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Indirect Taxes

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Published in: Indirect Tax
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Indirect Taxes Power Point

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  1. Indirect Taxes VALUE ADDED TAX Basic concepts of VAT (1) What is VAT?: Value added tax (VAT), as the term suggests, is a tax on the value added to the commodity at each stage in production and distribution chain. It is a system to collect the tax on the value at the final or retail point of sale. VAT is a consumption tax because it is borne ultimately by the final consumer. (2) Cascading of taxes: Tax leviable at each stage is chargeable on a value which includes the tax paid at earlier stage as there is no credit of tax paid at earlier stage. This is termed as cascading effect of taxes which leads to increase in cost of production. However, in the second case (VAT), tax is not levied on tax paid at earlier stage; it is levied only on the value added as credit of tax paid at earlier stages is allowed to be set off against the tax payable at the next stage. Thus, VAT helps in eliminating cascading of taxes.
  2. Indirect Taxes VARIANTS OF VAT (a) Gross Product Variant: The gross product variant allows deductions for taxes paid on all purchases of raw materials and components, but no deduction is allowed for taxes paid on capital inputs. (VAT Credit of VAT paid on Capital goods is not allowed) (b) Income Variant: The income variant of VAT on the other hand allows for deductions on purchases of raw materials and components as well as on capital goods. This method provides incentives to classify purchases as current expenditure to claim set-off. (VAT Credit of VAT paid on Capital goods is allowed but in proportion of use of Capital goods i.e. in proportion of rate of depreciation every year) (c) Consumption Variant: This variant of VAT allows deduction for all business purchases including capital assets. Thus, gross investment is deductible in calculating value added. It neither distinguishes between capital and current expenditures nor specifies the life of assets or depreciation allowances for different assets. (VAT Credit of VAT paid on Capital goods is fully allowed in the first year itself just like in case of inputs)
  3. Indirect Taxes The consumption variant of VAT is the most widely used variant of the VAT. Several countries of ' Europe and other continents have adopted this variant as it does not affect decisions regarding ' investment because the tax on capital goods is also available for set-off against the VAT liability. Hence, the system is tax neutral in respect of techniques of production (labour or capital-intensive). It also simplifies tax administration by obviating the need to distinguish between purchases of inputs and capital goods.
  4. Indirect Taxes Methods of computation of VAT Addition Method 1. Value Added = Factor payments + Profit ' In this method, the value added is arrived at by aggregating all factor payments and profit. VAT liability is computed by applying tax rate to the value added as computed above There is no need for any 'tax credit' because the purchases which have already suffered tax are not considered for taxation again. Since this method doesn't facilitate matching of sales invoices with purchases invoices, it becomes difficult to detect evasion of tax.
  5. Indirect Taxes Methods of computation of VAT Subtraction Method 2. Value Added = Sales — Purchases ' In this method, the value added is arrived at by deducting purchases from sales There is no need for any 'tax credit' because the purchases which have already suffered tax are not considered for taxation again. This method is generally followed when tax is not charged separately in the invoice i.e. the sales invoice shows sale price inclusive of tax.
  6. Indirect Taxes Methods of computation of VAT 3. Invoice method / Tax Credit Method / Voucher Method This is the most common and popular method for computing the tax liability under VAT system. Under this method, tax is imposed at each stage of sales on the entire sale value and the tax paid at the earlier stage (on purchases) is allowed as set-off. Thus, at every stage, differential tax is being paid. The most important aspect of this method is that at each stage, tax is to be charged separately in the invoice. VAT Payable = VAT on - VAT on inputs
  7. Indirect Taxes VAT rates and coverage of goods (1) VAT rates: In order to do away with the demerits of multiple rates prevalent under sales tax regime, minimum number of rates were recommended in the White Paper. However, States have deviated from the prescribed rates. The prevalent common tax rates are: 0% • Natural and unprocessed products in unorganized sector (e.g. firewood, plants)- Items which are legally barred from taxation and items which have social implications (e.g. national flag, salt). 1% • Precious stones, bullion, gold and silver ornaments etc. 5% ' Items of basic necessities like medicines and drugs, all agricultural and industrial inputs, declared goods & capital goods. Originally White Paper had proposed 4% rate on such goods but many States have subsequently increased this rate to 5%. ' Rate of declared goods has also been increased to 5% by many States after amendment of CST Act w.e.f. 08.04.2011. 12.5%/13.5% • All other goods not chargeable to any of the above rates. Originally White Paper had proposed 12.5% rate as the revenue neutral rate but most of the States have subsequently increased this rate to 13.5%. Largely, all States follow the above rate structure, but still there are many variations.
