Basic Taxation

Deepak Wagholikar
PRAJ Industries Ltd. ,Pune

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Contents
Scope
Theory of Taxation
Excise Duty
VAT
CST
Taxation in PRAJ group
Manufacturing

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Contents ..
Trading
EOU
SEZ
Taxation logic in SAP
Conclusion
Questions & Answers
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Scope of this Presentation
This presentation shall deal with
basics of
Excise Duty
Sales Tax VAT &
Central Sales Tax
with reference to Procurement
Function.
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Theory of Taxation
A Government levies various taxes on
individuals and organizations to earn revenue
for its functioning and development work .
Taxes can broadly be classified into two types.
Direct Taxes & Indirect Taxes
Direct taxes are those which are paid directly
include. eg-Income Tax ,Corporation tax etc,
Indirect Taxes are those which are levied
indirectly. eg- Excise Duty , Customs duty,
Sales tax etc
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Taxation in India
Taxation under Constitution - In the basic scheme of
taxation in India, it is envisaged that

(a) Central Government will get tax revenue from Income
Tax (except on Agricultural Income), Excise (except on
alcoholic drinks) and Customs

(b) State Government will get tax revenue from sales tax,
excise on liquor and tax on Agricultural Income

(c) Municipalities will get tax revenue from octroi and
house property tax.

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Taxation In India ..
Income Tax, Central Excise and Customs are
administered by Central Government.
Central Sales Tax is levied by Central
Government while State Sales Tax is levied by
individual State Governments.
Though Central Sales Tax is levied by Central
Government, it is administered by State
Governments and tax collected in each State is
retained by that State Government itself.
Taxation in India is complex.

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Definition It is an indirect Tax on
manufacture of certain goods in India.
It consists of various Acts, Rules,
Notifications, circulars.
Notable among them are
Central Excise Act-1944 &
Central Excise Tariff Act-1985
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It is administered by CBEC- Central Board of
Excise and Customs reporting to Revenue dept
in Finance Ministry of GOI.
India is divided into zones, then
Commissionerates ,Divisions and Ranges.
These formations are headed by Chief
Commissioner, Commissioner, Deputy/Asst
Commissioner and Superintendents
respectively.
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A organization upon application , is allotted a
ten-digit Excise Control Code
i.e ECC number.
This is very Important number and must be
mentioned on documents like Tax Invoice,
Returns etc.
Unit ECC number
SSW- Trading AAACP6090QXD003
SSW -Mfg AAACP6090QXM001
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Based on Harmonic System of Nomenclature various Items
/ commodities are classified into total 96 Chapters.

Eg. Chapter 73 deals with articles of Iron and Steel.

A item is further classified into 8 digit Central Excise Tariff
code starting with Chapter number.

Eg. 7307 2100 is tariff heading for Iron /Steel Flanges

Excise Tariff Manual gives a entire list of Items and their
Tariff heading with rate of duty applicable. eg. Flanges have
14% duty + 2% Ecess+ 1 % SE cess total -14.42%
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The Excise Duty is categorized into three types :

Ad valorem means according to Value ( Percentage
of value) eg- Duty on Electric Motors (Tariff
85011020) is 14.42 % .Thus if the Price of a Motor is
Rs. 10000/- , then excise duty payable will be Rs.
1442/-

Specific Duty means a specific amount per certain
quantity eg . total excise duty on petrol is Rs.14.35
per litre .

Combination duty Excise duty on Diesel was 6% (of
price) + Rs. 3.25 per litre earlier
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Excise duty paid on Inputs is setoff ( i.e.
credit is obtained )
In case of Manufacturing Credit is
obtained on gross level Input vs.
Output
In case of Dealer credit is obtained but
only that credit is passed on while selling.

