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Direct and Indirect Taxes

 Tax is the price we pay for civilised society – Justice


Holmes of US Supreme Court
 Taxes broadly classified as direct and indirect
 Direct taxes are paid directly by assessee to
Government while indirect taxes are paid indirectly
Foundation of all Laws in India
 Constitution of India is foundation of all laws in
India
 It is mother of all laws in India, law how to make
laws
 All other laws and Parliamentary or Government
actions are subordinate to Constitution.
 Act contrary to provisions of Constitution is Ultra
vires the Constitution and void
Constitutional Background
India, that is Bharat, shall be a Union of States [Article
1(1)]
Article 246 read with Seventh Schedule gives bifurcation
of powers between Union and State -
 List I – Union List
 List II – State List
 List III – Concurrent List
Taxation in Union List
 Entry No. 82 - Tax on income other than
agricultural income.
 Entry No. 83 - Duties of customs including
export duties.
 Entry No. 84 - Duties of excise on tobacco and
other goods manufactured or produced in India
except alcoholic liquors for human
consumption, opium, narcotic drugs, but
including medicinal and toilet preparations
containing alcoholic liquor, opium or narcotics.
- - Continued
Union List (Continued)
 Entry No. 85 - Corporation Tax.
 Entry 92 - Tax on advertisements in newspapers
 Entry 91 - Stamp duty on specified transactions
 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.
List I (Continued)
 Entry No. 92C – Tax on services (Entry passed but not
yet notified and hence not effective)
 Entry No. 97 - Any other matter not included in List II,
List III and any tax not mentioned in list II or list III
[This is ‘residual entry’]
 Central Excise duty is levied under Entry 84 and 97
Four Pillars of Central Excise
 Duty Liability
 Valuation
 Classification of goods
 Cenvat
 General excise duty rate is 12.5% - no education cess
Charging Section of Central Excise
 Section 3 of Central Excise Act (often called the
‘Charging Section’ ) states that ‘There shall be levied
and collected in such manner as may be prescribed
duty of excise on all excisable goods (excluding goods
produced or manufactured in special economic zones)
which are produced or manufactured in India - . - . -'
Basic Requirements for excise duty
 Duty is on ‘goods’
 Goods must be ‘excisable goods’
 Goods must be manufactured or produced
 Such manufacture or production should be in India
What are ‘goods’
 Must be movable and marketable.
 Actual marketing not necessary.
 Marketable – Not ‘marketed’
 Mere mention in Central Excise Tariff not sufficient –
SC in Bhor Industries and Moti Laminates
Illustration of Goods
 Electricity
 Water
 Software – packaged and tailor made
 Air
 Photograph
Dutiability of waste and scrap
 Waste and scrap is ‘final product’ for excise.
 Waste and scrap are ‘goods’ if these are normally
salable.
 Waste and scrap is dutiable only if ‘manufactured’.
 Waste and scrap is dutiable only if it is specified in
Central Excise Tariff
Plant and machinery erected at site
 In Triveni Engineering v. CCE AIR 2000 SC 2896 = 120
ELT 273 (SC), it was observed, 'The marketability test
requires that the goods 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 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 Central Excise Tariff Act, 1985 as
being subject to a duty of excise and includes salt’.
 Goods include article capable of being sold.
 Nil Duty and Exempt from Duty – Both are ‘excisable
goods’
Manufactured or Produced
 ‘Production’ is broader than ‘manufacture’.
‘Production’ included ‘manufacture’
 In both production and manufacture, new and
identifiable product should emerge
 Usually, ‘production’ term is used for new product by
natural process. ‘Manufacture’ derived from ‘manu’ i.e.
by hands.
Production
 Items like ore, asbestos, coffee, tea, tobacco, dairy
products etc.
 live products like horse, fish, flowers etc.
 By-products, scrap etc. which are not really
'manufactured' but they do get 'produced'
 It also covers ‘manufactured goods’ as term ‘produced’
is broader than ‘manufacture’.
