Taxation PAPER : 4 INTERMEDIATE (IPC) COURSE STUDY MATERIAL. Part II : Indirect Taxes (REVISED SYLLABUS) [Relevant for November, 2014 Examination]

Transcription

1 INTERMEDIATE (IPC) COURSE STUDY MATERIAL PAPER : 4 Taxation Part II : Indirect Taxes (REVISED SYLLABUS) [Relevant for November, 2014 Examination] As amended by the Finance Act, 2013 VOLUME III BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

2 This Study Material has been prepared by the faculty of the Board of Studies. The objective of the Study Material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the standard text books. In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein, they may write to the Director of Studies. All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the Study Material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA All rights reserved. No part of this book may be reproduced, stored in retrieval system, or transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior permission in writing from the publisher. Revised Edition : October, 2013 Website : bosnoida@icai.in ISBN No. : Price : ` Published by : The Publication Department, The Institute of Chartered Accountants of India, A-29, Sector 62, Noida , India. Printed by : Typeset and designed at Board of Studies. ii

3 A WORD ABOUT STUDY MATERIAL Taxation is one of the core competence areas of Chartered Accountants. Chartered Accountants are expected to advise clients and organizations, especially in the corporate sector, in the area of tax management and planning pertaining to both direct and indirect taxes. Considering the importance of the subject, the same has been included in the syllabus of both Intermediate (IPC) Course and Final Course of the Chartered Accountancy curriculum. Whereas in Intermediate (IPC) Course, both direct and indirect taxes have been included in one paper viz., Paper 4: Taxation; in Final Course, direct and indirect taxes have been allocated separate papers namely, Paper 7: Direct Tax laws and Paper 8: Indirect Tax Laws. Paper 4: Taxation of Intermediate (IPC) Course has two parts; Part I : Income-tax and Part II : Indirect Taxes. The syllabus of Part II has been revised to increase the scope of its coverage in line with the growing significance of indirect taxes. Students are expected to acquire working knowledge in indirect taxes after undergoing this course. This volume of the Study Material - prepared in accordance with the revised syllabus - includes laws relating to central excise duty, customs duty, central sales tax, VAT and service tax. In line with the syllabus of Part - II of this Paper, the discussion on central excise duty, customs duty, central sales tax and VAT are aimed at introducing the students to the basic concepts of substantive law of such taxes as also familiarizing them with the basic aspects of the significant procedures thereof. However, the provisions relating to service tax, which are included in the syllabus, have been discussed in detail. The subject matter in the Study Material is based on the law as amended by the Finance Act, No efforts have been spared in making this Study Material lucid and student friendly. Care has been taken to organize the Chapters in a logical sequence to facilitate easy understanding of the law. Nevertheless, students are requested to send their suggestions/feedback on how to make the Study Material more useful to them in the Feedback Form given at the end of the Study Material. They may also write to Faculty, Indirect Taxes at smita@icai.in and shefali.jain@icai.in. Happy Reading and Best Wishes! iii

4 HIGHLIGHTS OF CHANGES IN STUDY MATERIAL Amendments made vide the Finance Act, 2013 and recent notifications/circulars issued in central excise, customs, service tax laws have been incorporated in respective Chapters. Such amendments have been given in bold italics for the convenience of students. The following changes have been made in the Study Material to comply with the requirements of the revised syllabus: New Chapter 1 Basic Concepts of Indirect Taxes has been added in accordance with the revised syllabus. The Chapter is divided into five units as under: (i) (ii) Unit 1 Introduction Unit 2 Central Excise Duty (iii) Unit 3 Customs Duty (iv) Unit 4 Central Sales Tax (v) Unit 5 VAT The various concepts in the above Units have been explained with the aid of examples, illustrations, and tabular presentations, wherever possible. Diagrams including flow diagrams have also been used to facilitate intelligible reading and better retention of the complex law. Headings have been incorporated at appropriate places for quick grasping of the content discussed thereunder. New Chapter 5 Exemptions and Abatements has been included. Concepts relating to registration and invoicing have been added in service tax. New Chapter 7 CENVAT credit covering Rules 1-9 of CENVAT Credit Rules, 2004 has been included. Feedback form is given at the end of the Study Material. Students are encouraged to give their feedback/suggestions. iv

5 Level of Knowledge: Working knowledge SYLLABUS (REVISED) PAPER 4 : TAXATION (One paper Three hours 100 Marks) PART II INDIRECT TAXES (50 MARKS) Objective: To develop an understanding of the basic concepts of the different types of indirect taxes and to acquire the ability to analyse the significant provisions of service tax. 1. Introduction to excise duty, customs duty, central sales tax and VAT Constitutional aspects, Basic concepts relating to levy, taxable event and related provisions 2. Significant provisions of service tax (i) (ii) Constitutional Aspects Basic Concepts and General Principles (iii) Charge of service tax including negative list of services (iv) Point of taxation of services (v) Exemptions and Abatements (vi) Valuation of taxable services (vii) Invoicing for taxable services (viii) Payment of service tax (ix) Registration (x) Furnishing of returns (xi) CENVAT Credit [Rule 1-9 of CENVAT Credit Rules, 2004] Note If new legislations are enacted in place of the existing legislations the syllabus will accordingly include the corresponding provisions of such new legislations in place of the existing legislations with effect from the date to be notified by the Institute. Students shall not be examined with reference to any particular State VAT Law. v

6 PART II INDIRECT TAXES CONTENTS CHAPTER 1 : BASIC CONCEPTS OF INDIRECT TAXES UNIT 1: INTRODUCTION 1.1 Background Direct and Indirect Taxes Features of indirect taxes Constitutional provisions Principal indirect taxes Administration of indirect taxes UNIT 2: CENTRAL EXCISE DUTY 2.1 What is excise duty? Constitutional provisions Types of excise duties Sources of central excise law Levy of duty Goods and excisable goods Manufacture Manufacturer Collection of duty Classification of excisable goods Valuation of excisable goods Small scale industry (SSI) exemption General procedures vi

7 UNIT 3: CUSTOMS DUTY 3.1 What is customs duty? Constitutional provisions Sources of customs law Levy of customs duty Customs duty not leviable in certain cases Exemption from customs duty Classification of imported/export goods Valuation of imported and export goods Date for determining the rate of duty and tariff valuation of imported goods Date for determining the rate of duty and tariff valuation of export goods Types of customs duties Import and export procedures UNIT 4: CENTRAL SALES TAX 4.1 Categories of sales Constitutional provisions Sources of central sales tax aw Historical background of central sales tax Objects of the Central Sales Tax Act Levy and collection of central sales tax Charge of central sales tax Exceptions to levy of central sales tax (CST) Inter-State sale vii

8 4.10 Inter-State stock transfer/inter-state consignment transfer [Section6A] Sale outside the State [Section 4] Sale in course of import/export [Section 5] Rates of tax on sales in the course of inter-state trade or commerce Determination of turnover for central sales tax [Section 8A] Exemption from CST Goods of special importance/declared goods UNIT 5: VALUE ADDED TAX 5.1 Basic concepts of VAT VAT in Indian context Constitutional provisions relating to State-Level VAT VAT rates and coverage of goods Input tax and output tax Input tax credit (ITC) VAT liability Composition scheme for small dealers VAT and sales tax incentives VAT and Works Contract VAT and Lease Transactions VAT and Hire-Purchase Transactions VAT and sale of food articles Deficiencies in State-Level VAT VAT procedures viii

9 CHAPTER 2 : BASIC CONCEPTS OF SERVICE TAX 2.1 Introduction Genesis of service tax in India Constitutional Provisions Sources of service tax law Selective vs. comprehensive coverage Administration of service tax Role of a Chartered Accountant Extent, Commencement and Application [Section 64] Definition of service [Section 65B(44)] Charge of service tax [Section 66B] Education Cess and Secondary and Higher Education Cess Negative list of services [Section 66D] Date of determination of rate of tax, value of taxable service and rate of exchange [Section 67A] CHAPTER 3 : POINT OF TAXATION 3.1 Introduction Determination of point of taxation-general rule [Rule 3] Determination of point of taxation in case of change in effective rate of tax [Rule 4] Payment of tax in cases of new services [Rule 5] Determination of point of taxation in case of person liable to pay service tax under reverse charge or in case of associated enterprises [Rule 7] Determination of point of taxation in case of copyrights, etc. [Rule 8] Determination of point of taxation in other cases [Rule 8A] ix

10 CHAPTER 4 : VALUATION OF TAXABLE SERVICE 4.1 Valuation of taxable services for charging service tax [Section 67] Service Tax (Determination of Value) Rules, CHAPTER 5 : EXEMPTIONS AND ABATEMENTS 5.1 Introduction Mega exemption notification Small service provider s (SSP) exemption Exemption from service tax equal to R&D cess payable on import of technology Refund of service tax paid on services used in the export of goods Exemption to services for use of foreign Diplomatic Mission/consular post in India or family members of diplomatic agents or career consular officers posted therein Exemption to services provided by TBI/ STEP Exemption to services received by a developer/units of an SEZ Exemption to specified export promotion schemes Abatements in respect of various taxable services CHAPTER 6 : SERVICE TAX PROCEDURES 6.1 Introduction Registration [Section 69 & rule 4 of the Service Tax Rules, 1994] Issue of invoice, bill or challan or consignment note [Rule 4A & 4B of the Service Tax Rules, 1994] Person liable to pay service tax [Section 68 & Rule 2(1)(d) of the Service Tax Rules, 1994] Payment of service tax Returns [Section 70, Rule 7, Rule 7B & Rule 7C of the Service Tax Rules, 1994] Accounting codes for payment of service tax x

11 CHAPTER 7 : CENVAT CREDIT 7.1 Introduction Rule 2 Definitions Rule 3 CENVAT credit Rule 4 Conditions for allowing CENVAT credit Job Work provisions [Rule 4(5) and 4(6)] Rule 5 Refund of CENVAT credit Rule 5A Refund of CENVAT credit to units in specified areas Rule 5B - Refund of CENVAT credit to service providers providing services taxed on reverse charge basis Rule 6 Obligation of manufacturer or producer of final products and a provider of output service Rule 7 Manner of distribution of credit by input service distributor Rule 7A Distribution of credit on inputs by the office or any other premises of output service provider Rule 8 Storage of inputs outside the factory of the manufacturer Rule 9 Documents and accounts xi

12 1 Basic Concepts of Indirect Taxes Learning objectives UNIT 1: INTRODUCTION After reading Unit- 1 of this Chapter, you will be able to understand: the concept of tax and the objective for its levy the concept of direct and indirect tax and the differences between the two the basic features of indirect taxes the Constitutional provisions pertaining to levy of taxes what are the principal indirect taxes as to how the indirect taxes are administered in the country. 1.1 Background In any Welfare State, it is the prime responsibility of the Government to fulfill the increasing developmental needs of the country and its people by way of public expenditure. India, being a developing economy, has been striving to fulfill the obligations of a Welfare State with its limited resources; the primary source of revenue being the levy of taxes. Though the collection of tax is to augment as much revenue as possible to the Government to provide public services, over the years it has been used as an instrument of fiscal policy to stimulate economic growth. Thus, taxes are collected to fulfill the socio-economic objectives of the Government. What is a tax? A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the Government, a payment exacted by legislative authority. A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority". In simple words, tax is nothing but money that people have to pay to the Government, which is used to provide public services. 1.2 Direct and Indirect Taxes Taxes are broadly classified into direct and indirect taxes. Direct Taxes: A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The significant direct

13 1.2 Indirect Taxes taxes imposed in India are income tax and wealth tax. Indirect Taxes: If the taxpayer is just a conduit and at every stage the tax-incidence is passed on till it finally reaches the consumer, who really bears the brunt of it, such tax is indirect tax. An indirect tax is one that can be shifted by the taxpayer to someone else. Its incidence is borne by the consumers who ultimately consume the product or the service, while the immediate liability to pay the tax may fall upon another person such as a manufacturer or provider of service or seller of goods. Also called consumptionn taxes, they are regressive in nature because they are not based on the principle of ability to pay. All the consumers, including the economically challenged bear the brunt of the indirect taxes equally. Indirect taxes are levied on consumption, expenditure, privilege, or right but not on income or property. The significant indirect taxes levied in India are excise duty, customs duty, service tax, central sales tax (CST), value added tax (VAT), octroi, entry tax, purchase tax and the like. Economists world over agree that direct and indirect taxes are complementary and therefore, a rational tax structure should incorporate in itself both types of taxes. TAX DIRECT TAX * The person paying the tax to the Government directly bears the incidence of the tax. * Progressive in nature - high rate of taxes for pay. people having higher ability to * * INDIRECT TAX The person paying the tax to the Government collects the same from the ultimate consumer. Thus, incidnece of the tax is shifted to the other person. Regressive in nature - All the consumers equally bear the burden, irrespective of their ability to pay. [Fig. 1] Burden of borne by person himself tax the Burden of tax shifted to another person Direct Tax Indirect Tax

14 Basic Concepts of Indirect Taxes - Introduction 1.3 The different types of direct and indirect taxes are presented in figure 2 below: TAXES Indirect taxes Direct taxes Goods Services Income tax Wealth tax Other Excise Duty (on manufacture) Service tax Tax on Income Tax on Wealth Interest tax/expendtiure tax Customs Duty (on imports/exports) CST (on inter-state sale) Sales tax/vat (on sales within the State) Other/Misc. (Octroi, Entry tax) [Fig. 2] 1.3 Features of indirect taxes (i) An important source of revenue: Indirect taxes are a major source of tax revenues for Governments worldwide and continue to grow as more countries move to consumption oriented tax regimes. In India, indirect taxes contribute more than 50% of the total tax revenues of Central and State Governments. (ii) Tax on commodities and services: It is levied on commodities at the time of manufacture or purchase or sale or import/export thereof. Hence, it is also known as commodity taxation. It is also levied on provision of services. (iii) Shifting of burden: There is a clear shifting of tax burden in respect of indirect taxes. For example, VAT which is paid by the seller of the goods is recovered from the buyer by including the tax in the cost of the commodity. (iv) No perception of direct pinch: Since, value of indirect taxes is generally inbuilt in the price of the commodity, most of the time the tax payer pays the same without actually

15 1.4 Indirect Taxes knowing that he is paying tax to the Government. Thus, tax payer does not perceive a direct pinch while paying indirect taxes. (v) Inflationary: Tax imposed on commodities and services causes an all-round price spiral. In other words, indirect taxation directly affects the prices of commodities and services and leads to inflationary trend. (vi) Wider tax base: Unlike direct taxes, the indirect taxes have a wide tax base. Majority of the products or services are subject to indirect taxes with low thresholds. (vii) Promotes social welfare: High taxes are imposed on the consumption of harmful products (also known as sin goods ) such as alcoholic products, tobacco products etc. This not only checks their consumption but also enables the State to collect substantial revenue. (viii) Regressive in nature: 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 the income disparities between the rich and the poor. 1.4 Constitutional provisionss India has a three-tier federal structure, comprising the Union Government, the State Governments and the Local Government. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The Constitution of India is the supreme law of India. It consists of a Preamble, 22 parts containing Articles and 12 Schedules. Preamble 22 Parts (containing 444 articles) 12 Schedules Constitution of India [Fig. 3] Power to levy and collect taxes whether, direct or indirect emerges from the Constitution of India. In case any tax law, be it an act, rule, notification or order is not in conformity with the Constitution, it is called ultra vires the Constitution and is illegal and void.

16 Basic Concepts of Indirect Taxes - Introduction 1.5 Thus, a study of the basic provisionss of the Constitution is essential for understanding the genesis of the various taxes being imposed in India. The significant provisions of the Constitution relating to taxation are: (i) Article 265: Article 265 of the Constitution of India prohibits arbitrary collection of tax. It states that no tax shall be levied or collected except by authority of law. The term authority of law means that tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. (ii) Article 245: Part XI of the Constitution deals with relationship between the Union and States. The power for enacting the laws is conferred on the Parliament and on the Legislature of a State by Article 245 of the Constitution. The said Article provides as under: (i) Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. (ii) No law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation. (iii) Article 246: It gives the respective authority to Union and State Governments for levying tax. Whereas Parliament may make laws for the whole of India or any part of the territory of India, the State Legislature may make laws for whole or part of the State. (iv) Seventh Schedule to Article 246: It contains three lists which enumerate the matters under which the Union and the State Governments have the authority to make laws. LIST I UNION LIST LIST II STATE LIST LIST III CONCURREN T LIST It contains the matters in respect of which the Parliament (Central Government) has the exclusive right to make laws. It contains the matters in respect of which the State Government has the exclusive right to makelaws. It contains the matters in respect of which both the Central & State Governments have power to make laws. [Fig. 4] Entries 82 to 92C of List I enumerate the subjects where the Central Government has power to levy taxes. Entries 45 to 63 of List II enumerate the subjects where the State Governments have the power to levy taxes. Parliament has a further power to make any law for any part of

17 1.6 Indirect Taxes India not comprised in a State even if such matter is included in the State List. The table given below enlists the significant direct as well as indirect taxes being levied in India under the various Entries of the Union and State Lists. There is no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation). S. No. (i) (ii) (iii) (iv) Union List (List I) Income tax Entry 82 - Taxes on income other than agricultural income Customs Duties Entry 83 - Duties of customs including export duties Central Excise Duties Entry 84 - Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or opium/indian hemp/narcotic drugs/narcotics Wealth Tax Entry 86 - Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies State List (List II) State Level VAT Entry 54 - Taxes on the sale or purchase of goods (excluding newspapers) except tax on inter-state sale or purchase State Excise Duties Entry 51 - Duties of excise on alcoholic liquors for human consumption; opium, Indian hemp and other narcotic drugs and narcotics. The entry does not include duties of excise on medicinal and toilet preparations containing alcohol or opium/indian hemp/narcotic drugs/narcotics (v) Central Sales Tax Entry 92A - Taxes on the sale or purchase of goods other than newspapers, where such sale or

18 Basic Concepts of Indirect Taxes - Introduction 1.7 S. Union List (List I) No. purchase takes place in the course of inter-state trade or commerce (vi) Service Tax Entry 97 - Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists (vii) Entry 92C - Tax on services [Amendment passed by the Parliament on , but yet not made effective] State List (List II) 1.5 Principal indirect taxes The principal central and state level indirect taxes being levied in India along with the relevant statutes are tabulated below: Tax Relevant Statute Particulars Excise Duty [Central Value Added Tax (CENVAT)] Central Excise Act, 1944 Central Excise Tariff Act, 1985 Customs Duty Customs Act, 1962 Customs Tariff Act, 1975 Service Tax Chapter V and VA of the Finance Act, 1994 A tax on the manufacture or production of goods in India imposed by the Central Government. Basic General rate: 12% A duty imposed by the Central Government on goods imported into/exported out of India. Basic General Rate: 10% + Additional duty of customs (CVD) equivalent to the excise duty levied on like goods produced in India (12%) + Special additional duty of 4%. A tax imposed by the Central Government on the services (except the services covered in the negative list of services and exempted services) Rate: 12% Central Sales Tax Central Sales Tax A tax on the inter-state sales of

19 1.8 Indirect Taxes Act, 1956 Value Added Tax VAT Acts of respective State Governments goods, imposed by the Central Government but appropriated by the originating State. Rate: 2% A tax on the intra-state sales of goods, imposed by the State Governments. Rate generally at 5% and 12.5% /13.5% Besides these, there are other indirect taxes like entry tax, luxury tax, entertainment tax etc. levied by the State Governments. Municipal or local authorities also impose taxes like octroi or local area taxes. In this Chapter you will learn the basic concepts relating to levy, taxable event and other related provisions in respect of central excise duty, customs duty, service tax, central sales tax and value added tax. 1.6 Administration of indirect taxes The Department of Revenue of the Ministry of Finance exercises control in respect of matters relating to all the direct and indirect taxes through two statutory Boards, namely, the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC) respectively. Matters relating to the levy and collection of all the direct taxes (income tax, wealth tax etc.) are looked after by CBDT, whereas those relating to levy and collection of central indirect taxes (customs duties, central excise duties, service tax) fall within the purview of CBEC. The two Boards have been constituted under the Central Board of Revenue Act, CBEC deals with the tasks of formulation of policy concerning levy and collection of customs and central excise duties and service tax, prevention of smuggling and administration of matters relating to customs, central excise, narcotics to the extent under CBEC's purview and service tax. The Board is the administrative authority for its subordinate organizations, including Custom Houses, Central Excise and Service Tax Commissionerates. The State level indirect taxes are administered by Commercial Tax Departments of the respective States.

20 Learning objectives UNIT 2: CENTRAL EXCISE DUTY After reading Unit- 2 of this Chapter, you will be able to understand: the concept of excise duty the Constitutional provisions relating to levy of excise duty the different types of excise duties as to what are the different sources of central excise law the various provisions relating to levy of duty namely, application of excise law, taxable event and charge of excise duty the difference between goods and excisable goods concept of manufacture and deemed manufacture as to who is a manufacturer the provisions relating to collection of duty the concepts relating to classification of goods as to how the excisable goods are valued and what are the different modes of valuing the excisable goods under the central excise law. Apart from the above, after you finish reading this Unit, you will also get a fair idea of some of the significant procedures under excise law, namely SSI exemption, registration, payment of duty and filing of returns. 2.1 What is excise duty? Excise is derived from the Latin word Excisum/Excidere which means to cut out. The duty of excise is levied on a manufacturer or producer in respect of the commodities produced or manufactured by him. It is a tax upon manufacture of goods and not upon sales or proceeds of sale of goods. Duty of excise has been renamed as Central Value Added Tax (CENVAT). CENVAT includes duty, duties duty of excise or duties of excise. Although excise started as a pure duty on manufacturing activity, over a period of time it has included deemed manufacture and became a value added tax. The changed nomenclature (CENVAT) indicates the same. 2.2 Constitutional provisions Article 272 mentions Union duties of excise other than such duties of excise on medicinal or toilet preparations as are mentioned in the Union List shall be levied and collected by the

21 1.10 Indirect Taxes Government of India.. Entry 84 of the Union List of the Seventh Schedule provides as under: Duties of excise on tobacco and other goods manufactured or produced in India except: (a) alcoholic liquors for human consumption (b) opium, Indian hemp and other narcotic drugs and narcotics; but including medicinal and toilet preparations containing alchohol, or any substance stated before. Example: Medical syrups for cold and cough contain a small portion of alcohol. Even though it contains alcohol, it being a medicine will come under Entry 84 of Union List 1. Excise duty on alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics is a State subject i.e, State Government levies excise duty on such products. 2.3 Types of excise duties The following types of duties are levied under the excise law and through provisions of other Acts from time to time: (i) Basic Excise Duty: This duty, also known as CENVAT, is levied under section 3(1)(a) of Central Excise Act. It is levied at the rates specified in First Schedule to the Central Excise Tariff Act, read with exemption notifications, if any. Currently, the general rate of excise duty on non-petroleum products is 12%. This duty is applicable to majority of the excisable goods. (ii) Special Excise Duty: Special duty of excise is levied under 3(1)(b) of the Central Excise Act. It is levied on the commodities covered in second schedule (e.g. pan masala, cars) to the Central Excise Act, at the rates mentioned therein. However, w.e.f all goods falling in the second schedule have been exempted from the special excise duty. (iii) Additional Duty of Excise (Textile and Textile Articles) [AED(TTA)]: This duty is leviable under section 3 of the Additional Duties of Excise (Textiles and Textile Articles) Act, This Act provides for the levy and collection of additional duties of excise on certain textile and textile articles. However, w.e.f , all goods which were liable to AED (TTA) have been exempted from such duty. (iv) Additional Duty of Excise (Goods of Special Importance) [AED (GSI)]: It is levied under Additional Duties of Excise (Goods of Special Importance) Act, 1957 on the specified goods mentioned in its First Schedule. This duty is levied in lieu of sales tax and shared between Central and State Governments. However, w.e.f , all goods which were liable to AED (GSI) have been exempted from such duty. (v) National Calamity Contingent Duty (NCCD): It is imposed vide section 136 of the Finance Act, 2001 on pan masala, branded chewing tobacco, cigarettes, domestic crude oil and mobile phones.

22 Basic Concepts of Indirect Taxes Central Excise Duty 1.11 (vi) Additional Duty of Excise: It is imposed by way of surcharge on pan masala and certain specified tobacco products vide section 85 of the Finance Act, (vii) Education Cess: It is levied on excisable goods manufactured in 2% of the aggregate duties of excise levied on such goods. (viii) Secondary and Higher Education cess: It is levied on excisable goods manufactured in 1% of the aggregate duties of excise (excluding education cess) leviable on such goods. 2.4 Sources of central excise law Central Excise Law is a combined study of - Case Laws Central Excise Act, 1944 Central Excise Tariff Act, 1985 Trade Notices/Clarif ications CENTRAL EXCISE LAW Union Finance Acts Circulars/Inst ructions Notifications (Subordinate/ Delegated Legislation) Rules (Subordinate/ Delegated Legislation) [Fig. 5] (i) Central Excise Act, 1944: The Central Excise Act, 1944 (hereinafter referred to as the Act in this Unit) contains the basic provisions relating to the levy of excise duty. It comprises of Chapters I to VII. (ii) Central Excise Tariff Act, 1985: The Central Excise Tariff which was originally a schedule to the Central Excise Act, 1944 was de-linked from it and the Central Excise Tariff, Act 1985 containing the Tariff Schedule was enacted, based on the international product coding system called Harmonised System of Nomenclature (H.S.N.). The Schedules to the Act enlist all the excisable goods and provide for the corresponding rates of excise duty

23 1.12 Indirect Taxes chargeable on the same. (iii) Annual Union Finance Acts: Every year, the Finance Minister of the Government of India presents the Union Budget to the Parliament. Part A of the Budget Speech contains the proposed policies of the Government in fiscal areas. Part B of the Budget Speech contains the detailed tax proposals. In order to implement the above proposals, the Finance Bill is introduced in the Parliament. Once the Finance Bill is approved by the Parliament and gets the assent of the President, it becomes the Finance Act. The annual Union Finance Acts are one of the most significant ways through which the Government makes amendments to the central tax acts like the Central Excise Act and Central Excise Tariff Act. (iv) Rules: Rules are framed by the Central Government for carrying out the provisions of the Act. Rules cannot override the provisions contained in the Act. Rules should be read with the statutory provisions contained in the Act. The following significant rules have been issued under the Central Excise Act, 1944: Central Excise Rules, 2002: These Rules contain the procedure for the assessment and collection of duty including other procedures like manner of payment of duty, registration, maintenance of records, invoicing, rebate of duty, export without payment of duty etc. Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: These rules have been framed to prescribe valuation methods when transaction value cannot be determined under Section 4 of the Central Excise Act, CENVAT Credit Rules, 2004: These rules extend the credit of excise duty and service tax across goods and services. They provide for the manner of availing the credit and the utilization thereof. The rules covered in the syllabus have been discussed in Chapter-7 CENVAT Credit. Besides above, other rules namely, Central Excise (Appeal) Rules, 2001, Central Excise (Advance Rulings) Rules, 2002, Central Excise (Settlement of Cases) Rules, 2007, Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001, Central Excise (Compounding of Offences) Rules 2005, Central Excise (Determination of Retail Sale Price of Excisable Goods) Rules 2008 have also been notified to carry out the purposes of the Central Excise Act, (v) Notifications: Notifications are issued by the Central Government or the Central Board of Excise and Customs (CBEC) in terms of the power given under the Act or the Rules. Notifications are issued to provide rules relating to excise duty, make amendments therein, provide or withdraw exemptions from excise duty or deal with any other matter which the Central Government may think would facilitate the governance of excise duty. (vi) Circulars/Instructions: The Central Board of Excise and Customs issues departmental circulars or instruction letters from time to time for the purpose of ensuring uniformity in the classification of excisable goods or with respect to levy of duty of excise on goods. These circulars/instructions should be in conformity with the Act, Rules and Notifications. The

24 Basic Concepts of Indirect Taxes Central Excise Duty 1.13 circulars are binding on the Department but not binding on the assessee and the Supreme Court, High Court or the Tribunal. (vii) Trade Notices/Clarifications: Trade notices are issued by the Departmental authorities for trade facilitation and clarification purposes. They are binding on the departmental officers concerned. Authorities cannot take one stand in one State and another stand in another State. Trade notice disseminate the contents of the notifications and circulars/letters, define their jurisdiction; identify the banks in which excise duty can be deposited etc. (viii) Case Laws: It is not possible for the Parliament to conceive and provide for all possible issues that may arise in the implementation of any Act. Hence, the judiciary hears the disputes between the assessees and the Department and gives decisions on various issues. The Supreme Court is the Apex Court of the country and the law laid down by the Supreme Court is the law of the land. The decisions given by various High Courts apply in the respective States in which such High Courts have jurisdiction. The study of case laws is very essential as the case laws facilitate in interpreting the provisions of the Act and comprehending the real intention of the law makers. In fact, in India the tax laws are perceived to be of very complex nature and thus, role of the judiciary becomes all the more substantial as only the judiciary has the mandate of interpreting such intricate provisions of law. 2.5 Levy of duty (1) Application of the central excise law: The Central Excise Act applies to the whole of India. Though originally the Act did not apply to the State of Jammu and Kashmir, its application was extended to the same vide the enactment of Taxation Laws (Extension to Jammu & Kashmir) Act, It also extends to designated areas in the Continental Shelf and Exclusive Economic Zone of India (EEZ). The EEZ extends upto 200 nautical miles inside the sea from base line. Therefore, goods manufactured in Indian landmass as also in the designated areas in EEZ will be liable to excise duty. The Central Excise Tariff Act also applies to whole of India and extends to the designated areas in the Continental Shelf and Exclusive Economic Zone of India (EEZ). (2) TAXABLE EVENT: Taxable event is a event or transaction that results in a tax consequence for the party who executes the event. For example, the taxable event for levy of state level VAT is sale of products i.e., whenever any sale transaction is occasioned, sales tax liability would arise. Taxable event is the event which triggers the levy of tax. The taxable event for levy of excise duty is manufacture only when manufacture takes place, excise duty liability arises. However, all manufacturing processes do not attract levy of excise duty unless some basic conditions are met. Excise duty is not concerned with ownership or sale. Liability under excise law is event based (based on manufacture) and does not depend upon whether the goods are sold or captively consumed. Note: Though the levy of excise duty arises on manufacture but the same is collected on

25 1.14 Indirect Taxes removal of goods from the factory [Collection of duty has been dealt in detail in the subsequent pages of this Unit]. (3) Charge of excise duty: Section 3 of the Act is the charging section which provides for levy of excise duty. The provisions of section 3 are discussed below: (i) Basic conditions for levy of duty: Excise duty is leviable when the following four are satisfied cumulatively: Product liable to excise duty Such goods are excisable goods. Such manufacture results in goods ; and Such manufacture is done in India (excluding SEZ*); There is a manufacture; [Fig. 6] *A Special Economic Zone (SEZ) is a geographically bound zone where the economic laws relating to export and import are more liberal as compared to other parts of the country. Goods manufactured in Special Economic Zones are not leviable to excise duty. SEZ is considered to be a place outside India for all tax purpose. (ii) Government goods also liable to excise duty: There is no distinction between excisable goods produced by the Government and those produced by others, with regard to payment of excise duty. Excise duty is payable on all excisable goods, other than salt, manufactured in India by or on behalf of the Government (both Central and State) also. (iii) Goods manufactured by 100% EOU and brought to DTA liable to excise duty equal to customs duty: Hundred percent Export Oriented Undertakings are set up to promote exports. They generally export whole of the goods manufactured by them and such exports are exempt

26 Basic Concepts of Indirect Taxes Central Excise Duty 1.15 from duty. However, sometimes they may sell their goods in India also (known as Domestic Tariff Area). When EOU s sell their goods in DTA, the goods become liable to excise duty. Excise duty leviable in such a case is computed as follows: Excise duty = Total customs duties leviable under the Customs Act/other applicable law on like goods produced/manufactured outside India, if imported into India. Valuation as per customs law: The value of such goods shall be determined in accordance with the provisions of the Customs Act, 1962 if the duty to be levied is based on the value of such goods (ad valorem). Highest rate to be taken in case of different rates: Where in respect of any such like goods, customs duty is leviable at different rates, then, highest of those rates shall be taken. Unless the four basic conditions as set out in section 3 for levy are satisfied [Refer point (i)], central excise duty cannot be levied. Thus, it is very important to understand / interpret each of the conditions in detail to appreciate the implications. Each of the conditions is discussed in subsequent pages of this Unit. 2.6 Goods and Excisable Goods (1) Goods: Explanation to section 2(d) of the Act provides that goods includes any article, material or substance which is being capable of brought and sold for a consideration and such goods shall be deemed to be marketable. Section 2(d) defines excisable goods. Though the explanation to section 2(d) of the Act sets out as to what are included within the meaning of goods, the concept of goods has been more elaborately defined/explained in other laws/case laws as under: (i) Article 366(12) of the Constitution of India: Goods include all materials, commodities and articles. (ii) Sale of Goods Act, 1930: Section 2(7) defines goods to mean every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass and things attached to and forming part of the land which are agreed to be severed before sale or under the contract of sale. Thus, immovable property cannot be goods but any movable property whether visible, tangible, corporeal or not will constitute goods. Goods can be tangible like computer, machinery, pen, pencil etc. as also intangible like drawings, designs, software stored on a media. Similarly, electricity is also goods. (iii) Judicial View: The Supreme Court in the case of U.O.I. v. DCM 1997(1) E.L.T. J199 has held that in order to be goods the articles must be capable of coming to the market to be bought and sold. Therefore, to be called goods, the items must be moveable and marketable. From the above, two fundamental aspects of the term goods arise that they should be (a) moveable and (b) marketable.

