Indirect Taxation

Indirect Taxation

INDIRECT TAXATION

Student’s Guide For B.Com, M.Com, MBA, CA, CS & ICWA

Meena Goyal PhD

Pavan Goyal CA

2015 EDITION

Published by: Meena Goyal, Pune Maharashtra

Copyright ©: The copyright for this book belongs to Meena Goyal.

All rights reserved. No part of this book may be reproduced in any form or by any mean, electronic or mechanical, including photocopying, recording, posting it on the web or any other information storage and retrieval system , without the written permission of the publisher and authors.

For a soft cover version (print copy) please email the authors Meena Goyal and Pavan Goyal

Table of Contents

Indirect Taxation

Preface

About the Authors

Meena Goyal (Ph.D, M.Com)

Pavan Goyal (ACA, DISA, M.Com)

Salient features of the Book

1

Introduction to Indirect Taxation

Union list

State List

Major Indirect Taxes

Indirect Tax System in India

Features of Indirect Tax

2

Basics of Central Excise

Levy of Excise Duty

What is Goods under Central Excise?

Case Law on mobility and marketability

Illustration of Goods:

Taxable Event in Central Excise

Manufacturer

Case Laws

Exercises

Multiple choice questions

3

Classification of Goods

Central Excise Tariff Act, 1985

Trade Parlance Theory

Case Laws on Classification

Exercises

Multiple Choice Questions

4

Valuation of Excisable Goods

Specific Duty

Duty based on value

Case Laws

Compounded Levy Scheme (Rule 15 under CER 2002)

Production Capacity (sec 3A)

Case Laws

Solved numerical

Exercises

Multiple Choice Questions

5

General Procedures under Central Excise Law

Date of determination of Duty and Tariff Valuation

What is Assessment?

Provisional Assessment (Rule 7)

Procedure for Registration:

Exercises

Multiple Choice Questions

6

Basic Provisions of Service Tax

Important Laws Governing Service Tax:

SITUS of Taxation

What is Service?

Reverse Charge

Body Corporate

Abatement in Service Tax

List of Abatements

Rate of Service Tax

Composition Scheme

General Exemptions

Case Laws

Solved Problems

Exercises

Multiple Choice Questions

7

Procedural Aspects of Service Tax

Registration

Who shall Apply?

How to Apply?

Single Registration For Multiple Services

Returns under Service Tax

Revision of Returns

Solved Examples

Exercises

Multiple Choice Questions

8

Negative List of Services & Exemptions

Service

Sec  66E 

Negative List of Service Tax 2013-2014

Solved Examples

9

Point of Taxation Rules (POT), 2011

Solved Problems

Exercises

Multiple Choice Questions

10

Point of Provision of Services Rules, 2012

Relevance of Place of Provision of Service

Taxable territory

Rate of Service Tax

Determination of Place of Provision of Service

SEZ

Exercise

Multiple Choice Questions

11

CENVAT Credit

Rule 2 of CCR 2004

Case Laws On CENVAT Credit

Solved Examples

Exercises

Objective Questions

12

Central Sales Tax

Central Sales Laws

Branch Transfer

Form F

Solved Examples

Exercises

Multiple Choice Questions

13

Value Added Tax – VAT

Advantages of VAT

Disadvantages of VAT

Taxpayer’s Identification Number:

VAT Tax rates

Different Variants of VAT

Procedure of ITC and refund

Solved Problems

Exercises

Multiple Choice Questions

14

Customs Law - Basic

1. The Customs Act, 1962

2. The Customs Tariff Act, 1975

Taxable Event

Types of Customs Duties

Categories of Import

EDI Assessment

Relevant date for determining rate of duty and tariff valuation:

Limitations on Drawback Admissibility

Export Goods - Valuation for Assessment

Solved Problems

Exercises

Multiple Choice Questions

15

Customs Tariff Act

Customs Tariff

First Schedule of the Customs Tariff

General Explanatory Notes

Project Imports

BAGGAGE RULES

Exercises

Multiple Choice Questions

Annexure

CUSTOMS GUIDE FOR TRAVELLERS

Green and Red Channels

Preface

We are delighted to introduce Indirect Taxation to the Graduate and Post Graduate students of Management and Commerce. It is comprehensive text for the students pursuing professional courses like CA, CS and CWA. This comprehensive text covers the tax provisions of the Finance Act 2014. Our numerous interactions with teachers, Post Graduate and Graduate students and various taxation faculties across universities made us realize that there is a dearth of material on Indirect Taxes. The currently available books are very elaborate and meant for tax practitioners. This makes it difficult for the students to understand this important subject.

