— I INTRODUCTION TO INDIRECT TAX CHAPTER OUTLINE . Introduction of taxes 2. What are taxes ? 3, Features of Indirect Taxes Merits and Demerits of Indirect Taxes . Types of Indirect Taxes Self Test Exercises 1, INTRODUCTION OF TAXES Constitution of India has the right to collect and levy taxes. In Article 245 of the snstitution, it is stated that only two bodies uphold the power for enacting laws i.e, the larliament and the Legislature. Article 245 states that: a i i i ituti i make laws for the whole or Subject to the provisions of this Constitution, Parliament may Set of fee of India, and the legislature of a State may make laws for the whole or any part of the state. < . No law made by the Parliament shall be deemed to be invalid on the ground that it would have extraterritorial operation.Se GST 1.2 INTRODUCTI ON TO INDIREGy , Article 246 gives Union and State Government rights for levying tax Seventh Schedule to Article 246 states three lists which enumerate the matt : x . ae which the Union and th e Governments have the authority to make laws, te "Nder INDIAN CONSTITUTION List I List II State List Concurrent List ListI +: Union List : It contains the matters in respect of which the Parliament (Central Government) has the exclusive right to make laws. ListIl : State List : It contains the matters in respect of which the State Government has the exclusive right to make laws. ListII : Concurrent List : It contains the matters in respect of which both the Central and State Government have the exclusive right to make laws. 2. WHAT ARE TAXES ? Acharge which is mandatory imposed by the Government on income earned by individual or corporate, goods, services or any activity in order to raise revenue. It is considered as the penalty to live in this world. Taxes are charged to raise funds for various public expenditure. In terms of law failure to pay tax is a punishable act. There are various types of taxes, such as income tax, property tax, capital gain tax, service tax, value added tax, excise duty tax, GSTetc. Taxes are divided into two parts: 2.1 Direct Tax 2.2 Indirect TaxGST 1.3 Direct Taxes = Indirect Taxes Ultimate burden of Ultimate burden of Tax ‘Tax: Payment Payment : Purchaser —+ | Responsibility to Pay Tax %. Responsibility to Pay Tax : Shopkeeper example: GST | 21 Direct Tax : Taxes which are paid directly to the government are known as direct tax. It cannot be transferred to another person. Income tax, Corporate Tax, Capital Gain tax, Property taxetc. are considered as direct tax. Direct taxes may be adjusted to the individual characteristics of the taxpayer. Under this system government collects the tax from the person on whom tax itis sarod er iret a yn, th txpaye mtx bearer te se Povo DSS progressive in nature which means that if the income increases, percentage of tax charged will Heer ease ie taxpayers inthe higher tx racket have t pay higher rae of =k 22 Idec Tax: Atax whichis collectedbyteiatemediar from the person who ear Pe Be ics te tines tthe povermct ic koown i inet es. cramer tp tnother person, Sales tax value added tax (VAT), excise tax, GST are the few ee ak iat teil ep owen errion hae i ‘Thus, the burden of taxis shifted to the final consumer. ee ee Sa acannon vermas . two different persons.——_ sonia INTRODUCTION TO INDIRECT > Gs _ é ‘AX Adel ary ts) The incidence of tax is borne by the end consumer. It means that the person who pays tax to the government collects it from his customer. It is regressive in Nature The incidence of tax is borne by the person who pays tax to the Government. It is progressive in nature. 3S 3. FEATURES OF INDIRECT TAXES Charged from the final consumer of goods and services. Collected by intermediary and deposited to government. It falls both under central and state government depending upon the specific type of tax. For example, VAT is levied by state government where as CST by central government. Now, GST by both State and Central Government. Applied on all the sections of society whether rich or poor. The price of the product on which indirect taxes are imposed increases. Incidence and impact of tax does not fall on same entity. Itincludes Ad Valorem tax and Specific tax, of which Ad Valorem (VAT, GST) is proportional and Specific tax is fixed, VV V VVVVss 1.5 rr AND DEMERITS OF INDIRECT TAXES, GST err I 4, a 4, MERITS AND DEMERITS OF INDIRECT TAXES 1 Merits of Indirect Taxes ; Convenient : Indirect Taxes are levied on Production and sale of goods and sevEe®. ‘These taxes are imposed on the manufacturers, traders and sellers of goods and services, but their burdens of taxes are transferred to the final consumers. Tax payers feel it convenient because taxes are paid at the time of purchase of goods and services. Secondly, indirect taxes are paid in small amounts and at intervals. But the convenience is even greater due to the fact that the tax is “price coated”. It is wrapped in price. Itis like a sugar coated quinine pill. It is convenient for the State Government also, as taxes can be collected in lump sum and even at the ports or at the factory. Difficult to evade : Almost, selling price of all the products is inclusive of taxes. Therefore, the customer has no