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An Excise registered Unit has to maintain
certain Registers like RG-23 A (Mfg ),
RG-23 D(Dealer), RG-23C (Capital) etc
Certain data in prescribed format is to be
submitted to Excise department , which is
called as Returns.
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Value Added Tax
Value Added Tax (VAT) is a modern and
progressive form of sales tax. It is charged and
collected by Mfg / Dealers on the price paid by
the customer.
VAT paid by Mfg /Dealers on their purchases
is usually available for set-off against the VAT
collected on sales.
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VAT : Advantages
1. It is simple, transparent and progressive
2. Business friendly system of taxation
3. Reduction in the number of tax rates to only 5 slab
rates -0%,1%, 4% ,12.5% & 20%
4. Elimination of tax on tax in tax system
5. Full set-off available for VAT paid on most
business purchases
6. Simplification of tax forms and procedures
7. Greater reliance on self assessment and voluntary
compliance by dealers
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VAT Logic
All registered dealers, regardless of where they are in the chain of
manufacture or distribution, must charge VAT on their sales of
taxable goods and collect it from their customers.
Registered dealers must issue a tax invoice to other registered
dealers showing the VAT amount being charged as a separate
amount.
Registered dealers who pay VAT on their purchases can normally
claim a set-off for the VAT paid to their suppliers. As a result,
Tax is on Value Added by the dealer.
Dealers must ensure that tax is charged separately in their
purchase invoice in order to be eligible to claim set-off.
Certain dealers who sell mainly to consumers at retail level can
opt for a simplified system of VAT calculation and payment under
a Composition Scheme. Under the Composition Scheme, dealers
will not issue a tax invoice or show VAT as a separate amount on
a bill or cash memorandum.
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VAT - Legal Framework
Maharashtra Value Added Tax Act -2005
Applicable to entire Maharashtra state and is
effective 01.04.2006
Comprises of Act, Rules, Circulars,
Notifications, Schedules
A(0%),B(1%),C(4%),D(20%),E(12.5%)
Similar legal framework is there for other
States in India.
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VAT Registration
VAT applies to all types of businesses including Importers
,Manufacturers ,Distributors ,Wholesalers, Retailers ,Works
Contractors, Lessors
VAT Registration Nos are called as TAX Indentification
Number.( TIN )
VAT TIN -Transactions in Maharashtra;
CST TIN - Transactions Out of Maharashtra.
Eg. 27880000531V wef 1.4.06 is VAT TIN
27880000531C wef 1.4.06 is CST TIN
This nomenclature of TIN is different in different States
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VAT - Important Points
TAX INVOICE , along with declaration must be
issued.
VAT must be shown separately.
Registration numbers (TINs) must be printed on Tax
invoice.
Returns are to be filed along with VAT payable, if
any ( after setoff )
There is a negative list for VAT credit for certain
items which go in immovable Property. eg. Cement
procured for a constructing a building .
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Central Sales Tax
CST is a plain sales tax (unlike VAT) & is
applicable for Interstate Sales.
CST Act 1956 provides the backbone.
It is administered by respective State
Govts.
The Tax is collected by state where the
goods movement commences, first.
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Central Sales Tax ..
Definition of Sale -A sale or purchase of goods shall be
deemed to take place in the course of inter-State trade
or commerce if the sale or purchase (a) occasions the
movement of goods from one State to another or (b) is
effected by a transfer of documents of title to the goods
during their movement from one State to another

CST Act defines that goods includes all materials,
articles, commodities and all kinds of movable property,
but does not include newspapers, actionable claims,
stocks, shares and securities