  8. Indirect Taxes GOODS NOT COVERED UNDER VAT 1. PETROL 2. DIESEL3. ATF OR OTHER MOTOR SPIRIT 4. LIQUOR 5. LOTTERY TICKETS Input tax credit (ITC) The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. Input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. Thus, CST paid on purchases made from outside the State cannot be claimed as input tax credit
  9. Indirect Taxes (1) CST is not Vatable: Let us try to understand why CST is not Vatable with the help of the following example: Example: A dealer of Karnataka purchases goods from another dealer of Maharashtra. The Maharashtra dealer charges CST @ 2% on this sale against the 'C' form produced by the dealer of Karnataka. The tax is deposited in the treasury of Maharashtra and thus, forms part of Maharashtra's revenue. Though its name is central sales tax but the Central Government does not get any part of this revenue and it is totally a revenue receipt of the selling state. The Karnataka dealer later sells these goods in the State of Karnataka to any other dealer or consumer and collects VAT on the same. Now the question arises whether the Karnataka dealer can claim input tax credit of the CST paid by him against his VAT liability. The answer is no as Karnataka (purchasing State) would not allow set off of a tax paid in Maharashtra (another State). However, when liability of CST arises on an inter-state sale, input tax credit can be used for set off as the revenue in this case does not go to any other State.
  10. Indirect Taxes CST leads to cascading of taxes: India has a purely unbalanced State wise economy as only some of the States are manufacturing States while majority of them are consumer states. Manufacturing States generate considerable revenues from CST. When goods purchased from manufacturing States (with CST imposed on them) are resold in these States, the tax liability of non-manufacturing States becomes very high on account of VAT and CST. (2) Coverage of ITC: Input tax credit is available in respect of input tax paid on purchase of inputs and capital goods.
  11. Indirect Taxes (3) Purchases eligible for availing input tax credit: For the purpose of claiming ITC, the taxable goods should be purchased for any one of the following purposes- (i) for sale/resale within the State; (ii) for sale to other parts of India in the course of inter-State trade or commerce; (iii) to be used as- (a) containers or packing materials; (b) raw materials; or (c) consumable stores, required for the purpose of manufacture of taxable goods or in the packing of such manufactured goods intended for sale in the State or in the course of inter-State trade or commerce; (iv) for being used in the execution of a works contract; (v) to be used as capital goods required for the purpose of manufacture or resale of taxable goods; (vi) to be used as (a) raw materials; (b) capital goods; (c) consumable stores and (d) packing materials/containers for manufacturing/packing goods to be sold in the course of export out of the territory of India; (vii) for making zero-rated sales other than those referred to in clause (vi) above.
  12. Indirect Taxes (4) Purchases not eligible for input tax credit: ITC may not be allowed in the following circumstances- (i) purchases from unregistered dealers [as he cannot charge VAT]; (ii) purchases from registered dealer who opts for composition scheme (iii) purchase of goods as may be notified by the State Government; (iv) purchase of goods where the purchase invoice is not available with the claimant or there is evidence that the same has not been issued by the registered selling dealer from whom the goods are purported to have been purchased; (v) purchase of goods where invoice does not show the amount of tax separately; (vi) purchase of goods for being utilized in the manufacture of exempted goods or purchase of goods when the sales are exempt [However, in some States partial input tax credit is available even when sales are exempt]; (vii) purchase of goods for personal use/consumption or to be provided free of charge as gifts, free samples [partial credit is available in the State of Maharashtra]; (viii) purchase of goods like motor vehicles, toilet articles, furniture etc. which are not used in relation to production of goods or held for sale/resale; (ix) goods imported from outside the territory of India; (x) goods purchased from other States viz. inter-state purchases.