Meaning of ‘Manufacture’
 Manufacture as specified in various Court decisions
i.e. new and identifiable product having a distinctive
name, character or use must emerge or
 Deemed Manufacture – (a) Process amounting to
manufacture (b) Products covered under MRP
provisions
‘Manufacture’ as defined by Courts
 Union of India v. Delhi Cloth Mills Co. Ltd. AIR 1963 SC
791 = 1 ELT (J199) (SC five member constitution bench)
- manufacture means bringing into existence a new
substance. Manufacture is end result of one or more
processes, through which original commodity passes.
Manufacture implies a change but every change is
not manufacture. A new and different article must
emerge having a distinctive name, character or
use.
Issues relating to ‘Manufacture’
 Repairs, testing
 Packing, Labelling – not manufacture except in case of
deemed marketability
 Assembly of computer components
 Assembly of CKD packs
Deemed Manufacture
 Processes specified as ‘amounting’ to manufacture in
Central Excise Tariff – About 35 processes in different
Chapters
 Repacking, relabelling, putting or altering MRP is
‘deemed manufacture’ in case of about 110 articles
covered under MRP valuation provisions
Taxable Event in Central Excise
 Manufacture or production of excisable goods in India
is taxable event.
 Distinction between sales tax and central excise.
 Captive consumption, free samples, intermediate
product
 Ownership irrelevant in Excise. Excise Duty payable
on intrinsic value of goods
Manufacturer
 Section 2(f) - “the word manufacturer shall be
understood accordingly and shall include not only a
person who employs hired labour in the production or
manufacture of excisable goods, but also any person
who engages in their production or manufacture on
his own account.”
Duty Liability
 Duty liability is on ‘manufacturer’ – rule 4(1) of Central
Excise Rules
 Exceptions – (a) Molasses produced in Khandsari
sugar factory (b) goods in warehouse (c) Job work
under Notification No. 214/86-CE
Who is ‘Manufacturer’
 Person who actually brings new and identifiable
product into existence
 Raw material supplier is not ‘manufacturer’. Job worker
is the manufacturer.
 Brand name owner is not ‘manufacturer’.
 Loan licensee is not ‘manufacturer’
Principal to Principal Relation
 Contractor undertaking contract work within the
factory is not ‘manufacturer’
 Example – Wheat given to chakkiwala for grinding
into wheat powder
 Specialised agency doing fabrication within factory
Manufacture must be in India
 Imported goods
 Imports of CKD packs – assembly in India will not be
‘manufacture’
Why Classification?
 Classification tells you rate of duty, while valuation
tells you on what value that rate should apply
 Thousands of products – Not possible to list all
and state duty of each product
 Goods have to be classified and sub-classified and
then rate of each sub-classification is to be
specified
 Tariff to specify rate of duty payable on each
Article - Central Excise Tariff Act and Customs
Tariff Act.
Background of Tariff
 Harmonised Commodity Description and Coding
System developed by World Customs Organisation
(WCO)
 Based on International convention of Harmonised
System of Nomenclature (HSN).
 Indian Customs adopted this nomenclature w.e.f.
28-2-1986. Central Excise Tariff also adopted HSN
based classification w.e.f. 1-3-1986.
 Eight digit classification
Arrangement of Tariff
 Classification of goods from groups to sub-groups to
sub-sub groups
 Arrangement similar to menu in a Hotel
 All goods classified in 20 Sections in Excise Tariff and
21 Sections in Customs Tariff.
 Sections are divided into 96 chapters in Excise Tariff
and 98 Chapters in Customs Tariff. Chapter 77 is blank
in both Tariffs.
Headings and sub-headings within the Chapter
 Each chapter and sub-chapter is further divided into
various headings depending on different types of
goods belonging to same class of products.
 The tariff is designed to group all goods relating to
same industry and all the goods obtained from the
same raw material under one Chapter in a progressive
manner as far as possible.
Eight Digit classification
 First two digits indicate chapter number. Two more
digits are added to make ‘headings’. Thus, ‘headings’
have four digits. Further 2 digits are added for sub-
classification, which are termed as ‘sub-headings’. Last
2 digits are added for sub-sub-classification, which is
termed as ‘tariff item’. Rate of duty is indicated against
each ‘tariff item’ and not against heading or sub-
heading.