option to evade the indirect taxes, It can only be evaded if goods and services are not consumed which is not possible. Extensive Coverage : Indirect taxes have more coverage as compare to direct taxes. Almost all the goods and services carry indirect taxes. The taxes are to be paid by the consumers of such goods and services, Elastic : Some of the indirect taxes are elastic in nature. Government increases the taxes, if it feels that more revenue is required. In times of Prosperity indirect taxes produce huge revenues to the government. Universality : Poor people are always exempted from Paying direct tax due to less income as prescribed by law. But Indirect taxes have to be paid by both rich and poor class of people. Influence on Pattern of Production : Every product produced or services rendered have a different indirect tax rate. By imposing different taxes better allocation of Tesources can be achieved. For example : luxury goods carry the highest rate of taxes, making them expensive. Thus, government can divert resources from these Sectors to sector producing necessary goods, May not affect motivation to work and save : The indirect taxes may not affect the Motivation to work and to save. Since, most of the indirect taxes are not progressive in Nature, individuals may not mind to pay them. In other words, indirect taxes are generally Tegressive in nature. Therefore, individuals would not be demotivated to work and to save, which may increase investment. Welfare for the Society : The indirect taxes collected by the government are utilized in the activities such as giving education, medical facilities, transportation, family welfare etc. Sovernment also impose heavy taxes on the products which are harmful for Consumption such as cigarette, alcohol etc. It helps to keep a check and to minimize the consumption of such Products as well as helps the government to collect substantial Tevenue,GST 1.6 INTRODUCTION TO INDIRECT Tax 4.2 Demerits of Indirect Taxes : Although indirect taxes have become quite popular in both developed & under develope countries alike, they suffer from various demerits, of which the following are important : a High Cost of Collection : Indirect tax fails to satisfy the principle of economy. The government has to set up elaborate machinery to administer indirect taxes. Therefore, cost of tax collection per unit of revenue raised is generally higher in the case of most of the indirect taxes. b. Increase income inequalities : Generally, the indirect taxes are regressive in nature. The rich and the poor have to pay the same rate of indirect taxes on certain commodities of mass Consumption. This may further increase income disparities among the rich and the Poor. For example: Salt tax fell more heavily on the poor than on the rich, as both have to Pay the same price. The tax is wrapped in the price which is unfair. c Affects Consumption : Indirect taxes affect the consumption of certain products. For instance, a high rate of duty on certain products such as consumer durables may restrict the use of such products. Consumers belonging to the middle class group may delay their purchases, or they may not buy atall. The reduction in consumption affects the investment and production activities, which in turn hampers economic growth. Lack of Social Consciousness : Indirect taxes do not create any social consciousness as the taxpayers do not feel the burden of the taxes they pay. Uncertainty : Indirect taxes are often rather uncertain. Taxes on commodities with elastic demand are particularly uncertain, since quantity demanded will greatly affect as prices go up due to the imposition of tax. In fact a higher rate of tax on a particular commodity may not bring in more revenue. £ Inflationary : The indirect taxes are inflationary in nature. The tax charged on goods and services increase their prices. Therefore, to reduce inflationary pressure, the government may reduce the tax rates, especially, on essential items. &- Possibility of tax evasion : There is a possibility of evasion of indirect taxes as some customers may not pay indirect taxes with the support of sellers. For instance, individuals may purchase items without a bill, and therefore, may not pay Sales tax or VAT (Value Added Tax), or may obtain the services without a bill, and therefore, may evade the service tax. h Raising Prices Unduly : They cause the price of a product to rise more than the tax. A fraction of the money unit cannot be calculated, so seller tends to charge more than the tax. i Harmful to Industries : Tax charged on raw material tends to discourage industries as it will increase the cost of production and disturb their competitive capacity. dk Low Standard of Living : When the tax is imposed on the consumption of goods, it increases the prices and lowers the standard of living in the country. k. Cause of Unemployment : If the goods are taxed at higher rates, it lowers the effective demand, production of goods and employment. ae‘ici GST 1.7 (a) Sur Pur- Sur- charge | var | chase | ['WU"Y Et | T charge Ces Tax » * | Pa cess 5.1 INDIRECT TAXES BEFORE INTRODUCTION OF GST A. CENTRALTAK B, STATETAX Al Central Sales Tax (CST) : Central Sales