  13. Indirect Taxes Some special aspects: (1) One to one co-relation not required: VAT does not require bill to bill co-relation between input and output. It is not necessary to ensure that ITC of only those inputs which are actually utilized in Value Added Tax 114 the manufacture of the output is being set off against the output tax liability. ITC can be utilized for payment of VAT on any output without waiting for the input to be actually consumed/sold. Thus, ITC is available as soon as inputs/capital goods are purchased [In case of capital goods, some States allow ITC in specified installments]. (2) ITC in case of exports and inter-state sale: Whereas input tax credit is available on goods meant for export or inter-state sale, the same cannot be availed on goods purchased from outside India or outside the State. (3) ITC allowed only if VAT paid by the seller: Input tax credit is allowed only to the extent of tax received by the State Government from the seller. Therefore, the purchasing dealer, desirous of claiming set off, should also look into the credentials of the vendor so as to be sure that he will get the set off of tax paid to him. (4) Proportionate ITC in case of goods partially used for taxable goods: As learned before, ITC is allowed only if the goods are used for manufacture etc. of taxable goods and no credit is allowed for goods used in manufacture of tax free/exempted goods. Taxable goods are other than tax-free goods
  14. Indirect Taxes However, where the purchased goods are used partially for the purpose of taxable goods, input tax credit is allowed proportionate to the extent the purchases are used for the purposes of taxable goods. Thus, credit relating to the goods used in manufacture of exempted goods has to be reversed. Example: A manufacturer purchases 50 kg of raw material worth 10,000 and pays 1250 VAT on it. While 20 kg of the raw material is used for manufacture of taxable goods, the remaining is used for exempted goods. Thus, ITC of 500 (ITC proportionate to the raw material being used in manufacture of taxable goods) can only be allowed. (i) Stock transfer: Transfer of goods from one branch to another or consignment transfers are not liable to VAT or CST as they do not involve sale. Whereas entire ITC is allowed in case of transfer of goods within the State, partial ITC is allowed in case of inter-state transfer of goods. The tax paid on (i) inputs used in the manufacture of finished goods which are stock transferred; or (ii) purchase of goods which are stock transferred, to another State is available as input tax credit after retention of 2% of such tax by the State Governments. Example: If goods worth 2,000 chargeable to VAT @ 12.5% are stock transferred to a branch in another State, then 5 [2% of 250 C 2000 x 12.5%)] would be retained and balance 245 would be available as credit.
  15. Indirect Taxes (5) Utilization of ITC: ITC of a period may be used as under- Fi rstly ITC may be used for payment of VAT on intra-state sales made during the period If balance is available May be used for payment of CST payable on inter-state sales made during the period If further balance is available Carried forward to the next period (6) Carrying over of tax credit: As explained above, input tax credit is first to be utilized for payment of VAT. The excess credit can be then adjusted against the CST for the said period. After the adjustment of VAT and CST, excess credit, if any, will be carried over to the end of the next year. If there is any excess unadjusted input tax credit at the second year, then the same will be eligible for refund. However, some States grant refund at the end of the first financial year itself. (7) Refund of input tax / exemption from input tax: (i) Refund within three months in case of exports: The White Paper provides for the grant of refund of input tax paid if the goods are exported out of the country. Under the basic design of the White Paper, this refund is to be granted within a period of 3 months from the end of the period in which the transaction for export took place. (ii) Exemption/refund to SEZ and EOU Units: Units located in Special Economic Zone (SEZ) and Export Oriented Units (EOU) are granted either exemption from payment of input tax or refund of the input tax paid within three months. State Governments may reduce the time period of 3 months.
