INDIRECT TAXES Excise, VAT and GST

INDIRECT TAXES
• Refresh memory on indirect taxes – difference between incidence and impact of taxation
• Different kinds of indirect taxes – excise, service, customs, sales tax
• Legislative authority to levy indirect taxes flows from the Seventh Schedule read with the
other provisions of the Indian Consitution
• Excise Duty – Union List, Entry 84 (excise on tobacco and other goods manufactured in
India except alcoholic liquors, opium, narcotic drugs) and State List, Entry 51
• State Sales Tax or VAT (intra state) – State List, Entry 54
• Central Sales Tax (inter state trade or commerce) – Union List, Entry 92A
• Restaurant bill example – Note that the service tax rate has increased since the one used in
the next slide. It is presently at 15.2%.
 EXISTING TAX STRUCTURE

Indian Taxes

Direct Indirect

Central Central State

Luxury,
Excise Duty, VAT Lottery, Entry,
Income Tax Customs Duty Central Sales Service Tax
Ent, Purchase
Tax
 EXCISE DUTY
 Charging Section: Section 3 of Central Excise Act stipulates that excise duty is levied if: -
• There is a good (moveable and marketable)
• Goods must be mentioned in the Central Excise Tariff Act (CETA).
• Goods must have been manufactured or produced in India.
 Excluded Excisable goods: if production or manufacture is in a SEZ then no excise duty is
levied.
 Excise duty is not concerned with ownership / sale it is an event based duty which revolves
around the concept of manufacture / production. Taxable event for excise duty is manufacture
but the duty payable is as applicable on date of removal (clearance from factory). While the
collection is deferred, if the goods are not excisable at the time of manufacture, excise duty
cannot be levied at the stage of removal of such goods. CCE v Vazir Sultan (1996) 3 SCC 434.
 GOODS
 The term ‘goods’ has not been defined in the Central Excise Act.
• As per the judicial interpretation goods must be movable and marketable.
• Moveable means goods, which can be shifted from one place to another place, e.g., motor car,
mobile phone, computer etc. The goods attached to earth are immovable goods, such as, Dams,
Roads, and Buildings etc.
• Marketable means the goods must be capable of being bought or sold. However, excise duty is not
concerned with whether there was actual sale. (Explanation to Sec.2(d) which defines excisable
goods)
• Short shelf life – in the manufacture of animal feed supplements Vitamin A was manufactured
as an intermediate product which was captively consumed. The shelf life of the intermediate
product was two / three days. It was held that though the good had a limited shelf life as it was
capable of being bought and sold in such short period it was marketable and thus dutiable.
 EXCISABLE GOODS

 Excisable goods is described as goods specified in the Schedule to Central Excise