tax is being introduced in the sixth Constitutional Amendment. CST is levied on the interstate trade under the purview of the legislative jurisdiction of Parliament, It came into force in 1957. Interstate sale means that the seller is in one state and the buyer is in another state. {tis a tax which is levied at the time of the sale of CST 800ds which are sold through inter-state trade. It is an origin based tax on customers, It is collected by the state where the good is being sold. It is Imposed only on interstate sale whereas sale within the state or import / &xport of goods does not fall under this category. CSTis payable on inter-State sales is @ 2%, if C form is obtained. Even if CSTis charged by Union Government, the revenue goes to State Government. State from which movement ofj GST 18 INTRODUCTION TO INDIRECT Tax goods commences gets revenue, CST Actis administered by State Government. A trader dealing in goods which involve inter-state trade is expected to pay both the state sales tax and the central sales tax on such transactions. TH Central Excise Duty A.2 Central Excise Duty : Central Excise Duty is one of the types of Indirect Tax which is applicable on the goods either manufactured or produced in India and intended to be consumed within India. Excise Duty tax is imposed on the manufacturer or producer of the goods but is always transferred to the end consumer, Excise duty tax is always wrapped up in Selling price of the good. Excise Duty tax can be classified into two categories : a) Ad valorem : Ad valorem duty tax is charged as a fixed percentage on particular goods and services. b) Specific : Specific duty tax is charged as a fixed Rupees amount on certain purchase, Government also charges excise duty on the goods that are harmful for the society, like cigarettes and alcohol. Therefore, these taxes are also called as sin taxes. New name givento Excise Duty Tax is CENVAT (Central Value Added Tax). A3 Service Tax : Tax which is imposed by the government on service providers for giving services to the customers is known as service tax. Service tax is imposed on all services except the services specified in the Negative List of Services. Apart from this, Service Tax Exemption is allowed to small scale service providers if the total value of services provided by them during the yearis less than = 10 Lakhs. Service tax is levied on the service provider but is actually charged by the customers. Hence, it comes under the category of indirect taxes. It came into existence under the Finance Act 1994.We have to pay tax on almost on all the services availed by us. For example, service tax is charged on telephone bills, banking services, event management, consultancy service, advertising, beauty parlor, health center, architect, restaurants, short term accommodation by hotels etc. When the service is provided to an individual, then the tax will be charged on cash basis, while if provided to companies then on accrual basis. Service tax is applicable to whole of India except Jammu & Kashmir. It is payable only when the value of services provided in a financial year is more than © 10 lakhs. AA Custom duty & Octroi (On Goods) : Custom Duty is levied on e all the goods that are imported in India and some of the selected goods that are exported from India. Duties that are imposed on imported goods are termed as import duty where as duties imposed on exported goods are termed as export duty. Primary objective of the government to CUSTOM impose custom duty is to raise revenue. Secondly, it is also imposed to DUTY protect the domestic industry from the foreign competitors. Custom Duty tax can be classified into three categories : i. Advalorem : Ad valorem duties are imposed according to the value of ‘goods or dimensions.— eat 70M puty & OCTROI (ON Goons) GST 1.9 ou A specific: Specific duties are imposed according to the quantity or weight of the goods. é Compound duty : When custom duty is imposed as a combination of the value as well a8 . various other factors, then it isknown as compound duty. In India, Custom Duty is defined under the Customs Act 1962, All matters related to custom falls under the Central Board of Indirect Taxes & Custom (CBIC), which is a division of the iment of Revenue of the Ministry of Finance, CBIC formulates policies that concern collection or levying of custom duties, custom duty evasion, smuggling prevention and adminis- ative decisions related to custom's formations, Almost all the goods which are imported in India have to pay the Import Duty Tax. Still there are few items such as lifesaving drugs or equipments, fertilizers, food grain etc on which no import duty is imposed. Import duty is further dividedin sub categories : j. Basic ‘Custom Duty : Itis imposed on the goods imported u/s 12 of the Custom Act ,1962. j, Additional customs duty iTt is imposed on the goods imported w/s 3 of Custom Tariff Act, 1975. Central Excise Duty imposed on the similar goods produced within India is same as the Additional Custom Duty. iii. Protective duty : Protective duty may be imposed to shield the domestic industry against imports at the rate recommended by the Tariff Commissioner. jy. Anti-dumping duty : Anti-dumping duty may be imposed if the goods being imported is at below fair market price, and is limited to the difference between export and normal price (dumping margin). y. Safeguard Duty : Safeguard duty is levied if the government feels that a sudden increase in import can potentially damage the domestic industry. Octroi: Octroi is tax applicable on goods entering into municipality or any other jurisdiction for ‘ ty J use, consumption or sale. In simple terms one can callit as Entry Tax. duty B, STATETAX Bl Entry Tax: Entry tax was introduced on 1" September 2000. It is a tax or fee charged by the state government on the movement of goods from one state to another in India. Itis levied by the recipient state to protect its tax base. The tax applies to dealers, industrial, commercial or trading undertakings, central and state government companies, firms, societies and clubs which carry on business, This tax has now been subsumed by the GST. B.2 Taxes on Lottery : Before the introduction of GST , service tax was charged on the sale of lottery tickets, Now ithas been merged into GST. B.3 Value Added Tax / Sales Tax (VAT/ST) : Value Added Tax was introduced in India in 2005. In the beginning years of introduction of VAT few states such as Gujarat, Tamil Nadu, Rajasthan, Madhya Pradesh, Chhattisgarh, Jharkhand, Uttarakhand & Uttar Pradesh did not opted for VAT but in 2014 almost every state and union territories in India had opted for value added tax system except Andaman, Nicobar islands and Lakshadweep Island. Value Added Tax is imposed on the intrastate sale i.e., when the sale takes place within the State. Under such system both the buyer and the seller of the goods belong to the same state, Asost 1.10 INTRODUCTION TO INDE» is AK the name suggests itis levied on the product whenever value is added at a stage of Production, and at the point of retail sale, cA 1 ibe VAT is paid by the producer to the government but it is wane ‘ : ' from 4 customers orend users who purchase the goods. Itisa multistage tax which is levied at CVery g 4 of production of goods and services making the taxation system more transparent. VA‘ a imposed on domestic as well as imported goods. VAT was introduced to avoid double taxation system. The amount of VAT that the user pays is the cost of the product, less any of the costs materials used in the product that have already been taxed. VAT = Output tax —Input tax For example : Suppose Mr, X spends & 10,000 to purchases wheat flour to bake bread. Tax levied jg 10%, Mr. X has to pay © 1,000 as tax. Mr. X spends further & 5,000 to convert: wheat flour to bread. Now the: breag cost him & 15,000, Keeping € 5,000.as a profit margin, he sold the bread to the: customer for % 20,000 Plus tax. of 10%, The customer paid Mr. X the tax of € 2,000. Thus output tax is € 2,000 and inputtax is € 1,009, So, final VAT payable by Mr. X is € 1,000 (% 2,000 —& 1,000). Sales Tax : Sales tax is a consumption tax paid to the governing body on the sale of goods and services, Itis levied at a point of sale or we can say that customer pay sales tax when they purchases goods and services. It is collected by the retailers, wholesalers or agents and passed on to the governing body (government), Sales tax is not levied on all the goods and services. There are certain TAX goods and services which are exempted from it. Sales tax is charged on the movable goods. Union Government has an authority to charge sales tax on interstate sale, while state government has an authority to charge sales tax on intra state (within State) sale. Sales can be broadly classified in three categories. B4 Luxury Tax :Tax levied on luxury goods and services (which are not considered essential) is known as Luxury Tax, It was introduced in 1996. Luxury tax is modeled after sales tax or VAT. Luxury tax is charged as a percentage on alll items of a particular class. Luxury tax does not affect the majority of people, itmainly affects the wealthy class of the society. It is so because wealthy people mostly buy luxury items like expensive cars, jewelery etc. Luxury tax is imposed only if the amount of purchase crosses the certain limit. Luxury goods have high income elasticity of demand. With the increase in tax rate, there will be the sharp decrease in the demand for the luxury goods due to both income effect and substitution effect. B.5 Entertainment Tax : Entertainment Tax is covered under List2 of the Seventh Schedule of the Constitution of India, It is source of revenue for the State Government but it’s equally important contribution is towards the promotion of ancient Indian arts, culture, and also sports by granting tax exemption. Entertainment means any exhibition, perfor- mance, amusement , game, sport or race, (including horse race) and cinematographic exhibitions. The liability to collect entertainment tax- ENTERTAINMENT TAX GST 1.11 from the patrons and to deposit the same with the Government lies with the proprietors / organizers of entertainments. Cinemas are the main source of revenue from Entertainment Tax. 6 Securities Transaction Tax (STT) : Whenever securities are purchased or sold through Indian Stock Exchange Securities Transaction