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Tuesday, April 5, 2016

Indirect Taxes in India

Service Tax is applicable on provision of all services except the services specified in the negative list and those specifically exempted vide the mega exemption notification. The generic service tax rate is 14% which was w.e.f. 1st June, 2015. (There is an additional levy of 0.5% proposed as Swachh Bharat Cess on value of taxable services of notified services from a date to be notified). Service tax is generally payable by the service provider except in certain specified categories where the recipient is liable to pay the service tax such as manpower supply services, goods transport services, works contract services, legal services subject to prescribed conditions. In case of import of any services where the service provider is a non-resident, the service recipient in India would become liable to discharge the service tax liability on a reverse charge basis. The service tax law also provides for zero rating of services which are exported outside India. The service tax paid on the services received can be used as set-off against the liability of service tax on provision of services. The benefit of set-off is also available on excise duty which has been paid on inputs/ capital goods used by the service provider. Effective service tax rate will be increased from 14.5% to 15% from 1st June, 2016 as proposed in the Budget, 2016.

Excise duty is levied on a manufacturer or producer in respect of the commodities produced or manufactured by him. It is recoverable from the buyer of the goods. The applicable excise duty rate on the manufacture of any goods in India is based on the universally accepted HSN code assigned to the said goods. The generic excise duty rate is 12.5% (*education cess and Secondary and Higher Education cess on excise duty has been withdrawn from 1st March, 2015). The excise duty paid on raw materials used in the manufacture of finished products is available as set-off against the excise duty liability on manufacture of such finished goods, subject to satisfaction of prescribed procedures. The benefit of set-off is also available on the service tax which has been paid on services used by the manufacturer. The Central Government has provided certain excise duty incentives for units set up in specified backward areas of India. The benefits/ incentives are in the nature of full exemption from excise duty or refund of duty paid in cash after availing credit.

Customs duty is applicable on import of goods into India. It is payable by the importer of the goods and it comprises of the following elements:
  • Basic Custom Duty ("BCD")
  • Additional Custom Duty ("ACD") (this is levied in lieu of excise duty and is applicable on goods manufactured in India)
  • Education cess
  • Secondary and Higher Secondary cess
  • Special Additional Duty ("SAD") [levied in lieu of Value Added Tax ("VAT") applicable on sale of goods in India)
The applicable customs duty rate on the import of any goods into India is based on the universally accepted HSN Code assigned to the said goods. The generic BCD rate is 10% at present and the effective customs duty rate (i.e.the aggregate of the above mentioned components i.e. BCD, ACD, SAD and cesses) with BCD at 10% is 29.44% (with ACD at 12.5%, SAD at 4% and cesses at 3%)

The ACD paid as part of customs duty would be available as a CENVAT credit (set-off) to the manufacturers/ service providers using the imported goods as inputs in their manufacturing/ for provision of services. The SAD paid as part of customs duty would be available as credit to the manufacturer. For a trader, this SAD is available as a cash refund (subject to the prescribed procedure) if state VAT has been paid on subsequent sales of the imported goods. However, for a service provider no credit is available of the SAD paid.

India has central and state level indirect tax levied on sale or purchase of goods. Sales transactions which involve movement of goods within the same state are subject to levy of local state Value Added Tax whereas sales which involve interstate movement of goods are subject to CST in terms of the provisions of the Central Sales Tax Act, 1956. The rate of CST is equivalent to the VAT rate prevailing in the state from the movement of goods has commenced. There is a concessional rate of 2% if the buyer issues a declaration in Form C subject to the fulfillment of specified conditions. CST paid by the buyer while procuring the goods is not available as set-off for payment against any liability and hence is a cost to the business. Research and development cess ("R&D Cess") is leviable at the rate of 5% on import of technology directly or through deputation of foreign technical personnel under a foreign collaboration. Where the importer of the technology in India is liable for payment of service tax liability under the categories of consulting engineer's services or intellectual property right service on the import of the technology then the R&D Cess paid is available as deduction from such service tax liability subject to fulfilment of the specified conditions.

Value Added Tax ("VAT") is levied on sale of goods where the movement of goods takes place within the same state. Each state has different laws for levy of VAT and Schedules of rates on various goods. It is pertinent to note that the VAT paid to vendors for procurement of goods can be availed as input tax credit against discharge of VAT or CST liability on sale of goods. Certain VAT/ CST incentives are available to units set up in specified backward areas of the states. Such incentives are in the nature of a concessional rate of VAT/ CST or in the nature of remission/ subsidy of the VAT/ CST charged. The VAT ranges from NIL to 30% across different states and is also dependent upon the nature of the goods.

Entry Tax is levied on the entry of special goods into a state for use, consumption or sales therein. The entry tax rates from state to state and are applicable only on specified goods. Certain states provide for a set-off of entry tax paid against the VAT payable on the sale of goods in such stat. Local Body Tax ("LBT")/ Octroi is levied on the entry of specified goods into a specified municipal limit/ local area for use, consumption or sale. Presently, LBT/ Octroi is levied only in certain areas of Maharashtra for dealers having a turnover above the specified limit. The LBT/ Octroi rates vary from NIL to 10% across municipal areas and are also dependent upon the against any liability and nature of the goods. No set-off of LBT/ Octroi paid is available against any liability.

Besides the taxes as mentioned above, there are certain local taxes applicable within specific areas of certain identified cities, towns, villages, etc. These are agricultural produce market cess and mandi tax, entertainment tax, luxury tax, etc. Such taxes are generally levied on the removal of goods from the specified locations or on specified activities. No set-off of such taxes paid is available. Hence, such taxes would form part of the cost of procurement. 

The Indian Indirect tax system is complex and multi-layered which is levied on both central and state level. In order to reduce such complexities and streamlining various indirect taxes, reducing taxes and compliances, India has proposed to implement Goods and Services Tax ("GST"). It is contemplated that there would be a dual GST structure comprising of the CGST to be levied by the centre and SGST to be levied by the states. Integrated GST, which is a combination of CGST, would be applicable on all inter-state transactions of goods and services and would be levied by the Central Government, Interstate stock transfers would be treated at par with interstate sales for the levy of GST. The proposed framework of GST is as under:

  • GST is a broad-based and destination based consumption tax on supply of goods and services
  • Taxable event for GST would be supply of goods and services and therefore would no longer be manufacture of sale of goods
GST proposes to subsume the following taxes:

  1. Central taxes - Excise duty, CST, ACD, SAD, Service tax, surcharge, cesses, etc.
  2. State taxes - VAT, luxury tax, state cesses and surcharges, entry tax, etc.
  3. Basic customs duty on imports would not be subsumed with GST
  4. Additional 1% tax on inter-state supply of goods
  5. Petroleum products, viz. crude petroleum, diesel, aviation turbine fuel and natural gas have been temporarily kept out of the ambit of GST
  6. Alcohol for human consumption, tobacco and tobacco products are also excluded from gamut of GST levy
  7. Varying tax rates have been proposed, however, no final consensus achieved yet

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