The syllabi on ‘Indirect Taxation’ for most Graduate and Post-Graduate students does not require the vast detailing of all the sections. Consequently, we have attempted to write this text on ‘Indirect Taxation’ with a balanced approach, focusing exclusively on the syllabi for ‘Indirect Taxation’ for various Universities and Management Colleges. We have tried to include all the relevant concepts, sections, case laws and examples while writing this book. This book covers the latest syllabi covered across almost all Indian Universities.

Students and readers will find that the text presents all taxation concepts in a simple and lucid way. It includes key definitions, solved numerical questions and case laws. Every topic has been explained keeping in view the standard of the course. The chapters are also provided with multiple choice questions to help the students check their concept clarity. Indirect taxation is a very dynamic subject as new amendments take place every year.

We acknowledge the use of resources from ICAI and other government websites for various case-laws and citations. The objective of making this book in the form of an E-book is to make it instantaneously available to the users. The student community could even use their smart phones/devices to read this book anywhere such as bus, train, air-travel or even while standing in a queue. Please email us if you find any inaccuracies, misprints or errors.

We hope that the first edition of the book proves useful to the students. Any feedback thoughts, comments and reviews are welcome.

Dr Meena Goyal

meenagoyal@rediffmail.com

CA Pavan Goyal

pavangoyal30@gmail.com

About the Authors

Meena Goyal (Ph.D, M.Com)

Dr. Meena Goyal holds a Ph. D. from Pune University and has more than a decade’s experience in teaching Financial Accounting, Management Accounting, Financial Management and Security Analysis and Portfolio Management at Post Graduate Level. She currently serves as a Professor in Indira School of Business Studies, (ISBS) Pune. She has been a visiting faculty for core subjects of Finance at MAEER’s MITCOM, ICFAI Business School, Dhole Patil Education Society’s Institute of Management, Wigan and Leigh College, Matrix, Singhad Business School, International School of Corporate Management, International School of Management Research, Pune University, Indira Group of Institutes. Dr M Goyal is an active corporate consultant in areas of project financing and financial decision making. She also authors of the web page ‘Financial Tabloid’ in web magazine of ‘Expressions’ published by ISBS.

Pavan Goyal (ACA, DISA, M.Com)

CA. Pavan Goyal is a practicing Chartered Accountant based in Pune with a vast experience in the field of Direct and Indirect Taxation. He has also delivered lectures on taxation in various management colleges. He is enthusiastic about interacting with commerce students and is a strong believer in using industrial case studies to make learning fun and easy.

Salient features of the Book

This book specifically caters to the requirement of MBA (Finance) students, Bachelors and Post-Graduate students and also professional courses like CA, CWA and CS

The chapters have been arranged in a logical manner to facilitate easy comprehension.

The book follows a balanced approach - with an exclusive focus on the syllabus of Indirect Taxation (as a Text Book). Students who are new to indirect taxation will find this text easy to understand with its simplified approach to convey complex concepts.

The book also contains application oriented problems without becoming a highly technical reference book.

Numerous practical aspects and examples from the corporate world essential for a finance / commerce student are included.

The book has been updated with the latest amendments in the Finance Act 2014

Relevant case laws are also described at all appropriate occasions in the book to aid understanding indirect taxation issues.

1

Introduction to Indirect Taxation

The Constitution of India (COI) has given power to levy tax to central and state government under seventh schedule. Constitution of India is foundation of all laws in India. It tells how to make laws. All other laws and Parliamentary or Government actions are subordinate to constitution. The overall taxation structure can be depicted as displayed in Figure 1.

Article 246 read with seventh schedule gives bifurcation between Union and State.

List I: Union list

List II: State list

List III: Concurrent list

Figure 1: Indian Taxation Structure

Union list

Entry no. 82: Tax on income other than agricultural income

Entry no. 83: Duties of customs including export duties

Entry no. 85: Corporation Tax

Entry no. 84: Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium drugs, narcotic drugs, but including medicinal and toilet preparations containing alcoholic liquor, opium or narcotics.