27 1.16 Indirect Taxes GOODS MOVEABLE MARKETABLE [Fig. 7] (a) Goods must be Moveable : To be called goods, the articles must be something, which can ordinarily come or can be brought to the market to be bought and sold. As opposed to moveable goods, immoveable property cannot be brought to the market to be sold. Immovable property includes land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. Thus, excise duty cannot be levied on immoveable property. Example: Construction of roads is not liable to excise duty as roads are not goods. However, manufacture of car, truck etc. will attract excise duty as they are goods. (b) Goods must be Marketable: Unless the goods are capable of being marketed, they cannot be charged to duty. As per Explanation to section 2(d), goods includes any article, material or substance which is being capable of brought and sold for a consideration and such goods shall be deemed to be marketable. Thus, the only condition required for a product to be marketable is its capability of being put into the market for sale. The following points merit consideration in this regard: Actual sale is not necessary: Actual sale is not necessary in determining excisability of a product; its capability of being brought and sold for a consideration is sufficient to render it marketable. The fact that goods are not actually marketed is of no relevance. It is also not necessary that goods in question should be generally available in the market. Even one purchaser enough: Marketability does not depend upon the number of purchasers nor is the market confined to territorial limits of India. Burden of proof on Department: Marketability is a question of fact to be decided on the basis of the facts of each case. It is the onus of the Department to produce evidence of marketability. Goods of short-shelf life: Goods of short-shelf life, say one or two days will be deemed to be marketable only if they are capable of being brought and sold during that period. (2) Excisable Goods: Before we examine the question of what amounts to manufacture, it must be understood that unless the goods that are manufactured are excisable goods, there will be no question of levying excise duty. Section 2(d) of the Act defines excisable goods. The definition can be divided into three parts: Excisable goods means- - goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, as being subject to a duty of excise and

28 Basic Concepts of Indirect Taxes Central Excise Duty includes salt. Explanation: Goods includes any article, material or substance which is being capable of brought and sold for a consideration and such goods shall be deemed to be marketable. Thus, for becoming excisable goods, goods must not only be specified in the Tariff but must also be subject to a duty of excise. The following points merit consideration in this regard: Nil rate is a rate of duty: Nil rate is also a rate of excise duty. Therefore, goods specified in the Tariff as being subject to Nil rate of duty are also excisable goods. Example: Bamboos, Common salt, Rock salt are excisable goods liable to NIL rate of duty. Non-excisable goods: Goods not specified in the Tariff or the goods against which no rate (i.e, blank rate) has been specified in the Tariff are non-excisable goods. Example: Live animals, Live Trees, Newspaper and Maps though covered in the Tariff are not excisable goods as the rate column is blank. Non-dutiable goods: Non-dutiable goods are excisable goods but are not liable to duty either on account of rate of duty being NIL in the Tariff or on account of 100% exemption granted by any exemption notification. Exempted goods: Exempted goods are goods which have been exempted from payment of duty by way of an exemption notification. Exempted goods are excisable goods but no duty is payable on them in view of 100% exemption granted by way of notification. The excise duty liability in relation to goods and excisable goods has been explained with the help of a flow diagram given at page no Manufacture (1) Concept of manufacture: Manufacture or production of excisable goods in India is the taxable event for levy of central excise duty. Section 2(f) of the Act defines the term "manufacture" in an inclusive manner as follows: Manufacture includes any process, (i) incidental or ancillary to the completion of a manufactured product; (ii) 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; or (iii) which, in relation to goods specified in the Third Schedule, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to consumer and the term manufacturer shall be construed 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.

29 1.18 Indirect Taxes ANALYSIS: Manufacture u/s 2(f) Deemed Manufacture Any process which is specified in relation to any goods in the Section/Chapter notes of the Central Excise Tariff as amounting to manufacture [Clause (ii) of section 2(f)] Any process which, in relation to goods specified in the Third Schedule involves packing/repacking of such goods or labelling/re-labelling of containers or declaration/ alteration of RSP or any other treatment to render the product marketable to consumer [Clause (iii) of section 2(f)] Any process, incidental or ancillary to the completion of a manufactured product [Clause (i) of section 2(f)] [Fig. 8] Since the definition of manufacture is an inclusive one and does not spell out or enumerate the activities covered therein, the understanding of the term has been arrived at on the basis of the numerous legal decisions rendered in this regard. The most commonly used test for ascertaining as to whether "manufacture" for the purpose of attracting central excise duty has taken place was evolved by the Supreme Court in the case of Delhi Cloth and General Mills 1977 (1) ELT (J 199). The Court cited the following passage from an American judgement relating to manufacture: Manufacture implies a change, but every change is not manufacture and yet change of an article is the result of treatment, labour and manipulation. But something is necessary and there must be transformation; a new and different article must emerge having a distinctive name and character or use. This famous paragraph is now the basis for determining whether or not an activity or process amounts to manufacture. Therefore, the activity or process in order to amount to "manufacture" must lead to emergence of a new commercial product, different from the one with which the process started. In other words, it must be an article with different name, character or use.

30 Basic Concepts of Indirect Taxes Central Excise Duty 1.19 Manufacture in India Are the final products moveable? YES Are the final products marketable? NO NO Manufacture does not result in goods Excise duty not leviable Manufacture results in goods YES Are the goods specified in Central Excise Tariff? YES NO Non-excisable goods [i.e., goods not included in Central Excise Tariff or goods against which no rate (i.e. blank rate) has been specified in Central Excise Tariff Manufacture results in excisable goods Dutiable goods Are the goods subject to a duty of excise? YES Whether goods are chargeable to NIL rate of duty? NO Are the goods exempt from payment of duty vide any exemption notification? No NO YES YES Non-dutiable goods (goods carrying NIL rate of duty or granted 100% exemption by Notification) Exempted goods Excise duty not payable Excise duty payable on the goods [Fig. 9]

31 1.20 Indirect Taxes Burden of proof on department: Burden to prove that an activity/process amounts to manufacture is on the department. Examples of processes amounting to manufacture: (1) Obtaining sugar from sugarcane (2) Making furniture from wood (3) Rolling of tobacco to make biris (4) Conversion of fruit pulp to ready made fruit drink (5) Cutting, hemming and stitching of running cloth to make bed sheets, bed spreads and table cloths (6) Roasting, salting and spicing of peanuts/cashew-nuts/almonds (7) Obtaining oil or oil cake from oil seeds (mustard oil or mustard cake from mustard seeds) (8) Making of wheat flour from wheat Examples of processes not amounting to manufacture: (1) Burning in boiler of coal to obtain cinder (2) Stirring of cream to obtain butter (3) Upgradation of computer system by increasing the storage capacity (4) Painting of goods (5) Cutting of wood into small pieces (6) Chilling of water (2) DEEMED MANUFACTURE: Clauses (ii) and (iii) of the definition of manufacture as provided in section 2(f) of the Act are termed as deemed manufacture. The aforesaid definition gives a wider meaning to the expression "manufacture" as several processes which would not ordinarily be understood as amounting to manufacture are specifically included therein. Thus, a process which simply changes the form or size of the same article or substance would not ordinarily amount to manufacture and no excise duty would be payable unless it is deemed to be manufacture in either of the two following ways: The process is specified in the Section or Chapter Notes of the Schedule to the Central Excise Tariff as amounting to manufacture; or The goods are specified in the Third Schedule to the Act and the process involves packing or repacking of such goods in a unit container, labelling or re-labelling of containers including declaration or alteration of retail sales price on it or adoption of any other treatment on the goods to render the product marketable to the consumer. The Third Schedule to the Act covers the goods which are assessed on the basis of retail sale price. Valuation of excisable goods based on retail sale price has been discussed in subsequent pages of this Unit.

32 Basic Concepts of Indirect Taxes Central Excise Duty 1.21 Examples of deemed manufacture: (1) In relation to iron and steel covered in Chapter 72, Chapter Note 5 provides that the process of galvanization shall amount to manufacture. (2) In relation to audio or video tapes/cds etc. falling under heading 8523 of Chapter 85, Chapter Note 10 provides that recording of sound or other phenomenon shall amount to manufacture. (3) In relation to aluminium foils falling under heading 7607 of Chapter 76, Chapter Note 3 provides that process of cutting, slitting and printing of aluminium foils amount to manufacture. Illustration 1: Indicate whether the following activities will be liable to central excise duty? (1) Manufacture of alcohol and wine. (2) Manufacture of medicinal and cosmetic products containing alcohol. (3) Manufacture of excisable goods in a factory located in Jammu & Kashmir. (4) Production of excisable goods in notified designated areas at 210 nautical miles from the Indian landmass. (5) Production of excisable goods in a factory located in SEZ. (6) Manufacture of salt by the State Government. (7) Repairing, reconditioning or remaking. (8) Manufacture of parts used for repair or replacement during warranty period. (9) Labeling or re-labeling of unit containers of chocolate. Solution: (1) No. Entry 84 of the Union List of the Seventh Schedule specifically excludes alcoholic liquors for human consumption. Since, Entry 54 of the State List covers duties of excise on alcoholic liquors for human consumption, it may be liable to State excise duty. (2) Yes. Medicinal and cosmetic products containing alcohol are covered by Entry 84 of the Union List. (3) Yes. The central excise law extends to Jammu and Kashmir. (4) No. The central excise law extends to the notified designated areas in EEZ upto 200 nautical miles from the Indian landmass. (5) No. The central excise law does not apply to goods manufactured in SEZ. (6) No. Though there is no distinction between excisable goods produced by the Government and those produced by others, salt manufactured by any of the Government viz., Central or State is not leviable to excise duty. (7) No, since repairing, reconditioning or remaking does not result in to emergence of a new product.

33 1.22 Indirect Taxes (8) Yes. Excise duty is a levy on manufacture. Therefore, it is of no importance as to whether the manufactured goods are sold, captively consumed, distributed as free sample or used for free repair / replacement during warranty period etc. (9) Yes. Labeling or re-labeling of unit containers of the goods specified in Third Schedule to the Central Excise Act is deemed manufacture. Since chocolate is covered under Third Schedule, the labeling or re-labeling of its container will amount to manufacture. (3) Some special aspects (i) Captive consumption: Captive consumption in the context of excise law means utilisation of goods produced or manufactured within the factory of production. The goods internally consumed to manufacture the final product are termed as intermediate goods. Example: Rubber is used in manufacturing of soles and such soles are further used in manufacture of chappals. Here, soles are intermediate goods and their consumption within the factory for manufacture of chappals is captive consumption. Levy of excise duty: The intermediate goods will be chargeable to duty if they arise in the course of manufacture/production, are moveable and marketable in such intermediate stage, listed in the Tariff, and are subject to duty of excise in the Tariff. However, since paying duty on all captive consumption will cause inconvenience to manufacturers, exemptions have been given in many cases. If duty is payable on final product, excise duty is not payable on intermediate product used in manufacture of such final products. (ii) Assembly vis a vis manufacture: Assembly is a process of putting together a number of items or parts of an item to make a product or an item. From a general point of view, assembly would not amount to manufacture in as much as an already manufactured item may be put in a readily usable form. However, if the assembly results in new commercial commodity with a distinct name, character and use, then it would amount to manufacture. Example: Assembly of computers from duty paid bought out parts amounts to manufacture. (iii) Dutiability of site-related activities: The goods manufactured at site will be liable to duty if they have a new identity, character and use, distinct from the inputs/ components that have gone into its production. Further, such resultant goods should be specified in the Central Excise Tariff as excisable goods besides being marketable i.e. they can be taken to the market and sold (even if they are not actually sold). The goods should not be immovable. Examples: (1) Lifts and escalators installed in buildings and permanently fitted into the civil structure cannot be considered to be excisable goods and hence are not liable to duty. (2) Group of machines combined to constitute a new machine having own identity/marketability will be dutiable if assembled at site and fixed to earth only for purpose of ensuring vibration free movement. (iv) Dutiability of waste and scrap: Waste/scrap can be excisable goods if they are known in commercial parlance and are marketable. Further, the waste and scrap will not be

34 Basic Concepts of Indirect Taxes Central Excise Duty 1.23 excisable goods unless they are specified in Central Excise Tariff. Thus, if a particular waste/scrap is not mentioned in Tariff, it may be goods but not excisable goods. It is important to note here that as the excise duty is leviable on manufacture, the waste and scrap actually generated in the course of manufacture alone is chargeablee to duty and the waste and scrap generated without any process is not liable to excise duty. Waste of exempted goods: Waste of exempted goods has been exempted from payment of excise duty. Examples: (1) Bagasse, aluminium/ /zinc dross which is termed as waste/residue/refusee is chargeable to excise duty as it is an excisable goods arising during the course of manufacture and is capable of being sold for consideration. (2) Waste or scrap arising from repair of machinery is not a manufactured product as it doesn t arise during manufacture of final product. Therefore, it will not be liable to duty. 2.8 Manufacturer The term manufacturer has been defined in the definition of the term manufacture. As per section 2(f) of the Act, manufacture includes any process, and the term manufacturer shall be construed 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. ANALYSIS: A person carrying out manufactureinterms of any of the three clauses of section 2(f) willl be the manufacturer. The definition of manufacturerr is an inclusive one and the scope thereof has been widened by including: manufacturers manufacture who throughh hired labour, and manufacturers manufacture own account on who their [Fig.10 ] It is very important to understand as to who would be the manufacturer as it is the manufacturer, who is required to discharge the duty liability on the excisable goods in most of the cases. Manufacturerr may be understood as any person who is the creator, initiator and architect of

35 1.24 Indirect Taxes the activities and the processes, which bring into existence a new and identifiable product/goods in the market. Thus, a manufacturer is the one who undertakes natural manufacturing activity or who undertakes the processes defined as deemed manufacture. Some special aspects: (i) Raw material supplier vis a vis manufacturer: The person carrying out the actual manufacturing process is the manufacturer even if the raw material is supplied by someone else and the goods have been manufactured as per his specifications. Merely by supplying the raw material, the supplier thereof cannot be construed as the manufacturer. Therefore, it is not relevant as to whether the raw material belongs to the manufacturer or not. Example: M/s. Papadwala supplies raw material to several household ladies to make papads. These ladies make papads at their homes and supply the same to M/s. Papadwala. M/s. Papadwala does not supervise the ladies. M/s. Papadwala is only the raw material supplier and not the manufacturer as it does not exercise control and supervision over the ladies making papads. The ladies making papads are the manufacturers in this case. (ii) Brand name owner vis a vis manufacturer: Many a times, large manufacturers do not manufacture goods on their own but get their goods manufactured from others under their brand name. They usually exercise quality control and may also supply the design. In such cases, these large manufacturers will not be the manufacturer but the units actually manufacturing the product will be the manufacturer. Example: If Usha Fans gets its fans made from other fan making units under its brand name USHA, Usha Fans will not be the manufacturer in this case. The other fan making units who actually make the fans will be the manufacturer under central excise. Ownership of raw material is not relevant to determine who the manufacturer is. In both the above cases, the contracts are on a principal to principal basis. However, if the relationship between the raw material supplier/brand name owner and the job-worker is that of a principal and agent, the raw material supplier/brand name owner will be the manufacturer. It may be noted that a person supplying the raw material/brand name owner cannot be considered as hiring the job worker if he does not supervise and control the activities of the job worker. However, if the manufacturer is a dummy or fake unit, then the raw material supplier or the brand name owner will be deemed to be the actual manufacturer. 2.9 Collection of duty (1) When is duty liable to be paid?: As learned before, the taxable event for the levy of excise duty is manufacture, but the collection thereof is postponed to the stage of removal. Therefore, excisable goods cannot leave the factory of production unless excise duty thereon has been paid. However, excisable goods can be removed from the factory and stored in a warehouse without payment of duty. Excise duty, in such a case, becomes payable when the excisable goods are removed from the warehouse. (2) On which type of removals is the duty liable to be paid?: As per rule 4 of the Central Excise Rules, 2002, excisable goods cannot be removed from the place of manufacture or

36 Basic Concepts of Indirect Taxes Central Excise Duty 1.25 from warehouse - when the goods are stored in warehouse - without payment of duty whether for consumption, or export, or manufacture of any other commodity in or outside the place of manufacture until the excise duty leviable thereon has been paid in the prescribe manner. (3) Who is liable to pay duty?: The liability to pay excise duty has been casted on every person- who produces or manufactures any excisable goods, or who stores such goods in a warehouse Exception Procurer of molasses liable to pay excise duty on molasses: Where molasses are produced in a Khandsari sugar factory, the person who procures such molasses (not the person who produces the same) for use in the manufacture of any commodity has to pay the duty leviable on such molasses as if the molasses had been produced by the procurer. Person liable to pay excise duty Manufacturer of excisable goods Person who stores goods in a warehouse Procurer of khandsari molasses [Fig. 11] (4) What is the relevant date for determining the rate of duty?: Rule 5 of the Central Excise Rules, 2002 contains the provisions for determining the relevant date. The rate of duty and the tariff value prescribed under section 3(2) of the Act prevalent on the relevant date are used for the purpose of computing the amount of excise duty payable. Valuation of excisable goods based on tariff value is discussed in subsequent pages of this Unit. Provisions of rule 4 and 5 have been tabulated as under: Particulars Person liable to pay excise duty 1. Excisable goods Manufacturer (other than khandsari molasses) produced and stored in the factory of the manufacturer Event for duty payment Removal of goods from the factory Relevant date Date of removal of such goods from the factory

37 1.26 Indirect Taxes 2. Khandsari molasses produced and stored in the factory of the manufacturer 3. Excisable goods produced and cleared for captive consumption in the factory of production 4. Excisable goods produced in the factory and stored in a warehouse without payment of duty Procurer of the khandsari molasses Manufacturer Person who stores such goods in the warehouse Receipt of such molasses by the procurer Issuance of goods for further production Removal of goods from the warehouse Date of receipt of such molasses in the factory of the procurer of such molasses Date on which the goods are issued for such use Date of removal of goods from the warehouse Some special aspects: (i) Change in rate of duty between the date of manufacture and the date of removal: Sometimes it may happen that the rate of duty which was prevalent when the goods were manufactured undergoes a change when the goods are removed from the factory. This generally happens when the rate of duty is increased / decreased in the annual Union Budget. Example: Excise duty rate was increased from 10% to 12% with effect from Thus, in case of excisable goods manufactured during the month of February and cleared on , the rate of duty was 10% when the same were manufactured but was increased to 12% when the same were removed from the factory. The following points need to be considered in this regard: Duty will not be leviable if the goods were not excisable at the time of manufacture. Where the goods were excisable at the time of manufacture, duty will be leviable at the rate prevalent on the date of removal. Thus, in the above example, excise duty will be 12%. (ii) Goods becoming excisable/dutiable post manufacture but before removal: There can be situations when goods which are manufactured at the period in time when they were either not chargeable to duty or were exempted from duty get included in Tariff or become dutiable on account of withdrawal of the exemption subsequent to manufacture but before removal of such goods. The following points need to be considered in this regard: Non-excisable goods (goods not covered in the Central Excise Tariff or goods with blank rate column) will not be chargeable to duty even though subsequent to manufacture but before removal such goods are bought within the purview of the Tariff or are made

38 Basic Concepts of Indirect Taxes Central Excise Duty 1.27 chargeable to a specified rate of duty under the Tariff. The rationale behind such a treatment is that since the goods were not excisable goods as per the provisions of section 2(d) at the time of manufacture, they would not be liable to duty even though they are brought within the purview of the aforesaid section prior to removal from the factory. Exempted goods (excisable goods exempted from payment of duty vide an exemption notification) will be chargeable to duty at the time of removal if, subsequent to manufacture but before removal, the exemption from duty is withdrawn. In this case, since the goods were excisable at the time of manufacture, the rate of duty prevalent on the date of removal will be applicable. The following table summarizes the above position: On the date of manufacture Goods not listed in the Tariff or rate column blank Goods liable to 10% in Tariff On the date of removal Goods listed in Tariff and chargeable to 12% Duty rate increased to 12% Leviability of excise duty Duty not leviable since goods were not excisable at the time of manufacture. Duty 12% since goods were excisable goods at the time of manufacture. Nil rate in Tariff/Exempt Duty 10% Duty 10% as goods were excisable goods at the time of manufacture (NIL rate is also considered to be a rate of duty) Illustration 2: Compute the excise duty payable in the following cases: S. Value of Date of Rate of duty on Date of Rate of duty on No. goods (`) manufacture date of removal date of removal manufacture (i) 10, % % (ii) 25, % % + Additional 6% imposed w.e.f (iii) 30, Goods exempt from duty vide an exemption notification Exemption withdrawn Goods liable to 12%. (iv) 60, % %

39 1.28 Indirect Taxes Also, compute the duty payable in case the goods in point (i) above are to valued on the basis of tariff value and such tariff value changes from ` 10,000 (applicable on the date of manufacture) to ` 15,000 (applicable on the date of removal). The other particulars remain the same as in point (i) above. Further, in case of point (iv), goods have been removed from the factory and stored in a warehouse without payment of duty on On , the applicable rate of duty was 12%. Who is liable to pay duty in this case? In all the above cases, education 2% and secondary and higher education 1% has to be considered separately. Solution: As per Rule 5 of the Central Excise Rules, 2002, the rate of duty or tariff value applicable to any excisable goods (other than khandsari molasses) is the rate or value in force on the date when such goods are removed from a factory or a warehouse, as the case may be. Therefore, the duty payable will be computed as follows: S. Value of Applicable rate of duty (inclusive of 3% education Excise duty No. goods (`) cesses) payable ( `) (i) 10, % 1,236 (ii) 25, % [Since, excise duty is a levy on manufacture of 3,090 excisable goods, the additional duty which was not in force on the date of manufacture cannot be imposed on goods removed after its levy.] (iii) 30, % [Since, on the date of manufacture, the goods were excisable, the rate of duty on date of removal will be applied.] 3,708 (iv) 60, % [The applicable rate of duty is the rate prevalent on the date when goods are removed from the warehouse.] 9,270 Since, the tariff value applicable to any excisable goods is the value in force on the date when such goods are removed from a factory, the applicable tariff value in this case will be ` 15,000 (value applicable on the date of removal). The excise duty payable will be ` 1854 (12.36% of ` 15,000). In case of point (iv), where goods have been first stored in the warehouse without payment of duty and finally removed from the warehouse, the person liable to pay duty is the person who stores such goods in the warehouse and not the manufacturer. Illustration 3: Madhavpur Sugar Ltd. produces khandsari molasses and supplies the same to TP Ltd. which, in turn uses it in the manufacture of a non-excisable commodity. Khandsari molasses worth ` 2,00,000 have been supplied by Madhavpur Sugar Ltd. to TP Ltd. Compute the duty payable from the following information:

40 Basic Concepts of Indirect Taxes Central Excise Duty 1.29 Particulars Date Applicable rate of duty (inclusive of 3% education cesses) Date of production % Date of removal from the factory of Madhavpur % Sugar Ltd. Date of receipt of molasses by TP Ltd % Date of manufacture of non-excisable product in which molasses have been used Molasses have been exempted vide an exemption notification Who is liable to pay duty in the above case? Solution: In case of molasses, the person who procures such molasses for use in the manufacture of any commodity, whether or not excisable, has to pay the duty leviable on such molasses, in the same manner as if such molasses have been produced by the procurer. The rate of duty applicable in the case of molasses is the rate in force on the date of receipt of such molasses in the factory of the procurer of such molasses. Therefore, the relevant rate of duty will be 12% (rate applicable on the date of receipt of molasses in the factory of the procurer) and excise duty payable will be ` 24,720 (` 2,00,000 x 12.36%). Duty is payable by TP Ltd., the procurer of molasses, as if the molasses had been produced by it whether such molasses are used in manufacture of excisable or non-excisable commodity Classification of excisable goods (1) What is classification?: There are thousands of varieties of manufactured goods. Since all goods do not carry the same rate or amount of duty, it is practically impossible to identify all the goods individually. Therefore, it is necessary to identify the goods through groups and sub-groups and then to determine the rate of duty on each group or sub-groups of goods. The exercise of placing the various excisable goods under the various groups or subgroups is known as 'Classification' of a product. In other words, the classification of excisable goods consists of determining the headings or subheadings of the Central Excise Tariff Act, 1985 (CETA) under which the said goods would be covered. (2) Why is classification necessary?: Classification of excisable goods is essential for determining the applicable rate of duty as different rates of duty are chargeable on different types of goods. It is also required for the purpose of determining eligibility to exemptions, most of which are with reference to the Tariff headings or sub headings. (3) What is the scheme of classification?: CETA is based on the Harmonised System of Nomenclature (popularly known as HSN). Harmonised System of Nomenclature: HSN is an internationally accepted product coding

41 1.30 Indirect Taxes system formulated under the auspices of the General Agreement on Tariffs & Trade (GATT). The Central Excise Tariff Act is modelled along with international practices. The international practice of adopting a uniform classification internationally facilitates a common understanding of products across countries. In other words, the classification of a product under this code would be the same across the countries. The two Schedules to CETA: The classification of goods in the CETA is comprised in two Schedules; the First Schedule specifies the rate of basic excise duty (CENVAT) and the Second Schedule specifies the rate of special excise duty. Sections and Chapters: The First Schedule has Sections and Chapters. Each Section has various Chapters. A Section represents a broad class of goods. For example, Section I relates to Live animals and Animal products while Section V relates to Mineral products. A Chapter contains goods of one class e.g., Section V of Mineral Products has Chapter 25 relating to Salt; sulphur; earths and stone; plastering materials; lime and cement and Chapter 26 relating to Ores, slag and ash. The Chapter is further divided into headings and subheadings depending on different types of goods belonging to same class of products. Section Notes and Chapter Notes are given at the beginning of each Section and Chapter which govern the entries in that Section and Chapter respectively. The First Schedule to the CETA contains 96 Chapters grouped into 20 sections and specific code is assigned to each item. All of the items listed in the second schedule have been exempted from special excise duty with effect from Eight digit classification system: The excisable goods are classified by using 8-digit system. Description with eight digits is termed as tariff item. A tariff item under eight digit system would be interpreted as follows:- First two digits: refer to the Chapter Number of the Tariff Next two digits: refer to heading of the goods in that Chapter Next two digits: indicate Chapter sub-heading Last two digits: refer to the Chapter subsub-heading [Fig. 12]

42 Basic Concepts of Indirect Taxes Central Excise Duty 1.31 Example: Tariff Entry covers Hair dyes (natural, herbal or synthetic). The classification can be understood as- 33 refer to Chapter 33 Cosmetic or toilet preparations, essential oil etc. 05 refer to Heading Preparations for use on the hair 90 refer to Sub-heading Other 40 refer to the item Hair dyes (natural, herbal or synthetic) Interpretative Rules for classification: The Central Excise Tariff Act, 1985 incorporates six general rules of interpretation, which together provide necessary guidelines for classification of various products. By and large, these rules for interpretation are identical to those contained in the HSN. 1 (4) What is trade parlance theory?: According to the trade parlance theory, if a product is not adequately classified in the Central Excise Tariff Act, 1985, it should be classified according to its popular meaning or meaning attached to it by those dealing with it, i.e., in commercial sense. However, where the tariff heading itself uses highly scientific or technical terms, goods should be classified in scientific or technical sense. (5) Rate of duty: CETA specifies the rate of duty in respect of each tariff entry given in the Chapters there under. The rate of duty may either be a specific rate, i.e., quantified in terms of money or may be ad valorem, i.e., a percentage of the value of the goods. If the rate of duty is specific (a certain quantum of money), the assessee is required to pay that amount. However, if the rate of duty is ad valorem, the assessee has to determine the assessable value of the particular product and thereafter, apply the rate of duty to such derived assessable value. The process of determining the assessable value of a product is known as 'valuation'. Significance of exemption notifications: The effective rate of duty must be ascertained by considering the various exemption notifications issued from time to time. The rate of duty read with the rate prescribed in the notification, if any, will ultimately determine the effective rate of duty payable on clearance of goods Valuation of excisable goods After establishing the excisability of the goods, classifying them correctly and finding the applicable rate of duty, the next step is to pay the duty. 1 The Interpretative Rules will be discussed at the Final Level.

43 1.32 Indirect Taxes Establish excisability of the goods Classify the goods and find the applicable rate of duty [Fig. 13] Pay the appropriate duty However, it is important to know that duty is payable on more than one basis: Basiss of computing duty payable Specific duty Compounded Levy scheme Duty based on capacity of production Duty based on value (ad valorem duty) Duty based on the Tariff Value (Section 3(2) of the Act) Duty based on Retail Sale Price (Section 4A of the Act) Duty based on the value arrived at on the basis of valuation under Section 4 [Fig. 14] (a) Specificc duty: In the case of some goods, duty is payable on the basis of certain unit, length, weight, volume, etc. Duty is calculated quite easily by following this method. However, specific duties do not keep pace with inflation i.e., even if selling price of product rises, revenue earned by Government does not increase correspondingly. Hence, more and more tariff entries are designed based on ad valorem duty structure. Example: Duty payable on cigarettes is on the basis of length. (b) Compounded levy scheme: In sectors where there are large numbers of small manufacturers, it is not practically feasible for the Department to exercise normal excise controls and procedures. At the same time, small manufacturer rs find it difficult to comply with the complicated excise procedures.

44 Basic Concepts of Indirect Taxes Central Excise Duty 1.33 Under this scheme, the assessee has the option to pay the duty of excise on the basis of specified factors relevant to production of the goods covered under the scheme (size of equipment employed, number and the types of machines used for manufacture etc.) at the specified rates. The prescribed duty has to be paid by the assessee for the specified period. The advantage of this scheme is that it frees the manufacturer from observing day to day central excise formalities and maintenance of detailed accounts after making the lump sum periodic payment. Example: Stainless steel pattas/patties and aluminium circles are covered under this scheme. The rate of duty is ` 30,000 pm per cold rolling machine (Education cess and secondary and higher education cess to be added separately). (c) Duty based on capacity of production: This duty is payable on the basis of production capacity, without any reference to the actual production. The production capacity is determined as per the rules made in this regard. The Government may notify the goods which will be assessed to such duty having regard to the nature of the process of manufacture or production of excisable goods of any specified description, the extent of evasion of duty in regard to such goods or such other factors as may be relevant. This duty is mandatory i.e, duty cannot be paid in any other manner in respect of the goods notified under this scheme. Example: Pan masala, gutkha, tobacco etc. are notified under this scheme. (d) Duty based on value: In (a), (b) and (c) above, valuation of excisable goods is not required as duty is not based on the value of the goods. However, if the rate of duty is ad valorem, i.e., duty is expressed as a percentage of the value of goods; valuation of the excisable goods becomes essential. Significance of valuation increases as majority of the excisable goods are charged to ad valorem duty. Thus, in case of goods chargeable to ad valorem duty, for calculating the amount of duty payable, first the assessable value of the goods has to be determined. Illustration 4: Determine the excise duty payable in the following cases:- Goods Qty. (kg) Value of goods (`) Rate of duty A 1,000 20,00,000 ` 20 per kg B ,00,000 12% Education 3% are leviable separately. Solution: Computation of excise duty payable Goods A: Since rate of duty is per kg, value of such goods is not relevant. Excise duty payable will be computed on the basis of the quantity of the goods produced. Therefore, excise duty payable will be: 1,000 kg x ` 20 per kg = ` 20,000 Add: 3% education cesses = ` 600 Total excise duty payable = ` 20,600

45 1.34 Indirect Taxes Goods B: Since, in this case the rate of duty is a percentage of the value of excisable goods, the quantity of the goods produced is not relevant. Excise duty payable will be computed on the basis of the value of the goods. Therefore, excise duty payable will be: ` 10,00,000 x 12% = ` 1,20,000 Add: 3% education cesses = ` 3,600 Total excise duty payable = ` 1,23,600 Ad valorem duty is payable on the basis of the values prescribed under the Act namely, tariff value fixed by the Government in respect of certain goods; transaction value and value based on retail sale price printed on a package of goods. (i) Tariff value: The Central Government is empowered to notify the values of goods which will be chargeable to ad valorem duty. In such a case, the task is easy since the value is already fixed. The Central Government has also got the power to alter the tariff value once fixed. However, in recent years tariff values have rarely been fixed by the Government. The duty in such cases is the percentage of such tariff value and not the assessable value. Example: The Central Government has fixed tariff value for jewellery (other than sliver jewellery) under heading 7113 and branded readymade garments under Chapter 61 and 62 as 30% of the transaction value declared in the invoice and 30% of the retail sale price of the ready garments respectively. The Central Government may fix different tariff values for different classes or descriptions of the same excisable goods. The Central Government can also fix different tariff values for same class or description of the goods but produced or manufactured by different classes of producers or manufacturers or sold to different classes of buyers. Such tariff values may be fixed on the basis of wholesale price or average price of various manufacturers as the Government may consider appropriate. Illustration 5: X Ltd. manufactured readymade garments for ` 10 lakh (exclusive of all taxes). The retail sale price of such garments is ` 30 lakh. The rate of duty is 12.36% (inclusive of 3% education cesses). The tariff value is notified at 30% of retail sale price. Compute the excise duty payable. Solution: Since the goods are such for which tariff value has been fixed by the Central Government, the excise duty will be payable on the basis of tariff value. Tariff Value = ` 9,00,000 [30% of ` 30 lakh (RSP)] Excise duty payable = 12.36% of ` 9,00,000 = ` 1,11,240. (ii) Valuation with reference to retail sale price (RSP): Section 4A of the Act provides for valuation of excisable goods based on the retail sale price.

