indirect taxes – global suppliers group g. krishnamoorthy & j.v. niranjan introduction to...

Indirect Taxes – Global Suppliers Group

G. Krishnamoorthy &

J.V. Niranjan

Introduction to Indirect tax

Global Suppliers Group training programme


1. Introduction

2. Customs and FTP

3. Excise

4. Service tax

5. Sales tax/ VAT

6. Transaction modeling

CONTENTS


Indirect Taxes – Taxation Points

Supplier out side IndiaSupplier out side India

Merit Rate of Import – Customs Duties

Merit Rate of Import – Customs Duties Scheme Imports –

Customs Duties exempt

Scheme Imports – Customs Duties exemptLocal Procurement from

Manufacturer – Excise Duty and VAT

Local Procurement from Manufacturer – Excise Duty and VAT

Local Procurement from Dealer - VAT

Local Procurement from Dealer - VAT

Manufacture - Excise DutyManufacture - Excise Duty

Job - WorkJob - Work

Local Sales - VATLocal Sales - VAT

Interstate Sales – CST Interstate Sales – CST

Service Tax for various services

Service Tax for various services


Introduction

A multi-tax system administered at federal and state levels Includes customs, excise, service tax, sales tax and (now!) VAT Important source of revenue for both Centre and State Credit inter se some levies only (excise, additional duty of customs

& Service tax; VAT ) Credit on inputs , capital goods and input services Rates have been moderated Implementation :- procedure-dependent


The Indirect tax canvas – a snapshot

Customs duty - on imports/exports

of goods into India

CENVAT (central excise duty) - on

manufacture of goods in India

Service tax – on 96 specified

services/ service providers

Central sales tax (CST) – on inter-

state sale of goods

R & D Cess – on import of

technology

Central levies

Local Sales-tax - on sales of goods

within a particular state

Works Contract and Lease tax-

treated and taxed as deemed sale

transactions

Entry tax - on entry of goods in the

state/ local area for use,

consumption or sale

Ancillary taxes – luxury tax,

turnover tax, additional tax,

surcharge, etc

State levies

VAT replaced State levies from April 1, 2005 across 23 States and now covers all States except Uttar Pradesh


The Indirect tax canvas – a snapshot

Customs duty - on imports of goods into

India

CENVAT (central excise duty) - on

manufacture of goods in India

Service tax – on 96 specified services/

service providers

Central sales tax (CST) – on inter-state

sale of goods

R & D Cess – on import of technology

Central levies

Local Sales-tax - on sales of goods within

a particular state

Works Contract and Lease tax- treated

and taxed as deemed sale transactions

Entry tax - on entry of goods in the state/

local area for use, consumption or sale

Ancillary taxes – luxury tax, turnover tax,

additional tax, surcharge, etc

State levies

VAT replaced State levies from April 1, 2005 across 23 States

Commitment to roll out GST by 2010


CUSTOMS DUTYCustoms Duties


Customs duty

A central levy on “import into, or export from India”; irrespective of the nature of transaction between the shipper and the importer

Objectives:– Regulate imports and exports– Protect the domestic industry– Generate revenue

It generally consists of 3 components – – Basic customs duty (median rate at 12.5 percent) – Countervailing duty equivalent to excise (median rate 16

percent)– Additional customs duty in lieu of VAT (4 percent)– Other duties such as safeguard duty, anti-dumping duty would

apply in specific cases


… Customs duty

Framework:– Customs Act, 1962– Customs Tariff Act, 1975– Customs Rules and Regulations – Notifications and circulars

Method of computation Overtime, peak basic duty rate reduced from 60% to 12.5%.

Higher rate on specified products such as aerated drinks and motor vehicles

Classification aligned with 10-digit HSN classification Valuation principles also aligned with WTO Valuation Agreement

(earlier known as the GATT Valuation Code)


Customs duty… practical aspects

Key topical issues:– Classification, although gradually diminishing in relevance due

to rate moderation – Valuation, particularly of valuation of intra-group transactions

and interplay of transfer pricing – Inclusion of costs: pre-importation services; related designs/

engineering services– Anti-dumping – an effective tool?