Tax is imposed. Securities can be shares, debentures, mutual funds etc, Securities at Transaction Tax was introduced in 2004 budget and was applicable from Ist April, 2004, Securities Transaction Tax was introduced with an aim to reduce the short term capital gaintax and to eliminate tax on the long term capital gains, Securities Transaction \, B.7 Stamp Duty : Whenever an immovable property located in a state is transferred in another's name then the State Government imposes an indirect tax known as stamp duty. Government also imposes such tax on all legal documents. Every state has an authority to charge different tax rate. B8 Taxes on Advertisements : In the success of any business, advertisements play a very important role. As per survey, approximately 0.45% of the Indian GDP was spent on advertisement in the year 2018. After the introduction of service tax on all services (other than those covered under negative list), service tax was applicable on all the aspects of advertising services except the sale of space or time for advertisement in some instances. But, now GST is applicable on all modes of advertising including the sale of space in print media. 52 INDIRECT TAXES AFTER INTRODUCTION OF GST A. Goods &ServiceTax(GST) —_B. Custom Tax Al Goods & Service Tax (GST) : Goods & Service Tax is implemented in India from July 2017. It is a single indirect tax with an aim to make the nation a unified common market. It is levied by the government on the both goods & services provided by the supplier to the consumer. GST has subsumed many indirect taxes which are imposed by both Central Government and State Government, Indirect taxes such as Central Excise duty, Duties of Excise, Additional Duties of Excise, Additional duties of Customs, Service tax, Central surcharges, Cess, Value Added tax, Entry Tax, Central Sales Tax, Entertainment and Amusement Tax, Luxury Tax and Purchase Tax are subsumed into single tax system GST. The consolidation of several different taxes into one is forecast to help the country move forward by eliminating the cascading of taxes. The reform is also set to pave the way for a common national market, thereby making Indian commodities and services increasingly Competitive in both local as well as global markets. GST is a destination based tax. CGST : Excise Tax, ADE, Service Tax, Surcharge & Cess SGST : VAT,Purchase, Tax, Luxury Tax, Entry Tax, Surcharge & Cess IGST : CVD&SAD,CST oiae nee Pe) GST - AN INTRODUCTION CHAPTER OUTLINE , Introduction to GST i 1A.01 . Features of GST e 1A.03 . GST Council . 1A.05 . Decision making in GST Council i 1A.05 . Functions / Role of GST Council 1A.06 . Importance of GST 1A.06 . Disadvantages of GST 1A.07 . Types of GST 1A.08 . Difference Between CGST, SGST, UTGST & IGST 1A.11 . How will GST work ? 1A.11 . GST Legislation 1A.12 . Need of GST in India 1A.13 . Goods not covered under GST 1A.13 . Working of GST 1A.13 . Goods & Services Tax Network (GSTN) 1A.16 . Solved Problems 1A17 |, Self Test Exercises 1A.18 1. INTRODUCTION GST isan indirect tax. It has been introduced in India on Ist July 2017. Itis a single indirect _ lax with an aim to make the nation a unified common market. It is levied by the government on theboth goods and services provided by the supplier to the consumer. It is applicable on whole of ‘ It Covers the area of both Indian land and water (up to 200 nautical miles Inside Sea is a part Sea water). GSTis one indirect tax for the entire country. So, in pre GST era, the pattern of imposing indirect taxes was as follows : lei _ GST - AN INTRODL, Tio) \ Se eee Importer of goods : Import Duty is charged. Manufacturer of goods Wholesaler in Delhi selis goog. Central Excise Tax & to retailer in Haryana VAT/CST is charged. CST is charged. Customer in Haryana buys Retailer in Haryana sells goods VAT is charged. to customer in Haryana. VAT is charged. After introduction of GST, the pattern of imposing indirect tax is as follows : : Manufacturer of goods Wholesaler in Delhi sells Importer of goods : i i IGST & custom GST is charged. goods to retailer in Haryana GST is charged, duty is charged. Ea Customer in Haryana buys Retailer in Haryana sells goods GST is charged. to customer in Haryana : GST is charged. In India, it is based on dual GST model. It means that both Central Government as well as State Government will levy tax simultaneously on the common base amount. GST is sub divided into four different types : e SGST_ - State GST, collected by the State Govt. e CGST - Central GST, collected by the Central Govt. e IGST - Integrated GST, collected by the Central Govt. on supply of inter- state goods and services. e UTGST - Union territory GST, collected by union territory government. Note : India is a Union of States. The territory of India Comprises of the territories of the ~ State and the Union Territories. Currently, there are 28 States and 8 Union Territories; of which, three (Delhi, Jammu & Kashmir and Pondicherry) are having legislature.a SUBSUMED UNDER OST GST 1A.3 ft GST has subsumed many indirect (axes which are imposed by both Central Government & state Government Ean vedios tee are now under a single taxation regime, Indirect ‘ xessuch as eee