46 Basic Concepts of Indirect Taxes Central Excise Duty 1.35 Excisable goods need to be valued in terms of provision of section 4A if the following two conditions are satisfied cumulatively: The excisable goods to be valued are covered under the Legal Metrology Act, 2009 or related rules or under any other law and such law requires declaration of the retail sale price on the package of such goods The Central Government has notified the said goods as goods in relation to which the payment of excise duty will be on the basis of the RSP less such deductions/abatements as it may allow in the notification. The abatement is given as a percentage of the retail sale price. Examples: [Fig. 15] Goods notified under section 4A Rate of Abatement (%) Biscuits 30% Toothpaste 30% Photographic cameras 30% Pressure cooker 25% Meaning of Retail Sale Price Retail sale price has been defined to mean the maximum price at which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes, local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like, as the case may be, and the price is the sole consideration for such sale. However, if the provisions of the Act, rules or Legal Metrology Act, 2009 requires the retail sale price to exclude any taxes, local or otherwise, the retail sale price shall be construed accordingly. The following points merit consideration in this regard: All goods bearing RSP not covered under section 4A: It is important to note that all goods on which RSP has been declared will not be covered under the provisions of section 4A. Only when the declaration of RSP on the goods is mandatory under the Legal Metrology Act, 2009 or under any other law and such goods have been notified by

47 1.36 Indirect Taxes the Central Government for the purpose of section 4A, will the goods be valued under section 4A. The provisions do not apply in cases where manufacturers voluntarily affixes RSP on the products. Value = RSP printed on the package Abatement, if any, notified by the Government Illustration 6: RSP printed on the package of a pressure cooker is ` 5,000 (inclusive of all taxes). Declaration of RSP on package of pressure cooker is required under the provisions of Legal Metrology Act, 2009 and has also been notified by the Central Government for the purpose of section 4A. The prescribed rate of abatement is 25%. The applicable rate of duty is 12% plus 2% education cess and 1% secondary and higher education cess. Compute the duty payable. Solution: The value under section 4A will be (` % of ` 5000) = ` Excise duty payable will be ` 464 (12.36% of ` 3,750) rounded off. Maximum RSP deemed to be the RSP, if more than one RSP declared: Where more than one RSP is declared on the package of excisable goods, the maximum of such price will be deemed to be the RSP. Each RSP deemed to be the RSP, if different RSPs on different packages meant for different areas: Where RSPs are declared on different packages for the sale of any excisable goods in packaged form in different areas, each such RSP will be RSP for the purposes of valuation of the excisable goods intended to be sold in the area to which the retail sale price relates. Increased RSP deemed to be the RSP, if RSP increased after removal from factory: If the RSP declared on the package of excisable goods at the time of its clearance from the place of manufacture, is increased, such increased RSP will be deemed to be the retail sale price. RSP declaration not mandatory on wholesale packages: RSP declaration is compulsory in case of retail packages meant for sale to ultimate consumer. However, RSP declaration is not mandatory on wholesale packages, packaged commodities for institutional/ industrial consumers, agricultural farm produce etc. (iii) Transaction value: (1) Concept: In cases where neither tariff value has been fixed by the Central Government nor the valuation is based on the retail sale price, the assessable value of the goods is required to be computed in terms of 'transaction value' of the goods as provided under section 4 of the Act. The scheme of ad valorem valuation in general is summarized below:

48 Basic Concepts of Indirect Taxes Central Excise Duty 1.37 Excisable goods chargeable to ad valorem duty Are tariff values being fixed under section 3(2) for the goods? No Are the goods notified under section 4A for valuation with reference to retail sale price? Yes Yes Valuation under section 3(2) Valuation under section 4A No Valuation under section 4 [Fig. 16] The concept of 'transaction value' has been introduced under section 4 from July 1, Prior to 1 st July 2000, the valuation under this section was based on the principle of normal price which was based on the wholesale prices at which manufacturer ordinarily sold the goods. Assessable value to be the transaction value: As per section 4, assessable value of the excisable goods shall be the 'transaction value' if the following conditions are satisfied:- (a) The price is the sole consideration for the sale. In other words, the assessee must not receive any other sum either by way of money or by way of any other assistance for the manufacture of goods. (b) The assessee and the buyer of the goods are not related persons. (c) Goods have been sold by the assessee for delivery at the time and place of removal. In all other cases, which do not fulfill the aforesaid conditions, value is to be determined as per the provisions of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, The Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 will be discussed at the Final Level.

49 1.38 Indirect Taxes Valuation under section 4 can be better understood with the help of the following diagram: Duty chargeable with reference to value under section 4 Whether goods have been delivered at the time of removal? Yes No Goods to be valued as per Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 Whether goods have been delivered at the place of removal? Yes Whether buyer and the assessee are related persons? No Whether price is the sole consideration? Yes No Yes No Assessable Value = Transaction Value [ [Fig. 17] (2) Relevant definitions: (a) Transaction value means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods. (b) Assessee means the person who is liable to pay the duty of excise under this Act and includes his agent. (c) Persons shall be deemed to be related, if

50 Basic Concepts of Indirect Taxes Central Excise Duty 1.39 (i) they are inter-connected undertakings; (In a general sense, inter-connected undertakings have 25% common control through ownership, or management.) (ii) they are relatives; (Only natural relationships can be covered under this like husband, wife, members of HUF etc.) (iii) amongst them the buyer is a relative and a distributor of the assessee, or a subdistributor of such distributer; or (iv) they are so associated that they have interest, directly or indirectly, in the business of each other. (d) Place of removal means (i) a factory or any other place or premises of production or manufacture of the excisable goods. (ii) a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty. (iii) a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory from where such goods are removed. (e) Time of removal in respect of the excisable goods removed from the place of removal referred to above shall be deemed to be the time at which such goods are cleared from the factory. (3) ANALYSIS of the definition of transaction value: The definition of transaction value is an all inclusive definition. It is important to bear in mind that the concept of transaction value is quite different from the concept of price and such value can include many items which may classically have not been understood to be part of the sale price. Let us analyze the definition of transaction value through the use of flow charts. Transaction Value means the price actually paid or payable when sold And includes in addition to the price any amount that the buyer is liable to pay to or on behalf of the assessee by reason of or in connection with the sale whether payable at the time of sale or any time thereafter [Fig. 18] The definition also gives an illustration of the kind of amounts that are included as additions to price which the buyer may be liable to pay to or on behalf of the assessee. It is important to

51 1.40 Indirect Taxes note that the definition specifically states as including but not limited to which clearly means that the items included in the definition are only illustrative and more may be includible. Advertising or publicity Marketing and selling Storage Any other matter Items included in the definition Outward Handling Commission Servicing Warranty [Fig. 19] It is clear that the above are includible only if the buyer is liable to pay the same or if he pays the same on behalf of the assessee. Items excluded from the definition Excise duty Sales tax Other taxes [Fig. 20] The above are not includible, if actually paid or payable. Includibility or otherwise of a few significant items of cost in the transaction value (apart from the ones already provided in the definition) is given hereunder:

52 Basic Concepts of Indirect Taxes Central Excise Duty 1.41 (4) Inclusions/Exclusions in/from transaction value: Items of cost Includibility in transaction value or otherwise 1. Outward handling Includible only upto place of removal and if incurred by buyer as a condition of sale of goods. 2. Packing Cost of all forms of packing (special, general, protective, etc.) are includible. However, cost of durable/reusable packing is not included as it is amortized and included in the cost of product itself. Therefore, separate addition is not necessary unless audit of accounts reveal that such cost has not been amortized and include in the value of the product. 3. Dharmada or charity Includible. 4. Design, development and engineering charges 5. Bought out items and accessories Includible if they are specific to goods produced as goods cannot be produced without them. Essential Items- Includible as product cannot function without the same. However, the item should be fitted to the main article at the time of removal. Optional bought out items and accessories- Not includible. (Accessory means an object or device not essential in itself but adding to beauty, convenience or effectiveness of something else.). 6. Consultancy charges Includible if it relates to design, layout, etc. of final product; and such activity is done upto place of removal. 7. Testing & inspection charges 8. Erection, installation and commissioning charges 9. Pre-delivery inspection charges and after sales services 10. Discounts (Trade and Cash) 11. Notional interest on deposits, advances Includible but independent testing done by the buyer himself or through a third party is not includible. Not includible if it results in immoveable property. Includible only if it is collected by the manufacturer. All forms of discount (trade discount, cash discount, quantity discount, turnover discount, differential discounts to different buyers, damage discount) are excludible as the same are already factored into the definition of transaction value. However, the discount should be actually passed on to the buyers. Not includible unless it can be proved that price has been lowered on account of receipt of such advance from the buyer.

53 1.42 Indirect Taxes 12. Interest on delayed payment of receivables 13. Bank charges for collection of sale proceeds 14. Delayed payment charges Not includible as interest is nothing but finance charges and cannot be considered as payment by reason of sale. Not includible as the same cannot be considered as payment by reason of sale. Not includible as "transaction value" relates to the price paid or payable for the goods and delayed payment charge is nothing but the interest on the price of the goods which is not paid during the normal credit period. However, to be admissible as deduction it should be separately shown or indicated in the invoice and should be charged over and above the sale price of the goods. 15. Freight Not includible. However, if, sale is from depot, freight from factory to depot will be includible. 16. Transit insurance Not includible as it is a part of transportation cost. However, it should be shown separately in the invoice. (5) Price-cum-duty: Price-cum duty of the excisable goods sold by the assessee can be understood with the help of the following diagram: Price actually paid for the goods sold Money value of the additional consideration, if any, flowing directly or indirectly from the buyer to the assessee in connection with the sale of such PRICE-CUM-DUTY Sales tax and other taxes actually paid Price-cum-duty deemed to be inclusive of the duty payable on such goods [Fig. 21] The following points merit consideration in this regard: Situations when the price charged will be taken as price-cum-duty: o If the assessee has collected less duty from buyer than what is due; or o If the assessee has not collected any duty from the buyer even though the product is liable to duty; or

54 Basic Concepts of Indirect Taxes Central Excise Duty 1.43 o If the assessee has paid duty on lesser value due to receipt of additional consideration. In the above situations, the price charged (exclusive of sale-tax/local taxes) shall be regarded as price-cum-duty. The assessable value and the duty payable in such a case will be: Assessable Value = Price-cum-duty 100 (100 + Rate of excise duty) Duty payable = Price-cum-duty Rate of duty (100 + Rate of excise duty) Duty to be separately indicated in invoice: Every person liable to pay duty of excise should prominently indicate in all the documents/invoice, etc., the amount of such duty which will form part of the price at which such goods are to be sold. It is also the responsibility of such person to deposit any sum collected from the buyer in name of excise duty with the Government. Illustration 7: What will be the assessable value of the excisable goods in the following cases? (i) The price-cum-duty of excisable goods sold by A is ` 200 per unit. Excise 8% has been charged by A on such goods. However, A comes to know that the actual rate of duty chargeable on the goods sold by him is 12% and not 8%. A has collected only ` 200 per unit from the customers. (ii) B sells his excisable ` 200 per unit (inclusive of excise 12%). However, it has been found that B has collected ` 50 per piece separately. (iii) The price of the excisable goods sold by C is ` 500 per unit. C does not charge any duty of excise in his invoice on the belief that the goods sold by him are exempt from payment of duty vide an exemption notification. However, he comes to know that the goods are not exempt from excise duty but are liable to 12%. In all the above cases education cesses have to be considered separately. Solution: Particulars Pricecum-duty charged (per unit) [`] Additional consideration [ ` ] Actual price-cumduty (including additional considerati on) [ ` ] Correct rate (including 3% education cesses) [%] Value ( ` ) Duty payable ( ` ) (A) (B) (C) (D) (E) = (C) (F)=(E) 100 [100 + x (D) (D)] Goods sold by A

55 1.44 Indirect Taxes Goods sold B Goods sold by C Note: All the amounts have been rounded off to nearest rupee. Illustration 8: Calculate the assessable value and the excise duty payable from the following particulars: List price of the product (inclusive of taxes) ` 5,960 Trade discount 10% VAT 12.5% Excise duty 12% Education cesses as applicable An exemption notification grants exemption of 50% of the duty payable on this product. Solution: Particulars Amount in (`) List price of the product 5,960 Less: Trade discount 596 Price net of discounts but including taxes 5,364 Less: VAT [(` 5,364 x 12.5)/112.5] 596 Price-cum-duty (a) 4,768 Less: Excise 6% (on account of 50% exemption) [(` 4, x 6)/106] (rounded off to nearest rupee) Education 2%(rounded off) 5 Secondary and Higher education 1%(rounded off) 3 Total excise duty including education cesses (b) 278 Assessable value (a) (b) 4490 Illustration 9: Determine the transaction value and the duty payable from the following particulars: ` (i) Price of machinery excluding taxes and duties 5,50,000 (ii) Installation and erection expenses [Machinery has been fixed to the 21,000 earth] (iii) Packing charges (primary and secondary) 11,500 (iv) Design and engineering charges 2,000 (v) Dharmada 500

56 Basic Concepts of Indirect Taxes Central Excise Duty 1.45 Other information: (a) Cash 2% on price of machinery was allowed as per terms of contract since full payment was received before dispatch of machinery. (b) Bought out accessories valued at ` 6,000. The accessories are optional and provide ease of use of the machinery. (c) Central excise 12% and educational cess as 3%. Make suitable assumptions as are required and provide brief reasons. Solution: Determination of excise duty payable Particulars ` Price of machinery 5,50,000 Add: Packing charges (Note 1) 11,500 Design and engineering charges (Note 1) 2,000 Dharmada (Note 1) 500 Total 5,64,000 Less : 2% cash discount on price of machinery [` 5,50,000 x 2 %] (Note 4) 11,000 Assessable value 5,53,000 Excise 12.36% Excise duty payable [rounded off] 68, ,351 Notes:- While computing the assessable value:- 1. packing charges, design and engineering charges and dharmada have been included as such payments are in connection with sale. 2. installation and erection expenses have not been included as they result in immovable property which is not goods. 3. value of bought out accessories has not been included as they are optional and do not provide any value addition. 4. cash discount has been allowed as deduction as it has been passed on to the buyer Small scale industry (SSI) exemption Considering the significant contribution of small scale sector towards the industrial growth of the Indian economy and to the Gross Domestic Product, excise duty concessions have been granted under the central excise law to small scale units so as to make them competitive in the domestic and global market. The excise duty concessions have been extended to the SSI units by way of exemption notifications. Currently, Notification No. 8/2003 CE dated grants SSI exemption.

57 1.46 Indirect Taxes (1) Meaning of SSI unit: Small Scale Units are not defined in the Act or the rules made thereunder. It is important to note here that the definition of a SSI unit adopted commonly for trade purposes is not applicable under central excise. Under central excise, the basis for ascertaining whether a unit is a SSI, is the value of clearances of the unit in the previous financial year. (2) Eligible goods: SSI exemption is restricted to the products listed in the SSI exemption notification. Though the notification covers most of the products, few products like tobacco products, pan masala, watches, matches and some textile products are specifically excluded from SSI exemption. (3) Eligible SSI units: The units whose value of clearances of excisable goods for home consumption computed in accordance with the notification (mentioned above) does not exceed ` 400 lakh (4 crore) in the previous financial year are eligible for SSI exemption. The turnover limit is calculated by taking into account the clearances in respect of one manufacturer from one or more factories or from a factory by one or more manufacturers. Example: If ABC Ltd. wants to claim SSI exemption in the year , then the value of its clearances for the year should not exceed ` 4 crore. Further, if ABC Ltd. has started its business only in the year , then it is entitled for SSI exemption for the year as its previous year clearances are nil. (4) SSI exemption: The excisable goods covered by the notification are exempt from the whole of the duty up to the aggregate value of clearance of ` 1.5 crore in any financial year if the turnover of the unit does not exceed ` 4 crores in previous year 3. In simple words, a unit whose turnover does not exceed ` 4 crores in the previous year is entitled to full exemption from payment of duty on its first clearances of up to ` 150 lakh in the current financial year. Units having turnover upto ` 4 crores in the previous financial year and manufacturing goods specified in the SSI exemption notification are eligible for exemption from duty up to turnover of ` 1.5 crore in the current financial year [Fig. 22] (5) Availability of CENVAT credit: A SSI unit can avail CENVAT credit on inputs only after it starts paying duty. However, CENVAT credit of capital goods can be availed (but can be utilized only after the turnover crosses ` 150 lakh) even if the same have been received during period of exemption. (6) Goods bearing brand name of others: SSI exemption is not available in respect of 3 The manner of calculating the limits of ` 400 lakh and ` 150 lakh and other provisions of SSI exemption will be discussed in detail at the Final Level.

58 Basic Concepts of Indirect Taxes Central Excise Duty 1.47 clearances bearing a brand name of another person. This means that such clearances attract normal rate of duty. Brand name or trade name is any mark, symbol, monogram, label, signature or inventor word or writing which may or may not be registered. Brand or trade name must indicate a connection in the trade between the goods and the person using such mark or name. Exception: There are certain types of goods which are entitled to SSI exemption even though they bear the brand name of other person e.g. goods manufactured in rural area, packing material, account books, registers, writing pads. Illustration 10: (i) ABC Ltd. wants to claim SSI exemption in the year Its clearances for the year are ` 3 crore. ABC Ltd. manufactures goods bearing brand name of XYZ Ltd. Is ABC Ltd. eligible for SSI exemption? (ii) ABC Ltd. wants to claim SSI exemption in the year Its clearances for the year are ` 3 crore. ABC Ltd. manufactures goods bearing brand name of XYZ Ltd. in rural area. Is ABC Ltd. eligible for SSI exemption? Solution: (i) ABC Ltd. is not eligible for SSI exemption as it manufactures goods bearing brand name of others. (ii) ABC Ltd. is eligible for SSI exemption even though the goods manufactured by it bears the brand name of others as it manufactures goods in rural area General procedures 4 (1) Registration: Every manufacturer of excisable goods other than the ones specifically exempted is required to get his premises registered under the central excise law. Registration is also required for every prescribed person who carries on trade or holds private store-room or warehouse or otherwise uses excisable goods. A manufacturer is exempt from the requirement of getting his premises registered so long as the goods manufactured by him attract Nil rate of duty or remain exempt from the whole of the duty of excise leviable thereon. Small scale units availing the benefit of SSI exemption notification are also exempt from obtaining registration. However, such units are required to give a declaration in a specified form once the value of their clearances touches ` 90 lakhs. After the assessee applies for the registration in the prescribed manner, he is issued a 15 digit PAN based alphanumeric registration number and a registration certificate on completion of the registration procedure. The registration certificate is valid till the relevant unit is engaged in manufacture of excisable goods. It is not required to be renewed. (2) Payment of excise duty: The due dates and other provisions relating to payment of duty have been tabulated below: 4 The procedures under central excise will be discussed in detail at the Final level. In this unit, a bird s eye view of the significant procedures under central excise has been given to familiarize the students with the basic aspects of such procedures.

59 1.48 Indirect Taxes Type of Assessee Periodicity Due date for payment of duty Assessee eligible for SSI exemption (An eligible unit is one whose aggregate value of clearances does not exceed ` 400 lakh in the preceding financial year) Other assessees Quarterly payment duty Monthly payment duty of of In case of e- payment 6th day of the month following the relevant quarter. Other than e- payment 5th day of the month following the relevant quarter. For goods removed during the quarter ending in March, 31st day of March. 6th day of the month following the relevant month. 5th day of the month following the relevant month. For goods removed during the month of March, 31st day of March. The following points merit consideration in this regard: E-payment of duty: Assessees who have paid excise duty of rupees 10 lakh or more including the amount of duty paid by utilization of CENVAT credit in the preceding financial year are mandatorily required to pay the excise duty electronically through internet banking. EASIEST: For e-payment, assessees should open a net banking account with one of the authorized banks. For effecting payment, assessees can access the ACES website and click on the e-payment link that will take them to the EASIEST portal or they can directly visit the EASIEST portal. 18% on delayed payment of duty: Failure to pay the amount of duty by due date attracts interest at the 18% per annum on the outstanding amount. Duty may be paid in cash or by utilizing CENVAT credit: Duty may be paid in cash through account current, popularly known as PLA (Personal Ledger Account). Duty can also be paid by utilizing the CENVAT credit balance available at the end of the month, even though duty is payable by 5th/6th of following month. (3) Invoice: An invoice is the document under cover of which the excisable goods are to be cleared by the manufacturer. Therefore, excisable goods cannot be removed from a factory or a warehouse except under an invoice signed by the owner of the factory or his authorized agent. Serially numbered: The invoice should be serially numbered. The serial number shall commence from 1 st April every year (beginning of a financial year). Such serial numbers need to be intimated to the Superintendent of Central Excise having jurisdiction over the factory of the assessee, before issuing the invoices. Contents: The invoice should contain the registration number, address of the jurisdictional

60 Basic Concepts of Indirect Taxes Central Excise Duty 1.49 Central Excise Division, name of consignee, description, classification, time and date of removal, rate of duty, quantity, mode of transport, vehicle registration number and value of goods and the duty payable thereon. Number of copies: The invoice has to be prepared in triplicate in the following manner, namely:- i. the original copy being marked as ORIGINAL FOR BUYER; ii. the duplicate copy being marked as DUPLICATE FOR TRANSPORTER; iii. the triplicate copy being marked as TRIPLICATE FOR ASSESSEE. (4) Returns under central excise: A central excise assessee is required to file certain periodic returns, which relate to his tax liability and other transactions. Some significant returns to be filed by different categories of central excise assessees and their respective due dates are given in the following table: Form of Return Category of assessee Periodicity Due date ER-1 All assessees except SSI Monthly By 10th day of the month following the relevant month ER-3 Assessees eligible for SSI Quarterly By 10th day of concession (even if he does the month not avail the concession) following the relevant quarter ER-4 Assessees paying duty of ` 1 Annually By 30th [Annual Financial crore or more per annum November of the Information Statement either through PLA or succeeding year CENVAT or both together Note: All the above returns have to be filed electronically. Note: The rates of duties, wherever mentioned in the illustrations may not always be the actual rate prevalent during the period in question. They may be hypothetical rates assumed to explain the provisions of law with more clarity.

61 Learning objectives UNIT 3: CUSTOMS DUTY After reading Unit- 3 of this Chapter, you will be able to understand: the concept of customs duty the Constitutional provisions relating to levy of customs duty the different types of customs duties and computation of customs duty the sources of customs law the various provisions relating to levy of duty namely, application of the Customs Act, charge of customs duty and taxable event exceptions to the levy of customs duty exemption from the customs duty the concepts of classification and valuation of imported/export goods in brief as to how to determine the relevant date for determination of rate of exchange as to how to determine the rate of duty and tariff valuation of imported and export goods Apart from the above, after you finish reading this Unit, you will also get a brief idea of the import and export procedures under the customs law. 3.1 What is customs duty? Customs duty is a duty or tax, which is levied by the Central Government on import of goods into, and export of goods from, India. The term customs derives its colour and essence from the term custom, which means a habitual practice or course of action that characteristically is repeated in like circumstances. Duties on import and export of goods have been levied from time immemorial by all the countries. In India, at the time when the predominant system of governance was monarchy, it was customary for a trader bringing the goods to a particular kingdom to offer gifts to the King for allowing him to sell his goods in that kingdom. Kautiliya s Arthashastra also refers to shulka consisting of import duty and export duty that was collected at the city gates on goods coming in and going out respectively. Subsequently, the levy of customs duty was organised through legislation during the British period. Post independence, the Customs Act was passed and promulgated in India by the Parliament in the year It consolidated the erstwhile Sea Customs Act, 1878, Land Customs Act, 1924 and provisions for air customs. Further, the Customs Tariff Act was passed in the year 1975 to replace the erstwhile Indian Tariff Act, 1934.

62 Basic Concepts of Indirect Taxes Customs Duty Constitutional Provisions As learned earlier, customs duty is an indirect tax levied by the Central Government. The power to levy the customs duty is conferred by Entry 83 of the Union List of the Seventh Schedule to the Constitution of India. Entry 83 provides as under: Duties of Customs including Export duties The various types of customs duties are as under:- Antidumping duty Countervailing duty on subsidized articles Basic customss duty Types of customs duties CVD Special CVD Safeguard duties Protective duties The aforesaid duties have been elaborated subsequently in this Unit. 3.3 Sources of customs law Customs Law is a combined study of the Customs Act, 1962, Customs Tariff Act, 1975, Annual Union Finance Acts, Rules, Notifications, Circulars/ Instructions, Trade Notices/Clarifications and Case Laws. (1) Customs Act, 1962: Customs Act, 1962 contains the provisions governing the import and export duty imposed on imports and exports of the goods. (2) Customs Tariff Act, 1975: contains the provisions relating to various types of customs duties and the classification of imported and export goods. (3) Rules and regulations: Some of the rules and regulations issued under the Customs Act, 1962 are the Customs Valuation (Determination of Value of Imported Goods) Rules,

63 1.52 Indirect Taxes 2007, Customs Valuation (Determination of Value of Export Goods) Rules 2007, Baggage Rules, 1998, Export Manifest (Vessels) Regulations, 1976, etc Levy of customs duty (I) Application of the Act The Customs Act, 1962 applies to the whole of India. India includes territorial waters of India. Besides, the Customs Act, 1962 and Customs Tariff Act, 1975 have been further extended to:- (i) (ii) the notified designated areas in the Continental Shelf of India (CSI) and Exclusive Economic Zone of India (EEZI) and whole of EEZI and CSI for the purpose of processing for extraction or production of mineral oils and supply of any goods in connection thereto. Example: The machinery purchased by the oil rigs carrying on operations in the EEZI shall be considered as imported goods. 1. Baseline: It is the lower water mark along the coast. 2. Exclusive Economic Zone of India: It is an area beyond the Indian territorial waters. The limit of exclusive economic zone is 200 nautical miles from the nearest point of the baseline. 3. Continental Shelf of India: Continental shelf is the part of the sea floor adjoining a land mass where the depth gradually increases before it plunges into the ocean deeps. Continental Shelf of India extends beyond the limit of its territorial waters throughout the natural prolongation of its land territory to the outer edge of the continental margin or to a distance of 200 nautical miles from the baseline. (a) Meaning of Indian territorial waters: Indian territorial waters extend upto 12 nautical miles (22 km) into the sea from the appropriate base line. India includes not only the surface of sea in the territorial waters, but also the air space above and the ground at the bottom of the sea. (b) Meaning of Indian customs waters: Indian customs waters means the waters extending into the sea up to the limit of contiguous zone of India and includes any bay, gulf, harbour, creek or tidal river [Section 2(28) of the Customs Act, 1962]. Indian customs waters cover both the Indian territorial waters and contiguous zone. Indian territorial waters extend up to 12 nautical miles (nm) from the base line whereas contiguous zone extend to a further 12 nm from the outer limit of the territorial waters. Therefore, Indian customs waters extend upto a total of 24 nm from base line. 1 The other sources relevant for the study of the customs law are similar to the sources of the central excise law. Students are advised to refer Unit-2: Central Excise Duty for detailed discussion on the same.

64 Basic Concepts of Indirect Taxes Customs Duty 1.53 Contiguous zone of India: It is an area 12 nautical miles (nm) beyond the Indian territorial waters. Therefore, it is at a distance of 24 nautical miles from the nearest point of the baseline. (c) Significance of Indian territorial waters and Indian customs waters: India has sovereignty in its territorial waters whereas it has full and exclusive economic rights in its EEZ and Continental Shelf. Since India includes Indian territorial waters, all the provisions of the Customs Act and rules and regulations thereunder are applicable in Indian territorial waters. In addition to this, the Customs Act, 1962 has extended certain powers of the customs officers in the Indian customs waters as well (for example, power to stop and search any vessel, power to arrest a person in Indian customs waters etc.). (II) Charging section [Section 12 of the Customs Act, 1962] 1. Except as provided in this Act, or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under the Customs Tariff Act, 1975, or any other law for the time being in force, on goods imported into and exported from India. 2. The aforesaid provisions shall apply in respect of all goods belonging to Government as they apply in respect of goods not belonging to Government. However, imports by Indian Navy, specific equipment required by police, Ministry of Defence, Costal Guard etc. are fully exempt from customs duty by virtue of specific notifications subject to fulfillment of conditions and/or procedure set out in the said notifications. ANALYSIS : The following propositions arise from the aforesaid section:- 1. Customs duty is charged on goods and not on the person importing them or paying the duty. The goods shall be such as are imported to or exported from India. Being such, it is expected to be passed on to the buyer. 2. It may, however, be noted that this levy is subject to other sections in the Act. For instance: Section 13 no duty on pilfered goods Section 22 reduced duty on damaged goods Section 23 remission of duty on destroyed goods or no duty in case of relinquishment of the title to the goods. 3. Government goods shall be treated at par with non-governmental goods for the purposes of levy of customs duty. 4. Rates of duty: The rates at which duties of customs shall be levied under the Customs Act 1962 are specified in the First and Second Schedules of the Customs Tariff Act, 1975.

65 1.54 Indirect Taxes The Customs Tariff Act, 1975 First Schedule Second Schedule enlists the goods liable to import duty enlists the goods liable to export duty (i) Preferential rate of duty: If the goods are imported from the preferential areas [as notified by the Central Government], then a lower preferential rate of duty will be applicable on such goods subject to the fulfillment of specified conditions. (ii) Standard rate of duty: In any entry, if no preferential rate of duty has been notified, the standard rate of duty shall be applicable. Determination of duty where goods consist of articles liable to different rates of duty [Section 19] Except as otherwise provided in any law for the time being in force, where goods consist of a set of articles, duty shall be calculated as follows: - (a) Articles liable to duty with reference to quantity (specific duty) shall be chargeable to that duty; (b) Articles liable to duty with reference to value (ad valorem duty) shall:- (i) if they are liable to duty at the same rate, be chargeable to duty at that rate, and (ii) if they are liable to duty at different rates, be chargeable to duty at the highest of such rates; (c) Articles not liable to duty shall be chargeable to duty at the rate at which articles liable to duty with reference to value are liable under clause (b). However, - (a) Accessories of, and spare parts or maintenance and repairing implements for, any article which satisfy the conditions specified in the rules made in this behalf shall be chargeable at the same rate of duty as that article; (b) If the importer produces evidence to the satisfaction of the proper officer or the evidence is available regarding the value of any of the articles liable to different rates of duty, such article shall be chargeable to duty separately at the rate applicable to it. (III) Taxable event in case of import of goods into India/export of goods from India Section 12 makes it abundantly clear that the taxable event for payment of the duty of customs is the importation or exportation of goods into/out of India. However, since India includes

66 Basic Concepts of Indirect Taxes Customs Duty 1.55 territorial waters of India, even an innocent entry of a vessel into the territorial waters of India might have resulted in import of goods. The confusion in determining the point at which the importation or exportation takes place was cleared by the numerous legal decisions rendered in this regard. The major principles derived by these judgments are as follows:- (i) TAXABLE EVENT IN CASE OF IMPORTS (a) In case of goods cleared for home consumption*: Import of goods commences when they cross the territorial waters, but continues and is completed when they become part of the mass of goods within the country; the taxable event being reached at the time when the goods reach the customs barriers and bill of entry for home consumption is filed. (b) In case of goods cleared for warehousing**: In case of warehoused goods, the goods continue to be in customs bond. Hence, import takes place when the goods are cleared from the warehouse. The customs barriers would be crossed when they are sought to be taken out of the customs and brought to the mass of goods in the country. *Clearance for home consumption: It implies that customs duty on imported goods has been paid and thus, goods can be removed by the importer for utilization or consumption within the country. **Clearance for warehousing: In case where the goods are not immediately cleared for home consumption, they may be deposited in a warehouse and cleared at a later point of time. In such a case, the collection of customs duty will be deferred till such goods are cleared from warehouse for home consumption. (ii) TAXABLE EVENT IN CASE OF EXPORTS Export of goods is complete when the goods cross the territorial waters of India. If ship sinks within the territorial waters, export is not complete. Meaning of important terms (1) Goods: includes- (a) vessels, aircrafts and vehicles; (b) stores; (c) baggage; (d) currency and negotiable instruments; (e) any other kind of movable property [Section 2(22)]. For anything to be called as goods, it must moveable and marketable. The concept of movability and marketability of goods has been discussed at length in Unit 2: Central Excise Duty. (2) Export: The term export, with its grammatical variations and cognate expressions, means taking out of India to a place outside India [Section 2(18)].

67 1.56 Indirect Taxes (3) Export goods: means any goods, which are to be taken out of India to a place outside India [Section 2(19)]. (4) Exporter: in relation to any goods at any time between their entry for export and the time when they are exported, includes any owner or any person holding himself out to be the exporter [Section 2(20)]. (5) Import: The term import, with its grammatical variations and cognate expressions, means bringing into India from a place outside India [Section 2(23)]. (6) Imported goods: means any goods brought into India from a place outside India but does not include goods which have been cleared for home consumption [Section 2(25)]. (7) Importer: in relation to any goods at any time between their importation and the time when they are cleared for home consumption, includes any owner or any person holding himself out to be the importer [Section 2(26)]. (IV) Duty to be paid on goods derelict, wreck etc coming into India [Section 21] All goods, derelict, jetsam, flotsam and wreck brought or coming into India, shall be dealt with as if they were imported into India. Thus, even though such goods had not been actually imported, they would be liable to import duty. However, if such goods are entitled to be admitted duty-free under this Act, duty would not be levied provided it is shown to the satisfaction of the proper officer that they are so entitled. Meaning of various terms Derelict This refers to any cargo, vessel, etc. abandoned in the sea with no hope of recovery. Jetsam This refers to goods jettisoned from the vessel to save her from sinking. Flotsam Jettisoned goods which continue floating in the sea are called flotsam. Wreck This refers to cargo or vessel or any property which are cast ashore by tides after ship wreck.