Closely linked to Foreign Trade Policy Greater emphasis on Free Trade agreements (‘FTAs’)


Foreign trade Policy

Issued in exercise of powers under section 5 of the Foreign Trade (Development & Regulation) Act, 1992

Typically broad level schemes are set for a period of 5 years; however, every year has seen more and more changes – thankfully most of the changes are largely to relax conditions

Earlier known as the EXIM policy – changed from Sept 1, 2004 Objectives:

– Regulation of imports and exports through the ITC (HS)– Not to export taxes and reduction in cost of inputs for exports– Encouraging exports of both goods and services– Earning foreign exchange– Stimulating economic activity; and thus generating employment– Increasing India’s share in the global market


Framework – IEC – all importers and exporters are required to obtain an

Importer Exporter Code (which acts as a mandatory registration requirement)

– RCMC – registration with the export promotion council of the relevant industry – mandatory if benefit of any of the schemes under the Policy are availed

– Copy of Industrial Entrepreneurial Memorandum – All benefits need to be backed by a notification

Basics (Policy)– Pre-export benefits: Advance Authorization, EPCG, DFIA – Post-export benefits: DEPB, DFRC, Duty Drawback, Served from

India Scheme, Vishesh Krishi Upas Yojna, DFIA refund of terminal excise duty for deemed exports

…Foreign trade Policy


EXCISE DUTY


Excise duty

A central levy on “manufacture of excisable goods in India” Payable by the manufacturer upon removal of goods The rate of duty is prescribed under Central Excise Tariff Act Rate of tax

– Median rate of excise duty @16%– In addition, Certain goods are subject to additional duties of

excise and special additional duties of excise – On certain specified goods there are other duties like National

Calamity Contingent Duty (NCCD), various cesses like tobacco cess, automobile cess, etc

– A 2% education cess is levied on the aggregate of all such excise duties

Export of goods is not liable to duty


The definition of “manufacture” includes any ‘process’ – Which is incidental or ancillary to the completion of a

manufactured product– Which is specified in relation to any goods in the section or

chapter notes of the Excise Tariff as amounting to manufacture– 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 relabeling 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

What is “manufacture” ?– Manufacture as interpreted by the Court includes any process

which brings about such a change in the raw material that new goods emerge, having a distinctive name, character or use

…Excise duty


What are “goods” ?– “Goods” not defined under the Act. But to be excisable, goods

• Must be classified under the Central Excise Tariff• Must be moveable• Must be marketable

Bases of levy:– an ad valorem duty, i.e., duty as a percentage of value; value

being:• Transaction value;• Maximum retail price based value; or • Tariff value

– a specific duty, i.e., a rate fixed per unit, number, weight, volume or area

…Excise duty


Key topical issues:– Classification – Whether activity amounts to manufacture: test of creation of

marketable product– Impact on on-site activities– Deemed manufacture: processes such as packaging, labeling– Valuation linked to MRP for specified products– Related party transactions– Availability of Cenvat credit in event of procedural non-

compliances

…Excise duty


Job work

Central Excise Law permits movement of inputs to a processor for further process

The processor is termed as job worker and the process is termed as job work

Any process , be it amounting to manufacture or not , can be performed under job work provisions

There is an option to the job worker to either pay the Central Excise duty or opt for exemption , subject to certain conditions


Location To commence operations before…

Period of Exemption (from the date of commencement of commercial production)

North Eastern States (Assam, Tripura, Meghalaya, Mizoram, Nagaland, Manipur, Anunachal Pradesh)

No time limit 10 years

Kutch Region, Gujarat

December 31, 2005

5 years

Jammu & Kashmir No time limit 10 years

Uttaranchal & Himachal Pradesh

March 31, 2007 10 years

…Excise duty - Excise free zones


SERVICE TAX


Service tax

A Central levy on services Introduced in 1994 and gradually extended to 96 services Service tax regulated through the following legislations:

– Finance Act, 1994– Service Tax Rules, 1994

Additionally, the various portions of the excise law are made applicable for the administration, regulation etc. of the levy

Tax is not leviable for all services received in the state of Jammu & Kashmir , irrespective of the place from where the service originated

Selective approach: levy on “services” and/or “service providers” defined

Expected to be extended to all services with a well articulated negative list

Certain services may be devolved to States Liability to tax on the service provider generally Service recipient taxable under certain circumstances


Key topical issues:– Scope of definitions– Categorization of service: classification principles– Import of Services and Export of Services – Valuation of Services – Test of delivery– Inadequate ambit of advance ruling machinery – Coverage of intra-group services– Absence of well developed case law

… Service tax


VAT/ SALES TAX


Levied on sale of goods at state (on intra-state sales) and federal level (on inter-state sales)

Typically a single point levy Rates range from Nil to 20% Differential rates and laws have historically resulted in:

– Companies structuring supply/ distribution chains to leverage from first-point levy

– Diversion of trade to lower-tax states And, most importantly, transition to a VAT system of taxation!

