST) - Levied by the Central Government (as per Central GST Act 2017)
(b) State GST (SGST) - Levied by the State Government (as per State GST Act 2017)

 Both the Centre and State will operate over a common base, i.e. the base for levy and
imposition of duty/tax would be identical.
 Central GST is administered by the Central Government. Following major central indirect
taxes are subsumed under the CGST:
1. Central Excise Duty and Additional Excise Duties
2. Service Tax
3. Central Sales Tax
4. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
5. Special Additional Duty of Customs - 4% (SAD)
6. Surcharges and Cesses levied by Central Government

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T.Y. BBA (2020-21) Indirect Taxes Prepared By: Alka Shah
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 State GST is administered by the State Government. Following major state indirect taxes
are subsumed under the SGST:
1. VAT / Sales tax
2. Purchase Tax
3. Entertainment tax
4. Luxury tax
5. Entry tax and Octroi
6. Surcharges and Cesses levied by State Government

 On inter-state supply of goods and services, the Central Government will levy Integrated
GST (IGST), as per Integrated GST Act, 2017. IGST will be equal to CGST+ SGST.

 Import of goods are subject to basic customs duty and IGST.

 Exports will be treated as Zero rated supplies. No tax will be payable on export of goods
and services.

 All goods or services are covered under GST except :

 Alcohol for human consumption - State Excise plus VAT
 Electricity - Electricity Duty
 Real Estate - Stamp Duty plus Property Taxes
 Petroleum Products (to be brought under GST from date to be notified on
recommendation of GST Council)

 Tobacco products are subject to separate Excise Duty by the Centre over and above GST.

 Majorly, five different rates of GST has been prescribed for different goods i.e. 0%, 5%,
12%, 18% and 28%.

 GST (Compensation to States) Act, 2017 provides for a mechanism to compensate the
States on account of loss of revenue which may arise due to implementation of GST for a
period of Five years. For this purpose, GST Compensation Cess is levied by Central
Government on intra / inter state supply of specified luxury items or demerit goods like pan
masala, tobacco, aerated waters, coal, lignite, motor cars etc. It is to be computed on value
of taxable supply.

 Under GST regime, there is system of self-assessment of the taxes payable by the
registered person and compulsory electronic filing of GST returns by different class of
registered persons at different cut-off dates. Further, audit of registered persons to be
conducted in order to verify compliance with the provisions of Act.

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 GST Council:
GST Council is the apex constitutional authority to decide polies relating to GST. Article 279A
empowers President to constitute a joint forum of Centre & States. The provisions relating to
GST Council came into force on 12th September, 2016. The President constituted GST Council
on 15th September, 2016.
 Chairman of GST Council : Union Finance Minister.
 Members of GST Council : Union Minister of State in charge of Revenue/Finance, Ministers in
charge of Finance/Taxation or any other Minister nominated by each States & UTs.

Role of GST Council :

GST Council shall make recommendations to the Union & States on -
(a) taxes, cesses & surcharges levied by the centre and States, which may be subsumed in GST;
(b) Goods & Services that may be subjected to or exempted from GST;
(c) Model GST Laws, Principles of levy, apportionment of GST levied on inter state supplies and
the principles that govern the place of supply;
(d) Threshold limit of turnover below which goods and services may be exempted from GST;
(e) GST rates on goods and services;
(f) Special provisions with respect to special category States like Assam, Manipur, Mizoram,
Himachal Pradesh etc.:
(g) any other matter relating to GST, as the council may decide.
Decision in GST Council will be taken with atleast 75% of weighted average voting in favour of the
decision. Union Government will have 33.33% voting power and States will have 66.67% voting power.

 GST Common Portal and GSTN:

Common GST Electronic Portal (www.gst.gov.in), a website managed by Goods & Services Tax
Network (GSTN) has been set by the Government to establish uniform interface for taxpayer;
common & shared IT infrastructure between the Centre & States.
 This portal is one single common portal for all GST related services.
 It acts as a clearing house to verify claims & informs the respective governments to transfer
funds.
 A common GST portal provides linkage to all State/ UT Commercial Tax Departments, Central
Tax authorities, Taxpayers, Banks & other stakeholders.

Robust information Technology network is vital for administration of GST to ensure proper
compliance and avoid misuse of Input Tax Credit. Goods & Services Tax Network (GSTN) has
been incorporated as a section 25 company (non profit company) on 28-03-2013, owned by
Government (49% stake) and private players (51% stake) jointly. The company has been set up
primarily for developing common GST portal for providing IT infrastructure and services to the
Central and State Governments, taxpayers and other stakeholders for implementation of GST.

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Functions of GSTN:
 Facilitating registration; [Filing of application]
 Forwarding returns to CG & SG authorities; [Filing of Return]
 Computation & Settlement of IGST payment [Like a Clearing House]
 Matching of tax payment details with banking network;
 Providing various MIS reports to CG & SG based on taxpayer return information;
 Creation of challan for tax payment
 Providing analysis of taxpayers' profile; & running matching engine for matching, reversal &
reclaim of input tax credit.

 Advantages of GST in India:

 17 Taxes and 23 cesses merged into single tax. GST lead to One Nation, One Tax, One Market
- Creation of unified national market.
 Under GST seamless Input Tax Credit will be allowed throughout the supply chain, which will
eliminate cascading effect of taxes and double taxation.
 GST will bring efficiency and transparency in tax administration. Administrative work of
Government and compliance cost of business will reduce.
 Tax evasion and corruption will go down. Improved tax compliance will increase revenue of
both Centre and States.
 Reduction in overall tax burden of consumers, which was around 25% to 30% in earlier
Indirect Tax System.
 With introduction of GST, check posts have been removed throughout India. This will save
millions of truck hours and man hours.

 Comparison between GST and Earlier Indirect Tax System in India:

Sr. GST System Earlier Indirect Tax System

No.
1. One Nation - One Tax, leading to uniform One Nation - Many Taxes, No uniform
one national market national market
2. After introduction of GST, major indirect In earlier system the major Indirect taxes
taxes in India are GST and Customs Duty were - Excise Duty, State VAT, CST, Service
Tax and Customs Duty.
3. Constitutional validity as per new article Constitutional validity as per new article
246 (A) 246
4. Double Taxation and cascading effect of Due to number of taxes there was Double
taxes is reduced due to a single tax Taxation and Cascading effect of taxes
arises due to number of taxes
5. Tax evasion will be reduced due to In earlier system, tax evasion was at higher

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technology based system with internal side due to manual system with no internal
check and control check and control
6. Consumption based taxation system. Origin based taxation system.
7. Equal distribution of taxes between Uneven distribution of Taxes between
Centre and States Centre and States
8. Saving in transportation time and cost due Huge transportation time and cost involved
to removal of check posts due to verification of goods at each state
check post
9. Compliance rating will be given on the There was no concept of compliance rating
basis of track of compliances of taxable
person and it will be put in public domain.
10. Due to single tax, administrative cost of Due to multiple taxes, there was huge
Government and compliance cost of administrative cost of Government and high
business houses will go down compliance cost of business houses
11. Branch transfer outside the state is Branch transfer outside the state was not
taxable and Input Tax Credit is available to taxable
the recipient branch

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