68 Basic Concepts of Indirect Taxes Customs Duty Customs duty not leviable in certain casess Section 13 No duty on pilfered goods Section 22 Reduced duty on damagedd goods Section 23(1) Remission of duty on destroyed goods Section 23(2) No duty on relinquishment of the title to the goods 1. No duty on pilfered goods [Section 13] If any imported goods are pilfered after the unloading thereof but before the proper officer has made an order for clearance for home consumption or deposit in a warehouse, the importer shall not be liable to pay the duty leviablee on such goods. However, where such goods are restored to the importer after pilferage, the importer becomes liable to duty. Meaning of term pilfer : The term pilfer means to steal, especially in small quantities; petty theft. Therefore, the term does not include loss of total package. The underlying principle behind this provision is that when the goods are not under the control of the importer, he should not be required to pay duty on such goods. ANALYSIS: (a) Conditions to be satisfied for exemption from duty The imported goods should have been pilfered. The pilferage should have occurred after the goods are unloaded, but before the properr officer makes the order of clearancee for home consumption or for deposit into warehouse. The pilfered goods should not have been restored back to the importer. (b) Points which merit consideration If goods are pilfered after the order of clearance is made but before the goods are actually cleared, section 13 is not applicable and thus, duty would be leviable.

69 1.58 Indirect Taxes Section 13 deals with only pilferage. It does not deal with loss/destruction of goods. Provisions of section 13 would not apply if it can be shown that pilferage took place prior to the unloading of goods. In case of pilferage, only section 13 applies and remission of duty under section 23(1) is not permissible. 2. Remission of duty on goods lost or destroyed [Section 23(1)] Without prejudice to the provisions of section 13, where it is shown to the satisfaction of the Assistant Commissioner of Customs or Deputy Commissioner of Customs that any imported goods have been lost (otherwise than as a result of pilferage) or destroyed, at any time before clearance for home consumption, the Assistant Commissioner of Customs or Deputy Commissioner of Customs shall remit the duty on such goods. ANALYSIS: (a) This section comes into play in case of loss/destruction of imported goods at any time before their clearance for home consumption. (b) The remission of duty is permissible only in the case of total loss of goods. This implies that the loss is forever and beyond recovery. The loss referred to in this section is generally due to natural causes like fire, flood, etc. The loss of goods may be at the warehouse also. (c) Since section 23(1) is subject to the provisions of section 13, in case the goods have been pilfered after they have been unloaded but before order for clearance for home consumption or deposit in a warehouse, section 13 would apply and the importer would not be liable to pay the duty. Distinction between section 13 and section 23(1): The provisions of section 13 and section 23(1) can be better appreciated after going through the following points of distinction:- Basis Meaning Duty on goods Subsequent restoration goods of Pilferage of goods under section 13 The word pilfer means to steal, especially in small quantities; petty theft. Duty is not at all leviable on such goods. Where the pilfered goods are restored to the importer after pilferage, the importer becomes liable to duty. Loss or destruction of goods under section 23(1) The word lost or destroyed refers to total loss of goods i.e. loss is forever and beyond recovery. The duty paid on the goods shall be remitted to the importer. In case of destruction of goods, the restoration of goods is not possible.

70 Basic Concepts of Indirect Taxes Customs Duty 1.59 Warehoused goods Onus to prove the pilferage/destructi on or loss of goods Time of occurrence of pilferage or loss/destruction Provisions of section 13 are not applicable to warehoused goods. The onus to prove the pilferage does not lie on the importer. The imported goods must have been pilfered after the unloading thereof and before the proper officer has made an order for clearance for home consumption or deposit in a warehouse. Provisions of section 23(1) apply to warehoused goods also. The importer has to prove the loss/destruction to the satisfaction of the Assistant/ Deputy Commissioner of Customs. The imported goods should have been lost/destroyed at any time before clearance for home consumption. 3. No duty in case of relinquishment of the title to the goods [Section 23(2)] The owner of any imported goods may, at any time before an order for clearance of goods for home consumption or an order for permitting the deposit of goods in a warehouse has been made, relinquish his title to the goods and thereupon, he shall not be liable to pay the duty thereon. Meaning of relinquish: Relinquish means to give over the possession or control of, to leave off. However, the owner of any such imported goods shall not be allowed to relinquish his title to such goods regarding which an offence appears to have been committed under this Act or any other law for the time being in force. ANALYSIS: Sometimes, it may so happen that the importer is unwilling or unable to take delivery of the imported goods. Some of the likely causes may be: (i) the goods may not be according to the specifications; (ii) the goods may have been damaged or deteriorated during voyage and as such may not be useful to the importer; (iii) there might have been breach of contract and, therefore, the importer may be unwilling to take delivery of the goods. In all the above cases, the goods having been imported, the liability to customs duty is imposed and, therefore, the importer may relinquish his title to the goods unconditionally and abandon them. If the importer does so, he will not be required to pay the duty amount. However, the owner of any such imported goods shall not be allowed to relinquish his title to such goods regarding which an offence appears to have been committed under this Act or any other law for the time being in force.

71 1.60 Indirect Taxes It is open to the importer to exercise the above option at any time before the passing of the order for clearance for home consumption or before order permitting the deposit of goods in a warehouse. 4. Abatementt of duty on damaged or deterioratedd goods [Section 22] Section 22 provides the importer with an option to pay the reduced duty if the goods are damaged or deteriorated under any of the specified circumstances. (a) Cases where abatement is available: Abatement is available if it is shown to the satisfaction of the Assistant Commissioner/ Deputy Commissioner of Customs that the goods are damaged/ /deteriorated under any of the following circumstances: S.No. In case 1. any imported goods had been damaged or had deteriorated at any time before or during the unloading of the goods in India 2. any imported goods, other than warehoused goods, had been damaged on account of any accident, at any time after the unloading Provided such accident is not thereof in India but before their examination due to any wilful act, for assessment by the customs authorities negligence or default of the 3. importer, his employee or any warehoused goods had been damaged on agent. account of any accident at any time before clearance for home consumption (1) Damage: The term damage denotes physical damage to the goods. This implies that the goods are not fit to be used for the purpose for which they are meant. (2) Deterioration: Deterioration is reduction in quality of goods due to natural causes. (b) Amount of duty chargeable after abatement: The duty to be charged on such goods shall bear the same proportion to the duty chargeable on the goods before the damage or deterioration which the value of the damaged or deteriorated goods bears to the value of the goods before the damage or deterioration. Duty to be charged Value of damaged/deteriorated goods* Value of goods before damage/ /deterioration Duty on goods before damage/ deterioration Example: If the value of goods is `50,000 and after damage the value is `10,000 then duty payable on `50,000/- should be appropriately reduced to 20% of the duty on such goods before their damage (proportion of 10,000 to 50,000) ).

72 Basic Concepts of Indirect Taxes Customs Duty 1.61 (c) *Valuation of the damaged or deteriorated goods: The value shall be:- (a) Value ascertained by the proper officer or (b) The proper officer may sell such goods by public auction/tender or if the importer agrees, in any other manner and the gross sale proceeds shall be deemed to be the value of such goods. 3.6 Exemption from customs duty Central Government s power to grant exemption: Article 265 of the Constitution provides that No tax shall be levied or collected except by authority of law. The power of the Central Government to alter the duty rate structure is known as delegated legislation and this power is always subject to superintendence and check by the Parliament [Section 25]. a. General exemption: If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally either absolutely or subject to such conditions (to be fulfilled before or after clearance) as may be specified in the notification, goods of any specified description from the whole or any part of duty of customs leviable thereon. b. Special exemption : If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by special order in each case, exempt from payment of duty, any goods on which duty is leviable only under circumstances of an exceptional nature to be stated in such order. Further, no duty shall be collected if the amount of duty leviable is equal to, or less than, ` 100. Both the above mentioned exemptions may be granted by providing for the levy of duty on such goods at a rate expressed in a form or method different from the form or method in which the statutory duty is leviable. Further, the duty leviable under such altered form or method shall in no case exceed the statutory duty leviable under the normal form or method. Rationale for grant of exemption: The power for grant of exemption vests with the Central Government subject to the overall control of the Parliament. The Government on a rational basis may use this power and the exemptions may be based on any of the following factors: a. Moral grounds, where the duty should not be levied at all. Some of the instances, which may be given, are; (i) Where the goods do not reach the Indian soil at all. (ii) Where the goods have reached the Indian soil, but are not available for consumption. (iii) Where the goods get damaged or deteriorated in transit. b. Discretionary provision, where the exemption is used for controlling the economy and industrial growth of the country.

73 1.62 Indirect Taxes 3.7 Classification of imported/export goods (1) What is classification?: Classification of goods under customs consists of determining the headings or sub-headings of the Customs Tariff Act, 1975 (CTA) under whichh the imported/export goods would be covered. (2) Why is classification necessary?: Classification of imported goods determines (a) rate of applicable duty, (b) applicability of import controls or restrictions, (c) applicability of anti-dumping duty, safeguard duty etc., and (d) benefits of duty exemption notifications. Unlike in imports, in exports there are no implications of classification on rates of duty except for the very few items on which export duty and cess are payable. However, the correct classification would have implications for grant of export benefits like Drawback. (3) What is the scheme of classification?: The scheme of classification under customs is similar to the one in central excise. The said scheme has been discussed in detail under Unit 2: Central Excise Duty. Just like Central Excise Tariff Act, CTA is also based on the Harmonised System of Nomenclature (popularly known as HSN). Customs Tariff Act has two schedules:- The Customs Tarifff Act, 1975 First Schedule Second Schedule enlists the goods liable to import duty enlists the goods liable to export duty First Schedule to CTA has 21 Sections that containn 98 Chapters. Importer needs to determine the correct classification of the goods imported by him. 3.8 Valuation of imported and export goods The rates of Customs duties leviable on imported goods and export goods are either specific or on ad valorem basis 2 or at times on specific cum ad valorem basis. Section 14 of the Customs Act lays down the basis for valuation of imported and export goods where the customs duties are leviable on ad valorem basis. The value of imported goods and export goods may be determined in any of the following manner: - 2 Duty on ad valorem basis is levied as a percentage of the value of the goods.

74 Basic Concepts of Indirect Taxes Customs Duty 1.63 Valuation on the basis of Transaction value Valuation on the basis of Tarifff value (I) VALUATION ON THE BASIS OF TRANSACTION VALUE [Section 14(1)] (a) Valuation of imported goods: The value of the imported goods shall be the transaction value of such goods*. In case of imported goods, the transaction value shall be the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf i.e. the Customs Valuation (Determination of Value of Imported Goods) Rules, *The transaction value, in addition to the price as aforesaid, shall include any amount paid or payable for costs and services, including:- commissions and brokerage engineeringg design work royalties and licence fees costs of transportation to the place of importation insurance loading, unloading and handling charges to the extent and in the manner specified in the Valuation Rules referred above. (b) Valuation of export goods: As per section 14(1) of the Customs Act, 1962, the value of the export goods shall be the transaction value of such goods. In case of export goods, the transaction value shall be the price actually paid or payable for the goods when sold for export from India 3 Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 have been discussed in detail at Final Level in Paper 8: Indirect Tax Laws.

75 1.64 Indirect Taxes for delivery at the time and place of exportation where the buyer and seller of the goods are not related and price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf i.e. the Customs Valuation (Determinationn of Value of Export Goods) Rules (II) VALUATION ON THE BASIS OF TARIFF VALUE [Section 14(2)]: CBEC may fix tariff values for any classs of imported goods or export goods, having regard to the trend of value of such or like goods by notification in the Official Gazette if it is satisfied thatt it is necessary to do so. Where any such tariff values are fixed, the duty shall be chargeable with reference to such tariff value. Sub-section (2) overrides the provisions of sub- section (1). Tariff values have presently been fixed in respect of import of crude palm oil, crude palmolein, crude soyabean oil, brass scrap, poppy seeds etc. DATE RELEVANT FOR DETERMINATION OF RATE OF EXCHANGE The price paid or payable as referred above shall be calculated with reference to the rate of exchange as in force on the date on which a bill of entry in relation to imported goods is presented, or a shipping bill (in case of export by vessel or aircraft) or bill of export (in case of export by vehicle) in relation to export goods is presented 5 [Third proviso to section 14(1)]. ANALYSIS (1) For imported goods, the conversion in value shall be done with reference to the rate of exchange prevalent on the date of filing bill of entry. (2) For export goods, the conversion in value shall be done with reference to the rate of exchange prevalent on the date of filing shipping bill or bill of export. Conversion in value of imported goods with eference to the rate of exchange prevalent on the date of filing bill of entry Conversion in value of export goods with eference to the rate of exchange prevalent on the date of filing shipping bill /bill of export Meaning of rate of exchange Rate of exchange means the rate of exchange (i) determined by the Board, or 4 Customs Valuation (Determination of Value of Export Goods) Rules 2007 have been discussed in detail at Final Level in Paper 8: Indirect Tax Laws. 5 The concept of presentation of Bill of Entry and Shipping Bill/ Bill of Export has been discussed subsequently in this Unit under the heading of Import and Export Procedures.

76 Basic Concepts of Indirect Taxes Customs Duty 1.65 (ii) ascertained in such manner as the Board may direct, for the conversion of Indian currency into foreign currency or foreign currency into Indian currency [Explanation to section 14]. ANALYSIS: The rate of exchange is notified by three agencies- the Central Board of Excise and Customs (Board), the Reserve Bank of India and the Foreign Exchange Dealers Association of India. For the purpose of valuation under customs, rate notified by Board shall be taken into account. There are separate rates for imported goods (selling rate) and export goods (buying rate). Example: ABC Manufacturers have imported machinery from US worth $ 10,000. Determine the rate of exchange for the purpose of computation of customs duty from the following additional information: Particulars Date of bill of entry Date of entry inward Date Exchange rate as Exchange rate as notified by CBEC notified by RBI ` 68 per US dollar ` 70 per US dollar ` 69 per US dollar ` 71 per US dollar Solution: Exchange rate in the given case will be the rate of exchange notified by CBEC on the date of presentation of bill of entry i.e Hence, the rate of exchange for the purposes of computation of customs duty will be `68 per US dollar. 3.9 Date for determining the rate of duty and tariff imported goods valuation of Section 15 prescribes the relevant date for determining the rate of duty and tariff valuation, if any, applicable to any imported goods in the following manner: In case of goods entered for home consumption goods cleared for home consumption from the warehouse The rate of duty and tariff valuation shall be the rate and valuation in force on the date on whichh a bill of entry in respect of such goods is presented** on which a bill of entry for home consumption in respect of such goods is presented any other goods of payment of duty

77 1.66 Indirect Taxes **In case the goods have been imported by a vessel or aircraft, the rate of duty and tariff valuation shall be the rate and valuation in force on:- (i) the date on which Bill of Entry in respect of such clearance is presented or (ii) the date on which Entry Inwards is granted/ arrival of aircraft takes place whichever is later. Example: Bill of entry is presented on , the vessel or aircraft arrives on In this situation, relevant date for determination of the rate of import duty is because though for procedural purposes, the Bill of Entry was filed on , for the purpose of determining the rate of duty and tariff valuation of such goods, Bill of Entry will be deemed to have been filed on Date for determining the rate of duty and tariff valuation of export goods Section 16 prescribes the relevant date for determining the rate of duty and tariff valuation, if any, applicable to any export goods as under: In case of goods entered for export any other goods The rate of duty and tariff valuation shall be the rate and valuation in force on the date on which the proper officer makes an order permitting clearance and loading of the goods for exportation of payment of duty Exception: In respect of baggage and goods imported/exported by post, section 15 and 16 will not be applicable 6. the provisions of 3.11 Types of customs duties 1. Basic customs duty (BCD) It is the duty levied under the charging section-section 12 of the Customs Act, 1962 Leviable on Rate of duty any imported/export goods as specified in the First and Second Schedules of the Customs Tariff Act, 1975 Assessablee value for transaction value under section 14(1) /tariff value computing BCD (where duty is leviable on ad valorem basis) determined under section 14(2) of the Customs Act, There are special procedures prescribed for the import/export of baggage and import/export by post. The said provisions have been discussed at the Final Level.

78 Basic Concepts of Indirect Taxes Customs Duty Additional customs duty under section 3(1) of the Customs Tariff Act, 1975 [also known as Countervailing duty (CVD)] It is leviable on any imported article It is the duty equal to Rate of duty excise duty for the time being in force leviable on a like article if produced or manufactured in India. Rate of excise duty leviable on a like article if produced or manufactured in India** (except in case of alcoholic liquor for human consumption for which rate of additional duty is notified by the Central Government). Note: EC and SHEC leviable on additional duty of customs are exempt. **If a like article is not so produced or manufactured in India, rate of duty is the rate of excise duty which would be leviable on the class/description of articles to which the imported article belongs, and where such duty is leviable at different rates, the highest of such rates of duty. 3. CVD under section 3(3) of the Customs Tariff Act, 1975 Leviable on any imported article [whether on such article duty is leviable under sub-section (1) or not] It is the duty equal to additional duty 1 representing such portion of the excise duty leviable on such raw materials, components and ingredients 1 as determined by rules made by the Central Government in this behalf Assessable value for computing CVD under section 3(1) and 3(3) of the Customs Tariff Act, 1975 In case the duty is charged Determination of assessable value on the like article produced/ manufactured in India (i) On the basis of the tariff Such tariff value value fixed under 3(2) of the Central Excise Act, 1944 (ii) On the basis of MRP under section 4A Retail Sale Price (RSP) declared on the xxx imported article Less: Abatement notified by Government for like article xxx Assessable value of the imported article xxx Note: Where on any imported article more than one RSP is declared, the maximum of such RSP shall be deemed to be the RSP for the purposes of this section.

79 1.68 Indirect Taxes (iii) Any other case Value under section 14(1) /tariff value xxx determined under section 14(2). Add: Basic custom duty xxx Assessable value xxx Note: While computing CVD under sections 3(1) & 3(3), duties leviable under section 8B/8C/9/9A shall not be included. 4. Special CVD under section 3(5) of the Customs Tariff Act, 1975 It is leviable on any imported article Purpose of levy of this duty To counter-balance the sales tax, VAT, local tax or any other charges for the time being in force leviable on a like article on its sale, purchase or transportation in India**. Rate of duty Rate as notified by the Central Government, but not exceeding 4%. **If a like article is not so sold, purchased or transported, rate of duty is the rate at which such taxes/charges would be leviable on the class or description of articles to which the imported article belongs, and where such taxes/ charges are leviable at different rates, the highest of such tax/ such charge. Assessable value Value under section 14(1) /tariff value determined section xxx for computing 14(2) special CVD Add: Basic custom duty xxx under section 3(5) Add: CVD under section 3(1)/ 3(3) xxx Add: Education cess [customs] xxx Add: Secondary and higher education cess [customs] xxx Assessable value xxx Note: While computing special CVD under section 3(5), duties leviable under section 8B/8C/9/9A shall not be included. 5. Education cess (EC) Levied on Imported goods Rate of cess 2% on aggregate of customs duties leviable on such goods Duties to be excluded for computing this cess Special CVD under section 3(5), duties leviable under section 8B/8C/9/9A and SHEC and EC itself 6. Secondary and Higher Education cess (SHEC) Levied on Imported goods Rate of cess 1% on aggregate of customs duties leviable on such

80 Basic Concepts of Indirect Taxes Customs Duty 1.69 Duties to be excluded for computing this cess goods Special CVD under section 3(5), duties leviable under section 8B/8C/9/9A and EC and SHEC itself Steps for computation of basic customs duty, CVD, special CVD and education cesses: S.No. Particulars ` (1) Assessable value for computing basic customs duty [Transaction value xxxx under section 14(1)/Tariff value under section 14(2)] (2) Add: Basic custom duty [(1) Rate of BCD] xxxx (3) Total value for computing additional customs duty u/s 3(1) [(1)+(2)] xxxx (4) Additional custom duty u/s 3(1) [(3) Rate of CVD] xxxx (5) Total duty amount for education cess of customs [(2)+(4)] xxxx (6) Education 2% of (5) xx (7) Secondary and higher education 1% of (5) xx (8) Total duty payable before additional customs duty u/s 3(5) [(5)+(6)+(7)] xxxx (9) Total value for computing additional customs duty u/s 3(5) [(1)+(8)] xxxx (10) Additional customs duty u/s 3(5) [(9) Rate of special CVD] xxxx (11) Total duty payable [(8)+(10)] xxxx Example: Compute the customs duty payable from the following information available:- Assessable value under section 14 `1, Rate of basic customs duty 10% Rate of additional custom duty under section 3(1) 12% Rate of additional custom duty under section 3(5) 4% Particulars ` Assessable value for computing basic customs duty 1, Basic custom 10% of ` 1, Total value for computing additional customs duty u/s 3(1) 1, Additional custom duty u/s 3(1) [12% of `1100](Refer note below) Total duty amount for EC and SHEC [ ] Education 2% 4.64 Secondary and higher education 1% 2.32 Total duty payable before additional customs duty u/s 3(5) Total Value for computing additional customs duty u/s 3(5) [`1,000+`238.96] 1, Additional customs duty u/s 3(5) [`1, %] Total duty payable ` [ ] (Rounded off) 289

81 1.70 Indirect Taxes Note: Since, education cess and secondary and higher education cess leviable under sub-section (1) of section 3 of the Customs Tariff Act, 1975 is exempted, rate of additional customs duty has been taken as 12% instead of 12.36%. Illustration 1: Hari India Ltd. has imported a machinery whose assessable value is ` 1,00,000. Rate of basic customs duty is 10%, additional duty of customs under section 3(1) is 12%, additional duty of customs under section 3(5) is 4% and education cess is 3% on duty. Compute the amount of total customs duty payable by Hari India Ltd. Solution: Computation of customs duty payable:- Particulars ` 1. Assessable Value 1,00, Basic customs 10% 10, Sub-Total 1,10, Additional duty of customs 12% of ` 1,10,000 i.e. (` 13,200) 13, Education cess 3% of ` 23,200 [(2) + (4)] Total customs duty payable before special CVD [(2) + (4) + (5)] 23, Special CVD@ 4% of [(1)+(6)] 4, Total customs duty payable [(6)+(7)] (Rounded off) 28,852 Illustration 2: Kalaniketan Enterprises imported some goods from UK. The assessable value of the imported goods is ` 20,00,000. Compute the customs duty payable from the following additional information: Date of bill of entry (Rate of BCD is 10%) Date of entry inward (Rate of BCD is 8%) C.V.D. is 12% Special C.V.D. as applicable Solution: Particulars Amount (`) Assessable value 20,00, Add: Basic custom 10% (Note below) 2,00, Total 22,00, Add: 2,64,000

82 Basic Concepts of Indirect Taxes Customs Duty 1.71 Add: Education cess (3% of custom duty) = 3% of (` 2,00,000+ ` 2,64,000) 13,920 Total for Special CVD [` 22,00,000+` 2,64,000+` 13,920] 24,77, Special 99, Total duty payable (` 2,00,000+ ` 2,64,000+` 13, ,77, ` 99,116.80) Total duty payable (Rounded off) 5,77,037 Note: The rate of duty shall be:- (i) the rate in force on the date of presentation of bill of entry or (ii) the rate in force on the date of entry inward whichever is later. OTHER CUSTOM DUTIES 1. Protective duties: A duty imposed on imported goods for the protection of the interests of any industry established in India on the recommendation of Tariff Commission. It is effective only and inclusive of the date, if any, specified in the First Schedule of the Tariff [Sections 6 and 7]. 2. Safeguard duty: is levied if the Central Government is satisfied that: (a) any article is imported into India in increased quantities; and (b) such increased importation is causing or threatening to cause serious injury to domestic industry. Safeguard duty is product specific i.e. it is applicable only for certain articles in respect of which it is imposed. This duty is in addition to any other duty levied under this Act or any other law in force. Education cess and secondary and higher education cess is not payable on safeguard duty. The duty imposed under this section shall be in force for a period of 4 years from the date of its imposition and can be extended with the total period of levy not exceeding 10 years. Safeguard duty shall not apply to articles imported by a 100% EOU undertaking or a unit in a FTZ or in a SEZ unless specifically made applicable [Sections 8B]. In case the goods are imported in increased quantities from People s Republic of China, a specific safeguard duty is imposed under section 8C. 3. Countervailing duty on subsidized articles: The countervailing duty on subsidized articles is imposed if:- (a) Any country or territory, directly or indirectly, pays or bestows subsidy upon the manufacture or production or exportation of any article. Such subsidy includes subsidy on transportation of such article.

83 1.72 Indirect Taxes (b) Such articles are imported into India. (c) The importation may/may not directly be from the country of manufacture/production and (d) The article, may be in the same condition as when exported from the country of manufacture or production or may be changed in condition by manufacture, production or otherwise. The amount of countervailing duty shall not exceed the amount of subsidy paid or bestowed as aforesaid. This duty is in addition to any other duty chargeable under this Act or any other law for the time being in force. It shall be in force for a period of 5 years from the date of its imposition and can be extended for a further period of 5 years [Section 9]. 4. Anti-dumping duty* *: Where any article is exported by an exporter to India at less than its normal value, then, upon the importation of such article into India, the Central Government may impose an anti-dumping duty not exceeding the margin of dumping in relation to such article. Margin of dumping Normal Value Export Price IMPORT PROCEDURES The procedure for importation of goods by air, by sea or by land has been outlined below:- (1) Landing /calling of vessel/aircraft: In case goods are imported by sea/air, the goods shall be loaded in the vessel/aircraft in the exporting country and sent to India. In case of import by land, the goods shall be sent in a vehicle. The duty imposed under this section shall be in force for a period of 5 years from the date of its imposition and can be extended for a furtherr period of 5 years. The anti- specifically made applicable for such units [Section 9A]. dumping duty shall not be leviable on articles imported by a 100% EOU unless *Note: Dumping occurs when one country exports goods to another country at a price lower than its normal value. This is an unfair trade practice which can have a distortive effect on international trade. Anti dumping duty is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect Import and export procedures 7 7 The import and export procedures under customs have been discussed in detail at the Final level. In this unit, said procedures have been outlined to familiarize the students with the flow of import and export of goods.

84 Basic Concepts of Indirect Taxes Customs Duty 1.73 When the vessel/aircraft carrying imported goods arrives in India, the person-in-charge of such vessel/aircraft [master/pilot of the vessel/aircraft respectively] entering into India from outside India shall allow calling /landing of the vessel/aircraft only at the customs port/customs airport unless otherwise permitted by CBEC. (2) Delivery of import manifest/report: The person-in-charge of a vessel/aircraft shall deliver to the proper officer an import manifest [detailed information about goods in vessel/aircraft] by presenting the same electronically before the arrival of the vessel/aircraft at the customs port/customs airport. In case of import by land, the personin-charge of the vehicle shall deliver to the proper officer an import report [detailed information about goods in vehicle] within 12 hours of the arrival of vehicle at the customs station. (3) Grant of Entry Inwards to the master of the vessel/permission to unload the goods: On receiving import manifest from the master of a vessel, the proper officer shall grant Entry Inwards to the master. The master of the vessel shall not permit the goods to be unloaded until the order of Entry Inwards has been granted by the proper officer to such vessel. Date of Entry Inwards is the date on which the vessel finds a berth place for discharge of cargo. (4) Unloading of goods: Imported goods shall be unloaded:- (a) only if mentioned in the import manifest/import report. (b) only at the approved places in any customs port/customs airport. (c) under the supervision of the proper officer. (d) during working hours and shall not be unloaded on Sunday/on any holiday. (5) Unloaded goods to be in the custody of the Custodian until their clearance: Once the imported goods have entered the customs area, they shall remain in the custody of the Custodian [a person approved by the Commissioner of Customs for this purpose]. If the imported goods are pilfered after unloading in a customs area, while in the custody of the Custodian, then the Custodian shall be liable to pay duty on such goods. (6) Filing of entry for import, i.e. Bill of Entry: The importer of any goods, other than goods intended for transit or transhipment [provisions of goods in transit/transhipment are discussed below in point (11)], shall file a Bill of Entry electronically for clearance of goods from the custom station port/airport.. In case the goods are to be cleared for home consumption, importer would file Bill of Entry for home consumption. However, if the importer does not need the goods immediately, he may request the goods to be warehoused. In that case, an Into-Bond Bill of Entry (for warehousing) would be filed. When subsequently, the goods are clearance from warehouse for home consumption, an Ex-Bond Bill of Entry is required to be filed.

85 1.74 Indirect Taxes Timing of filing of Bill of Entry: A Bill of Entry may be presented at any time after the delivery of the Import Manifest/Import Report. However, in case of import by a vessel/aircraft, a bill of entry may be presented even before the delivery of such Import manifest if the vessel or the aircraft by which the goods have been shipped for importation into India is expected to arrive within 30 days from the date of such presentation. (8) Assessment of duty on the imported goods: Assessment is the procedure of quantifying the amount of liability. The importer will self-assess the duty considering the applicable rate of exchange and rate of import duty. This self-assessment is subject to verification by the proper officer of the Customs and may lead to reassessment by such officer if the assessment made by the importer is found to be incorrect. The proper officer shall return the Bill of Entry to the importer after determination of the duty amount. (9) Payment of duty: If the goods are cleared to be stored in a warehouse, payment of duty is deferred till the time of clearance from such warehouse. However, in case the goods are cleared for home consumption, customs duty has to be paid. The importer has to pay the duty within 2 days (excluding holidays) of the determination of such duty amount. In case he fails to do so, he is required to pay interest on the duty till the time he actually pays the duty and clears the goods. (10) Clearance of imported goods from the custom station: The goods lying under the custody of the custodian have to cleared either for home consumption or for warehousing or for transhipment within 30 days (or such extended time as the proper officer may allow) from the date of unloading of goods at the customs station. The importer may exercise any of the following options:- (a) Clearance for home consumption: In case the importer files the Bill of Entry for home consumption and the proper officer is satisfied that the imported goods are not prohibited goods and duty on the same has been paid, he may make an order permitting clearance of the goods for home consumption. (b) Warehousing of imported goods: The importer may not clear the goods for home consumption and request the goods to be warehoused. In such a case, he shall file an Into-Bond Bill of Entry for warehousing and is assessed to duty. Thereafter, he shall execute a bond binding himself in a sum equal to twice the amount of the duty assessed on such goods. The proper officer after satisfying himself that all the requirements have been fulfilled shall make an order permitting the deposit of the goods in a warehouse. Subsequently, the importer of any warehoused goods may clear them for home consumption provided:-

86 Basic Concepts of Indirect Taxes Customs Duty 1.75 (i) (ii) an ex-bond Bill of Entry has been presented to the proper officer and duty is assessed and paid by him rent and warehousing charges along with any penalty on warehoused goods, if any, have been paid by importer, and (iii) an order for clearance of such goods for home consumption has been made by the proper officer. (11) Imported goods in transit or transhipment: Transit of goods: Where any goods (not being prohibited goods) which are imported in a conveyance are mentioned, in the import manifest/import report, as for transit in the same conveyance to any place outside India or any customs station, they may be allowed to be so transited without payment of duty. Transhipment of goods: Where any goods (not being prohibited goods) which are imported in a conveyance are mentioned, in the import manifest/import report, as for transhipment to any place outside India or to any major port/other port as notified /any other customs station, they may be allowed to be so transhipped without payment of duty. The importer shall present the Bill of Entry for transhipment to the proper officer. Unlike transit under transhipment, goods are transferred from one conveyance to another. 1. Conveyance: includes:- (a) a vessel (b) an aircraft and (c) a vehicle [Section 2(9)]. 2. Vehicle: means conveyance of any kind used on land and includes a railway vehicle [Section 2(42)]. 3. Customs station: means any customs port, customs airport or land customs station [Section 2(13)]. Note: There are separate import procedures for import of baggage and import by post. The same have been discussed at Final level in Paper 8: Indirect Tax Laws.

87 1.76 Indirect Taxes The brief procedure for import of goods has been depicted in the diagram below:- Goods arrived at the Indian customs station Import manifest/report (delivered by Person-in-charge to Proper Officer) Entry Inwards (granted by Proper Officer to Person-in-charge) Unloading of goods at the customs port Goods under the the custody of of custodian Custodian under the supervision of Proper Officer at the approved places on working days at working hours Electronic filing of Bill of Entry (filed by importer with Proper Officer) For home consumption For transhipment For warehousing (without payment of duty) Payment of duty selfassessed Bill of Entry filed for home consumption Order for clearance for home-consumption

88 Basic Concepts of Indirect Taxes Customs Duty 1.77 EXPORT PROCEDURES The procedure for exportation of goods by air, by sea or by land has been outlined below:- (1) Filing of shipping bill/ bill of export: The exporter is required to present electronically to a proper officer of customs a shipping bill [in case of export by a vessel or by air] and a bill of export [in case of export by a vehicle]. An exporter entering any export goods self-assesses and pays the duty, if any, leviable on such goods subject to verification by the proper officer. (2) Order permitting clearance and loading of goods for exportation: Where the proper officer is satisfied that: goods entered for export are NOT prohibited goods and exporter has paid duty, if any, on them, he passes order permitting clearance and loading of goods for exportation called Let Export Order. (3) Grant of Entry Outwards: A vessel intending to start loading of export goods must be first granted an Entry Outwards by the proper officer. The master of a vessel shall not permit the loading of any export goods, until the proper officer grants entry-outwards to such vessel. Note: Entry outwards is the permission granted by the Customs authorities to a vessel to go on a foreign voyage to the port of consignment. (4) Loading of goods on conveyance for exportation: The export goods shall be loaded on the conveyance for exportation with the permission of person-in-charge. He shall not permit the loading at a customs station unless a shipping bill/bill of export/bill of transhipment, as the case may be, duly passed by the proper officer, has been handed over to him by the exporter. Note: In case of goods exported in a vessel, grant of entry outwards is also mandatory requirement before loading of goods. (5) Delivery of export manifest/report: The person-in-charge of a conveyance carrying export goods shall, before departure of the conveyance from a customs station, deliver to the proper officer in the case of a vessel or aircraft, an export manifest electronically, and in the case of a vehicle, an export report. (6) No conveyance to leave without written order: The person-in-charge of a conveyance which has loaded any export goods at a customs station shall not cause or permit the conveyance to depart from that customs station until a written order to that effect has been given by the proper officer. Note: There are separate export procedures prescribed for export of baggage and export by post. The same have been discussed at Final level in Paper 8: Indirect Tax Laws.

