Indian Business Tax Structure

Direct Tax

Indirect Tax

Income Tax

Wealth Tax

Gift Tax

Customs

Central Excise

Service Tax

Sales Tax

Other Commercial Taxes

Constitutional Background
No tax shall be levied or collected except by authority of law. Article 265 State Govt. cannot impose tax on sale or purchase during imports or exports; or tax on sale outside the state. Article 286(1) Parliament is authorised to formulate principles for determining when a sale or purchase takes place (a) outside the state (b) in the course of import and export. Article 286(2) Parliament can place restrictions on tax on sale or purchase of declared as goods of special importance and the state government can tax such declared goods only subject to these restrictions. Article 286(3)

Constitution of India
7th Schedule
Union List List I Entry 92A Taxes on sale or purchase of goods other than newspaper where such sale or purchase takes place in the course of interstate trade or commerce. Central Sales Tax Act State List List II Entry no. 54 Tax on sale or purchase of goods other than newspaper except on interstate sale or purchase.

State VAT Acts

Indian Sales Tax Laws

International cross Border Transactions involving export and import of Goods through Indian customs frontiers
CST

0%

Interstate sale involving movement of goods interstate origin state and destination state Sale of Goods of special importance Declared goods, sold any where in India

< or = 2%

< or = 5%

LST

Sale of Goods of special importance Declared goods, sold any where in India Other than Declared Goods unrestricted Sovereign Rights

< or = 5%

Any Rate

Interstate Sale

Sale of goods.

movement of goods interstate that is from one state to another.

Inseparably connected Inextricably connected

Illustration 1 A
Ahmedabad
Sale happens in Karnataka

B
Bangalore He likes the goods. Provides the visiting card with details Provides a purchase order Makes a payment Requests B to ship the goods to Ahmedabad Which state is the appropriate state for collection of tax Is there Sale of goods ? Is there Movement of goods Interstate ? In which state does the ownership pass? Which is the appropriate state for collection of tax ?
Karnataka is the appropriate state to collect CST

Illustration 2 A
Ahmedabad
Sale happens in Gujarat

B
Bangalore
IS Gujarat the appropriate state to collect CST

He likes the goods. Provides the visiting card with details Provides a purchase order, Makes a payment Requests B to ship the goods to Ahmedabad

ORIGIN BASED LAW

With a condition that goods will be accepted only if the quality controller in Ahmedabad approves the goods. Quality controller approves the goods in Ahmedabad Is there Sale of goods ? Is there Movement of goods Interstate ? In which state does the ownership pass? Which is the appropriate state for collection of tax ?

Interstate Sale

Sale of goods.

movement of goods interstate that is from one state to another.

CENTRAL ENACTMENT

ORIGIN BASED LAW.

STATE IMPLEMENTATION

Inseparably connected Inextricably connected

STATE COLLECTION STATE ENJOYMENT.

Illustration 3 B
Hyderabad

A
Ahmedabad
ORIGIN BASED LAW

B
Bangalore

A places order on B at Bangalore for supply of goods B delivers the goods from the Hyderabad factory, as he does not have sufficient stock at Bangalore. Which is the appropriate state for collection of tax
Andhra Pradesh is the appropriate state to collect CST

Illustration 4 A
Bhopal

A
Bangalore
ORIGIN BASED LAW

B
Bangalore

A is in Bangalore. B is also in Bangalore They are next door neighbours A places order on B to supply goods and deliver at the project site in Madhya Pradesh Is it an interstate sale?
Karnataka is the appropriate state to collect CST

Lessons learnt
Whether ownership passes before the movement of goods or after the movement of goods is irrelevant Whether the ownership passes at the originating state or the destination state is irrelevant The location of the buyer and sellers are also irrelevant The place where documentation is done is also irrelevant What is relevant is From which state does the goods originate from? with respect to the contract of sale? That Originating state is the appropriate state for collection of taxes.

Types of CST Transactions

Interstate Sale at concession rates Sale in transit Branch transfer and consignment sales Sale in the course of export Sale to SEZ units Deemed Exports Sale to special entities WHO, UNESCO diplomatic missions, consulate offices.