  16. Indirect Taxes - SERVICE TAX LEGAL FRAMEWORK It was introduced in 1994 by the 10th Finance Minister Dr. Manmohan Singh. There is no separate statute for service tax. Instead, it is governed by Sections 64 to 96 -l of Chapters V & VA of the Finance Act, 1994 as amended from time to time. The Act extends to the whole of India (including the designated areas in the Continental Shelf and Exclusive Economic Zone of India except the state of Jammu & Kashmir. Initially three services were identified and taxed. Telephone Stock broking General insurance
  17. Indirect Taxes What is Cenvat Credit Scheme? By the introduction of Cenvat Credit Rules with effect from 10-9-2004 the credit of excise duty paid on inputs and capital goods as well as input services used in relation to business are allowed to both manufacturers and service providers. Cenvat Credit Rules, 2004 has unified the credits available on goods and services, the Cenvat credit of duty on inputs and tax on taxable services would be available to both the 'manufacturers' and 'output service providers'. However, credit cannot be allowed on inputs and input services that are used to manufacture exempted goods or providing exempted services. The cenvat credit on capital goods can be allowed to be availed only where it is partially used to manufacture dutiable/excisable goods or to render taxable output services. Selective coverage v. Comprehensive Coverage of services for taxation: Under comprehensive coverage, all services brought under service tax net with exclusion of certain basic services by way of negative list. Under selective coverage, selected services are covered for taxation and their scopes respective are also separately specified. In India, we follow selective coverage of services for taxation. The CBEC (Central Board of Excise and Customs ) and Directorate of Service Tax at Mumbai make policy decisions as to coverage of services for the purpose of imposition of service tax.
  18. Indirect Taxes Il. Negative List of Services — This is new concept introduced by Finance Act , 2012 The negative list shall comprises seventeen services, namely: - services by Government or a local authority excluding the following services to the extent they are not Covered elsewhere- services by the Department of posts by way of speed post, express parcel post , life insurance , and agency services provided to a person other than Government ; services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; Transport of goods or passengers; or Support services , other than services covered under clauses (i) to (iii) above , provided to business entities; B. services by the Reserve Bank Of India• C. services by a foreign diplomatic mission located in india; D. services relating to a agriculture or agricultural produce by way of- i. agricultural operations directly related to production of any agricultural produce including cultivation , harvesting, threshing , plant protection or seed testing; ii. supply of farm labour;
  19. Indirect Taxes iii.processes carried out at an agricultural farm including tending ,pruning ,cutting, harvesting , drying , cleaning, trimming, sun drying, fumigating , curing sorting , grading , cooling or bulk packaging and Such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market; iv.renting or leasing of agro machinery or vacant land with or without a structure incidental to its use ; loading ,unloading , packing , storage or warehousing of agricultural produce Agricultural extension services; Services by any Agricultural Produce Marketing Committee or Board or services provided by a Commission agent for sale or purchase of agricultural produce;
  20. Indirect Taxes E. trading of goods; F. any process amounting to manufacture or production of goods; G. selling of space or time slots for advertisements other than advertisements broad cast by radio or television; H. services by way of access to a road or a bridge on payment of toll charges; l. betting, gambling or lottery; J. admission to entertainment events or access to amusement facilities; K.transmission or distribution of electricity by an electricity transmission or distribution utility; L. services by way of— i. pre-school education and education up to higher secondary school or equivalent; ii. education as a part of a curriculum for obtaining a qualification recognized by any law for the being in force; iii.education as a part of an approved vocational education course; M. services by way of renting of residential dwelling for use as residence; N. services by way of— i. extending deposits , loans or advances in so far as the consideration is represented by way of interest or discount;
  21. Indirect Taxes ii. inter sale or purchase of foreign currency amongst banks or authorized dealers of foreign exchange or amongst banks and such dealers; O. services of transportation of passengers , with or without accompanied belongings , by — i. a stage carriage ii. railways in a class other than- First class ; or An air-conditioned coach; iii. metro , monorail or tramway; iv. inland waterways; v. public transport , other than predominantly for tourism purpose , in a vessel between places located in india; and vi. metered cabs , radio taxis or auto rickshaws; P. services by way of transportation of goods — i. by road except the services of — A. a goods transportation agency ; or B. a courier agency; ii. by an aircraft or a vessel from a place outside India up to the customs station of clearance in india ; or iii. by inland waterways; Q. funeral, burial , crematorium or mortuary services including transportation of the deceased
  22. 1 2 3 4 5 6 7 8 9 Indirect Taxes DECLARED SERVICES (66E) Rentin of Immovable ro er Construction of com lex Temporary transfer/ permitting to use [enjoyment of any intellectual Property rights Develo ment, desi etc of so tware Agreeing to refrain from an act/ to tolerate an act / situation/ to do an act Transfer of goods by way of hiring, leasing, licensing without transfer of fight to use Delivery of goods on hire purchase/ instalment basis Service 0ft10n In works contract Service portion in a activity where goods, being food/ other articles of human consumption/ c IS supplied as a part of activity

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