89 1.78 Indirect Taxes The brief procedure for export of goods has been depicted in the diagram below:- Exporter Shipping Bill/ Bill of Export filed electronically 1 grants written order permitting the conveyance to leave customs station Handing over of Shipping Bill/ Bill of Export passed by PO 4 7 Person-in-charge conveyance delivers Export manifest/report 6 of 4 Grant of Entry outwards (in case of export by vessel) Proper Officer (PO) If duty is payable, it is assessed and paid If PO is satisfied that: 2 -goods entered for export are NOT prohibited goods -Exporter has paid duty, IF ANY, on them 5 Goods are loaded on conveyance for export with the permission of Person-in-charge 3 PO passes order permitting clearance and loading of goods for exportation Note: The rates of duties, wherever mentioned in the illustrations may not always be the actual rate prevalent during the period in question. They may be hypothetical rates assumed to explain the provisions of law with more clarity.

90 Learning objectives UNIT 4: CENTRAL SALES TAX After reading Unit- 4 of this Chapter, you will be able to understand: the concept of sale historical background of central sales tax objects of the Central Sales Tax Act, 1956 the Constitutional provisions relating to central sales tax the provisions relating to levy and collection of central sales tax as to what is an inter-state sale sales tax implications on inter-state stock transfer/consignment transfer as to what is a sale outside the State as to what is sale in course of import and export how to determine the applicable rates of central sales tax on the sales in the course of inter-state trade or commerce how to determine the turnover for computing central sales tax provisions relating to the goods of special importance Apart from the above, after you finish reading this Unit, you will also get a brief idea of the forms and procedures under the central sales tax law. 4.1 Categories of sales Sales may be classified as:- (i) (ii) Intra-State sales Inter-State sales (iii) Sales in course of import (iv) Sales in course of export 1 Central Sales Tax (CST) is a tax imposed on inter-state sales, i.e. sales made from one State to another whereas sales tax within the State is levied on the intra-state sales, i.e. sales made within a State. Sales made in course of imports and sale in course of export are not liable to sales tax. 1 Sales in course of import and export have been explained subsequently in this Unit.

91 1.80 Indirect Taxes Categories of sales Sales liable to tax within the State Sales liable to CST Sales not liable to sales tax Intra-State sales Inter-State sales Sales in course of import Sales in course of export Examples depicting distinction between inter-state sales and intra-state sales (I) INTRA-STATE SALES Goods transferred within a State A (Seller) Ahmedabad, Gujarat Intra-State sale B (Buyer) Surat, Gujarat Liable to sales tax within the State (II) INTER-STATE SALES Goods transferred from one State to another A (Seller) Ahmedabad, Gujarat Inter-State sale Liable to CST B (Buyer) Mumbai, Maharashtra

92 Basic Concepts of Indirect Taxes Central Sales Tax Constitutional provisions Intra-State sale is within the authority of the State Government 2 while inter-state sale is within the authority of the Central Government. Central Government levies Central sales tax by drawing power from Entry 92A of the Union List which provides as follows:- Entry 92A Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-state trade or commerce It is important to note here that power to impose tax on sale of newspapers has been specifically excluded from the purview of the powers of the Central Government. 4.3 Sources of central saless tax law Central saless tax law is a combined study of the Central Sales Tax Act, 1956, Annual Union Finance Acts, Rules, Notifications, Circulars/ Instructions, Trade Notices/Clarifications and Case Laws. (1) Central Sales Tax Act, 1956: Central Sales Tax Act, 1956 contains the provisions governing the sales tax imposed on inter-state sales, i.e. sales made from one State to another. (2) Rules: The rules issued under the Central Sales Tax Act, 1956 are the Central Sales Tax (Registration and Turnover) Rules, Historical background of central sales tax (1) Pre-Constitution period: Before independence, Government of India Act, 1935 empowered the provinces of British India to levy taxes on sales of goods and on advertisements. Central Provinces and Berar (presently Madhya Pradesh) was the first State to levy sales tax by virtue of the power conferred upon it by the Government of India Act. It levied a selective sales tax on selected products (motor spirit and lubricants). As a matter of fact, General Sales Tax was pioneered by Madras (presently Chennai) which introduced the system of multi-point taxation system in The next comer in the field was East Bengal, which introduced the single point taxation system in Other States followed suit in quick succession, so that saless tax came to constitute the main revenue item for the States. However, there was a lack of coordination among various States. 2 Sales tax law within the State is levied by State Government by virtue of Entry 54 of the State List i.e. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of Union List. 3 The other sources relevant for the study of the central sales tax law are similar to the sources of the central excise law. Students are advised to refer Unit-2: Central Excise Duty for detailed discussion on the same.

93 1.82 Indirect Taxes Each ingredient of sale namely, contract of sale, consideration, transfer of property in goods and buyer and seller is essential to a transaction of the sale. For the purposes of levying sales tax under the General Sales Tax Act, the States selected any one of the foregoing ingredients described above and levied sales tax on a transaction if that ingredient exists in their State. However, there was a possibility that more than one State had territorial nexus with the sale transaction. For instance, contract of sale took place in one State; goods might be delivered in another State while the property in goods might be transferred in third State. In such a case, more than one State tried to tax the same transaction taking plea that one of the ingredients of sales took place in their State. Thus, the result of nexus theory was the overlapping of taxation. Almost all the States enacted sales tax laws extending their operations into the territories of other States. Nexus means connection or link. Nexus theory was enunciated in the Privy Council s decision in the case of Wallace Bros v. CIT ITR 240. The underlying concept is that there should be a territorial nexus between the person sought to be charged and the State seeking to tax. (2) Period after the adoption of Constitution: The Constitution makers were aware of this problem. They introduced article 286 in the Constitution to deal with the said problem. However, the provisions of Article 286 [as it stood at that time] were drafted in such a manner that they led to further problems and confusion. Explanation to clause (a) of Article 286(1) provided that a sale or purchase shall be deemed to have taken place in the State in which the goods have actually been delivered as a direct result of such sale or purchase for the purpose of consumption in that State. Supreme Court (SC), in case of State of Bombay v. United Motors (India) Ltd. (1953) 4 STC 133 (SC), held that the State in which the goods were delivered was alone competent to levy tax on inter-state sales. However, this decision caused hardship to the dealer who supplied goods in various States as it was practically very difficult for him to pay sales tax and get assessed in each of the States in which he was supplying the goods. Subsequently, SC in case of Bengal Immunity Co. Ltd. v. State of Bihar STC (SC) reversed the judgment in United Motors (India) Ltd. and held that State cannot impose tax on inter-state sales. The judgment referred Article 286(2) which prohibited the State from imposing tax on the sale of goods where such sale takes place in the course of inter-state trade or commerce subject to the removal of ban by legislation made by Parliament. The Court held that since the Parliament had not passed any such law, no State can impose tax on inter-state sales. The net result was that while intra-state sales could be taxed under the relevant State law, inter-state sales could neither be taxed by the State of despatch nor by the State of delivery until the Parliament provided for it. (3) The Taxation Enquiry Commission: In the meanwhile, on April 1, 1953, a commission was appointed by the Ministry of Finance to set out basic considerations for the future development of the sales tax.

94 Basic Concepts of Indirect Taxes Central Sales Tax 1.83 (4) Amendment of Constitution: In the light of the suggestions made by the Taxation Enquiry Commission, the Constitution was amended by the Constitution (Sixth Amendment) Act, As a result: 1. A new entry 92A was inserted in the Union List bestowing on the Union, the power to levy tax on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-state trade or commerce. 2. Entry 54 in the State List was substituted and the States powers were confined to levy taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92A of List I (Union List). 3. The powers of the Government of India were enlarged by inserting a new sub-clause (g) in Article 269(1). Article 269(1)(g) provided that Government of India shall levy and collect taxes on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-state trade or commerce. However, it also provided for the assignment of such taxes to the States in the prescribed manner. Further, a new clause (3) was inserted in Article 269 whereby the Parliament was empowered to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-state trade or commerce. 4. Article 286 which provided the restrictions on imposition of taxes on the sale or purchase of goods was amended. The amended article stipulates as follows: i. No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place a. outside the State or b. in the course of the import of the goods into, or export of the goods out of, the territory of India. ii. Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1) namely, sale or purchase of goods outside the State or in the course of the import into or export out of territory of India 4. iii. Any law of a State shall, in so far as it imposes, or authorises the imposition, of a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-state trade or commerce, be subjected to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax, as Parliament may, by law, specify 5. Acting on the powers conferred by the above amendments, the Central Government introduced the Central Sales Tax Bill, 1956 on 21st November, The Bill was passed by 4 Section 4 & 5 of the Central Sales Tax Act, 1956 are in exercise of the powers conferred under this clause [discussed in detail subsequently in this Unit]. 5 Section 14 & 15 of the Central Sales Tax Act, 1956 are in exercise of the powers conferred under this clause [discussed in detail subsequently in this Unit].

95 1.84 Indirect Taxes the Parliament and received the assent of the President on 21st December, The entire Act with the exception of section 15 came into force on 5th January, Section 15 came into force from 1st October, It extends to the whole of India. 4.5 Objects of the Central Sales Tax Act The objects of the Central Sales Tax Act include: (i) formulation of principles for determining as to:- (a) when a sale or purchase of goods takes place in the course of inter-state trade or commerce, or (b) when a sale or purchase takes place outside a State, or (c) when a sale or purchase takes place in the course of import into or export from India (ii) provision for the levy, collection and distribution of taxes on sales of goods in the course of inter-state trade or commerce (iii) declaration of certain goods to be of special importance in inter-state trade or commerce (iv) State laws to be subjected to the restrictions and conditions in the matter of imposing taxes on the sale or purchase of goods declared by the Central Government to be of special importance. 4.6 Levy and collection of central sales tax Central sales tax extends to whole of India. Although being a Central legislation it is levied by the Central Government, the State Government of the State from which the movement of goods commenced is empowered to collect it. Section 9(1) contains the provisions regarding levy and collection of CST as under:- (i) Levy: CST payable by any dealer on sales of goods effected by him in the course of inter-state trade or commerce shall be levied by the Government of India. (ii) Collection: CST so levied shall be collected by that State Government from which the movement of the goods is commenced. 4.7 Charge of central sales tax Section 6(1) provides that subject to the other provisions contained in the Central Sales Tax Act, every dealer shall be liable to pay tax under this Act on sales of all goods, other than electrical energy, effected by him in the course of inter-state trade or commerce during any year. CST is leviable on inter-state sale of goods even if the sale of goods inside a State is exempt as per the sales tax law of the appropriate State.

96 Basic Concepts of Indirect Taxes Central Sales Tax 1.85 Dealer is the person liable to pay CST. CST is levied on the sale of goods. Sale should be in the course of inter-state trade or commerce. CST is not levied on electrical energy. Liability is subject to other provisions of the CST Act. IMPORTANT TERMS 1. Goods Goods include all materials, articles, commodities and all other kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and securities [Section 2(d)]. ANALYSIS: As per the definition of goods, they must be movable, i.e. they include all kind of movable property. However, following are specifically excluded from the definition of goods:- (i) Newspapers: Newspapers are not goods under the Central Sales Tax Act and State VAT laws. Although in general sense, newspapers are goods, but they have been specifically excludedd from the definition of goods in view of Entry 92A of the Unionn List and Entry 54 of the State List. In both these entries, newspapers have been specifically excluded from the purview of taxes on inter-state sales and intra-state sales respectively. (ii) Stocks, shares and securities (iii) Actionable claims: are outside the purview of definition of goods under CST Act. Actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent [Section 3 of the Transfer of Property Act, 1882]. Note: Electricity is capable of abstraction, consumption and use and it can be transmitted, transferred, delivered, stored, possessed, etc. and is, therefore, goods. However, it is important to note that although electricity is goods, it has specifically been excluded from the purview of CST by the charging section. 2. Sale Sale, with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, and includes, (i) a transfer, otherwisee than in pursuance of a contract, of property in any goods for cash, deferredd payment or other valuable consideration;

97 1.86 Indirect Taxes (ii) a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (iii) a delivery of goods on hire-purchase or any system of payment by instalments; (iv) a transfer of the right to use any goods for any purpose ( whether or not for a specified period) for cash, deferred payment or other valuable consideration; (v) a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (vi) a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods [Section 2(g) )]. ANALYSIS: The definition of goods may be read in two parts:- (A) Conventional definition (B) Deemed sales (A) CONVENTIONAL DEFINITION: Sale means any transferr of property in goods by one person to another for cash or deferred payment or for any other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods. Essential elements of a conventional sale are as follows:- (I) There must be a contract of sale between buyer and seller. (II) There must be transfer of goods. (III) General property in goods must be transferred from buyer to seller. (IV) Consideration must be paid or agreed to be paid. It may be cash or deferred payment or for any other valuable consideration. Sale of goods takes place only when such goods are segregated, i.e. ascertained and property in goods is passed on to the buyers. Sale of illegal goods is also liable to CST. Free supply is not sale as there must be a valuable consideration. Definition of sales excludes a mortgage or hypothecation of or a charge or pledge on goods.

98 Basic Concepts of Indirect Taxes Central Sales Tax 1.87 Note: Sale of bundles of old newspapers as waste paper is not sale of newspaper and is therefore, not exempt. (B) DEEMED SALES: There are some transactions which may not be termed as sales because either of the essential elements of the sale is absent. However, Article 366(29A) of the Constitution makes the provision for taxing these deemed sales. These are:- (i) Compulsory sales: Section 2(g)(i) covers a sale where there is no contract between two parties. One of the essential elements of sale of goods is that there must be a contract between two parties and there should be mutual consent between them. Hence, the compulsory sale would not have been otherwise taxable, but for this clause. This clause of the definition of sale makes sales tax payable on a sale where there is a compulsory transfer under the Government orders, where goods are a controlled commodity. In case of controlled commodities, there is no mutual consent between buyer and seller. The seller is under an obligation to sell the goods on the order of the controlling authorities at the controlled prices. (ii) Sale of goods involved in the execution of works contract: One of the essential elements of sale is that there should be sale of goods. Since works contract involves both sale of goods and provision of services, as per the conventional definition, sales tax could not be levied on it. Section 2(g)(ii) makes CST payable on the value of goods involved in the inter-state works contract whereas on the value of services, service tax shall be payable. Guidelines to ascertain whether a transaction is a works contract: To ascertain whether a transaction is a works contract as contemplated in Article 366(29A)(b), the following points should be kept in mind: 1. There must exist an indivisible works contract; divisible contracts are outside the scope. 2. Goods must be involved in the execution of the works contract. 3. Transfer of property must be an integral part of its execution. Property in goods must pass either as goods or in some other form. Form of goods is irrelevant for determination of rate of tax. 4. Property in goods must be transferred during the execution of works not before or after the execution of works. 5. If during the execution of works contract, goods are consumed and their identity is lost, then no transfer of property occurs in those goods. 6. Some work has to be done on the property of the contractee by the contractor. 7. Pure labour contracts or service contracts are outside the purview of the sales tax law. 8. There must be a dominant intention to effect the transfer of property in goods in execution of works contract. However, even if the dominant intention of the contract

99 1.88 Indirect Taxes is rendering of a service and in that process if there is a transfer of property in goods, the contract will amount to a works contract. Following points merit consideration with regard to levy of CST on such transaction:- There can be inter-state sale of goods in works contract and C form can be issued/ received. CST is levied on goods involved in the works contract and not on the works contract. Building contract is 'works contract'. Painting or printing is also a 'works contract'. Job work or processing is 'works contract' if property in goods passes to customer during job work. Works contract means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repairr or commissioning of any movable or immovable property [Section 2(ja) )]. (iii) Hire-purchase or any system of payment by installments: As per clause (iii) of section 2(g) of CST Act, 'sale' includes a delivery of goods on hire-purchase Hire- purchase agreement means an agreement under which owner of the goods let out them on hire to the hirer. Under this transaction, the hirer acquires the possession of goods immediately on signing the hire purchase agreement, but the property in the goods passes to hirer only when the or any system of payment by installments. Hire purchase is one of the modes of financing an asset. last installment is paid. If the hirer fails to pay any of the installments, the owner takes the asset back without any refund of the earlier installments. Under installment payment system, the ownership of the goods is passed immediately on payment of the first installment. Hire-purchase Ownership of the goods remains with the seller until the last installment is paid. Buyer gets the ownership only after paying the last installment. Installment payment system Buyer gets the ownership of the goods with the payment of the first installment. (iv) Lease transactions: Section 2(g)(iv) covers a sale where property in goods is not transferred; only right to use is transferred. Thus, it makes sales tax payable on the lease transactions.

100 Basic Concepts of Indirect Taxes Central Sales Tax 1.89 A lease is a special type of transaction, under which a party owning the asset (called the 'lessor') provides that asset for use over a certain period of time to another party (called the 'lessee') for consideration (called 'rentals'). The legal ownership of the asset remains with the lessor, but the lessee retains the possession and uses the asset over the period of the lease. Therefore, the characteristics of a lease are summarized as under:- There must bealessor and a lessee both competent to contract There must be an asset to be leased Actual possession and control on the asset must be transferred There must be an acceptance of the leased property There must be transfer of right of enjoy by the lessor to the lessee There must be aconsid- eration Generally, there are two different types of leases: Finance lease: Here the lessor provides finance to the lessee for the purchase of necessary equipments. Machinery and tools, intended to be purchased are purchased in the name of the lessor, but the right to select the assets rests with the lessee. Lessor s interest in the equipment is that of ownership and the rent received or receivable against such lease. After the end of lease period, the lessee has an option to purchase the leased asset. As per the Accounting Standard (AS 19) on leases issued by the ICAI, a finance lease is a lease that transfers substantially all the risks and rewards incidental to the ownership of an asset. Operating lease: Here the lessor selects the machinery and equipment required to be purchased and then leases out the same to the customer. The ownership is retained by the lessor, but the use of the assets by the lessee is made for a limited period of time. The AS 19 on Leases defines an operating lease as a leasee other than a finance lease. (v) Sale of goods by any unincorporated association or body of persons to a member: For sale, there must be distinct buyer and seller. The seller cannot sell the goods to himself. An unincorporated association or body of personss is not a distinct entity from its members. Thus, in case of goods sold by unincorporated association or body of persons to a member, the element of the sale that buyer and seller must be distinct, is absent. Clause 366(29A)(e) has empowered the Parliament to tax this transaction and thus this clause has been inserted in the definition of sale. (vi) Sale of food articles: As per section 2(g)(vi), sale includes a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other

101 1.90 Indirect Taxes article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration. Background for levy of sales tax on deemed sale Sales tax laws enacted by various States proceeded on the footing that the expression sale of goods would be given a wide expression since it related to entries in the legislative lists. However, in Gannon Dunkerley s case (AIR 1958 SC 560), the Supreme Court held that the expression sale of goods would have the same meaning as it had in the Sale of Goods Act, As a result of this decision, a transaction, in order to be subject to the levy of sales tax under Entry 92A of the Union List or Entry 54 of the State List should have the essential ingredients namely, parties competent to contract, mutual assent and transfer of property in goods from one of the parties to the contract to the other party thereto for a price. Subsequently, in a number of judgments, Supreme Court held various other transactions which in substance, resemble the sale transaction, to be not liable to sales tax (few examples have been discussed below). This position resulted in the scope for avoidance of tax in various ways. For example, in the case of works contract, if the contract treats the sale of materials separately from the cost of the labour, the sale of materials would be taxable. However, in case of an indivisible works contract, it is not possible to levy sales tax on the transfer of property in the goods involved in the execution of such contract as it has been held that there is no sale of the materials as such and the property in them does not pass as movable. Though in practice, the purchaser in a hire purchase agreement gets the goods on the date of hire purchase, it has been held that there is sale only when the purchaser exercises the option to purchase at a much later date and therefore, only the depreciated value of the goods involved in such transaction at the time the option to purchase is exercised becomes assessable to sales tax. Similarly, while sale by a registered club (having a corporate statue) to its members is taxable, sales by an unincorporated club or association of persons to its members is not taxable as such club has no separate existence from that of the members. In the Associated Hotels of India case (AIR 1972 SC 1131), the Supreme Court held that there is no sale involved in the supply of food or drink by a hotelier to a person lodged in the hotel. The aforementioned problems connected with the power of the States to levy tax on the sale of goods and with the levy of CST, were referred to the Law Commission which recommended that certain amendments should be made in the Constitution to overcome the problems created by the above judicial decisions. Consequently, the Constitution (46th Amendment) Act, 1982 was passed. Constitution (46th Amendment) Act, 1982 The new clause (29A) was inserted in Article 366 which widened the scope of levy of sales tax both by the Government of India as well as by State Governments. Both the Governments may, after enacting suitable legislations, levy tax on the transactions of the following nature

102 Basic Concepts of Indirect Taxes Central Sales Tax 1.91 (a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property in goods (whether as goods or in some other form) invoked in the execution of a works contract; (c) a tax on the delivery of goods on hire purchase or any system of payment by installments; (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. 3. Dealer Dealer means any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash, or for deferred payment, or for commission, remuneration or other valuable consideration, and includes- (i) a local authority, a body corporate, a company, any cooperative society or other society, club, firm, Hindu undivided family or other association of persons which carries on such business; (ii) a factor, broker, commission agent, del credere agent, or any other mercantile agent, by whatever name called, and whether of the same description as hereinbefore mentioned or not, who carries on the business of buying, selling, supplying or distributing, goods belonging to any principal whether disclosed or not; and (iii) an auctioneer who carries on the business of selling or auctioning goods belonging to any principal, whether disclosed or not and whether the offer of the intending purchaser is accepted by him or by the principal or a nominee of the principal. Explanation 1 - Every person who acts as an agent, in any State, of a dealer residing outside that State and buys, sells, supplies, or distributes, goods in the State or acts on behalf of such dealer as- (i) a mercantile agent as defined in the Sale of Goods Act, 1930, or (ii) an agent for handling of goods or documents of the title relating to goods, or (iii) an agent for the collection or the payment of the sale price of goods or as a guarantor for such collection or payment, and every local branch or office in a State of a firm registered

103 1.92 Indirect Taxes outside that State or a company or other body corporate, the principal office or headquarters whereof is outside that State, shall be deemed to be a dealer for the purposes of this Act. Explanation 2 - A Government which, whether or not in the course of business, buys, sells, supplies or distributes, goods, directly or otherwise, for cash or for deferred payment or for commission, remunerationn or other valuable consideration, shall except in relation to any sale, supply or distribution of surplus, unserviceable or old stores or materials or waste products or obsolete or discarded machinery or parts or accessories thereof, be deemed to be a dealer for the purposess of this Act [Section 2(b)]. 4. Sales tax law Sales tax law means any law for the time being in force in any State or part thereof, which provides for the levy of taxes on the sale or purchase of goods generally or on any specified goods expressly mentioned in that behalf and includes Value Added Tax (VAT) law, and general sales tax law means the law for the time being in force in any State or part thereof which provides for the levy of tax on the sale or purchase of goods generally and includes VAT law [Section 2(i)]. 4.8 Exceptions to levy of central sales tax (CST) Proviso to Section 6(1) Penultimate sales for export Section 6(2) Subsequent inter-state saless Section 6(3) Sale to foreign mission/un etc. I. No CST on penultimate sales for export [Proviso to section 6(1)] A dealer shall not be liable to pay CST on the penultimate sales for export under section 5(3) 6. II. No CST on subsequent sales [Section 6(2)] Where a sale of any goods in the course of inter-state trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods to a registered dealer, if the goods are of description referred to in section 8(3) [discussed subsequently in this Unit],, shall be exempt from tax under this Act. However, no such subsequent sales shall be exempt from tax under this sub-section unless the dealer effecting the sale furnishes to the prescribed authority within three 6 The provisions explaining penultimate sale for exports have been discussed in detail subsequently in this Unit.

104 Basic Concepts of Indirect Taxes Central Sales Tax 1.93 months after the end of the period to which the declaration/certificate relates or within such further time as that authority may, for sufficient cause, permit,-- (a) a certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribed authority (Form E-I/ Form E-II); and (b) if the subsequent sale is made to a registered dealer, a declaration referred to in sub-section (4) of section 8 (Form C). Further, it shall not be necessary to furnish Form C as referred to in clause (b) above in respect of a subsequent sale of goods if,- (a) the sale or purchase of such goods is, under the sales tax law of the appropriate State, exempt from tax generally or is subject to tax generally at a rate which is lower than 2% (whether called a tax or fee or by any other name); and (b) the dealer effecting such subsequent sale proves to the satisfaction of the prescribed authority that such sale is of the nature referred to in this sub-section. ANALYSIS: Since every sale, in the course of inter-state trade, is liable to tax, the levy can become a multiple levy if the goods change hands several times during their movement from one State to another. Thus, section 6(2) provides exemption to subsequent inter-state sale of the goods if the following conditions are satisfied:- (i) First sale to be an inter-state sale: First sale should be an inter-state sale i.e. either (a) sale of goods occasioning the movement of goods from one State to another or (b) sale effected by the transfer of documents of title to the goods. Moreover, the subsequent sale should be effected by the transfer of documents of title to the goods during the movement of such goods in course of inter-state sales. Note: Exemption to subsequent sales is available even if the first inter-state sale is exempt from CST. (ii) Subsequent sales to a registered dealer: Sale subsequent to an inter-state sale is exempt only if:- (a) purchaser is a registered dealer. (b) the goods are of description referred to in section 8(3). (iii) Prescribed certificates to be furnished: The dealer effecting the subsequent sale needs to furnish following certificates/declaration:- (a) Form E-I/ Form E-II*: obtained from the registered dealer from whom he has purchased the goods, and (b) Form C: Form C obtained from such dealer if the subsequent sale is made to a registered dealer. *Note: Form E-I is issued by the selling dealer who first moves the goods in case of inter- State sales. Form E-II is issued by the second or subsequent transferor of such goods.

105 1.94 Indirect Taxes However, it shall not be necessary to furnish Form C in respect of a subsequent sale of goods if,- (a) the sale or purchase of such goods is, exempt from tax generally or is subject to tax lower than 2%, under the sales tax law of the appropriate State and (b) the dealer effecting such subsequent sale proves to the satisfaction of the prescribed authority that such sale is of the nature referred to in this subsection. The concept of subsequent sales and the certificates to be furnished can be better understood with the following example:- Example: A of Gujarat sells the goods to B of Haryana. As per the contract, A was required to deliver the goods in Odisha. For this purpose, A dispatches the goods from Gujarat to Odisha. During the movement of goods, B sells the goods by transfer of documents of title to the goods, to C of Bihar who in turn sells them to D of Odisha during such movement. D ultimately takes the delivery of the goods. Here, all the four dealers are registered dealers. A Gujarat E-I Form TAXABLE C Form 1 C Form 2 B Haryana NOT TAXABLE E-II Form D Odisha 3 E-II Form NOT TAXABLE C Form C Bihar Levy of CST in case subsequent sales is taxable: If subsequent sale is made to an unregistered dealer or if necessary certificates/declaration are not furnished, the subsequent sale would become taxable. Levy and collection of CST, in such cases, would be in the following States:- (a) Where such subsequent sale has been effected by a registered dealer: State in which the registered dealer obtains or could have obtained Form C from the sales tax authorities, in other words, the State in which he is registered.

106 Basic Concepts of Indirect Taxes Central Sales Tax 1.95 (b) Where such subsequent sale has been effected by an unregistered dealer: State from which such subsequent sale has been effected [Proviso to section 9(1)]. Example: Ram of Gujarat sells the goods to Babu of Haryana (a dealer registered in Haryana). As per the contract, Ram was required to deliver the goods in Bihar. For this purpose, Ram despatches the goods from Gujarat to Bihar and obtains Form C from Babu. During the movement of goods, Babu sells the goods by transfer of documents of title to the goods, to Charan of Bihar, an unregistered dealer who ultimately takes the delivery of the goods. Ram Gujarat TAXABLE 1 1 Babu Haryana CST is payable in the State of Haryana as Babu has obtained Form C from Haryana for supply to Ram. TAXABLE as dealer Charan is not registered. 2 Charan C Bihar III. No CST on sale to foreign missions/un etc.: No CST is payable on sale of any goods made by a dealer, in the course of inter-state trade or commerce, to any official or personnel/consular or diplomatic agent of:- (i) any foreign diplomatic mission or consulate in India or (ii) the United Nations or any other similar international body entitled to privileges under any convention or agreement to which India is a party or under any law for the time being in force if such official, personnel, consular or diplomatic agent, as the case may be, has purchased such goods for himself or for the purposes of such mission, consulate, United Nations or other body. However, aforesaid exemption is available only if the dealer selling such goods furnishes to the prescribed authority Form J obtained from the official, personnel, consular or diplomatic agent.

107 1.96 Indirect Taxes 4.9 Inter-State Sale Inter-State sales under section 3 Section 3(a) Direct inter-state Sale Section 3(b) Sale by transfer of documents A.-Section 3(a)-Where sale occasions movement of goods from one State to another As per section 3(a), inter-statanother. In this regard, following points merit consideration:- sale takes place if sale occasionss the movement of goods from one State to The stipulation for movement of goods outside the State may be either expressed or implied. It is immaterialinwhichstate the ownership of the goods is passed on to the buyers. Movement of goods should be incident of sale and should be necessitated by the contract of sale. Thus,itmust be inter-linked withthe sale of goods. Mode of transport of goods is immaterial. It may be aircraft, rail, motor transport, angadia, ship or handicraft. For the purpose of section 3(a), there is no distinction between unascertained/futuree goods and the goods which are already in existence, ifatthetimee when the sale took place, these goods come into existence. Note: Wheree the movement of goods commences and terminates in the same State it shall not be deemed to be a movement of goods from one State to another by reason merely of the fact that in the course of such movement, the goods pass through the territory of any other State [Explanation 2 to section 3].

108 Basic Concepts of Indirect Taxes Central Sales Tax 1.97 Examples to illustrate the concept of inter-state sale under section 3(a) Example 1: Even if the buyer and seller are in the same State, it is an inter-state sale if the sale occasions the movement of goods from one State to another. A (Seller) Vapi, Gujarat B directs A to desptach some goods 1 directly to his factory in Mumbai B (Buyer) Surat, Gujarat 2 2 A despatches the goods from Vapi to Mumbai. Sale of goods from A to B is an Inter-State sale Factory of B Mumbai, Maharashtra Example 2 : Movement of goods on the basis of telephonic conversation is sufficient to be held as inter-state sale A (Seller) Gujarat B called up A and asked him to deliver him the goods in UP 1 2 B (Buyer) U.P. A delivered the goods as per the telephonic conversation It is an inter-state sale

109 1.98 Indirect Taxes Example 3: Even if the buyer is located outside the State, sale is not an inter-state sale if the goods do not move outside the State 1 A (Seller) Vapi, Gujarat B directs A to desptach some goods directly to his factory in Surat B (Buyer) Lucknow, U.P. A despatches the goods from Vapi to Surat. Sale of goods from A to B is NOT an Inter-State sale 2 Factory of B Surat, Gujarat B.-Section 3(b)-Where sale or purchase is effected by a transfer of documents of title to the goods during their movement from one State to another As per section 3(b), a sale or purchase shall be deemed to take place in the course of inter- State trade or commerce if the sale or purchase is effected by a transfer of documents of title to the goods during their movement from one State to another*. *It is important to note here that unlike section 3(a), the movement of goods from one State to another need not necessarily be occasioned by sale under this clause. ANALYSIS (a) Meaning of Documents of title to the goods : Documents of title to the goods is generally a lorry receipt in case of transport by road, railway receipt in case of transport by rail, bill of lading in case of transport by sea and airway bill in case of transport by air.

110 Basic Concepts of Indirect Taxes Central Sales Tax 1.99 Lorry receipt Railway receipt Transport by road Transport by rail Transport by sea Transport by air Bill of Lading Airway bill Document of title to the goods substantiates that the person holding the document has the title to the goods mentioned in the document. Transfer of title to the goods means transferr of right of possession of such goods or control over such goods. Thus, a person in whose name the document of title to the goods is endorsed would be entitled to the delivery of the goods. Document of title to the goods as per the Sales of Goods Act, 1930: As per section 2(4), document of title to the goods includes includes a bill of lading, dock warrant, warehousee keeper's certificate, wharfingers' certificate, railway receipt, multimodal transportt document, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorising or purporting to authorise, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented. (b) Transfer must be during the movement of goods: A sale would be covered under clause (b) of section 3 [and termed as inter-statthe goods during the movement of such goods from sale] if sale/purchase is effected by transferr of documents of title to one place to another. Commencement and termination of movement of goods: Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee [Explanation 1 to section 3]. Thus, any sale by transfer of documents of title to the goods after the goods are delivered to a carrier, but beforee physical delivery of such goods is taken at the final destination would be termed as inter-state sale. Example 1: Ram, a dealer in Haryana, got an order for delivery of goods in U.P. He sent the goods from Haryana to U.P. by rail. In this case, movement of goods commenced at

111 1.100 Indirect Taxes the time when the goods were handed over to the railway booking office at Haryana for transportation to U.P. The movement of goods would be deemed to continue even if the goods reach U.P. and were lying in the possession of railways. Movement would be deemed to be terminated only at the time when delivery was actually taken at U.P. on submission of railway receipt. Example 2: A Dealer Kolkata in A placed an order on B for certain jute goods and instructs it to deliver the same to C in Kerela Sale by B to A is an Inter-State sale under section 3(a) Sale of goods by A to C is effected by transfer of documents. Documents were transferred to C before goods reach Kerela & C takes delivery thereof. It is an Inter-State sale under section 3(b) 1 B Jute Mill in Kolkata 2 C Party Kerela B dispatched goods to Kerela in 4.10 Inter-State stock transfer/inter-state consignment transfer [Section 6A] Sometimes, a dealer (principal) sends the goods to his consignment agent in another State so that the goods are sold by the agent in that State on his behalf. Similarly, a dealer may send the goods to his own branch/depot in another State from where such goods can be sold. Section 6A applies to a situation where the goods are sent by a dealer, outside the State to his other place of business or his agent/principal in other State. In other words, this section covers the inter-state consignment transfer/ inter-state branch transfer. In the aforesaid cases, although goods have been transferred from one State to another, generally, the property in goods does not pass from principal to the agent. Thus, there is no sale and consequently, no CST is payable provided there was no pre-existing agreement for the sale of the goods so transferred. The burden of proving that the movement of those goods was occasioned NOT by reason of sale shall be on the dealer transferring the goods to his branch/agent/principal. For this purpose, he may furnish Form F to the assessing authority, within 3 months from the end of the period to which such form relates obtained from the principal officer of the other place of business, or his agent or principal.