Entry no. 91: Stamp Duty on specified transactions

Entry no. 92: Tax on advertisements in newspaper

Entry no. 92A: Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.

Entry no. 97: Residual entry which includes any matter not included in list I and II.

State List

Entry no. 34: Betting and Gambling

Entry no. 45: Land Revenue

Entry no. 49: Tax on Land and building

Entry no. 50: Tax on mineral rights

Entry no. 51: Excise on alcohol, liquor, opium and narcotics

Entry no. 52: Octroi and Entry Tax

Entry no. 53: Tax on consumption and sale of electricity

Entry no. 54: Sale within state, other than newspaper

Entry no. 55: Tax on advertisements other than newspaper

Entry no. 56: Tax on goods or passengers carried by road or inland waterways

Entry no. 57: Tax on vehicles

Entry no. 59: Tolls

Entry no. 60: Profession Tax

Entry no. 63: Stamp Duty (other than those under Union List)

Major Indirect Taxes

Excise is duty on ‘manufacture’ in India

Service tax is on provision of services

Sales tax (now VAT) is on sale of goods in India

Customs duty is on import and export of goods

An indirect tax is one in which the burden can be shifted to others. The tax payer is not the tax bearer. The impact and incidence of indirect taxes are on different persons. An indirect tax is levied on and collected from a person who manages to pass it on to some other person or persons on whom the real burden of tax falls. For e.g. commodity taxes or sales tax, excise duty, custom duties, etc. are indirect taxes

Indirect Tax System in India

In general, the Indirect Tax in India is a complex system of interconnecting laws and regulations, which includes specific laws of different states. The Indirect Taxation regime encompasses various types of taxes like Sales Tax, Service Tax, Custom and Excise Duties, VAT and Anti-Dumping Duties.

Features of Indirect Tax

Easy to collect since mainly in organised sector

Less resistance from assessees

Buyer has no choice and cannot resist

Indirect taxes are regressive in nature

2

Basics of Central Excise

This chapter introduces Central Excise Duty. The following are the four pillars of central excise

Duty Liability

Valuation

Classification of Goods (CETA)

CENVAT

In other words, Central Excise Law is a combined study of:

Central Excise Act (CEA), 1944;

Central Excise Tariff Act (CETA), 1985;

Central Excise Rules, 2002; and

CENVAT Credit Rules, 2004

Levy of Excise Duty

The power to levy a duty of excise manufactured or produced in India derives its authority from entry 84 of the Union List (List I) of Seventh Schedule read with Article 246 of the Constitution of India. Thus, Central Excise is a tax on the ‘act of manufacture or production’. Section 3 of the Central Excise Act, 1944 (hereinafter referred to as the Act) is the charging section, which specifies the conditions under which Excise Duty is leviable on all excisable goods which are manufactured or produced in India.

Basic Conditions for Levy of Excise Duty

It is commonly known that levy of excise duty arises on manufacture and the duty is collected on removal of goods from the factory. However, all manufacturing process does not attract levy of excise duty unless some basic conditions are met. An item will be subject to excise duty if the following four basic conditions are met i.e.,

The item is goods under central excise.

The goods must be excisable i.e. it should be covered by Central Excise Tariff.

The goods must be manufactured and

Such manufacture or production must be in India.

Unless all of these conditions are satisfied, Central Excise Duty cannot be levied. Thus, it is very important to understand / interpret each of the conditions in detail to appreciate the implications, which are discussed below in brief.

What is Goods under Central Excise?

The word goods has not been defined under the Central Excise Act. However, as per judicial interpretation, the word goods, for purpose of levy of Excise duty, must satisfy two requirements i.e. (a) they must be movable and (b) they must be marketable.

Goods must be movable - They must be movable. Thus, immovable property or property attached to earth is not ‘goods’ and hence duty cannot be levied on it. It was observed that the word ‘manufacture’ or ‘production’ are associated with movables. (E.g., a ‘dam’ or 'road' is constructed - not 'manufactured' or 'produced').