A stock transfer to own Branch outside state , is not a
Sale.
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CST ..
What constitutes a Sale ?
Essential requirements of sale are
There must be transfer of goods
General property in the goods should be
transferred to buyer from seller
Consideration i.e. price must be paid or agreed
to be paid. It may be cash, deferred payment
or any other valuable consideration
Sale includes hire purchase, goods involved
in works contract, lease or sale of food articles.
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CST ..
Location of Buyer or Seller is Immaterial - Even
though the Buyer and Seller are from same State , but
the Goods Movement occurs from one state to another
, CST will be applicable.
Temporary movement through another State is not
Inter State sale - If movement of goods starts from
one State and ends in the same State, it will not be
deemed to be movement of goods during inter State
sale; even if during transit goods pass through other
State.
Goods Transfer to Job Worker (subcontracting) outside
state does not become a Sale.
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CST Rates.
Sales tax rate for sale within
the State ( VAT )
CST rate in case
of sale to
registered
dealers
CST rate in case of
sale to
unregistered
dealers
Nil Nil Nil
1% 1% 1%
3% 3% 3%
12.50% 3% 12.50%
20% 3% 20%
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CST Forms
A dealer has to issue certain declarations in prescribed
forms to buyers/sellers. These forms are prescribed in
Central Sales Tax (Registration and Turnover) Rules,
1957.
Out of these forms, forms C, E-I, E-II, F and H are
printed and supplied by Sales Tax authorities.
Dealer has to issue declarations in the forms printed
and supplied by the Sales Tax authorities only. These
forms are in triplicate.
Eg. If a Buyer , buys material from outside state, he will
issue a C form to seller against payment of CST @ 3%
This C form issued contains details pertaining to Seller
like Tax Invoice number, invoice date, Invoice Amount
etc and thus establishes occurrence of interstate
transaction.
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Form
Type
Tax rate Purpose : Establish Interstate
transaction between
C 3 % Two Registered dealers-Buyer
& Seller
E-I 3% Sale in transit between Buyer
and Seller (who is
Manufacturer- First Sale)
E-II 0 or 3% Sale in transit between Buyer
and Seller (who is Dealer-
Second Sale)
H 0% Between Buyer and seller ,
wherein the Material is
Ultimately Exported by Buyer
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CST ..
Exemption from CST if sale to SEZ -
CST Act provides that inter state sale
made to a unit in SEZ (Special Economic
Zone) will be exempt from CST agnst
form I.
CST is Refundable for supply to EOU
unit. (but first it has to be paid)
This Tax is being phased out .
In FY-0607 it was 3 % , This year it will
be 2% , so on so forth.
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Procedures are very important for any
taxation law.
Often valuable tax concessions are lost
or penalties are imposed only because
prescribed procedures are not followed.
Proper Understanding and administration
of Tax laws is of prime importance.
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Praj Group operates in every single
category as regards taxation.
Mfg , Trading, EOU, SEZ, STPI .
A variety of transactions are done like
Sale in Transit , High seas Sale , Third
country sale, apart from normal Buy-sale
transactions.
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Excise is paid and credit taken for material
received. Excise is also called as cenvat
Excise is charged on Sales Value of Finished
goods
Eg. An item- X is purchase at Rs. 100 , with
Excise Rs.14.42 , while selling item Y(x is one
of the component of Y) at Rs.200, Duty
charged will be 28.84 (14.42% of sales value)
VAT -100 % Setoff is applicable in most cases.
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Excise / Cenvat credit is taken based on
Excise Invoice Duplicate for Transporter
(which is received along with Material)
Exactly same amount of Cenvat is charged (
passed on ) in Invoice raised on client,
irrespective of Sales Price.
Eg. An item purchased at Rs.100, will have
excise Rs. 14.42 and the same will be charged
while selling, even though the sales price is Rs.
200/-
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Trading : Export Jobs-Excise
For export Jobs excisable goods can be
directly despatched from Vendor to Sea /
AirPort, without payment of excise duty, under
CT1 Bond.
Non-excisable goods can also be sent to port
directly.
If Excisable material is received at Stores &
then exported, Duty Drawback is used to get
some part of duty back with proper
documentation.

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1. PO raise for Export job with proper tax codes.
2. Give signed PO copy to EXL dept for CT1
form.
3. EXL checks & obtains excise Authorities
signature on CT1 (against B-1 Bond
executed earlier).
4. EXL gives approved CT1 in duplicate to
Buyers, along with pre-authorised Blank
ARE1 form.
5. Despatch Instructions are given to Buyer.
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Buyer forwards the CT1,ARE1 & Despatch
Instructions to Vendor.
Vendor submits Packing List ,along with Draft
ARE1 form to Buyer.
Buyer forwards the same to EXL dept.
EXL checks & prepares Pre-shipment invoice
and forwards its to vendor through buyer. Draft
ARE1 is also approved by EXL.
Vendor marks packages as given in Pre-
shipment Packing List.
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Vendor writes the package details on
ARE1 and his invoice.
Vendor despatches material under self-
removal or Excise Sealing to Port as
mentioned in Despatch Instructions,
under intimation to Buyer.
Octroi Formalities (N form) are done for
Mumbai Port through nominated Octroi
agent.