112 Basic Concepts of Indirect Taxes Central Sales Tax Relevant terms Business- The term business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make profit and whether or not any gain or profit accrues from such trade, commerce, manufacture, adventure, or concern. It also includes any transaction in connection with, or incidental or ancillary to such trade, commerce, manufacture, adventure or concern [Section 2(aa)]. Place of business: includes (i) in any case when a dealer carries on business through an agent (by whatever name called), the place of business of such agent; (ii) a warehouse, godown or other place where a dealer stores his goods; and (iii) a place where a dealer keeps his books of account [Section 2(dd)]. Points which merit consideration Stock transfer/consig nment transfer can be of standard goods which can be sold off the shelf. The burden to prove that the inter-state transfer of goods is stock transfer lies on the Dealer and not on Department. For the purpose, he has to submit a declaration obtained from branch/agent in Form F. Form F has to be collected covering one month transactions from the Branch Manager or Consignment agent. If at the time of inter-state stock transfer, the dealer has an order for such purchase in hand, such transfer shall not be deemed to be inter- State sale. Examples illustrating the concept of inter-state stock transfer/branch transfer: Example 1 Mr. A, a registered dealer, transferred goods from his factory in Gujarat to Mumbai branch so that the goods can be sold from there. Factory Gujarat Buyer was not known and identified before the despatch of the goods. Branch Mumbai It is stock transfer and hence NOT an Inter-State sale

113 1.102 Indirect Taxes Example 2 Maharashtra Government formulated a policy under which it issued allotment cards to the weavers. The weavers, on production of such allotment cards, could get the viscose yearn at concessional rates. In the below mentioned example, weavers submitted the allotment cards to Mr. X, a dealer of viscose yearn in Maharashtra. On receiving these cards in branch from the weavers, he got the goods despatched from his factory in Tamilnadu to his branch in Maharashtra. Mr. X s Branch Maharashtra Weavers submitted allotment cards. Weavers 1 Goods despatched from factory to branch only after receiving the allotment cards It is an Inter-State sale and NOT stock transfer 2 Mr. X s Factory Tamilnadu 4.11 Sale outside the State [Section 4] States are empowered to impose tax only on intra-state sales and not on inter-state sales of goods by virtue of Entry 54 of the State List. Further, Article 286(1)(a) of the Constitution of India stipulates that State cannot impose a tax on the sale or purchase of goods where such sale or purchase takes place outside the State and the power to formulate principles for determining as to when a sale or purchase of goods shall be deemed to have taken place outside the State has been conferred on the Parliament by clause (2) of Article 286. Combined reading of article 286 and Entry 54 makes it apparent that a State can levy sales tax only on intra-state sales of goods provided such sales takes place inside such State and outside all other States. The principles as to when a sale is deemed to take place inside a State and when it is deemed to take place outside a State have been formulated under section 4 of the Central Sales Tax Act. It reads as follows:- (1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with sub- section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States. (2) A sale or purchase of goods shall be deemed to take place inside a State if the goods are within the State-

114 Basic Concepts of Indirect Taxes Central Sales Tax (a) in the case of specific or ascertained goods, at the time the contract of sale is made; and (b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation. Explanation- Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of this sub-section shall apply as if there were separate contracts in respect of the goods at each of such places. ANALYSIS: Before going through the provisions of section 4, one must be conversant with the concept of specific/ascertained goods and unascertained/future goods as explained hereunder:- Specific goods: means goods identified and agreed upon at the time a contract of sale is made [Section 2(14) of the Sales of Goods Act, 1930]. Thus, these are the goods which are in existence and which are identified by the parties at the time of contract of sale. Unascertained goods: means the goods defined only by description and not identified and agreed upon at the time of contract. Unascertained goods may be existing goods or future goods. Ascertained goods: Unascertained goods become ascertained when after the contract of sale has been made, the goods are identified in accordance with the agreement. Section 4(1) does not actually define what is a Sale outside a State, but instead it describes what is a Sale inside a State and that such a sale shall be outside all the other States. (a) When is a sale/purchase deemed to take place inside a State?: A sale or purchase of goods shall be deemed to take place inside a State:- Specific or ascertained goods if the goods are within the State at the time the contract of sale is made Unascertained or future goods if the goods are within the State at the time of their appropriation to the contract of sale by the seller or by the buyer*

115 1.104 Indirect Taxes *Note: It is immaterial whether the other party to the contract gives his assent to the appropriation prior or subsequent to such appropriation. (b) When is a sale/purchase deemed to take place outside a State?: When a sale or purchase of goods has taken place inside a State in accordance with aforesaid provisions, such sale or purchase shall be deemed to have taken place outside all other States. Illustrations explaining the concept of sale inside a State and sale outside a State Example 1: Sale of specific goods Menon Rewari, Haryana Sonepat 2 Shekhar Sonepat, Haryana Menon sells to Bhaskar a car which was lying at Rewari. The car was identified by Bhaskar at the time of contract of sale. Menon delivers the car to Shekhar in 1 Bhaskar directs Menon to deliver the car to Shekhar of Sonepat The sale of car by Menon to Bhaskar is inside the Haryana State; i.e., this sale would be outside all other States, inasmuch as the car was inside Haryana State at the time the contract of sale was made. Bhaskar Maharashtra Example 2: Sale of unascertained goods Chander Bengaluru, Karnataka Madan contracts to purchase from Chander, 25 lathes to be manufactured at Chander s factory in Bengaluru. Chander manufactures the lathes and separates them out and appropriates them to the contract in Bengaluru. Madan Mysore, Karnataka In this case, the sale would be within the State of Karnataka since at the time of appropriation, the goods were in that State. (c) Single contract of sale of goods situated at more than one places In the case of both the above groups of goods (specific and unascertained), it may so happen that there is a single contract of sale or purchase of goods situated at more than one places. In such a case it shall be deemed that there are separate contracts in respect of the goods at each of such place.

116 Basic Concepts of Indirect Taxes Central Sales Tax (d) Section 4 is subject to the provisions of section 3 Section 4 is subject to the provisions of section 3. It implies that the provisions of section 4 would apply only when sales of goods is not an inter-state sale under section 3. In case of intra-state sales, sales tax shall be levied by the State inside which such sales is deemed to have taken places Sale in course of import/export [Section 5] Article 286(1)(b) of the Constitution of India stipulates that State cannot impose a tax on the sale or purchase of goods where such sale or purchase takes in the course of import/export. Further, clause (2) of Article 286 confers the power on the Parliament to formulate principles for determining when a sale or purchase of goods shall be deemed to have taken place in the course of import/export. In exercise of the powers conferred by the Constitution, section 5 was introduced. Section 5 stipulates as to when a sale or purchase is deemed to take place in the course of import/export. Central sales tax is not leviable on sale in course of export/import. The provisions of section 5 have been discussed hereunder:- Sale in the course of export A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India only if:- (i) sale or purchase occasions such export, or (ii) sale or purchase is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India, or (iii) it is penultimate sales. (a) Sale/purchase occasioning the export: In such a case:- (i) there shall be a sale of goods; (ii) such sale shall occasion export, involving transhipment of goods from one country to the other and shall be between two parties of two countries and (iii) the final result of transhipment shall be that the goods have come to rest in the other country. Example: A B Mumbai A enters into a contract of sale with B and moves the goods out of the territory of India London In this case, the sale would be deemed to have occasioned the export of the goods out of the territory of India and would not be liable to CST.

117 1.106 Indirect Taxes (b) Sale or purchase effected by a transfer of documents of title to the goods: In such a case, sale is effected by a transfer of documents of title to the goods AFTER the goods have crossed the customs-frontiers of India. Such transfer of documents of title to the goods can take place immediately on loading of goods in a conveyance after obtaining clearance from the customs authorities for export. Example: A Gujarat A s Branch London A shipped the goods for transfer to his branch in London. After the goods are loadedd on ship, A got an order from a customer in Londonn for the said goods. So, the document of title to such goods was endorsed in favour of the said customer. In this case, the sale would be deemed to be sale in course of export effected by transfer of documents and as such would NOT be liable to CST. Points which merit consideration regarding sale occasioning export of goods or sale effected by transfer of documents of tile to the goods after goods cross the customs frontier Sale to a foreign tourist in India is not 'sale in course of export'. Sale in course of export is exempt even if made by an unregistered dealer. The goods should be destined to foreign country even though actual reaching of destination is not necessary.

118 Basic Concepts of Indirect Taxes Central Sales Tax (c) Penultimate sales for export: Penultimate sale is the sale preceding the sale occasioning the export. Such sale would also be deemed to be the sale in course of exports and would not be liable to central saless tax. However, the penultimate sale or purchase is considered to be a sale or purchase in the course of export only if the dealer selling the goods furnishes a declaration in Form H, duly filled in and signed by the exporter to whom the goods are sold, to the prescribed authority in the prescribed form and manner. Conditions to be fulfilled for a sale to be considered as penultimatee sale:- A sale is considered as penultimate sale if all the following conditions are fulfilled:- (i) There is a pre-existing agreement or order in relation to export [agreement with a foreign buyer and not an agreement or order with a local party containing the covenant to export]. (ii) Penultimate sale must be, after the agreement with the foreign buyer, for the purpose of complying with such agreement or order in relation to export. (iii) Same goods which are sold in penultimate sale must be exported, though may not be in the same form. There is a pre- or existing agreement order in relation to export. Sale is for the purpose of complying with such agreement or order in relation to export. Conditions to be fulfilled for a sale to be considered as penultimatee sale Same goods which are sold in penultimate sale must be exported, though may not be in the same form. Example: ABC Ltd. received export order for ediblee prawns. It purchased prawns from a local dealer and cleaned them. A small inedible portion was removed and the edible portion was exported. In the given case, purchase of prawns is a penultimate sale for exports. (d) Purchase of ATF by any designated Indian carrier for the purposes of its international flight deemed to take place in course of export If any designated Indiann carrier purchases Aviation Turbine Fuel for the purposes of its international flight, such purchase shall be deemed to take place in the course of the export of goods out of the territory of India. In this regard, following points merit consideration:-

119 1.108 Indirect Taxes CST and sales tax within the State will not be applicable on such purchase as it is not an inter-state sales, but a purchase in the course of the export. Exemption is only available to Indian carriers notified by the Central Government in this behalf. Some of the designated Indian carriers so specified are Air India, Indian Airlines, Jet Airways and Spicejet. Exemption is available only in case of international flights and not the domestic flights. Sale in the course of import A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if:- (i) sale or purchase occasions such import, or (ii) sale or purchase is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India, (a) Sale occasioning the import: Below mentioned example elucidates the concept of sales occasioning the import: A Mumbai B enters into a contract of sale with A and sends the goods to India B London In this case, the sale would be deemed to have occasioned the import of the goods into the territory of India and would not be liable to CST. (b) Sale or purchase effected by a transfer of documents of title to the goods: In such a case, sale is effected by a transfer of documents of title to the goods BEFORE the goods have crossed the customs-frontiers of India. Such transfer of documents of title to the goods can take place at any time before clearance of goods from customs. Import starts when the goods cross the customs barrier in a foreign country and ends when they cross customs barrier in the importing country. Further, if the documents are transferred when goods are in customs bonded warehouse, it will be treated as transfer of documents before the goods cross the customs barrier. However, on the other hand, if the imported goods are cleared from customs and then sold to a buyer in India, such sale would not be termed as sale in course of import. Such sale shall be inter- State sale or intra-state sale, as the case may be.

120 Basic Concepts of Indirect Taxes Central Sales Tax For instance, if Bill of Lading is endorsed in favour of buyer before the goods have crossed the limit of customs port or if the letter of delivery issued by bank is endorsed in favour of buyer before taking the delivery from customs, it is sale in course of imports. Meaning of crossing the customs frontiers of India: Crossing the customs frontiers of India means crossing the limits of the area of a customs station* in which imported goods/export goods are ordinarily kept before clearance by customs authorities. *Customs station means any customs port [in case of a vessel], customs airport [in case of an aircraft] or land customs station [in case of a vehicle]. Example: A Gujarat A s Branch London A s branch in London shipped some goods for transfer to A in India. When the goods were in the high seas, A got an order from a customer in India for the said goods. So, he endorsed the documents of title to such goods in favour of the said customer Rates of tax on sales in the course of inter-state trade or commerce As per section 8(1), the liability to pay CST is on the dealer who sells the goods in the course of inter-state trade or commerce. For computing CST payable, the applicable rates would be determined as per the provisions of sub-sections (1) to (4) of section 8, in the following manner: (A) CASES WHERE CONCESSIONAL RATE OF CST IS APPLICABLE: The concessional rate of CST is:- (i) 2% of the turnover of the dealer or In this case, the sale would be deemed to be sale in course of imports effected by transfer of documents and as such would not be liable to CST. (ii) Rate applicable to the sale or purchase of such goods inside the appropriate state* under the sales tax law of that State whichever is lower. *Appropriate State means- (i) in relation to a dealer who has one or more places of business situated in the same State: that State;

121 1.110 Indirect Taxes (ii) in relation to a dealer who has places of business situated in different States: every such State with respect to the place or places of business situated within its territory [Section 2(a)]. Conditions to be fulfilled for concessional rate of CST: A dealer is liable to pay CST at the concessional rate of CST provided the following conditions are satisfied:- (I) Sale is of eligible goods: Goods described in sub-section (3)* are the goods eligible for concessional rate of CST. (II) Sale is made to a registered dealer: The dealer can pay CST on inter-state sale of such eligible goods at the concessional rate provided the sale has been made to a registered dealer. (III) Form C to be furnished by the purchasing dealer: The selling dealer is required to obtain a declaration in Form C from the purchasing dealer and furnish it to the prescribed authority, in order to secure concession in the rate of tax. *Note: Following goods as specified in the certificate of registration of the registered purchasing dealer, are eligible for concessional rate of CST:- (a) goods of the class/classes intended:- (i) (ii) for resale by him, or for use by him in manufacture or processing of goods for sale, or (iii) for use in the telecommunications network, or (iv) for use in mining, or (v) for use in the generation or distribution of electricity or any other form of power. (b) containers or other materials intended for being used for the packing of goods for sale. Further, containers or other materials used for the packing of any goods referred to in clause (a) or (b) above are also so eligible [Section 8(3)]. (B) CASES WHERE CONCESSIONAL RATE OF CST IS NOT APPLICABLE: In case any of the aforesaid three conditions are not fulfilled, the rate of CST would be the rate applicable to the sale or purchase of such goods inside the appropriate State under the sales tax law of that State.

122 Basic Concepts of Indirect Taxes Central Sales Tax Rates of CST at a glance:- In case rate of sales tax within the State is CST rate in case of sale to registered dealers is CST rate in case of sale to unregistered dealers is less than 3% 3% or more 2% applicable rate of sales tax within the State applicable rate of sales tax within the State Illustration: Ram of Gujarat, a registered dealer, purchases goods specified in section 8(3) from Shyam of Maharashtra and furnishes Form C to Shyam with regard to such purchase of goods. Calculate the CST rate applicable assuming that the rate of sales tax within Maharashtra is:- (i) Nil (ii) 1% (iii) 2% (iv) 3% (v) 4% (vi) 5% (vii) 8% (viii) 10% (ix) 13.5% (x) 20% Will your answer be different in case Ram is not a registered dealer? Solution: Sales tax rate for sale within the State CST rate in case Ram is a registered dealer and furnishes Form C CST rate in case Ram is an unregistered dealer Nil Nil Nil 1% 1% 1% 2% 2% 2% 3% 2% 3% 4% 2% 4% 5% 2% 5% 8% 2% 8% 10% 2% 10% 12.5% 2% 12.5% 20% 2% 20%

123 1.112 Indirect Taxes 4.14 Determinationn of turnover for central saless tax [Section 8A] Turnover means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-state trade or commerce made during any prescribed period* and determined in accordance with the provisions of this Act and the rules made thereunder [Section 2(j)]. *Prescribed period is the period in respect of which a dealer is liable to submit returns under the general sales tax law of the appropriate State. Example: Mr. A is a dealer registered in Delhi. He is required to file the return quarterly under the Delhi VAT Act, Thus, for the purposes of the Central Sales Tax Act, the turnover would be the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-state trade or commerce made during three months. DEDUCTIONS TO BE MADE WHILE COMPUTING THE TURNOVER While determining the turnover of a dealer for the purposess of computing CST payable, following deductions shall be made from the aggregate of the sale prices:- (i) Central sales tax payable (ii) Sale price of all goods returned to the dealer by the purchasers of such goods within a period of six months from the date of delivery of the goods. (iii) Such other deductions as the Central Government may, having regard to the prevalent market conditions, facility of trade and interests of consumers, prescribee [Section 8A] ]. ANALYSIS: Following deductions are allowed to be made from the aggregate of the sale prices while computing the turnover:- (i) Central sales tax payable: The aggregate of sales price is taken inclusive of central sales tax, whether it is shown separately in the invoice or not. Consequently, the turnover is arrived at by deducting the CST from the aggregate of sales price. CST is calculated as follows:- CST Aggregate of sales price Rate of tax 100+Rate of tax Alternatively, turnover may be calculated by making back calculation in the following manner:- Turnover Aggregate of saless price Rate of tax Explanation- Where the turnover of a dealer is taxable at different rates, the aforesaid formulas shall be applied separately in respect of each part of the turnover liable to a different rate of tax.

124 Basic Concepts of Indirect Taxes Central Sales Tax (ii) Sale price of all goods returned by the purchasers: Deduction of sale price of all goods returned is available from the aggregate of the sales prices provided:- (a) the goods are returned by the purchaser within a period of 6 months from the date of delivery of the goods, and (b) satisfactory evidence of such return of goods and of refund or adjustment in accounts of the sale price thereof is produced before the competent authority. (iii) Such other deductions as the Central Government may, having regard to the prevalent market conditions, facility of trade and interests of consumers, prescribe. MEANING OF SALE PRICE Sale price means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged [Section 2(h)]. ANALYSIS: (A) Definition of sale price: As per section 2(h), sale price means the amount payable to a dealer as consideration for the sale of any goods subject to following inclusions and exclusions:- Inclusions in the sale price:-any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof. Exclusions from the sale price:-following are to be excluded from the sale price:- (a) Any sum allowed as cash discount according to the practice normally prevailing in the trade. (b) Cost of freight/delivery: The cost of freight/ delivery or cost of installation is excluded where such cost is separately charged by the dealer. Cost of freight or delivery is includible only if:- (a) it is NOT shown separately in an invoice or (b) Contract is for sale FOR destination and property in goods is transferred only at destination. In case of sale of goods from depot, freight from factory to depot is includible in sale price even if shown separately in invoice. (B) Other Inclusions and Deductions from sale price: In addition to the inclusions and exclusions (as discussed above) from the sale price specifically mentioned in the definition of sale price, few other inclusions and exclusions have been discussed below. The same have been arrived at on the basis of the legal decisions rendered in this regard.

125 1.114 Indirect Taxes 1. Dharmada - Charity or dharmada collected by the dealer will form part of the sale price because so far as the purchaser is concerned, he has to pay the whole amount for purchasing the goods. 2. Weighment dues - If the services of weighing are in respect of the goods and incidental to their being sold, the dues charged are to be included in the sale proceeds. 3. Insurance charges - Insurance charges incurred by the assessee prior to the delivery of the goods form part of sale price. 4. Packing charges - The packing charges realised by the dealer is an integral part of the sale price and hence includible. Further, cost of packing material is also includible in sale price. 5. Indemnity/Guarantee charges - Indemnity / guarantee charges recovered from the same buyers to incur loss during transit at buyers request are allowed as deduction from the sale price. 6. Discount according to trade practice - Any sum allowed as discount according to the practice normally prevailing in the trade will not form part of the sale price. 7. Excise duty - Excise duty paid by a dealer in respect of the goods which he sells will not be liable to be deducted from his turnover. 8. Government subsidies - Where a product is controlled and has to be sold at controlled price subsidies are granted by the Government to manufacturers to compensate the cost of production which is usually higher than the controlled price. Such subsidy will not form part of sale price or turnover. 9. Incentive paid to supplier/manufacturer Any incentive paid to suppliers/to others on behalf of suppliers to ensure scheduled delivery is includible. These are not post sales expenses. 10. Design Charges Design charges charged separately in respect of goods manufactured as per design and sold to buyer are includible. 11. Deposits for returnable containers/bottles: are not includible in the sale price. 12. Free of cost material supplied by customer is not includible in sale price. (C) Sale price in case of works contract: In the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner* by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause. *Note: It may be noted in this regard that so far no rules have been framed by the Central Government.

126 Basic Concepts of Indirect Taxes Central Sales Tax Collection of tax to be only by registered dealers [Section 9A] No person who is not a registered dealer shall collect in respect of any sale by him of goods in the course of inter-state trade or commerce any amount by way of tax under this Act, and no registered dealer shall make any such collection except in accordance with this Act and the rules made thereunder. CST payable to be rounded off [Section 9B] The amount of central sales tax, interest, penalty, fine or any other sum payable, and the amount of refund due, under the provisions of this Act shall be rounded off to the nearest rupee*. However, this provision does not apply to CST collected by a dealer. It implies that when a dealer collects CST from the buyer, he may charge it in the invoice without rounding off, but when the same is credited to the Government, amount needs to be rounded off to the nearest rupee. *Note: For this purpose, where such amount contains a part of a rupee consisting of paise, then, if such part is fifty paise or more, it shall be increased to one rupee and if such part is less than fifty paise, it shall be ignored. SOME ILLUSTRATIONS EXPLAINING THE COMPUTATION OF CST LIABILITY: Illustration 1: Mr. D, a first stage dealer in packing machinery in the State of Gujarat furnishes the following data: Sale proceeds of inter-state sales during F.Y ,50,000 (CST not shown separately) Above sales include: Excise duty 9,00,000 Freight 1,50,000 (of this ` 50,000 is not shown separately in invoices ) Insurance charges incurred prior to delivery of goods 32,000 Installation and commissioning charges shown separately 15,000 Design charges charged separately 30,000 Determine the turnover and CST payable, assuming that all transactions were covered by valid C Forms and sales tax rate within the State is 5%. `

127 1.116 Indirect Taxes Solution: Computation of Mr. D s turnover and central sales tax payable Sale proceeds of inter-state sales 92,50, Less: Freight shown separately in the invoices 1,00,000 Less: Installation and commissioning charges shown 15,000 separately ` ` 1,15, Turnover including CST (A) 91,35, Less: CST payable (91,35,000 2/102) (B) 1,79, Turnover excluding CST ( A- B) 89,55, Central sales tax payable (rounded off) 1,79,118 Notes 1. Excise duty forms part of the sale price and is not deductible. 2. Freight not shown separately in the invoices and insurance charges incurred prior to delivery of goods are not deductible in calculating the turnover. 3. Sale price includes design charges charged separately. 4. The CST on transactions covered by valid C forms is 2% or the sales-tax rate within the State, whichever is lower. Since, in this case, the State sales-tax rate is higher than 2%, the rate of CST is taken as 2%. Illustration 2: Mr. X reported inter-state sales of ` 36,20,000. This includes the following: (i) Excise duty ` 3,00,000 ; and (ii) Deposit for returnable containers and packages ` 5,00,000. Central sales tax was not included separately in the sales invoice. Compute tax liability under the CST Act, assuming the rate of CST at 2%. Solution: Computation of central sales tax liability of Mr. X:- Total sales of Mr. X 36,20, Less: Deposit received towards returnable containers and packages 5,00, Turnover (including central sales tax) 31,20,000.00

128 Basic Concepts of Indirect Taxes Central Sales Tax Less : Central sales tax thereon = 31,20,000 x 2/102 61, Turnover (excluding central sales tax) 30,58, The central sales tax liability is ` 61,176 [rounded off] (being 2% of ` 30,58,823.53) Note Excise duty is part of turnover and hence should not be excluded from turnover. Illustration 3: Mr. A s total inter-state sales are ` 52,00,000 for the year ended Further, goods sold in March, 2014 have been returned by the customers to the value of ` 5,20,000 in May, He had not charged tax separately in the sale invoices. Assuming that the applicable rate of CST is 2%, compute his CST liability. Solution: Total sales 52,00,000 Less : Sale price of goods returned to the dealer by the purchaser of such goods (within 6 months from the date of delivery of the goods) 5,20,000 Turnover in terms of the Central Sales Tax Act 46,80,000 Mr. A has not charged the amount of sales tax separately in the sales invoices. Therefore, according to section 8A, the sales tax has to be worked out applying the following formula Rate of tax X Aggregate of sale price Rate of tax Central sales tax liability = 2 x 46,80, = 93,60, = ` 91,765 (rounded off) Illustration 4: From the following details, compute the central sales-tax payable by a dealer carrying on business in New Delhi : Total inter-state sales (including CST) 16,00,000 ` ` (i) Trade commission for which credit notes have to be issued separately 48,000 (ii) Installation charges charged separately 25,000 (iii) Excise duty 80,000 (iv) Freight, insurance and transport charges recovered separately in the invoice 60,000

129 1.118 Indirect Taxes (v) Goods returned by dealers within six months of sale, but after the end of the financial year 40,000 Buyers have issued C forms for all purchases. Sales tax rate within the State is 4%. Solution: Sales as per bill (including CST) 16,00,000 Less :Trade commission 48,000 Installation charges charged separately 25,000 Freight, transport charges 60,000 Goods returned within 6 months 40,000 1,73,000 Turnover including CST 14,27,000 Central sales 2% (`14,27,000 х 2 / 102) 27, Turnover 13,99, CST at 2% thereof (rounded off) 27,980 Note: The CST on transactions covered by valid C forms is 2% or the sales-tax rate within the State, whichever is lower. Since, in this case, the State sales-tax rate is higher than 2%, the rate of CST is taken as 2% Exemption from CST Following exemptions may be granted from CST in case of sale to a registered dealer:- (I) Exemption by notification granted by the State Government [Section 8(5)]: State Government can grant exemption, by issuing a notification in the Official Gazette, in respect of the inter-state sales effected from the State subject to the fulfilment of the following conditions:- (a) State government is satisfied that such exemption is necessary in the public interest. (b) Sale must be made to a registered dealer. (c) The selling dealer must furnish Form C as obtained from the registered purchasing dealer. `

130 Basic Concepts of Indirect Taxes Central Sales Tax Exemption may be absolute [complete exemption from CST] or partial [reduced rate Exemption may be subject to certain of CST]. condition(s). Exemption from CST under section 8(5) Exemption may be granted to sales of notified goods/classes of goods. Exemption may be granted to notified dealers/class of dealers [purchasing and/or selling dealer]. (II) Exemption from CST to a sale to unit/developer in SEZ [Section 8( (6),8(7) & 8(8)]: A registered dealer in SEZ (unit in SEZ/developer of SEZ) can obtain goods from outside SEZ, for specified purposes, without payment of CST. Following conditions must be satisfied in order to claim the said exemption:- 1. Purposes for which unit/developer of SEZ may use the goods sold: (a) Unit in SEZ: for the purpose of setting up, operation, maintenance, manufacture, trading, production, processing, assembling, repairing, re- or conditioning, re-engineering, packaging or for use as packing material packing accessories in a unit located in any SEZ. (b) Developer of SEZ: for the purpose of development, operation maintenance of SEZ by developer. 2. Authorised unit/developer: The unit in SEZ must be authorised to establish such unit or developer of SEZ must be authorized to develop, operate and maintain such SEZ, by the authority specified by the Central Government in this behalf. 3. Sale to registered dealer: The goods must be sold to a unit/developer of SEZ who is a registered dealer. 4. Declaration to be furnished: The purchasing dealer has to submit a declaration in Form I. 5. Goods specified in the registration certificate: Goods should be of such class or classes of goods as specified in the Certificate of registration of the registered dealer. Special Economic Zone (SEZ) A Special Economic Zone (SEZ) is a geographically bound zone where the economic laws relating to export and import are more liberal as compared to other parts of the country. These are like a separate island within the territory of India. SEZs are projected as duty free area for the purpose of trade, operations, duty, and tariffs. SEZ is considered to be a place outside India for all tax purpose. Within SEZs, a unit may be set-up for the manufacture of goods and other activities including processing, assembling, trading, repairing, reconditioning, making of and

131 1.120 Indirect Taxes gold/ silver, platinum jewellery etc. As per law, SEZ units are deemed to be outside the customs territory of India. Goods and services coming into SEZs from the domestic tariff area or DTA are treated as exports from India and goods and services rendered from the SEZ to the DTA are treated as imports into India Goods of special importance/declared goods Article 286(3) empowers the Parliament to declare some goods as goods of special importance and to impose restrictions and conditions with regard to power of the States pertaining to levy, rates and other incidence of tax on such goods. Thus, Parliament can restrict the power of States to tax such declared goods. State Government cannot levy sales tax within the State on these goods exceeding 5%. If declared goods are sold inter-state, tax paid within the State is reimbursed to seller provided the goods are sold inter-state in the same form. A. Declared goods/goods of special importance As per section 2(c) of the Central Sales Tax Act, 1956, declared goods means goods declared under section 14 to be of special importance in inter-state trade or commerce. The following is an illustrative list of goods declared under section 14 to be of special importance in inter-state trade and commerce and thus constituting declared goods : (i) Cereals (ii) Coal, including coke in all its forms, but excluding charcoal (iii) Cotton, (indigenous or imported) in its unmanufactured state, whether ginned or unginned, baled, pressed or otherwise, but not including cotton waste (iv) Cotton fabrics (v) Cotton yarn, but not including cotton yarn waste (vi) Crude oil (vii) Hides and skins, whether in a raw or dressed state (viii) Iron and steel (ix) Jute (x) Oilseeds (xi) Pulses (xii) Man-made fabrics. (xiii) Sugar. (xiv) Liquefied petroleum gas for domestic use B. Restrictions imposed on the tax imposed on the declared goods Section 15 lists the restrictions which are imposed on the sale of the declared goods. These restrictions are as follows:-

132 Basic Concepts of Indirect Taxes Central Sales Tax (i) Sales tax within the State not to exceed 5% The tax payable under the sales tax law of a State in respect of any sale or purchase of such goods inside that State shall not exceed 5% of the sale or purchase price. (ii) Sales tax imposed within the State if goods sold inter-state subsequently If a tax is levied on sales or purchase of any declared goods inside a State and the same commodity is subsequently sold in the course of inter-state trade or commerce and is subjected to CST, the sales tax paid within the State realised previously in respect of the commodity is reimbursed. The said reimbursement is subjected to following conditions:- (a) the tax on the inter-state sale has been actually paid. Thus, it will not be possible for the dealer to claim back the tax paid by him in respect of the goods which subsequently became the subject-matter of an inter-state sale, unless he has actually paid the inter-state tax. Similarly, if the inter-state sale of the goods is exempt from tax, reimbursement of tax paid on intra-state sale is not available. (b) The inter-state sale of goods must be in the same form. Note: The rates of taxes, wherever mentioned in the illustrations may not always be the actual rates prevalent during the period in question. They may be hypothetical rates assumed to explain the provisions of law with more clarity.