Tariff Act, 1985 as being subject to excise duty.
 Excise duty is chargeable on different goods at different rates. Therefore, goods
are classified for determination of duty.
 The classification of goods contained in Central Excise Tariff Act and Custom
Act is common. The classification uses an 8-digit nomenclature.
 MANUFACTURE
 Section 2 (f): Manufacture includes (i) any process incidental or ancillary to the
completion of a manufactured product (examples : packing, purification, etc.)
 UoI v Delhi Cloth & General Mills Co. Ltd. AIR 1963 SC 791 – manufacture is used to
mean “as bringing into existence, new substance” and does not mean merely to produce some
change in substance. There must be transformation; a new and different article must emerge having
a distinctive name, character or use. Manufacture is the end result of one or more processes
through which the original product passes.
 Trade parlance is important – only when the change or series of change transform a
commodity to a point where it is commercially recognized as a new and distinct
commodity, can manufacture be said to have taken place.
 Intermediate product: If at the intermediate stage a new product known to the
commercial world comes into existence, manufacture takes place.
 DEEMED MANUFACTURE
 Section 2(f) : Manufacture includes a process which is specified in relation to any
goods in the Section or Chapter notes of the First Schedule to the Central Excise Tariff
Act, 1985 as amounting to manufacture ; or
which, in relation to the goods specified in the Third Schedule, involves packing or
repacking of such goods in a unit container or labelling or re-labelling of containers
including the declaration or alteration of retail sale price on it or adoption of any other
treatment on the goods to render the product marketable to the consumer.
 Re-packing from bulk to a form suitable to consumer is not manufacture as use of
original material has not changed and no new product has come into existence.
 Applying the deemed manufacture provisions, re-packing from bulk to retail pack of
pan masala, yeast, etc. shall amount to manufacture.
 MANUFACTURER
 Liability to pay excise duty is on the manufacturer. Ultimate impact though would be
on the consumer.
 Manufacturer is the person who actually manufactures or produces excisable goods.
Manufacturer’s liability does not depend on whether he is able to collect the duty from
the customer.
 SALES TAX : PROBLEMS
 The sales tax structure had come under severe criticism on account of problems of
double taxation of commodities and multiplicity of taxes, resulting in a cascading tax
burden.
 For instance, in the existing structure, before a commodity is produced, inputs are
first taxed, and then after the commodity is produced with input tax load, output is
taxed again.
 Discuss the example of cascading effect and the change to be brought with the
introduction of input credit under the VAT system.
VAT: IS IT THE SOLUTION?
 STRUCTURE OF VAT
 It is based on the value addition to the goods, and the related VAT liability of the
dealer is calculated by deducting input tax credit from tax collected on sales during the
payment period.
 In reality: broadly there are a number of rates applied – 1% (gold and silver
ornaments, precious and semi-precious stones), 5% (goods of basic necessities), 13.5%
to 15% (normal rate on all goods other than those mentioned elsewhere), 20% (ATF,
petroleum products) and no restrictions on liquor, cigarettes and lottery tickets.
 WHAT ARE THE PROBLEMS
WITH THE CURRENT REGIME?
 Cascading effect – limitations of present structure
 Classification disputes and blurring of distinction between goods and services –
works contracts, as an example
 International competitiveness
 Adminstrative issues
 GST : UNDERSTANDING THE
BASICS
 What is GST?: A comprehensive tax on the manufacture, sale and consumption of goods
as well as services, and it is proposed to replace all indirect taxes on goods and services.
 Definition as per amended Article 366: “goods and services tax” means any tax on supply
of goods, or services or both except taxes on the supply of the alcoholic liquor for human
consumption. Services defined to be anything apart from goods.
 Which taxes / levies would it not subsume? – Customs duty, cesses (?)
 Exempt category of goods and services -
 Designed to be a destination based tax, that is, a tax that accrues to the State where goods
/ services are consumed.
 Through a tax credit mechanism, this tax is collected on value added on goods and
services at each stage of sale or purchase in the supply chain and thereby reduces cascading
of taxes. The system allows the set-off of GST paid on the procurement of goods and
services against the GST, which is payable on the supply of goods or services.
 System to be introduced requires an amendment to the Constitution – why?
 CONSTITUTION AMENDMENTS
PURSUANT TO GST
 Article 246A: States shall have power to impose goods and service tax along with the
Union Government. Union Government shall have exclusive power only where the
supply of goods or services is in inter state trade.
 Article 279A: constitutes the GST Council and outlines its powers
 Omission of Article 268A and entry 92 C relating to service tax
 Omission of entry tax under Entry 52, State list – why?
 Entry 84, List I amended to provide for duties of excise on crude petroleum, high
speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel and tobacco and
tobacco products. Amendment led to confusion on legality of power to impose Union
excise duties until April 1, 2017 : read into entry 97, List I.
 Entry 54, List II – provides for sales taxes on the aforementioned items from entry
84, List I.
 Some other entries omitted: Entry 55 and 62 (List II) and Entry 92 (List I)
 GST : UNDERSTANDING THE
BASICS
 The Constitution (122nd) Amendment Bill, 2014 was passed by both houses of Parliament on
August 8, 2016. To come into effect from April 1, 2017.
Article 368 - constitutional amendment would require ratification of one half of the States if the
amendment seeks to make a change in the Lists in the Seventh Schedule which contains the specific
taxing entries. After such ratification, the GST Bill has received the Presidential assent and has come
into force as an Act on September 8, 2016.
 The proposed tax system will take the form of “Dual GST”, which is concurrently levied by the
Central and State Government. This will comprise of :
• Central GST (CGST) – which will be levied by the Centre.
• State GST (SGST) – which will be levied by the State.
• Integrated GST (IGST) – which will be levied by the Central Government on inter-State supply
of goods and services. The IGST will then be distributed by the Central Government to the
Centre and the destination State.
 Proposed rate structure – four tier structure (5, 12, 18, 28) with an additional sin cess to
compensate State governments for losses for the first 5 year period.
PROPOSED STRUCTURE UNDER THE GST
REGIME

Indian
Taxes

Direct Indirect

Customs
Central GST
Duty

Income Tax Intra-State Inter-State

CGST SGST IGST

 GST COUNCIL
 The GST Constitutional Amendment Act provides for a GST Council to be constituted to
make recommendations to the Union and the States on matters including – taxes to be
subsumed under GST; goods / services to be subjected to or exempted from GST; date on
which GST should be levied on petroleum, crude, high speed diesel, petrol , natural gas etc.;
principles governing place of supply; threshold limit of turnover for exemption from GST;
rates including floor rates with bands of GST.
 It shall also lay down a mechanism to adjudicate disputes between Centre and States.
 GST Council to comprise of Union Finance Minister (Chairman of GST Council);
Minister of State (Revenue) and State Finance / Taxation Ministers.
 Vote of Central Government to have a weightage of 1/3rd of the votes; and 2/3rd of the
weightage to the votes of all State Governments taken together. Every decision to be taken
by a majority of at least 3/4th of the weighted votes of members present and voting.