Indirect Tax

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Introduction & type of indirect taxes

Rohit G / Indore

5 years of teaching experience

Qualification: MBA/PGDM (WBUT - 2015)

Teaches: Accountancy, Commerce Subjects, Economics, Mathematics, Bank Clerical, IBPS, SBI Exam, SSC Exams, BBA Entrance, BBA Subjects, Management Subjects

  1. INDIRECT TAXES
  2. Scope 'Introduction 'Types of Indirect Taxes *Excise Duty *Value Added Service (VAT) *Custom Duty *Sales Tax 'Conclusion
  3. Introduction The objective of imposing taxes for any state is to raise revenue and to pay the necessary expenses of the Government such as promotion of the public welfare, protection of its citizens, and to finance its various activities. The state shall always ensure judious rising of funds and its spending. 3
  4. Taxes are conventionally classified as Direct Taxes & Indirect Taxes. Indirect taxes, the responsibility is on the assessee to collect the amount from others and remit it to the Government and if the assessee has not collected the same from others, he/she still be liable to pay the same to the Government from his pocket. 4
  5. There are 4 types of indirect taxes, namely 'Excise Duty 'Value Added Tax (VAT) 'Custom Duty 'Sales Tax 5
  6. Excise Duties An excise duty is a tax on the manufacture of goods within the country. Excise duties are levied under the Central Excise and Salt Act, 1944, Excise Tariff Act, 1985, and Modified Value Added Tax (MODVAT) scheme. The rates of excise duty that can be levied vary depending inter alia on the nature of the item manufactured, the nature of the manufacturing concern, and the place of ultimate sale. 6
  7. Though the collection of tax is to augment as much revenue as possible to the government to provide public services, over the years it has been used as an instrument of fiscal policy to stimulate economic growth. Thus it is one of the socio-economic objectives. 7
  8. Who is liable to pay excise duty? The liability to pay tax excise duty is always on the manufacturer or producer of goods. There are three types of parties who can be considered as manufacturers: 'Those who personally manufacture the goods in question. 'Those who get the goods manufactured by employing hired labour. 'Those who get the goods manufactured by other parties. 8
  9. Types of Excise Duty? There are three different types of central excise duties which exist in India which are as follows:- *Basic- It is charged on all excisable goods other than salt at the rates mentioned in the said schedule. 'Additional - It is charged on goods of special importance, in lieu of sales Tax and shared between Central and State Governments. 9
  10. *Special - It is charged on all excisable goods on which there is a levy of Basic excise Duty. Every year the annual Budget specifies if Special Excise Duty shall be or shall not be levied and collected during the relevant financial year. Therefore, each year the Finance Act spells out that whether the Special Excise Duty shall or shall not be charged, and eventually collected during the relevant financial year. 10
  11. Consequence of evading payment of excise duty? Under the different sections of the central excise act, the fines for evading tax can range from 25-50% of the amount of duty evaded. When we look at the amount of excise we may have to pay, this is a rather large amount and along with the financial repercussions. Apart from that, we also have to encounter a tarnished image. 11
  12. Value Added Tax (VAT) One of the important components of tax reforms initiated since liberalization is the introduction of Value Added Tax (VAT). The Value Added Tax (VAT) was introduced as an indirect tax into the Indian taxation system from 1 April 2005. The term 'value addition' implies the increase in value of goods and services at each stage of production or transfer of goods and services. 12
  13. VAT is a tax on the final consumption of goods or services and is ultimately borne by the consumer. It is a multi-stage tax with the provision to allow 'Input Tax Credit (ITC)'. This 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. It is given for all manufacturers and traders for purchase of inputs/supplies meant for sale, irrespective of when these will be utilised/ sold. 13
  14. The VAT liability of the dealer/ manufacturer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month). If the tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund. 14
  15. The existing General Sales Tax Laws were replaced by VAT. Haryana became the first State in the country that had adopted the taxation. Few states like Gujarat, Rajasthan, Madhya Pradesh, Chhattisgarh, Jharkhand, Uttarakhand and Uttar Pradesh have opted to stay out of VAT taxation system during the initial introduction of VAT and have then adopted VAT at a later date. As of 2012, VAT has been introduced in 33 States and UTs. There is uniform VAT rate of 4% and 12.5% all over India. 15
  16. Need of VAT In India's prevalent sales tax structure, there have been problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. Thus, VAT has been introduced to replace such complex structure. The main motive of VAT has been the rationalisation of overall tax burden and reduction in general price level. Thus, it seeks to help common people, traders, industrialists as well as the Government. 16
  17. Custom Duty Customs Duty is a type of indirect tax levied on goods imported into India as well as on goods exported from India. Taxable event is import into or export from India. Import of goods means bringing into India of goods from a place outside India. Export of goods means taking goods out of India to a place outside India. In India, the basic law for levy and collection of customs duty is Customs Act, 1962. It provides for levy and collection of duty on imports and exports, procedures, prohibitions on importation and exportation of goods, penalties, offences, etc. 17
  18. Types of Custom Duties There are 5 types of customs duties listed by the Central Board of Excise and Customs (CBEC), the apex body of customs matters. 'Basic Duty- It may be at the standard rate or, in the case of import from some other countries, at the preferential rate. 'Additional customs duty- Equals to central excise duty leviable on like goods produced or manufactured in India. It is payable only if the imported article is such as, if produced in India, its process of production 18
  19. would amount to 'manufacture' as per the definition in Central Excise Act, 1944. 'Additional duty of customs- It is levied to offset the disadvantage to like Indian goods due to high excise duty on their inputs. It is levied to provide a level playing field to indigenous goods which have to bear various internal taxes. 'Education cess - At the prescribed rate is levied as a percentage of aggregate duties of customs. 19
  20. 'Anti-dumping Duty/ Safeguard Duty- For import of specified goods with a view to protecting domestic industry from unfair injury. It would not apply to goods imported by a 100% EOU (Export Oriented Units) and units in FTZ (Free Trade Zones) and SEZ (Special Economic Zones). 20
  21. Sales Tax A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. There is usually a list of exemptions. The tax can be included in the price or added at the point of sale. Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, and is simple to calculate and simple to collect. Each state fixes its own slab rates for the purpose of collection of sales tax. 21
  22. Sales tax can be levied either by the Central or State Government or Central Sales Tax department. Also, 4% tax is generally levied on all inter-state sales. State sales taxes that apply on sales made within a state have rates that range from 4- 15% . Sales tax is also charged on works contracts in most states and the value of contracts subject to tax and the tax rate vary from State to State. However, exports and services are exempt from sales tax. Sales tax is levied on the seller who recovers it from the customer at the time of sale. 22
  23. Conclusion Taxation has always played an important role in the formulation of the government's industrial policy. Indirect Taxes are the only means of reaching the poor. They are convenient to both the tax-payer and the State. The tax-payers do not feel the burden much, partly because it is paid in small amounts and also it is paid only when making purchases. Indirect taxes can be spread over a wide range. As they can be spread widely, they are more beneficial and suitable, thus relieving a common man from the burden of heavy taxation. 23
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