Form Raj
Form A Application Form B Registration Certificate Form C - Declaration of continuing registration status Form D sale to Governments Form E Sale-in-transit Form F Branch Transfers Form G Indemnity Bond on loss of forms Form H Sale in the course of Export Form I Sale to SEZ Units Deemed Export Form J Sale to Special Entities

IN - TRANSIT - SALE

A R
Maharashtra

B R
Gujrat

C R
Gujrat

D R
Gujrat

IN - TRANSIT - SALE

A R

C Form

B R

C Form

C R

C Form

D R
Kerala

Tamil Nadu

Karnataka

Andhra Pradesh

IN - TRANSIT - SALE

A R

C Form
E1 Form

B R

C Form
E2 Form

C R

C Form
E2 Form

D R
Kerala

Tamil Nadu

Karnataka

Andhra Pradesh

Movement of goods otherwise than by way of sale

Movement of goods interstate for purposes of Exhibition and return Repair and return Job work and return Stock and future sale of goods in the destination state
Of generic goods (without customer identity) Not against pre-existing order of sales (premeditated sales)

Documentary Proof Form F

Movement of goods otherwise than by way of sale has to be supported by
F form from the destination state Lorry receipt from the transporter Delivery note issued by the sales tax dept
Way bill Road permit Delivery note [ VAT 515 in Karnataka]

Loss of Statutory Forms Indemnity in Form G

Make police complaint for loss of forms Make newspaper advertisement for loss of forms
One in local vernacular language One in English Daily

Execute a indemnity document in Form G

Promise to make good any consequential loss that may arise to the Government due to misuse or abuse of the lost forms by any body else

Sale in the course of Export Form H

The penultimate sale, preceding the ultimate export sale, is exempt from tax
The export order should be first received, by the merchant or trader exporter The goods should be then purchased for export. This benefit is not available for manufacturer exporter The goods purchased and the goods exported must be same. Example of packing of PRAWNS and Dressing of PINEAPPLES. Primary form of prawn and pineapple is maintained. Export cannot be out of stock, but only from purchases for purposes of export Exporter should issue H form Exporter should provide the proof of physical export, that is bill of lading, packing list etc attested by customs. Packing materials purchased for export is also eligible for this tax exemption

Sale to SEZ Form I

Sale to SEZ or developer of SEZ is deemed to be export. The sale should be to a unit residing in the special economic zone The goods are to be used for export The buyer should issue form I The form I should be countersigned by the Export Commissioner under whose jurisdiction the SEZ is located. Even the developer of the SEZ is eligible for the exemption

Sale to Special Entities Form J

Govt of India has entered into a treaty to exempt the special entities from consumption tax [indirect taxes] Sale to special entities are exempt, against Issue of form J. The special entities are
UN organizations like WHO UNESCO etc Diplomatic missions embassies Consulate General offices of other countries.

They are not allowed to resell, but they can take the goods to their own country.

VAT: An Example
A: Supplier of Raw material; B: Manufacturer; C: Wholesaler; D: Retailer Tax rate = 10%
SALES TAX DEPARTMENT 10 A 100+10 B 5 10 200+20 5 C 250+25 D 300+30

Note: Total tax collected = 10+10+5+5 = 30 Which is also equal to 10% of 300 = tax paid by consumer. Consumer

Different Stages of VAT

B
Manufacturer Sale Value Rs. 200.00 Gross VAT 10%; Rs. 20.00 Net VAT Rs. 20-10=10.00

C
Wholesaler Sale Value Rs. 300.00 Gross VAT 10%; Rs. 30.00 Net VAT Rs. 30-20=10.00

A
Raw Material Producer Sale Value Rs. 100.00 Gross VAT 10%; Rs. 10.00 Net VAT Rs. 10.00

D
Retailer Sale Value Rs. 400.00 Gross VAT 10%; Rs. 40.00 Net VAT Rs. 40-30=10.00