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Material is received in Warehouse near port.
Material is offered to Customs dept for
checking.
After Customs Clearance material is stuffed
into container.
Material is loaded into the ship.
Ship sails out for next port.
Material is delivered at Port of Discharge.
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Trading : Export -Sales Tax
In case of purchase from outside
Maharashtra CST will be 0% agsnt H
form.
In case of Purchase within Maharashtra,
VAT ( as applicable- 4% or 12.5%) will be
applicable and full setoff obtained.
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EOU-Duty-Free Procurement
All Material Imported by EOU unit can be
procured free of customs duty.
Material can be procured domestically
,without payment of excise duty by CT3 /
ARE3 procedure.
CST has to be paid , but is refundable for
EOU.
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EOU-CT 3 process
In case of domestic procurement, PO is raised
with appropriate tax codes.
Application for CT3 is made ,along with signed
PO copy submitted to Excise dept.
Excise approves CT3 and gives it back.
Buyer sends approved CT3 copy to vendor.
Against this CT3 ,Vendor despatches material ,
duty free ,along with form ARE3.
Material is received and GRIN prepared.ARE-3
received is submitted to Excise dept.
One copy is endorsed by Excise & send back to
vendor.
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Special Economic Zone
A Special Economic Zone (SEZ) is a
geographical region that has economic
laws that are more liberal than a
country's typical economic laws.
Concept originated in China in early 80s.
In India Units situated in SEZ are exempt
from all taxes and duties subject to
certain conditions.
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Purpose of SEZ
Generation of additional economic activity

Promotion of exports of goods and services;

Promotion of investment from domestic and foreign
sources;

Creation of employment opportunities.

SEZ Act 2005 and SEZ Rules 2006 form the basis of legal
framework.
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SEZ - Incentives
Duty free import/domestic procurement of goods for
development, operation and maintenance of SEZ units
100% Income Tax exemption on export income for SEZ units
under Section 10AA of the Income Tax Act for first 5 years, 50%
for next 5 years thereafter and 50% of the ploughed back export
profit for next 5 years.
Exemption from minimum alternate tax under section 115JB of the
Income Tax Act.
External commercial borrowing by SEZ units upto US $ 500 million
in a year without any maturity restriction through recognized
banking channels.
Exemption from Central Sales Tax.
Exemption from Service Tax.
Single window clearance for Central and State level approvals.
Exemption from State sales tax and other levies as extended by
the respective State Governments.
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SEZ-Taxation process
Material procured free of excise duty against
ARE1 form ,from excisable vendor (Inside or
Outside Gujarat)
Material procured from Vendors in Gujarat, is
exempted from VAT wef 1.4.2008.
Material Procured from Outside Gujarat is 0%
CST against form I. Material supply to
accompany Form - 403 (issued by Gujarat
Sales Tax dept and passed on to Vendor by
Praj)
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Tax codes in S.E.Z.
ZP- PUR-SEZ- GUJARAT VAT EXEMPT-
SUPPLY TO SEZ UNIT
(procurement from Gujarat State)
and
CI-PUR-SEZ- EXCISE 0% + CST 0%
AGNST FORM I
(Procurement from Outside Gujarat)

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Taxation in SAP
There is a there is a single tax Master in SAP
(same master for Sales as well as purchases)
For ease of our understanding and usage, we
have used a logic to differentiate .
A two digit Numeric Code (Numbers) is given
for all taxes related to Sales [eg -05-Sales VAT
MH VAT -4 % ] (charged to our customers)
A two digit alphanumeric code for all taxes
related to Purchases.[ eg- CA -PUR Form C Ex-
14.42 % and CST-2%]
All tax codes in Purchase will start with word -
PUR
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Taxation in SAP ..
Tax code is selected, manually, while making a
Purchase Order, based on conditions
applicable.( eg. Local Purchase, Sale in transit
etc)
SAP classifies Taxes into two parts.
One which can be setoff and other which
cannot be setoff (i.e. they are a cost)
System Setting are done accordingly.
It is very IMPORTANT to use appropriate
codes.

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It is clear that Taxation is complex and
needs adequate knowledge.
Usage of Appropriate tax code in SAP is
very important with reference to type of
Transaction and Plant.
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Thank You