Sales tax


Replaces State-level local sales tax and other levies such as lease tax, works contract tax, etc

A multi-point taxation system – tax across the value chain till the goods reach the consumer

Harmonisation of rates into 5 bands: Exempt, 1%, 4%, 12.5% and 20%

Invoice based input tax credit mechanism– Credit is available for the tax paid on the previous stage of

sale/purchase– Credit also available on Capital goods

Advocates removal of special rates/ exemptions/ concessions based on location/ industry

VAT


VAT on what

VAT on– sale or purchase of goods – transfer of property in goods otherwise than in pursuance

of a contract– transfer of property in goods used in works contract– right to use goods– sale of goods on hire purchase – misc. ( supply of goods by a club to its members)

No VAT if sale or purchase– Outside the state– In the course of import into India– Exports outside India– In the course of interstate trade

… VAT


Differences between Sales Tax & VAT

Sales Tax– Single point tax– Exemptions– Concessional rate– Many rates– Generally no set off

VAT– Multi point tax– Generally no exemptions– No concessional rates– Fewer rates– Set off


Item Value Tax Rate Tax Collected

Net Tax payable to the department

Payable By

Raw material purchased by manufacturer 1000 10% 100 100 Raw Material supplier

Transfer of manufactured goods to wholesaler 1500 10% 150 50 ManufacturerTransfer of goods by wholesaler to retailer 1800 10% 180 30 WholesalerTransfer of goods by retailer to consumer 2000 10% 200 20 Retailer

200Total tax payable to Government

How VAT works


Manufacturer Trader Trader Consumer

Tax charged from customers

Rs. 5 Rs. 6 Rs. 7.5

Adjustments / set off

Nil Rs. 5 Rs. 6.0

Pays to Deptt. Rs. 5 Re. 1 Rs. 1.5

Sales Tax Dept. Collects 5+1+1.5 = 7.5 which is 5% of

150(consumer price) = tax paid by consumerAssuming sale price of Rs. 100, 120 and 150 respectively @ 5%

Intra State Sale


Dealer Inter - State

Trader Inter - State

Importer

Tax charged from customers

Rs. 7.5 (LST)

Rs. 8 (4%-CST)

Adjustments / set off

Nil Rs. 7.5 (LST)

Deptt. collects Rs. 7.5 Re. 0.5

Assuming sale price at Rs.150/- and Rs.200/- respectively

Rs. 8.80 (LST) Nil

Rs. 8.80

Sale Price at Rs.220/ -

Maharashtra Gujarat

Inter State Sale


VAT Impact

Sales tax is levied on sale of goods only and is run on differing principles in all 28 states

VAT is still a state run legislation also only on sale of goods, but is supposedly built on common principles across states

Sales tax is a single point tax, generally levied on the first sale of goods in a state

VAT is a multi point tax and therefore taxes the final value of sale; essentially a consumption tax

Sales tax has a very weak credit system for tax on inputs

VAT has a more robust system of credits, will lead to some efficiency in parts of the supply chain

The structure of sales tax makes evasion easier

VAT is a self policing tax system, and hence meets revenue objectives of the government without tax rate hikes


Tamil Nadu

J & K

Orissa

Bihar

Jharkhand

Chattisgarh

Uttaranchal

Pondicherry

Gujarat WB

Punjab

Assam

Kerala

DelhiHaryana

MP

UP

Maharashtra

Goa

Rajasthan

AP

Karnataka

VAT – Roll out Status

The first state to replace sales tax with VAT in April 2003

Only State outside VAT canvass


Computation of customs duty

Particulars In INR

CIF value of imports incl landing charges (a) 1000

Basic customs duty [12.5% of (a)] (b) 125

Value for levy of CVD [(a) + (b)] (c) 1125

CVD [16.32% of (c)] (d) 184

Value for levy of Education cess [b + d] (e) 309

Education cess [2% of (b) + (d)] (f) 6

Additional Duty of Customs [4% of (a+ e + f) ]

(g) 53

Total Customs duty [(b) + (d) + (f) + (g)] (h) 368

Total landed cost (i) 1368

CVD and Additional duty of Customs are recoverable

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