Note: Total VAT collected at four point; 10+10+10+10 = Rs. 40.00

Vat Issues
Interstate purchases is not vatable against local sales tax collected. Here I buy interstate and sell locally and lose the interstate tax as it is non redeemable. Interstate sale is vatable against the local purchase tax paid. Govt loose. Here I buy locally and sell interstate and local govt. Redeems all the the input tax which may be higher than the output tax. Input tax is allowed to be rebated only if you collect out put tax. Other wise input tax will become your cost. In VAT Law Exemption means punishment Exporter is refunded the input taxes paid on inputs relatable to export. This is called zero rating of input taxes Zero Rating of input taxes is allowed even to persons selling against H form or I form. With respect to Branch transfer, input tax credits are allowed even though there is no output tax. Input tax only to the extent of 2% is not Vatable. Input taxes paid in excess of 2 % are VATABLE.

VAT Rates
Schedule of Exempted goods Schedule of Vulnerable goods Schedule of Concessional goods
Industrial inputs to the extent notified Information technology goods as notified Capital goods to the extent notified Goods of Local Importance

0% 1% 5%

Declared goods Goods not covered above Works contract, lease of goods,

5% 14% 14%

Non VAT goods no input credit any rate of output tax Input tax restricted goods

Input tax restricted goods

Motor Vehciles and their parts Stationery items Food and food articles Cutlery & crockery etc Building materials Electrical goods and their parts

Capital Goods
They are used in the business of the dealer for resale, or use in the manufacture for sale
Plant and equipment Goods carriage vehicle Material handling equipment Pollution control equipment Cold storage equipment, storage equipment Billing equipment, including computers

The input taxes paid on purchase of such equipment is allowed to be used for payment of output tax liabilities.

Works contracts
Works contracts are composite, indivisible contracts, containing cost elements such as goods, services and also profit. These indivisible works contracts are allowed to be artificially divided into goods services and profits, so as to arrive at the taxable value of goods that can be subject to levy of VAT. 46th Constitutional amendment has introduced the concept of deemed sales, wherein, the Governments are allowed to divide the contracts so as to arrive at the value of goods and put them to tax.

 Works contacts can be broadly divided into two parts

Works Contracts

Goods

Non-Goods

i) Local Purchases i) COST OF Labour ii) Interstate Purchases ii) COST OF Outsourced labour (contract labour) iii) Imported Purchases iii) COST OF Labour Like Charges/establishment iv) COST OF Designs, Drawings, etc iv) Sale-in-transit v) Inter state movement of v) COST OF Testing fees, certification fees etc contractors own goods vi) COST OF Architect fees /Eng fees vi) Free Supplies vii) COST OF Consumables which cease to Exist PLUS FAIR SHARE OF PROFITS

Works contracts
Owner Free Supplies from owner contractee

Principle of accretion Local Purchases Inter-State Purchases Imported Purchases Interstate movement of own goods Contractor Used or consumed in the execution of the works contract

Registered In the local State

Assessable Value Merit I approach

Value in Crores 1. 2. 3. 4. 5. 6. 7. 8. Gross Value of Contract Less: Assessable in Originating State (Exclusion) Revised Gross Value Less: Actual cost of labour together with share of profits Taxable value of goods used in the works contract Tax at 12% Less Input tax credits on local purchases Net out put tax payable Rs. 12,000 2,000 10,000 4,000 6,000 720 120 600

Assessable Value Merit II approach

Value in Crores 1. 2. 3. 4. 5. 6. 7. 8. Gross Value of Contract Less: Assessable in Originating State (Exclusion) Revised Gross Value Less: Standard Deduction as per prescribed say @30% Taxable value of goods used in the works contract Tax at 12% Less Input tax credits on local purchases Net out put tax payable Rs. 12,000 2,000 10,000 3,000 7,000 840 120 720

Composition
Value in Crores 1. 2. 3. 4. 5. 6. 7. 8. Gross Value of Contract Less: Assessable in Originating State (Exclusion) Revised Gross Value Less: Labour deductions Taxable value of goods used in the works contract Tax at 4% composition rate Less Input tax credits on local purchases Net out put tax payable Rs. 12,000 2,000 10,000 NIL 10000 400 NIL 400

Input tax credit not allowed Output tax cannot be collected Tax invoice cannot be issued No interstate purchases or import purchases. No interstate or export sale