133 Learning objectives UNIT 5: VALUE ADDED TAX After reading Unit- 5 of this Chapter, you will be able to understand: the basic concepts of VAT - what is VAT, how does it operate, what are its different variants, what are the different methods of computation thereof and what are its merits and demerits the design of VAT in Indian context CENVAT, State - Level VAT and proposed GST Constitutional provisions relating to levy of State - Level VAT what are the different VAT rates and coverage of goods the concept of input tax and output tax the concept of input tax credit how to compute the VAT liability the provisions relating to Composition Scheme for small dealers the position of VAT vis a vis sales tax incentives the applicability of VAT on works contract, lease transactions and hire-purchase transactions the deficiencies in the existing State - Level VAT regime in India 5.1 Basic concepts of VAT (1) What is VAT?: Value added tax (VAT), as the term suggests, is a tax on the value added to the commodity at each stage in production and distribution chain. It is a system to collect the tax on the value at the final or retail point of sale. VAT is a consumption tax because it is borne ultimately by the final consumer. Let us try to understand the concept of VAT with the help of an example. Suppose, for manufacturing a product A, the manufacturer purchases four types of commodities B, C, D and E and pays excise duty on all of them. When ultimately he sells his manufactured product A, on which he has to discharge his liability towards excise, the excise duty leviable on such product is on a tax base which includes excise duties paid by the manufacturer on products B, C, D and E. Thus, the final excise duty is a duty on duty, which increases the cost of production as well as the price of the final product. However, under VAT, the excise duties paid on commodities B, C, D and E are allowed to be set-off from the final duty liability on product A. Thus, the manufacturer avoids payment of duty on duty and the cost of the product is reduced, ultimately benefitting the consumer. The above example is a case of value added tax on manufacture. In the same way, there can be a value added tax in respect of trading in commodities also. In case of VAT on sales, the

134 Basic Concepts of Indirect Taxes Value Added Tax various taxes paid on inputs purchased will be allowed as a credit and set off against the tax liability on the value of sales of the commodity. In the same way, one can think of a system of VAT dealing with input and output services. The individual systems of manufacturing, sales and services VAT are ultimately combined to form a grand system of VAT on goods and services known as Goods and Services Tax. (2) Cascading of taxes: As seen in the above example, in first case (non VAT), tax is levied on tax i.e, tax leviable at each stage is chargeable on a value which includes the tax paid at earlier stage as there is no credit of tax paid at earlier stage. This is termed as cascading effect of taxes which leads to increase in cost of production. However, in the second case (VAT), tax is not levied on tax paid at earlier stage; it is levied only on the value added as credit of tax paid at earlier stages is allowed to be set off against the tax payable at the next stage. Thus, VAT helps in eliminating cascading of taxes. (3) How VAT operates: Value Added Tax (VAT) is levied as a proportion of the value added at each stage of production or distribution (i.e., sales minus purchase) which is equivalent to wages plus interest, other costs and profits. To illustrate, a chart of transactions is given below: Manufacturer A Sale price ` 300 Gross VAT ` Net VAT ` 21 [` ( ` ` 4)] Wholesaler B Sale price ` 400 Gross VAT ` 50 Net VAT ` (` 50 - ` 37.50) Product X Sale price ` 100 Gross VAT ` Net VAT ` Product Y Sale price ` 100 Gross VAT ` 4 Net VAT ` 4 Retailer C Sale price ` 500 Gross VAT ` Net VAT ` ( ` ` 50) Inputs for manufacturer [Fig. 1] Note: The rate of tax is assumed to be 12.5% on transactions relating to goods manufactured by A (i.e., on sales made by A, B and C). For a manufacturer A, inputs are product X and product Y which are purchased from a primary producer. In practice, even these producers use inputs. For example, a farmer would use seeds, feeds, fertilizer, pesticides, etc. However, for this example, their VAT impact is not considered. B is a wholesaler and C is a retailer. The inputs X and Y are purchased at ` 100 each on which tax is 12.5 % and 4% respectively. After adding wages, salaries and other manufacturing expenses to the cost of inputs, manufacturer A will also add his own profit. Assuming that after the addition of all these costs his sale price is ` 300, the gross tax (at the rate of 12.50%) would be

135 1.124 Indirect Taxes ` As manufacturerr A has already paid tax on ` 200, he would get credit for this tax (i.e. ` ` 4 = ` 16.50) ). Therefore, his net VAT liability would be ` 21 only (` minus ` 16.50) and because of this, he would take the cost of his inputs to be only ` 200. Similarly, the sale price of ` 400 fixed by wholesaler B would have net VAT liability of ` (` 50 - ` ) and the sales price of ` 500 by retailer C would also have net VAT liability of ` (` ` 50). Thus, VAT is collected at each stage of production and distribution process, and in principle, its entire burden falls on the final consumer, who does not get any tax credit. Hence, VAT is a broad-based tax covering the value added by each party to the commodity during the various stages of production and distribution. (4) Variants of VAT Gross Product Variant Tax is levied onallsales and deduction for tax paid on inputs excluding capital goods is allowed. Income Variant Tax is levied on all sales with set-off for taxpaidon inputs and only depreciation goods. on capital Consumption Variant Tax is leviedonallsales with deduction for tax paid on all business inputs (including capital goods). [Fig. 2] (a) Gross Product Variant: The gross product variant allows deductions for taxes paid on all purchasess of raw materials and components, but no deduction is allowed for taxes paid on capital inputs. (b) Income Variant: The income variant of VAT on the other hand allows for deductions on purchases of raw materials and components as well as depreciation on capital goods. This method provides incentives to classify purchases as current expenditure to claim set-off. (c) Consumption Variant: This variant of VAT allows deduction for all business purchases including capital assets. Thus, gross investment is deductible in calculating value added. It neither distinguishes between capital and current expenditures nor specifies the life of assets or depreciation allowances for different assets. The consumption variant of VAT is the most widely used variant of the VAT. Several countries of Europe and other continents have adopted this variant as it does not affect decisions regarding investment because the tax on capital goods is also available for set-off against the VAT liability. Hence, the system is tax neutral in respect of techniques of production (labour or capital-intensive). It also simplifies tax administration by obviating the need to distinguish between purchases of inputs and capital goods. In practice, therefore, most countries use the consumption variant. Also, most VAT countries include many services in the tax base. Since the business gets set-off for the tax on services, it does not cause any cascading effect.

136 Basic Concepts of Indirect Taxes Value Added Tax (5) Methods of computation of tax Methods of computation of VAT Addition method Aggregating all the factor payments and profit Invoice method Deducting tax on inputs from tax on sales Cost subtraction method Direct subtraction method Deducting aggregate value of purchase exclusive of tax from the aggregate value of sales exclusive of tax Intermediate subtraction method Deducting tax inclusive value of purchases from the sales and taxing difference between them. [Fig. 3] (a) Addition method: This method aggregates all the factor payments (excluding value of material) including profits to arrive at the total value addition on which the tax rate is applied to calculate the tax. This type of calculation is mainly used with income variant of VAT. A drawback of this method is that it does not facilitate matching of invoices for detecting evasion as tax liability is calculated periodically and not invoice-wise. (b) Invoice method: This is the most common and popular method for computing the tax liability under VAT system. Under this method, tax is imposed at each stage of sales on the entire sale value and the tax paid at the earlier stage (on purchases) is allowed as set-off. Thus, at every stage, differential tax is being paid. The most important aspect of this method is that at each stage, tax is to be charged separately in the invoice. This method is very popular in western countries. In India also, this method is followed under the State Level VAT and the Central Excise Law. This method is also called the 'Tax Credit Method' or 'Voucher Method'. Example: Stage Particulars VAT Liability (A) [`] VAT Credit (B) [`] Tax paid to Government (A) (B) [`] 1. Manufacturer/first seller in the State sells the goods to distributor for ` Rate of tax is 12.5%. Therefore, his tax liability will be ` 125. He will not get any VAT credit, being the first seller. 2. Distributor sells the goods to a wholesale

137 1.126 Indirect Taxes dealer for say ` 12.50% and will get set-off of tax paid at earlier stage at ` 125. The tax payable by him will be ` Wholesale dealer sells the goods to a retailer at say ` Here again, he will have to pay the tax on ` He will get credit of tax paid at earlier stage of ` 150. The tax payable by him will be ` Retailer sells the goods to consumers at say ` Here again, he will have to pay tax on ` He will get credit for tax paid earlier at ` The tax payable by him will be ` Total Thus, the Government will get tax on the final retail sale price of ` 2,000. However, the tax will be paid in installments at different stages. At each stage, tax liability is worked out on the sale price and credit is also given on the basis of tax charged in the purchase invoice. If the first seller is a manufacturer, he gets the credit of tax paid on raw materials, etc. which are used in the manufacturing. From the above illustration, it is clear that under this method, tax credit cannot be claimed unless and until the purchase invoice is produced. As a result, in a chain, if at any stage the transaction is kept out of the books, still there is no loss of revenue. The Government can recover the full tax at the next stage. Thus, the possibility of tax evasion, if not entirely ruled out, is reduced to a minimum. However, proper measures are required to prevent the production of fake invoices to claim credit of tax paid at an earlier stage. It is said that in this method, the beneficiary is the trade and industry because in the above example, the total tax collection at all the stages is ` whereas tax received by the State is only ` 250. (c) Cost subtraction method: Under this method, tax is charged only on the value added at each stage of the sale of goods. Since, the total value of goods sold is not taken into account, the question of grant of claim for set-off or tax credit does not arise. Further, under this method tax cannot be shown separately in invoice and tax liability can only be calculated periodically. Since, tax payable on a product is not known, end-use based exemption cannot be given under this method. For imposing tax, 'value added' is simply taken as the difference T R between sales and purchases. Tax is calculated by the formula, where T = Taxable R turnover and R = Rate of Tax. This method is suitable for gross product variant.

138 Basic Concepts of Indirect Taxes Value Added Tax Example: Stage Particulars Turnover 12.50% for tax under VAT (` ) (` ) 1. First seller sells the goods to a distributor at ` 1,125 inclusive of tax. 2. Distributor sells the goods to a whole-seller at ` 1,350. Here, taxable turnover will be ` 1,350 - ` 1, Wholesaler sells the goods to a retailer at say, Rs 1, Here, taxable turnover will be ` 1, ` 1, Retailer selling the goods at say, ` Taxable turnover will be ` ` , ( ) ( ) ( ) ( ) , Thus, under this system also, tax is charged at each stage and the incidence of tax on the final sale price to the consumer remains the same as in the invoice method. However, this holds good till the time the same rate of tax is attracted on all inputs, including consumables and services, added at all the stages of production/distribution. If the rates are not common, then the final tax by the two methods may differ. This is explained through the examples given below. Example: Invoice method Particulars All inputs taxable at ONE rate Invoice value [`] Material value [`] VAT [`] Input tax credit [`] Net VAT paid [`] Inputs for A Product 12.50% Product 12.50% A sells goods to B B sells goods to C C sells goods to D D sells goods to E FINAL

139 1.128 Indirect Taxes Subtraction method Particulars Inputs for A A to B B to C C to D D to E Invoice value [`] Purchase price [`] Value added [`] % [`] FINAL Invoice method Particulars Inputs for A Product 4% Product 12.5% A sells goods to B B sells goods to C C sells goods to D D sells goods to E Inputs taxable at DIFFERENT rates Invoice [`] Material Value [`] VAT [`] Input tax credit [`] Net VAT paid [`] FINAL Subtraction method Particulars Inputs for A A to B B to C C to D D to E Invoice [`] Purchase Price [`] Value Added [`] % [`] FINAL

140 Basic Concepts of Indirect Taxes Value Added Tax Thus, on the same consumer price of ` 2700, under invoice method, VAT works out to be ` 300 whereas under the subtraction method it works out to be ` 281. Therefore, this method is not considered as a good method. (6) Merits and Demerits of VAT S. No. Merits Demerits 1. Reduced tax evasion: Even if tax is evaded at one stage, the transaction gets caught in next stage of production or distribution. 2. Increased tax compliance: VAT acts as a self-policing mechanism as the buyer can get credit of tax paid only if the seller issues the invoice showing tax and thus, the buyer insists on getting the invoice from the seller, thereby acting as a police for the seller. 3. Certainty: VAT brings certainty owing to is simple tax structure and minimum variations. 4. Transparency: As the tax charged has to be shown clearly in the invoice, the system becomes transparent with no hidden taxes. Distortions in case of exemptions/ concessions: The merits accrue in full measure only where there is one rate of VAT and the same applies to all commodities without any question of exemptions whatsoever. Once concessions like differential rates of VAT, composition schemes, exemption schemes, exempted category of goods etc. are built into the system, distortions are bound to occur. Increased compliance cost: The detailed accounting and the paper work required for complying with the VAT system increases the compliance cost which may not always commensurate with the benefit to traders and small firms. Increased working capital requirements: Since tax is to be imposed or paid at various stages and not on last stage, it increases the working capital requirements and the interest burden on the same. Thus, it is considered to be non-beneficial in comparison with single stage-last point taxation system. Consumption favoured over production: Since, VAT is a consumption based tax, it is collected by the State consuming the goods. Thus, States where consumption is higher tend to get more revenue than States where production is higher.

141 1.130 Indirect Taxes 5. Cheaper exports: Exports get cheaper as taxes paid at earlier stages could be availed as credit or refunded in cash. 6. Better accounting systems: Since the tax paid at the earlier stage is to be received back, the system promotes better accounting systems. 7. Neutrality: Since tax credit of both inputs and capital goods is available, there is no distinction between labor intensive and capital intensive industries. Tax evasion through bogus invoices: Since input tax credit can be availed on the basis of invoices, dealers try to claim tax credit on the basis of fake invoices where no purchases has been made - thereby causing loss of revenue to the exchequer. Regressive tax: Burden of VAT falls disproportionately on the poor since the poor are likely to spend more of their income than the relatively rich person. 5.2 VAT in Indian context Proposed GST VAT on goods and services at both Central & State Level Central Level CENVAT on manufacture of goods & services VAT IN INDIA State Level State VAT on intrastate sale of goods [Fig. 4] (1) CENVAT: In India, VAT was introduced for the first time in the year 1986 as Modified VAT (MODVAT) in case of manufacture of goods. The same was subsequently changed to Central VAT (CENVAT) in the year VAT was introduced in case of services in the year 2002 and the same was subsequently integrated with CENVAT in the year Thus, excise duty paid on inputs/capital goods and service tax paid on input services could be availed as credit for being set off against the manufacturer s excise duty liability or a service provider s

142 Basic Concepts of Indirect Taxes Value Added Tax service tax liability 1. (2) State-Level VAT: After the introduction of VAT in the area of manufacture and services, a need arose to introduce a similar system in the area of sales tax as the erstwhile sales tax regime had become highly complex due to multiple taxes, cascading effect, varying rates of sales tax on different commodities in different States leading to unhealthy competition among the States often resulting in counter-productive situations. It is in this background that attempts were made to introduce a harmonious VAT in the States. In view of the Constitutional constraints (Central Government is empowered to levy tax on goods and services while tax on sales is a State subject), CENVAT could not be extended to sales tax. Therefore, the Central Government constituted an Empowered Committee of State Finance Ministers chaired by Dr. Asim Dasgupta to consider introduction of State-Level VAT. Finally, State-Level VAT was introduced on by majority of the States, though few States had already implemented it by that time. State-Level VAT replaced the erstwhile sales tax system and marked a significant step forward in the reform of domestic trade taxes in India. After overcoming the initial difficulties, all the States and Union Territories implemented VAT. Trade and industry also responded well to the reform. The rate of growth of tax revenue nearly doubled from the average annual rate of growth in the pre-vat five year period after the introduction of VAT. Introduction of VAT in the States has been a more challenging exercise in a federal country like India, where each State, in terms of Constitutional provisions, is sovereign in levying and collecting State taxes. State-Level VAT has addressed the distortions and complexities associated with the levy of tax at the first point of sale under the erstwhile system and resulted in a major simplification of the rate structure and broadening of the tax base. Thus, at present, VAT is operational in India as CENVAT (central level) in case of manufacture of goods and rendition of services and as State-Level VAT in the case of sale of goods. White Paper on State-Level VAT in India: The Empowered Committee of State Finance Ministers brought out a White paper on State-Level VAT in India on , which provided a base for the preparation of various State VAT legislations. Considering that VAT is a State subject, the States had freedom for making appropriate variations consistent with the basic design as agreed upon at the Empowered Committee. Broadly, the White Paper consists of the following: (a) Justification of VAT and Background (b) Design of State-Level VAT (c) Steps taken by the States All the State VAT legislations passed by the States have incorporated the principles of State- Level VAT as contained in the White Paper. However, each State has made changes as per its needs. 1 The concept of CENVAT credit available on goods and services has been discussed in Chapter-7 of this Study Material.

143 1.132 Indirect Taxes No model law for all States: Though the basic concepts of State-Level VAT are same in all States, tax on sales being a State subject, the provisions of VAT Acts of different States differ from State to State. For instance, provisions in respect of credit allowable, credit of tax on capital goods and the like are not uniform. Further, definitions of terms like business, sale, sale price, goods, dealer, turnover, input tax etc. are also not uniform. Though as per the design of State-Level VAT set out in the White Paper, tax rates were expected to be uniform broadly, the tax rates on various articles differ from State to State. The concepts relating to VAT dealt in subsequent pages of this Unit are based on the principles laid down by the White Paper on State-Level VAT. It may be noted that the discussion in this Unit is not based on the provisions of any particular State VAT Act. (3) Goods and Service Tax: Despite the introduction of value added tax in India - at the Central level in the form of CENVAT and at the State level in the form of State VAT - its application has remained piecemeal and fragmented on account of the following reasons: (a) Problems relating to distinguishing between goods and services have been a major cause of concern in service taxation as the distinction between the two is often blurred. (b) Non-inclusion of several State and local levies in State VAT such as luxury tax, entertainment tax, etc. (c) Cascading effect of taxes as CENVAT on the goods remains included in the value of goods taxed under State VAT. (d) No integration of VAT on goods with tax on services at the State level. (e) Continued imposition of the central sales tax (CST), which is non-vattable, leads to cascading effect thereby adding to the cost of goods. With a view to mitigate such problems, the then Finance minister, Mr. P. Chidambaram, in Union Budget proposed the roll out of India s most ambitious indirect tax reform namely, Goods and Service Tax (GST). GST seeks to attain a comprehensive and harmonized tax structure in a federal State like India. It is aimed at creating a common domestic market, removing multiplicity of taxes, eliminating cascading effect of tax on tax, making the prices of the Indian products competitive and, above all, benefiting the end consumers. A dual model has been proposed for GST in India so that both Central and State Governments can collect taxes to raise resources to fulfill their sovereign obligations/ duties. GST will subsume most of the indirect taxes being levied in India including central sales tax (CST). GST would integrate goods and service taxes for the purpose of set-off relief. Simultaneous introduction of GST at the State level will ensure that both the cascading effects of CENVAT and service tax are removed with set-off, and a continuous chain of set-off from the original producer s point and service provider s point up to the retailer s level is established which reduces the burden of all cascading effects. However, for the GST to be introduced at the State level, it is essential that the States should be given the power to levy tax on services. This power of levy of service taxes has so long been only with the Centre. A Constitutional Amendment is proposed for giving this power to the States as well.

144 Basic Concepts of Indirect Taxes Value Added Tax Though, introduction of GST in India is a very arduous task as it requires amendment of the Constitution of India and consensus between Central and States Governments on variety of issues like rates, basic threshold, exemptions, classification, administration; it is expected to give a major relief to industry, trade, agriculture and consumers through a comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of multiple taxes and phasing out of CST. 5.3 Constitutional provisions relating to State-Level VAT As learned before, tax on intra-state sale or purchase of goods is a State subject. Therefore, State Governments levy VAT under the authority of Entry 54 of the State List which reads as under:- ENTRY 54 OF STATE LIST Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A* of Union List. [Fig. 5] [*Central Government levies CST by virtue of Entry 92A of the Union List] It is important to note that State Governments are not empowered to levy tax on intra-state sale or purchase of newspapers. You may also recollect that inter-state sale or purchase of newspapers is also not liable to central sales tax. Thus, sale or purchase of newspapers, whether inter-state or intra-state, is not liable to any type of tax. (1) What is tax on sale or purchase of goods?: Clause (29A) of the Article 366 of the Constitution defines the term "tax on sale or purchase of goods". The definition is an inclusive one and it lays down six specific instances of deemed sale i.e., cases which are not sales in traditional sense but have been deemed to be sales for the purpose of leviability of CST/VAT. These deemed sales encompass elements of both goods as well as services. The goods portion is chargeable to CST/VAT and on services portion, service tax is imposed. This aspect has been discussed in detail in Unit 4 of this Chapter. (2) What is sale?: Sale means- (a) any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration; and (b) includes deemed sales transactions under Article 366(29A) of the Constitution of India; but (c) does not include a mortgage or hypothecation of, or a charge or pledge on, goods. (3) What are goods?: (i) As per Sale of Goods Act, 1930: As per section 2(7) of the Sales of Goods Act, 1930, goods means-

145 1.134 Indirect Taxes (a) every kind of movable property other than actionable claims and money and (b) includes stockss and shares, growing crops, grass and things attached to and forming part of the land, which are agreed to be severed before sale or under the contract of sale. (ii) As per Central Sales Tax Act, 1956: Section 2(d) of 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. Though each State has its own definition of 'goods' but broadly, the definitions are similar to the definition provided under the CST Act. The following points merit consideration in this regard: Goods may be tangible (like computer, pen, pencil etc.) as well as intangible (like patent, copyright). Goods include all kinds of movable property, but not newspapers, actionable claims, stocks, shares and securities. Plant and machinery erected at site, being immovable property, is not goods. Electricity is goods but lottery ticket, being actionable claim, is not goods. Software (branded as well as unbranded) is goods. 5.4 VAT rates and coveragee of goods (1) VAT rates: In orderr to do away with the demerits of multiple rates prevalent under sales tax regime, minimum number of rates were recommended in the White Paper. However, States have deviatedd from the prescribed rates. The prevalent common tax rates are: 0% 1% 5% 12.5%/13.5% Natural and unprocessed products in unorganised sector (e.g. firewood, plants)- Itemswhich are legally barred from taxation and items which have social implications (e.g. national flag, salt). Precious stones, bullion, gold and silver ornaments etc. Items of basic necessities like medicines and drugs, all agricultural and industrial inputs, declared goods & capital goods. Originally White Paper had proposed 4% rate on such goods but many States have subsequently increased thisrate to 5%. Rate of declared goods has also been increased to 5% bymany States after amendment of CST Act w.e.f All other goods not chargeable to any of the above rates. Originally White Paper had proposed 12.5% rate as the revenue neutral rate butmostofthe Stateshavee subsequently increased this rate to 13.5%. [Fig. 6]

146 Basic Concepts of Indirect Taxes Value Added Tax Largely, all States follow the above rate structure, but still there are many variations. (2) Coverage of goods under VAT: As per the White Paper, generally, all the goods, including declared goods will be covered under VAT and get the benefit of input tax credit. GOODS NOT COVERED UNDER VAT PETROL DIESEL ATF OR OTHER MOTOR SPIRIT LIQUOR LOTTERY TICKETS [Fig. 7] The few goods which will be outside VAT will be liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. Though sale of liquor, petrol, diesel and aviation turbine fuel (ATF) is charged to tax under VAT laws in many States, taxes paid on them are not allowed as credit to the buyer. In other words, they are outside the VAT chain. ATF and petroleum products are liable to minimum 20% VAT in most of the States. 5.5 Input tax and output tax Input tax It is the tax paid or payable in the course of business on purchases of any goods made from a registered dealer OF THE STATE. Output tax It is the tax charged or chargeable under the Act, by a registered dealer for the sale of goods in the course of business. [Fig. 8] In simple words input tax is the tax paid by a dealer on local purchases of business inputs, which include goods that he purchases for resale, raw materials, capital goods as well as other inputs for being used directly or indirectly in his business. Output tax is the tax charged by a dealer on his sales that are subject to tax.

147 1.136 Indirect Taxes Example: A purchases inputs valuing ` 1,000 chargeable to 12.5%. In this case, ` 125 paid by A as VAT is input tax for A. When A sells goods manufactured from such inputs to B at ` 2,000 chargeable to 12.5%, ` 250 collected by A from B is the output tax for A while the same is input tax for B. Thus, it is clear that CST cannot be an input tax as it is leviable on purchases made by the dealer from outside the State. Likewise, custom duty paid on imported inputs cannot also be an input tax as it is leviable on purchases made by the dealer from outside the country. 5.6 Input tax credit (ITC) The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. Input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. Thus, CST paid on purchases made from outside the State cannot be claimed as input tax credit. (1) CST is not Vatable: Let us try to understand why CST is not Vatable with the help of the following example: Example: A dealer of Karnataka purchases goods from another dealer of Maharashtra. The Maharashtra dealer charges 2% on this sale against the C form produced by the dealer of Karnataka. The tax is deposited in the treasury of Maharashtra and thus, forms part of Maharashtra s revenue. Though its name is central sales tax but the Central Government does not get any part of this revenue and it is totally a revenue receipt of the selling state. The Karnataka dealer later sells these goods in the State of Karnataka to any other dealer or consumer and collects VAT on the same. Now the question arises whether the Karnataka dealer can claim input tax credit of the CST paid by him against his VAT liability. The answer is no as Karnataka (purchasing State) would not allow set off of a tax paid in Maharashtra (another State). However, when liability of CST arises on an inter-state sale, input tax credit can be used for set off as the revenue in this case does not go to any other State. CST leads to cascading of taxes: India has a purely unbalanced State wise economy as only some of the States are manufacturing States while majority of them are consumer states. Manufacturing States generate considerable revenues from CST. When goods purchased from manufacturing States (with CST imposed on them) are resold in these States, the tax liability of non-manufacturing States becomes very high on account of VAT and CST. (2) Coverage of ITC: Input tax credit is available in respect of input tax paid on purchase of inputs and capital goods. (i) Inputs: ITC is allowed to a registered dealer for purchase of any goods made within the State from a dealer holding a valid certificate of registration under the Act. Further, the ITC is given to both manufacturers and traders for purchase of inputs/supplies meant for both sale within the State as well as to other States, irrespective of when these will be utilized/sold.

148 Basic Concepts of Indirect Taxes Value Added Tax (ii) Capital goods: (a) Meaning of capital goods: Capital goods include plant and machinery, furniture, fixture, electrical installations, vehicles etc. (other than raw material) purchased by the registered dealer or manufactured by the registered dealer himself. Input tax paid on purchase of capital goods as also on the raw materials used for manufacturing the capital goods, is eligible for ITC. (b) Need of ITC for input tax paid on capital goods: By extending ITC on capital goods, the cascading effect of taxes (tax on tax) is avoided. If VAT paid on capital goods is allowed as ITC, deprecation is claimed on the value excluding VAT. This reduces the cost and ultimately, the selling price. (c) Policy in White Paper: ITC on capital goods is also available for traders and manufacturers. Tax credit on capital goods can be adjusted over a maximum of 36 equal monthly installments. The States can, at their option, reduce the number of installments. For instance, in Maharashtra full ITC on capital goods is available in the month of purchases itself. However, if the capital asset is sold within the period of 36 months, proportionate ITC is withdrawn. There is a negative list of capital goods (on the basis of principles already decided by the Empowered Committee) not eligible for input tax credit. The allowable set off on capital goods is part of normal set off. The dealer can adjust this set off against his other VAT liability. (3) Purchases eligible for availing input tax credit: For the purpose of claiming ITC, the taxable goods should be purchased for any one of the following purposes- (i) for sale/resale within the State; (ii) for sale to other parts of India in the course of inter-state trade or commerce; (iii) to be used as- (a) containers or packing materials; (b) raw materials; or (c) consumable stores, required for the purpose of manufacture of taxable goods or in the packing of such manufactured goods intended for sale in the State or in the course of inter-state trade or commerce; (iv) for being used in the execution of a works contract; (v) to be used as capital goods required for the purpose of manufacture or resale of taxable goods; (vi) to be used as (a) raw materials;

149 1.138 Indirect Taxes (b) capital goods; (c) consumable stores and (d) packing materials/containers for manufacturing/packing goods to be sold in the course of export out of the territory of India; (vii) for making zero-rated sales other than those referred to in clause (vi) above. (4) Purchases not eligible for input tax credit: ITC may not be allowed in the following circumstances- (i) purchases from unregistered dealers [as he cannot charge VAT]; (ii) purchases from registered dealer who opts for composition scheme [Concepts relating to Composition Scheme have been discussed under Heading 5.8 of this Unit.] (iii) purchase of goods as may be notified by the State Government; (iv) purchase of goods where the purchase invoice is not available with the claimant or there is evidence that the same has not been issued by the registered selling dealer from whom the goods are purported to have been purchased; (v) purchase of goods where invoice does not show the amount of tax separately; (vi) purchase of goods for being utilized in the manufacture of exempted goods or purchase of goods when the sales are exempt [However, in some States partial input tax credit is available even when sales are exempt]; (vii) purchase of goods for personal use/consumption or to be provided free of charge as gifts, free samples [partial credit is available in the State of Maharashtra]; (viii) purchase of goods like motor vehicles, toilet articles, furniture etc. which are not used in relation to production of goods or held for sale/resale; (ix) goods imported from outside the territory of India; (x) goods purchased from other States viz. inter-state purchases. Some special aspects: One to one co-relation not required: VAT does not require bill to bill co-relation between input and output. It is not necessary to ensure that ITC of only those inputs which are actually utilized in the manufacture of the output is being set off against the output tax liability. ITC can be utilized for payment of VAT on any output without waiting for the input to be actually consumed/sold. Thus, ITC is available as soon as inputs/capital goods are purchased [In case of capital goods, some States allow ITC in specified installments]. ITC in case of exports and inter-state sale: Whereas input tax credit is available on goods meant for export or inter-state sale, the same cannot be availed on goods purchased from outside India or outside the State.

150 Basic Concepts of Indirect Taxes Value Added Tax ITC allowed only if VAT paid by the seller: Input tax credit is allowed only to the extent of tax received by the State Government from the seller. Therefore, the purchasing dealer, desirous of claiming set off, should also look into the credentials of the vendor so as to be sure that he will get the set off of tax paid to him. Proportionate ITC in case of goods partially used for taxable goods: As learned before, ITC is allowed only if the goods are used for manufacture etc. of taxable goods and no credit is allowed for goods used in manufacture of tax free/exempted goods. Taxable goods are other than tax-free goods. However, where the purchased goods are used partially for the purpose of taxable goods, input tax credit is allowed proportionate to the extent the purchases are used for the purposes of taxable goods. Thus, credit relating to the goods used in manufacture of exempted goods has to be reversed. Example: A manufacturer purchases 50 kg of raw material worth ` 10,000 and pays ` 1250 VAT on it. While 20 kg of the raw material is used for manufacture of taxable goods, the remaining is used for exempted goods. Thus, ITC of ` 500 (ITC proportionate to the raw material being used in manufacture of taxable goods) can only be allowed. Stock transfer: Transfer of goods from one branch to another or consignment transfers are not liable to VAT or CST as they do not involve sale. Whereas entire ITC is allowed in case of transfer of goods within the State, partial ITC is allowed in case of inter-state transfer of goods. The tax paid in excess of 2% on (i) (ii) inputs used in the manufacture of finished goods which are stock transferred; or purchase of goods which are stock transferred to another State is available as input tax credit. Example: If goods worth ` 2,000 chargeable to 12.5% are stock transferred to a branch in another State, then ` 40 [2% of ` 2,000] would be retained and balance ` 210 would be available as credit. Exempted goods v. zero rated goods: Under VAT laws, zero percent is also a rate of tax and credit is available if final product is zero-rated e.g. in case of exports. In such a case, ITC can be utilized for payment of VAT on taxable goods sold within India. If the exports of the dealer are more than his taxable sale within India, he can get refund of the ITC available with him. However, if goods are exempted goods, then ITC on inputs used in the manufacture thereof is not allowed.

151 1.140 Indirect Taxes (5) Utilization of ITC: ITC of a period may be used as under- ITC may be used for payment of VAT on intra-state sales made during the period. Firstly If balance is available May be used for payment payable of on CST intermade sate sales during the period. Carried forward to the next period. If further balace is avaialble [Fig. 9] (6) Carrying over of tax credit: As explained above, input tax credit is first to be utilized for payment of VAT. The excess credit can be then adjusted against the CST for the said period. After the adjustment of VAT and CST, excess credit, if any, will be carried over to the end of the next year. If there is any excess unadjusted input tax credit at the second year, then the same will be eligible for refund. However, some States grant refund at the end of the first financial year itself. (7) Refund of input tax / exemption from input tax: Refund within three months in case of exports: The White Paper provides for the grant of refund of input tax paid if the goods are exported out of the country. Under the basic design of the White Paper, this refund is to be granted within a period of 3 months from the end of the period in which the transaction for export took place. Exemption/refund to SEZ and EOU Units: Units located in Special Economic Zone (SEZ) and Export Oriented Units (EOU) are granted either exemption from payment of input tax or refund of the input tax paid within three months. State Governments may reduce the time period of 3 months. Reimbursement of tax to UNO and Embassies: In some of the States, the specialized agencies of the United Nations Organization and Consulates and also Embassies of any other countries located in the State get the reimbursement of tax paid subject to fulfillment of conditions. (8) Refund of special CVD paid on goods imported by a trader: Manufacturers in India are allowed to avail CENVAT credit of special CVD paid on imported goods used in the manufacture of final products. The special CVD is 4% on imported goods in lieu of VAT [Special CVD has been discussedd in detail in Unit 3 of this Chapter]. However, a trader importing goods for further sale in India can claim refund of the special CVD paid by him, if he - charges VAT on further sale of such imported goods and

152 Basic Concepts of Indirect Taxes Value Added Tax mentions in the VAT invoice issued by him that the buyer will not be able to avail CENVAT credit of such duty. 5.7 VAT liability Value Added Tax (VAT) is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from output tax payable i.e., tax collected on sales during the payment period (say, a month). Subject to the provisions relating to credit for input tax, the net tax payable by a taxable person for a tax period can be calculated on the basis of the following formula: Net tax payable = A B, where A = Total of the tax payable in respect of taxable supplies made by the taxable person during the tax period and B = Total input tax credit allowed to the taxable person for the tax period. Net tax payable Output tax Input tax [Fig. 10] Example: A is a trader selling raw materials to a manufacturer of finished products. He imports his stock-in-trade as well as purchases the same in the local markets and sells the entire product to B. Sl. Particulars ` No. (i) A's cost of imported materials 11,250 (A has deposited ` 1250 duty on the above. Since, this is not a State VAT it will form cost of the input) (ii) A's cost of local materials 20,000 (VAT charged by local suppliers ` 2,500. Since the credit of this would be available, it will not be included in cost of input) (iii) Other expenditure (such as for storage, transport, etc.) incurred and profit earned by A 8,750 (iv) Sale price of goods 40,000 (v) VAT on the 12.50% 5,000 (vi) Invoice value charged by A to the manufacturer, B 45,000

153 1.142 Indirect Taxes A s VAT liability will be determined as under: I. A's liability for VAT ` Tax on the sale price 5,000 Less: Set-off of VAT paid on purchases On imported goods Nil On local goods 2,500 2,500 Net Tax Payable 2,500 Now B manufactures finished products from the raw materials purchased from A and other materials purchased from other suppliers. The following would be the position in his case Sl. Particulars ` No. (i) B s cost of raw materials (VAT available set off ` 5,000) 40,000 (ii) B s cost of other materials Local Purchases (VAT charged on the above ` 2,500) 20,000 Inter- State Purchases* (CST paid ` 400) 10,400 (iii) Manufacturing and other expenses incurred and profit earned by B 29,600 (iv) Sale price of finished product 1,00,000 (v) VAT on the 12.5% 12,500 (vi) Invoice value charged by B to the wholesaler, C 1,12,500 *Credit / set off for tax paid on inter-state purchases (inputs) is not allowed. II. B's liability for VAT ` ` Tax on the sale price 12,500 Less: Set-off of VAT paid on purchases To A 5,000 To other suppliers 2,500 7,500 Net Tax Payable 5,000 When C, after repacking the goods into other packing boxes, sells the finished product to a retailer, following would be the position: Sl. No. Particulars (i) C's cost of goods (VAT paid available as set off ` 12,500) 1,00,000 (ii) Cost of packing material (VAT charged on the above ` 250) 2,000 (iii) Expenses incurred and profit earned by C 18,000 (iv) Sale price of goods 1,20,000 (v) VAT on the 12.5% 15,000 (vi) Invoice value charged by C to D, a retailer 1,35,000 `

154 Basic Concepts of Indirect Taxes Value Added Tax III. C s liability for VAT ` ` Tax on the sale price 15,000 Less: Set-off of VAT paid To B 12,500 To other suppliers ,750 Net Tax payable 2,250 When D sells the goods to the consumers, the position would be as under: Sl. Particulars ` No. (i) D s cost of goods (VAT paid available as set off ` 15,000) 1,20,000 (iii) Expenses incurred and profit earned by D 20,000 (iv) Sale price of goods 1,40,000 (v) VAT on the 12.5% 17,500 (vi) Invoice value charged by D to the consumers 1,57,500 IV. D s liability for VAT ` Tax on the sale price 17,500 Less: Set-off of VAT paid to C 15,000 Net Tax Payable 2,500 Total recovery It would be seen from the above illustration that VAT is collected at each stage of production or distribution till the goods reach the hands of ultimate consumer. The revenue collection to the department is provided in the table given below: Sl. Particulars ` No. (i) Paid by suppliers selling raw materials to A 2,500 (ii) Net tax paid by A on his sales to B 2,500 (iii) Paid by suppliers selling other materials to B 2,500 (iv) Net tax paid by B 5,000 (v) Paid by suppliers selling packing materials to C 250 (vii) Net tax paid by C 2,250 (viii) Net tax paid by D 2,500 Total Recovery of Revenue 17,500 Illustration 1: If inputs worth ` 1,00,000 are purchased and sales are worth ` 2,00,000 in a month, input tax rate and output tax rate are 4% and 12.5% respectively, then what will be the input tax credit/set-off and net VAT payable?

