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Indirect Taxes – Global Suppliers Group
G. Krishnamoorthy &
J.V. Niranjan
Introduction to Indirect tax
Global Suppliers Group training programme
Indirect Taxes – Global Suppliers Group
1. Introduction
2. Customs and FTP
3. Excise
4. Service tax
5. Sales tax/ VAT
6. Transaction modeling
CONTENTS
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
CUSTOMS DUTYCustoms Duties
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
… 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)
Indirect Taxes – Global Suppliers Group
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’)
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
EXCISE DUTY
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
SERVICE TAX
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
VAT/ SALES TAX
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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
Indirect Taxes – Global Suppliers Group
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