 Rules for interpretation of Tariff
Exemption from Excise Duty
 Government can grant exemption from excise duty –
partial or complete – conditional or unconditional by
issuing a notification – section 5A(1) of CEA and
section 25(1) of Customs Act
 Tariff has to be read along-with exemption
notification to find exact rate of duty
Exemption Notification
 Notifications are issued by Government by
notifying in Official Gazette
 They become effective on the date issued [section
5A(5) of CEA and section 102(4) of Customs Act]
 Notification subordinate to Act. Notification
cannot be with retrospective effect
 CE, CE(NT), Cus, Cus(NT) and Ser suffix to
indicate type of Notification
Tariff Rate and Effective Rate
 Tariff Rate is as prescribed in Tariff
 Effective Rate is as specified in exemption Notification
 Nil duty means the Tariff itself specifies duty as ‘Nil’
 Exempt from duty means exempted by a notification
Some Exemption Notifications
 SSI Exemption – 8/2003-CE
 Exemption to goods manufactured in backward areas
like North-East Region, J&K, Sikkim and Kutch
 Goods supplied to EOU
Overview of SSI Exemption
 Notification No. 8/2003-CE dated 1-3-2003
 Unit whose turnover was less that Rs 4 crores in
previous financial year are entitled to full
exemption upto Rs 150 lakhs in current financial
year.
 Goods manufactured by an SSI unit with brand
name of others are not eligible for SSI concession,
unless goods are manufactured in a rural area.
Valuation
 After determining that excise duty is payable, rate of
excise duty is found out on the basis of Central Excise
Tariff Act read with relevant exemption notification.
 Next issue is valuation i.e. ‘value’ on which excise duty
is payable.
Excise duty payable on one of
following basis
 Specific duty, based on some measure like
weight, volume, length etc.
 Duty as % of Tariff Value fixed under section 3(2)
 Duty on basis of production capacity – section 3A
of Central Excise Act
 Duty based on basis of Maximum Retail Price
printed on carton after allowing deductions -
section 4A of CEA
 Duty as % based on Assessable Value fixed under
section 4 (ad valorem duty) (If not covered in any
of above)
MRP Based Valuation
 In case of about 144 products, duty is payable u/s 4A of
Central on basis of MRP printed on the package, after
allowing abatement at specified rates. MRP should be
inclusive of all taxes and duties.
 For example, if MRP is Rs 100 and abatement is 35%,
‘value’ will be Rs 65 for excise purposes, irrespective of
actual sale price
Applicability of MRP Valuation provisions
 The provision applies only when product is
package intended for retail sale and is specified in
a notification issued u/s 4A of CEA.
 MRP provisions u/s 4A of CEA are overriding
provisions (even for job work)
 Even in case of products covered u/s 4A, where
MRP provisions are not applicable, valuation will
be on basis of ‘value’ u/s 4 i.e. Assessable Value e.g.
wholesale package, industrial or institutional
consumers, exports
Composition Scheme
 Compounded levy scheme under rule 15 of Central
Excise rules, provides for payment of duty on basis of
production capacity. It is an optional scheme and not
compulsory like production capacity basis scheme.
 The scheme is presently applicable to stainless steel
pattas/patties and Aluminium circles. These articles
are not eligible for SSI exemption.
Duty on Production Capacity
 Section 3A of CEA provides for payment of duty on
basis of production capacity, without any reference to
actual production. Production capacity will be
determined as per Rules. Scheme compulsory and not
optinal
 Pan masala , gutkha and chewing tobacco are covered
under these provisions.
 Reduction if factory closed for 15 days or more
Tariff Value
 In some cases, tariff value is fixed by Government from
time to time. This is a “Notional Value” for purpose of
calculating the duty payable. Once ‘tariff value’ for a
commodity is fixed, duty is payable as percentage of this
'tariff value' and not the Assessable Value fixed u/s 4. This
is fixed u/s 3(2) of Central Excise Act.