Goods must be Marketable (and not marketed)- The item must be such that it is capable of being bought or sold. This is the test of ‘Marketability’. The goods must be known in the market. Unless this test of marketability is satisfied, duty cannot be levied, as these will not be goods. This view, first held by 5-member constitution bench of Supreme Court in UOI v. Delhi Cloth, has been consistently followed by Supreme Court in subsequent cases and by all High Courts. It was held that to become ‘goods’ an article must be something, which can ordinarily come to market to be bought and sold.

Case Law on mobility and marketability

Sirpur Paper Mills case - 1998 - SC

Paper making machine was assembled and erected at site from bought out components and own made components. The resultant product is not immovable property like a building. Embedding in concrete base has been done to ensure wobble free operation only. It could be dismantled from the base and re-erected elsewhere. There was manufacture (from components to machine). The machine made was moveable. Held there was manufacture of excisable goods. Therefore ED was attracted.

Board’s Circular – Taking cue from the Sirpur judgement the CBEC in exercise of the power conferred under Section 37B of the Central Excise Act issued orders (No.53/2/98cx dated 2.4.1998) – 1998 (76) ECR – 41c, clarifying that the ratio of Sirpur judgement should be followed scrupulously in deciding the excisability of plant and machinery assembled at site after considering the broad criteria (i) final product is distinct (ii) it is specified in Tariff; (iii) it is movable goods and saleable in market.

Triveni Engineering & Industries Ltd.(2000-(120) ELT – 273 (SC)

Supreme Court in Triveni case has held that installation or erection of Turbo alternator on platform specially constructed on land cannot be treated as common base, such alternator would be immovable property, hence not taxable. Each case had therefore to be decided on merit after considering the broad criteria as specified in Sirpur case. The present legal provision is as decided in Triveni Engineering, ie. ‘The marketability test requires that the goods are as such should be in a position to be taken to market and sold. If they have to be separated, the test is not satisfied’. Thus, if machinery has to be dismantled before removal, it will not be goods. It, therefore, follows:

duty cannot be levied on immovable property,

if plant is so embedded to earth that it is not possible to move it without dismantling, no duty can be levied,

if machinery superficially attached to earth for operational efficiency and can be easily removed without dismantling, duty is leviable,

Turnkey projects are not dutiable but individual component/machinery will be dutiable if marketable.

Actual sale is not necessary

Actual sale is not necessary in determining excisability of a product as long as goods are saleable or marketable

Duty leviable on captive consumption

Since excise is a duty on manufacture, duty is leviable even if goods are consumed within the factory and not sold. However, the goods must be marketable in the condition in which they are manufactured and further consumed within the factory.

Example: One factory manufacturing car but this factory used tyres from its another unit then in this case it is to be said that tyres are captively consumed

Even one purchaser enough –

The fact that goods are not in fact marketed is of no relevance. Even if goods are available from only one source or from a specified market, it makes no difference so long as they are available for purchasers. Marketability does not depend upon the number of purchasers or to territorial limits of the country.

Marketability to be decided on the basis of the state in which it is produced

The commodity which is sought to be made liable to excise duty must be a commodity that is marketable as it is, and not a commodity that may, by further processing, be made marketable. UOI v. DCM. (molten iron)

ED was leviable on Refined oil. Sale took place after deodorisation. In the market, the product is known as Refined oil: after deodorisation only.

Applying the marketability test, the Supreme Court held that Refined oil which is not deodorised is NOT goods

CCE vs. Bansal Indus Gases 2003(151) ELT.4(SC 3 member bench)

Carbide sludge arising in the manufacture of acetylene gas is not marketable and hence not liable to duty.

Waste and Scrap are ‘goods’ - In Khandelwal Metal and Eng. Works v. UOI Apex Court held that scrap would be liable to duty, if it is known in commercial parlance by that name and has an established market. Thus, waste/scrap can be ‘excisable goods’ if they are known in commercial parlance and are marketable. Further, the waste and scrap will not be ‘excisable goods’ unless they are specified in CETA (Central Excise Tariff Act). Thus, ‘waste or scrap’ will be ‘goods’ and hence taxable only if specifically mentioned in CETA (Tariff).

In view of this, CETA covers almost all items of ‘waste and scrap’. E.g. Waste Alloy Steel, Waste Copper, Ferrous Waste, Waste glass, HDPE Waste, Waste plastics etc. If a particular waste/scrap is not mentioned in CETA, it may be ‘goods’ but not ‘excisable goods’

Illustration of Goods:

Electricity (movable and marketable)

Water (movable and marketable)

Software – packaged and tailor made – both types are goods if they are sold through media of CD however, if they are downloaded through internet then Central Excise is not applicable but Service tax is payable on such goods

Air – (movable but presently freely available so not marketable but packaged oxygen cylinders are excisable)

Machinery (if it is in a movable condition)

Note:

Waste and Scrap are goods if they are saleable in the normal saleable. They are dutiable if they are manufactured. They are dutiable if mentioned in the Central Excise Tariff.

Example

A firm may buy raw materials in drums. The firm uses raw material for manufacturing its final product. Then it sells the drums as scrap. Here it is not excisable because the firm didn’t manufacture drums.

Broken glass sold as scrap cannot be charged to Central Excise because it is not mentioned in the Central Excise Tariff.

Central Excise on Plant and Machinery erected at site:

Whether immovable things are goods or not, was clarified in the case of Triveni Engg. vs. CCE 2000 (120) ELT 273 by the Supreme Court where it was observed that immovable property or articles embedded to earth, erections, turnkey projects are not generally termed as goods because they cannot ordinarily come to the market to be bought and sold.

If machine has to be dis-assembled for removal, it is not ‘goods’ and duty cannot be levied.

Excisable Goods

Section 2(d) Excisable goods means ‘Goods specified in the Schedule to CETA as being subject to duty of excise and includes salt.

Goods include article capable of being sold

Nil duty and Exempt from Duty – Both are excisable goods

Factory

According to section 2(e) Factory means any premises where any part of the excisable goods other than salt are manufactured or any manufacturing process is carried out.

Manufacture and Produce

Sec 2(f) manufacture includes any process-

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 Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture,

Production is a term broader than manufacture. In both production and manufacture, new and identifiable product should emerge. Usually, production term is used in case of natural production (ores, tea, coffee, horse, fish etc) and manufacture is used in case of human intervention. ‘Manu’ means hands.

Note:

By-products and scrap are not manufactured but they get produced in the process of manufacture and are hence goods (may be excisable also)

Some important points related to manufacture

Activity of repairs and testing – not manufacture as no new product comes in existence

Assembly of Computer Components – manufacturing activity as new and identifiable product has come into existence

Assembly of Computers and CKD packs – Completely Knock Down packs - manufacture as new product comes in existence – CKD packs are used only for transportation convenience.

In State of Karnataka Vs. Raghurama Shetty (1981) 47 STC 369 (SC) it was held that de-husking of paddy into rice is a manufacturing process as rice is distinct commercially different commodity from paddy.

Packaging and Labelling is not manufacture except a few cases.

Deemed manufacture in case of certain processes and products

Relabelling, repacking, putting or altering MRP is ‘deemed manufacture’ in case of about 144 articles covered under MRP valuation provisions in Central Excise Tariff Act.

Some processes are also ‘Deemed Manufacture’ in Central Excise Tariff Act. There are about 35 processes mentioned in different chapters.

Therefore we can say that excise duty is not levied on:

Services such as doctors treating the patients, accountants preparing the accounts, in these cases service tax are levied.

Immovable goods such as roads, bridges and buildings.

Non-Marketable goods, i.e., goods for which no market exists, e.g., melted iron ore at 1600 degree Celsius.

Goods that are not mentioned in CETA; and

Goods manufactured or produced out of India.

Taxable Event in Central Excise

Taxable event means the stage when tax is levied/ applied. Manufacture or production in India is the stage of levying tax. However, the government, at the time, when the goods are removed from the factory, i.e., goods are taken out from factory, collects tax. Since, excise duty is levied at the time of removal of goods. Thus, it becomes taxable at the time of their removal and therefore, the date of its actual production is not relevant. The date of removal is relevant and the rate of excise duty applicable on the date of removal shall be actual rate of excise duty to be paid. For example, if the goods are excisable and produced before the budget (when tax rate is 10%). The budget declares a rate of 12% on the goods, then excise duty would be applicable at the rate of 12% if the goods are removed after the budget. Thus, the date of production is not important.

In case of captive consumption, free samples, intermediate