 In customs, tariff values fixed for edible oils
Ad valorem duty
 This is residual method of valuation
 Duty is payable on ‘value’ as per section 4 of Central
Excise Act
 Section and Rules well drafted to avoid manipulation
in ‘value’
 Basic principle is that excise duty is payable on
intrinsic value of goods – ownership is irrelevant
When transaction value is
assessable value
 The goods should be sold at the time and place of
removal.
 Buyer and assessee should not be related.
 Price should be the sole consideration for the sale.
 Each removal will be treated as a separate transaction
and 'value' for each removal will be separately fixed.
Transaction Value excludes taxes
 Amount of duty of excise, sales tax and other taxes, if
any, actually paid or actually payable on such goods is
deductible
 Only taxes actually paid or payable are allowed as
deduction.
 If goods are cleared without payment of duty, the price
is taken as ‘cum duty’ price and excise duty payable
should be calculated by back calculations
Inclusions in Assessable Value
 Packing charges and design charges
related to manufacture.
 Price escalation after clearance, but
not when price was final at the time of
clearance – interest
 Transport charges upto place of
removal are includible in assessable
value.
 Notional interest on advances is
Exclusions from Value
Any Trade discount is allowable as
deduction from assessable value.
Cash discounts
Taxes are not includible in ‘value’
Outward freight after place of
removal
Valuation Rules
 If transaction value is not acceptable, valuation is
required to be done as per Valuation Rules [Section
4(1)(b) of Central Excise Act and Valuation Rule 3]
 Valuation can be done on value of ‘such’ goods (i.e.
goods of same class of same manufacturer) [Rule
4]
 Valuation of free samples, when price not sole
consideration, related party transactions, depot
sales
Valuation in case of captive
consumption
 In case of captive consumption, duty is payable on
basis of cost of production plus 10%. Cost of
Production should be calculated on basis of CAS-4
[Rule 8]
Job Work
 Since excise duty is on manufacture, duty will be
payable even if goods are manufactured on job
work basis, on intrinsic value
 As per rule 10A of Valuation Rules, duty is
payable on the basis of price at which raw
material supplier sales the final product in the
market.
 If product is covered under MRP, duty is payable
as per section 4A.
Exemption to Job work
 Job work is exempt if material is sent to job worker
under Cenvat Credit Rule 4(5)(a).
 Job work is exempt if material was sent under
Cenvat provisions or under notification No. 214/86-
CE.
 Service tax is payable on Job work if (a) Activity is
not manufacture or (b) Material is not sent under
Cenvat provisions
Basics of Vat
 Vat is tax on value added
 Broadly, ‘value added’ is difference between ‘value’ at
the output stage and ‘value’ at the input stage
Conventional Mode of tax on Goods
Detail A B C
Purchases - 110 165
Value 100 40 35
Added
Sub-Total 100 150 200
Add Tax 10 15 20
10%
Total 110 165 220
Transaction with Vat
Transaction without VAT Transaction With VAT
Details A B A B
Purchases - 110 - 100
Value 100 40 100 40
Added
Subtotal 100 150 100 140
Add Tax 10 15 10 14
Total 110 165 110 154
Highlights of Cenvat
 Instant Credit – You need not wait till actual use
 One to one co-relation not required in Vat/Cenvat
 Credit on inputs, input services as well as capital goods
 Destination principle
Document for availing Cenvat Credit
 Original or Duplicate Invoice (in case of manufactured
goods), Dealer’s Invoice, Bill of Entry (in case of
imports), Supplementary Invoice
 Xerox not permitted. Endorsed Invoice/Bill of Entry
permissible
 Defect in document – Permission of AC/DC required
to avail Cenvat Credit
Core procedures in Central Excise
 Registration – PAN based Registration Number
 Daily Stock Account
 Invoice for clearance
 Monthly/quarterly payment of duty
 Records and returns
Other procedures
 Exports
 Receipt of goods for repairs/reconditioning
 Provisional assessment
 Warehousing of goods
 Adjudication, appeals and settlement