155 1.144 Indirect Taxes Solution: S.No. Particulars ` (a) Inputs tax paid within the month (` 1,00,000 x 4%) 4,000/- (b) Input tax credit of input tax paid 4,000/- (c) Output tax payable (` 2,00,000 x 12.5%) 25,000/- (d) Net VAT payable [(c) (b)] 21,000/- Illustration 2: Compute the VAT payable and VAT credit to be carried forward, if any, from the following particulars: Inputs purchased within a month ` 10,00,000 Outputs sold in the month ` 7,50,000 Input tax and output tax rate 12.5% Solution: S.No. Particulars ` (a) Input tax 12.50% on ` 10,00,000 1,25,000 (b) 12.5% on sale of goods of ` 7,50,000/- during the month 93,750 Net VAT payable during the month (b) (a) Tax credit to be carried to the next month (a) (b) 31,250 Illustration 3: Compute the net VAT payable and VAT credit to be carried forward, if any, from the following particulars: Tax paid on purchases made in the State within a month 10,000 Tax charged for sales in the State within a month 4,500 CST charged for inter-state sales within a month 15,000 Solution: Net VAT payable (` 4,500 ` 10,000) Excess credit (` 10,000 - ` 4,500) 5,500 CST to be paid to Government (` 15,000 ` 5,500) 9,500 VAT credit to be carried forward Illustration 4: From the following particulars, compute the Net VAT liability of the month and VAT credit to be carried forward, if any. NIL ` ` Nil NIL

156 Basic Concepts of Indirect Taxes Value Added Tax Particulars (` ) (i) Inputs/supplies purchased during the month 1,00,000 (ii) Capital goods purchased during the month 10,00,000 (iii) Sales during the month 10,00,000 VAT rate on purchases of inputs, capital goods and sales is 12.5%. Solution: Particulars (` ) VAT paid on procurement of inputs/supplies 12,500 VAT paid on procurement of capital goods 1,25,000 VAT credit available in the month 1,37,500 Output VAT on sales 1,25,000 Net VAT payable during the month Nil Carry over of tax credit for set off during the next month 12,500 Illustration 5: R. Ltd. of Mumbai made a total purchases of input and capital goods of ` 60,00,000 during the month of February, The following further information is available: (i) Goods worth ` 15,00,000 were purchased from Assam on which 2% was paid. (ii) The purchases made in February, 2013 include goods purchased from unregistered dealers amounting to ` 18,50,000. (iii) It purchased capital goods (not eligible for input tax credit) worth ` 6,50,000 and those eligible for input tax credit for ` 9,00,000. (iv) Sales made in Mumbai during the month of February, 2013 is ` 10,00,000 on which VAT at 12.5% is payable. All purchases given are exclusive of tax. 4% is paid on local purchases. Calculate the: (a) amount of purchases eligible for input tax credit. (b) amount of input tax credit available for the month of February, (c) Net VAT payable for the month of February, Input tax credit on eligible capital goods is available in 36 equal monthly installments. Solution: Computation of purchases eligible for input tax credit, input tax credit available for February, 2013 and net VAT payable for the month:-

157 1.146 Indirect Taxes S. No. Particulars ` (i) Goods purchased from Assam on which 2% was paid - (Purchases made from outside the State on which CST is payable are not eligible for input tax credit) (ii) Purchases from unregistered dealers - (Purchases from unregistered dealers are not eligible for input tax credit) (iii) Capital goods eligible for input tax credit 9,00,000 (iv) Balance purchases liable to VAT and thus, are eligible for input tax credit 11,00,000 (` 60,00,000 (` 15,00,000 + ` 18,50,000 + ` 6,50,000 + ` 9,00,000) Purchases eligible for input tax credit 20,00,000 VAT paid on purchases eligible for input tax credit 44,000 (` 11,00,000 x 4%) VAT paid on capital goods eligible for input tax credit (input tax credit available in 36 equal monthly installments) ` 9,00,000 4% 1, Input tax credit available for February, ,000 Output VAT payable (` 10,00,000 x 12.5%) 1,25,000 Less: Input tax credit available 45,000 Net VAT payable 80, Composition scheme for small dealers (1) Threshold for registration: A dealer is a person who purchases, sells, supplies or distributes the goods in the course of his business for valuable consideration. The White Paper provides that registration for VAT is not compulsory for dealers having gross turnover up to ` 5 lakh. However, subsequently States have been allowed to increase such threshold limit to ` 10 lakh. Most of the States have kept the threshold limit for registration at ` 5 lakh. In case of Karnataka, the limit is ` 2 lakh. (2) Composition Scheme: VAT system requires elaborate record keeping and detailed accounting, which increases the compliance cost of the dealers. Small dealers generally do not have the expertise and the knowledge to comply with requirements relating to records and accounts.

158 Basic Concepts of Indirect Taxes Value Added Tax The White Paper, therefore, has provided a simple optional composition scheme for small registered dealers where tax is paid at a small percentage of the gross turnover. The scheme entails a simpler method of accounting for VAT. Input tax credit is not allowed under the scheme and the dealer opting for the scheme is not authorized to issue Vatable invoices. Composition rate: The Empowered Committee has permitted the States to reduce the rate of composition tax to as low as 0.25 %. The composition tax at the rate decided by the State Governments can be levied on the taxable turnover. The State Governments may also provide for different types of composition schemes to be notified for different classes of retailers. (3) Eligible dealers: A dealer is eligible to opt for the Composition Scheme (scheme) if- he is a registered dealer; he is liable to pay tax under the respective State VAT Acts; his turnover does not exceed ` 50 lakhs in the last financial year; and all his purchases and sales are within the State. [Fig. 11] (4) Non-eligible dealers: The following dealers are not eligible for the scheme: dealer making inter-state purchases; dealer making inter-state sales; dealer importing the goods for sale in India; dealer stock transferring goods outside the State; dealer exporting the goods; dealer desirous of issuing VAT-able invoice. [Fig. 12] (5) Exercising of option: The dealer should not have any stock of goods which are brought from outside the State on the day he exercises his option to pay tax by way of composition. He should not use any goods brought from outside the State after such date. He should also not claim input tax credit on the inventory available on the date on which he opts for composition scheme. (6) Advantages and disadvantages of the scheme: The advantages and disadvantages of the Scheme are tabulated in figure 13 given in the next page. The scheme is basically useful for the dealers (i) who directly sell to final consumers, who cannot avail any input tax credit; or (ii) who cannot maintain elaborate records required for availing input tax credit.

159 1.148 Indirect Taxes ADVANTAGES Minimum records: If a dealer avails this scheme, he need not maintain any statutory recordsasprescribed under the respective State VAT Acts. Only the records for purchase, sales, inventory have to be maintained. Simple tax calaculation: Generally, a small tax is payable (normally 4% or lower). Simple return: A simple return form covers longer return period under such schemes. DISADVANTAGES Non availability of input tax credit: A dealer opting for the scheme cannot avail input tax credit on purchases made by him. Thus, it adds to the cost of the goods as the tax cannot be passed on. VAT chain gets broken: Since, a buyer purchasing from the composition dealer does not get any tax credit, the VAT chain gets broken, and the benefit of tax paid earlier is not passed on to the subsequent buyers. This ultimately leads to cascading of taxes. [Fig. 13] 5.9 VAT AND SALES TAX INCENTIVES During the sales tax regime, State Governments used to offer sales tax incentives to new industries set up in the State with the ultimate objective of the development of the State. By and large the incentives were given in three modes as describedd below:- Exemption from tax Deferment of tax liability Remission of tax Neither tax charged nor tax collected by the eligible industry. Input tax also not payable on purchases of raw materials. Exemption ceases either with the expiry of exemption exemption period or the amount, whichever occurs first. Tax collected buyers but the from the payment thereof to the Government deferred. After the expiry of the prescribed period, the liability to be paid in specified installments. Tax collected from the buyers but the payment thereof remitted. Input tax paid on purchases by the unit to be refunded. [Fig. 14] However, any exemption from tax is against the principles of VAT as it breaks the VAT chain. VAT system works on the basis of tax credit passed at each stage of production and

160 Basic Concepts of Indirect Taxes Value Added Tax distribution through issuance of tax invoices. Therefore, the dealers effecting exempted sales break the VAT chain as they are not allowed to avail input tax credit and issue tax invoices to pass on the credit. State Governments, therefore, stopped giving incentives to new industries after January, Howbeit, incentives already given to industries set up prior to January, 2000 were continued under the VAT regime by converting them to deferral schemes so that such industries could pass on the benefit of VAT to their buyers VAT AND WORKS CONTRACT (1) Works contract liable to VAT: As learned in previous Unit, works contract is a deemed sale, which involves transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Sub-clause (b) of clause (29A) of the Article 366 of the Constitution inter alia provides that the term "tax on sale or purchase of goods" include a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. Therefore, works contract transactions, when executed within the State, are subject to VAT. The definition of works contract provided under various State VAT laws are largely based on the definition of works contract as provided under Central Sales Tax Act [Refer Unit-4 for the definition of works contract under CST Act]. Example: Construction of a new building, turnkey projects including engineering, procurement and construction (EPC) or commissioning projects etc. are works contracts. (2) Taxable turnover for works contract: Works contract is a composite contract of goods and services. While VAT is leviable on goods involved in the execution of works contract, service tax is levied on value of services. (i) Taxable turnover where labour and other service charges are quantifiable Taxable turnover to be contract price less labour and other service charges: Turnover for imposition of VAT in relation to the transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract, shall mean sale price of goods in which there is transfer of property. The amount representing labour and other service charges incurred for such execution has to be excluded from the contract price to arrive at the taxable turnover for imposition of VAT [Refer Gannon Dunkerly decision discussed in the previous Unit]. (ii) Taxable turnover where labour and other service charges are not quantifiable (a) Taxable turnover to be cost of goods plus cost of transfer/conversion and profit margin: Where such labour and other service charges are not quantifiable, the sale price shall be the cost of acquisition of the goods and the margin of profit on them prevalent in the trade plus the cost of transferring the property in the goods and all other expenses in relation thereto till the property in them, whether as such or in any other form, passes to the contractee and where the property passes in a different form, the sale price shall include the cost of conversion.

161 1.150 Indirect Taxes (b) Standard rate of deduction: Alternatively, dealers can also make use of the standard rate of deduction provided in the State VAT laws for deducting labour and other like charges in the contract to arrive at the taxable turnover for imposition of VAT. (3) Tax rates: (a) Schedule rate: As a basic feature, tax is chargeable on the transfer of property in the goods involved in the execution of a works contract at the rates prescribed for the concerned goods in the schedules of the concerned State VAT legislation. Where the value of each item of material transferred in the course of execution of a works contract is identifiable, tax is charged on the value of individual items of materials as provided under the schedules to the concerned State VAT legislation. The contractor is entitled to avail input tax credit on inputs. (b) Revenue neutral rate: If the values of individual goods are not identifiable, contractor can pay tax at Revenue Neutral Rate (RNR - generally 12.5%/13.5%) after deducting the value attributable towards labour and other like charges. Illustration 6: Determine the taxable turnover, input tax credit and net VAT payable by a works contractor from the details given below on the assumption that the contractor maintains sufficient records to quantify the labour charges. Assume output VAT at 12.5%. Particulars ` (in lakh) (i) Total contract price (excluding VAT) 100 (ii) Labour charges paid for execution of the contract 35 (iii) Cost of consumables used not involving transfer of property in goods 5 (iv) Material purchased and used for the contract taxable at 12.5% VAT (VAT included) 45 The contractor also purchased a plant for use in the contract for ` 10.4 lakh (inclusive of VAT). In the VAT invoice relating to the same, VAT was charged at 4% separately. Assume 100% input tax credit is available on capital goods immediately. Make suitable assumption wherever required and show the working notes. Solution: Under works contract, where labour and service charges are quantifiable, the turnover for imposition of VAT is the contract price less the labour and other charges incurred for such execution. Computation of the taxable turnover, input tax credit and net VAT payable by the works contractor: Particulars ` ` Total contract price 1,00,00,000 Less : Deductions admissible 1. Labour charges paid for executing the contract 35,00, Cost of consumables in which no property is transferred 5,00,000

162 Basic Concepts of Indirect Taxes Value Added Tax Total deductions 40,00,000 Taxable turnover 60,00,000 Output VAT 12.5% (on ` 60,00,000) [A] 7,50,000 Less : Admissible input tax credit 1. On material (` 45,00,000 x 12.5/112.5) 5,00, On plant (` 10,40,000 x 4/104) 40,000 Input tax credit [B] 5,40,000 Net VAT payable [A] [B] 2,10,000 (4) Composition Scheme: The salient features of the Composition Scheme provided under various State VAT Acts are: VAT legislations provide for an optional Composition Scheme to collect tax on works contracts in a simple manner so as to minimize the inconvenience caused to the assessees. Tax is paid at a composite rate on the gross contract value. The tax rate is generally lower in such scheme. Input tax credit is not allowed under the scheme. However, in some States (e.g. Maharashtra) partial input tax credit is granted. (5) Input tax credit on capital goods: Several kinds of works contracts do not involve any manufacturing or processing of goods e.g. contracts for construction of roads, bridges, etc., and yet capital goods of substantial value are used in the execution of such contracts. Majority of the VAT legislations provide for availing of input tax credit on capital goods only where such goods are used in manufacturing or processing of goods VAT and Lease Transactions (1) What is a lease? A lease is a special type of transaction, under which a party owning the asset (called the 'lessor') provides that asset for use over a certain period of time to another party (called the 'lessee') for consideration (called 'rentals'). The legal ownership of the asset remains with the lessor, but the lessee retains the possession and uses the asset over the period of the lease. The characteristics of a lease can be summarized as under: There must be a lessor and a lessee both competent to contract; There must be an asset to be leased; Actual possession and control on the asset must be transferred; There must be an acceptance of the leased property; There must be transfer of right of enjoyment by the lessor to the lessee; and There must be a consideration. [Fig. 15]

163 1.152 Indirect Taxes (2) Lease transactions are liable to VAT: As learned in previous Unit, lease is a deemed sale. Sub-clause (d) of clause (29A) of Article 366 of the Constitution inter alia provides that tax on sale or purchase includes a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. In common parlance, these transactions are known as lease of goods and the tax on these sales is referred to as "lease tax". Therefore, lease transactions when effected intra-state are liable to VAT. Inter state leasing is subject to CST. However, if an asset is given on rent for use but the complete possession and control of the asset is not handed over, the transaction is not a deemed sale as it is not a transfer of right to use. In such a case, it becomes a service liable to service tax. Example: If a machinery is given on rent but the operator thereof is provided by the person giving the machinery for use, the transaction becomes a service as complete possession and control of the asset is not handed over. However, if the machinery is given on rent with full control and possession (the person taking the machine on hire is free to use it as per his requirements) then the transaction becomes a deemed sale. Sub-lease: Transfer of the right to use goods does not require that the goods should be owned by the person effecting such transfer. Accordingly, sub-lease of an asset too can be taxed, unless the State Value Added Tax law has provided for the levy of tax only at one stage. (3) Taxable event: Taxable event is the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Thus, a transfer which is gratuitous is not taxable. Likewise, transfer of the right to use immovable property - not being goods - like renting a house or factory is not taxable. (4) Taxable turnover: Normally, the sale price means the amount of valuable consideration paid or payable for any sale made during the given period. It also includes some other charges before delivery thereof. However, certain States have provided for the deduction of interest or finance charges for the purpose of determination of sale price/taxable turnover. (5) Input tax credit: (i) Input tax credit allowed on purchase of the asset which is to be leased: The lessor pays VAT (input tax) at the time of procurement of goods. However, liability to pay VAT (output tax) on lease rentals is spread over the tenure of the lease. Therefore, some States provide for utilization of input tax credit for paying output tax only over the entire period of lease. This results in accumulation of input tax credit in the hands of the lessor for a long period of time. However, States like Maharashtra have provided for immediate utilization of such input tax credit against payment of any tax. (ii) Input tax credit as capital goods: The assets given on lease are generally capitalized by the lessor in his books and are treated as capital assets. Thus, provision relating to input tax credit on capital goods apply in this case also, e.g. if VAT law provides to give

164 Basic Concepts of Indirect Taxes Value Added Tax input tax credit on capital goods in 36 months, then irrespective of period of lease, input tax credit would be available only in 36 months. (6) Maintenance of leased asset: Maintenance of the leased asset involving supply of materials for maintenance/repair, which are in the nature of consumables, by the lessor does not amount to works contract, as there is no transfer of property in such materials to the lessee. Thus, there would be no VAT on the value of the consumables used during maintenance/repair of the asset. In such a case, the contract becomes a service contract liable to service tax. However, if parts are also supplied during the maintenance, then such contract becomes a works contract liable to VAT as there is a transfer of property in goods involved in the execution of the contract. In such a case, the materials required for such maintenance/repair would be input for sale and input tax credit will be available. (7) Sale of leased asset after lease period: Sale of a leased asset after the lease period is over is taxable in the same manner in which normal sale of such asset would have been taxed. Normally, such sale is effected to the same lessee and hence such sale would be a local one exigible to tax under the VAT laws of the State in which the asset is located VAT and Hire-Purchase Transactions (1) Hire-purchase: Hire-purchase is a type of installment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Under this transaction, the hirer acquires the goods immediately on signing the hire-purchase agreement but the ownership or title of the same is transferred only when the last installment is paid. In the case of hire-purchase, property passes in the goods when the hirer exercises his option to purchase the goods subject to the fulfillment of the terms of the agreement and then the transaction fructifies into a concluded (normal) sale. Hire-purchase Ownership of the goods remains with the seller until the last installment is paid. Buyer gets the ownership only after paying the last installment. Installment payment system Buyer gets the ownership of the goods with the payment of the first installment. [Fig. 16]

165 1.154 Indirect Taxes It may be noted that in hire-purchase transactions, the word 'purchase' is of primary significance while 'hire' is an adjunct. In a contract of hire-purchase the contract is for 'purchase' with the attributes of hire and not 'hire with the attributes of a purchase. (2) Hire-purchase liable to VAT: As learned in previous Unit, hire purchase is a deemed sale. Sub-clause (c) of clause (29A) of Article 366 of the Constitution inter alia provides that tax on sale or purchase includes a tax on the delivery of goods on hire-purchase or any system of payment by installments." By virtue of this sub-clause, State legislations have been able to deem that a sale takes place on the date of delivery of the goods on hire purchase notwithstanding the fact that the option to purchase is exercised only at the end when the title of the goods as per the terms stands transferred from the dealer to the hirer. Therefore, intra-state hire-purchase transactions are liable to VAT. Inter state hire-purchase transactions are subject to CST. Under VAT laws of different States, hire-purchase and installment sales are at par with normal sales and hence the provisions of the State VAT laws as applicable to normal sales are equally applicable to hire-purchase and installment sales. Pure financial transactions (Hire-purchase finance) not liable to VAT: Transactions which are purely of a financial nature between the financier and the hirer are not covered by subclause (c) of clause (29A) of Article 366. Where it is explicit in the hire-purchase contract that the reservation of title by the financier is merely a matter of security, such a transaction is a pure financial transaction. There is no real sale of the asset by the financier to the hirer and thus, such pure financial transactions are not liable to VAT. (3) Taxable event: The definition of sale under value added tax laws of various States provides that the taxable event will be the actual or physical delivery of goods on hire purchase or any system of payment by installments. It is implicit that such transaction should be for monetary consideration. It is important to note that in case of hire-purchase transactions, the delivery of the goods has been made the taxable event and not the completed sale on payment of the last installment. (4) Input tax credit: The hire purchase transaction is at par with normal sale transaction. Therefore normal provisions relating to input tax credit apply in this case also. However, some States have provided for prorata credit. Some special aspects: Liability to tax when sale concludes: A debatable question which arises is whether in case of hire-purchase, VAT will have to be paid again at the time when transaction fructifies into a concluded sale, inspite of tax having been deposited on installment (payable as and when due, whether or not recovered). Answer to this problem depends mostly upon the provisions of the VAT laws of the States in which the goods are located when the transaction fructifies into a concluded sale. One view is that when the transaction fructifies into a concluded sale, tax will not be payable as tax has already been paid on installment. However the other view is that,

166 Basic Concepts of Indirect Taxes Value Added Tax earlier tax was a tax on delivery of the goods on hire-purchase or installment. Therefore, at that time only the consideration received for hire-purchase or installment was taxed and the consideration receivable at the time of concluded sale does not get taxed. Hence, tax is payable again on the fructified sale on the depreciated value of the asset or its market value. The second view appears to be logical. However, if no consideration is payable on fructified sale, then tax is not attracted. Finance charges/interest: It is common knowledge that the installment fixed for payment in the case of a hire-purchase arrangement involves an element of interest or finance charges in addition to the price of the goods sold. While some of the State VAT legislations have provided for deduction of such interest or finance charges in arriving at the sale price to be treated as turnover in a hire purchase transaction, some States have not done so. Goods returned: VAT is payable on the date of delivery of the goods. If for any reason the goods are returned, then refund of tax will have to be claimed as per the provisions of respective State VAT laws. In substance, this is a sales return. Many States have provided a time limit for granting the claim of goods returned. Therefore, if the goods are not returned during that specified period, no benefit will be available. Unpaid installments/ forfeited installments: If for any reason, the transaction of hire purchase fails, then the vendor takes possession of the goods. Normally, in such cases the installment received for the intervening period are forfeited VAT and sale of food articles As per clause (f) of Article 366 (29A) of the Constitution, tax on sale or purchase includes a tax on supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service is for cash, deferred payment or other valuable consideration. Thus, sale of food in hotel is a deemed sale liable to VAT. Service tax law considers that such a transaction involves element of service also and thus, the service portion involved in such a sale is declared to be a service liable to service tax Deficiencies in State-Level VAT The State-Level VAT in India is not a perfect system of VAT. It has the followings flaws: (i) Non-uniformity in VAT rates across the country: One of the primary reasons for implementation of VAT had been to do away with the multiple rates of sales tax prevalent in different States leading to unhealthy competition between the States and distorted economic development of the country. However, under VAT regime also States have deviated from the agreed rate structure prescribed by the White Paper to suit their individual requirements. Thus, in the present scenario also, VAT rates are not uniform all over India.

167 1.156 Indirect Taxes (ii) Non-uniformity in provisions of VAT laws across the country: The provisions of VAT Acts and Rules as also the varied procedures are not uniform across the country. (iii) CST non-vatable: Non-availability of credit of central sales tax leads to cascading of taxes. (iv) Double taxation: There is no clear distinction between goods and services which leads to double taxation as both Union and State Governments tax the same transaction in different ways i.e., both service and VAT tax are levied on the same transaction. Union Government treats the transaction as service and levies service tax while State Governments treat the transaction as sales and levy State VAT. For instance, both VAT and service tax are levied in case of software. (v) Hurdles in movement of inter-state goods: Since, the State-Level VAT is not a National VAT, goods moving from one State to another have to cross through check posts at State borders which causes delays, corruption and harassment VAT procedures 2 (1) Registration: Registration is the process of obtaining certificate of registration (RC) from the authorities. A dealer registered under a VAT Act is called a registered dealer. Any dealer, who intends to carry on the business of purchase and sale of goods in the State and is liable to pay tax, cannot carry on the business unless he is registered and holds a valid registration certificate under the Act [Refer Heading 5.8 of this Unit for discussion on threshold for registration]. Tax Payer s Identification Number (TIN): TIN (Tax Payer's Identification Number) is the registration number of the dealer consisting of 11 digit numerals throughout the country. First two characters represent the State code as used by the Union Ministry of Home Affairs. The set of the next nine characters are however, different in different States. (2) Invoice: Invoice is a document listing goods sold with price, tax charged and other details as may be prescribed and issued by a dealer authorized under the Act. The White Paper provides that: (i) Every registered dealer whose turnover of sales exceeds the specified amount shall issue to the purchaser a serially numbered tax invoice, cash memo or bill with the prescribed particulars. (ii) The tax invoice shall be dated and signed by the dealer or his regular employee, showing the required particulars. (iii) The dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. 2 Though the basic concepts relating to VAT apply in respect of all the States, the procedural law differs on many counts from State to State. Therefore, a bird s eye view of the significant VAT procedures has been given in this Unit with the objective of familiarizing the students with the basic aspects of significant procedures under VAT Laws.

168 Basic Concepts of Indirect Taxes Value Added Tax Importance of VAT invoice (tax invoice): Invoices are crucial documents for administering VAT. In the absence of invoices, VAT paid by the dealer on the inputs/capital goods cannot be claimed as set off. Invoices should be preserved with full care. In case any original invoice is lost or misplaced, a duplicate authenticated copy must be obtained from the issuing dealer. Contents of VAT invoice: Generally, the various legislations provide that the tax invoice should have the following contents: (i) the words tax invoice in a prominent place; (ii) name and address of the selling dealer; (iii) registration number of the selling dealer; (iv) name and address of the purchasing dealer; (v) registration number of the purchasing dealer (may not be required under all VAT legislations); (vi) pre-printed or self-generated serial number; (vii) date of issue; (viii) description, quantity and value of goods sold; (ix) rate and amount of tax charged in respect of taxable goods; (x) signature of the selling dealer or his regular employee duly authorized by him for such purpose. (3) Returns: A registered dealer has to required to file monthly/quarterly/annual returns as per the provisions of the State Acts/Rules along with the tax payment challans. The returns should disclose the details like output tax liability, value of input tax credit, payment of VAT. The dealer also has the option of filing the revised return within the stipulated time period under the VAT provisions. The composition dealers are also required to file the return on periodical basis as stipulated under the respective State VAT provisions. (4) Audit by Chartered Accountants: Apart from the Departmental Audit, many States have also incorporated the concept of audit of accounts by Chartered Accountants. However, auditing for all types of dealers may not be necessary. For example, in Maharashtra and Rajasthan, the dealer whose turnover exceeds ` 40 lakhs in any year is required to get his accounts audited in respect of such year.

169 2.1 Introduction 2 Basic Concepts of Service Tax Government's primary sources of revenue in India are direct and indirect taxes. Central excise duty on the goods manufactured/produced in India and customs duties on imported goods constitute the two major sources of indirect taxes in India. However, revenue receipts from customs & excise have been constantly declining due to World Trade Commitments and rationalization of commodity duties. On the other hand, service sector has been growing phenomenally thereby pushing back the contribution of traditional contributors like agriculture and manufacturing sectors to GDP. In 2002, the service sector accounted for 49.2% of GDP while agriculture accounted for 25% and industry 25.8% of GDP. Service sector is now occupying the center stage of the economy so much so that in the contemporary world, development of service sector has become synonymous with the advancement of the economy. Continued growth in GDP accompanied by higher rate of growth in service sector promises new and wider avenues of taxation to the Government. Government's argument was that substantial revenue should come from the service sector and the tax on goods (excise duty) should be complemented with the tax on services. If the tax on services reduces the degree of intensity of taxation on manufacturing and trade without forcing the Government to compromise on the revenue needs, it will enable better pricing of its products by the manufacturing sector in the global market. With these objectives in mind, service tax was introduced in India in 1994 and today it is envisaged as the tax of the future. 2.2 Genesis of service tax in India The imposition of service tax was in sequel to the Report of the Chelliah Committee on Tax Reforms. On these recommendations, Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech (year ) introduced the new concept to tax services by mentioning There is no sound reason for exempting services from taxation, when goods are taxed and many countries treat goods and services alike for tax purposes. The Tax Reforms Committee has also recommended imposition of tax on services as a measure for broadening the base of indirect taxes. I, therefore, propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers.'' Thus, initially service tax was imposed on 3 services. The baton then passed on to successive finance ministers who widened the service tax net in their rein. This selective approach of taxation of services continued till With the

170 Basic Concepts of Service Tax 2.2 introduction of the Finance Act, 2012, India embraced the new system of taxation of services by way of the introduction of negative list. Hence, with effect from July 1, 2012, there is comprehensive taxation of the entire service sector. 2.3 Constitutional Provisions Initially there was no specific entry in the Union List for levying service tax. Service tax was levied by the Central Government by drawing power from entry 97 of the Union List. Entry 97 is a 'residuary entry' in List-I, which has been reproduced below: 97 - Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists. The 'residuary entry' provides wide powers to the Central Government in respect of taxation of the subjects not mentioned in the Lists given by the constitution. However, as a result of deliberations between the States and the Centre and as per the recommendations of the various expert committees, entry 92C was introduced in the VII Schedule in the Union List vide Constitution (92 nd Amendment) Act, 2003 with effect from Entry 92C reads as under: 92C - Taxes on services. A new Article 268A [Service tax levied by Union and collected and appropriated by the Union and the States] was inserted in the Constitution which reads as follows: (1) Taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of India and the State in the manner provided in clause (2). (2) The proceeds in any financial year of any such tax levied in accordance with the provisions of clause (1) shall be-- (a) Collected by the Government of India and the States; (b) Appropriated by the Government of India and the States, in accordance with such principles of collection and appropriation as may be formulated by the Parliament by law. A consequential amendment to Article 270 of the Constitution was also made to enable Parliament to formulate by law, principles for determining the modalities of levying the service tax by the Central Government and collection of the proceeds thereof by the Central Government and the State Government. With this amendment in the Constitution, the Central Government has become competent to enact a separate legislation on service tax. Note: Although Parliament has passed the Constitutional amendment making entry 92C to Union List, this provision has not yet been made effective by the Parliament. Consequently, service tax is presently collected under the powers of Entry 97 only.

171 2.3 Indirect Taxes 2.4 Sources of Service Tax Law Service tax was introduced in the year 1994 but till date, there is no independent statute for levying service tax. However, following sources provide statutory provisions relating to service tax and can be broadly grouped under the following categories: (1) Finance Act, 1994: The statutory provisions relating to levy of service tax on services were first promulgated through Chapter V of the Finance Act, Since then, Chapter V of the Finance Act, 1994 is working as the Act for the service tax levy. Later, in the year 2003, the Finance Act, 2003 inserted Chapter VA to deal with advance rulings. In the year 2004, the provisions relating to levy of education cess on the amount of service tax were made applicable through Chapter VI of the Finance (No.2) Act, 2004 and in the year 2007, the provisions relating to levy of Secondary and Higher education cess on the amount of service tax were made applicable through Chapter VI of the Finance Act, (2) Rules on service tax: Section 94 of Chapter V and section 96 -I of Chapter VA of the Finance Act, 1994 grants power to the Central Government for making rules for effective carrying out the provisions of these Chapters. Using these powers, the Central Government has issued the Services Tax Rules 1994, Service Tax (Advance Rulings) Rules, 2003, Service Tax (Registration of Special Category of Persons) Rules, 2005, Service Tax (Determination of Value) Rules, 2006, Point of Taxation Rules, 2011, Place of Provision of Service Rules, 2012 etc. Rules should be read with the statutory provisions contained in the Act. Rules are made for carrying out the provisions of the Act and the rules cannot override the provisions contained in the Act i.e. in short, the rules can never override the Act and cannot be in conflict with the same. (3) Notifications on service tax: Sections 93 and 94 of Chapter V, and section 96-I of Chapter VA of the Finance Act, 1994 empower the Central Government to issue notifications to exempt any service from service tax and to make rules to implement service tax provisions. Accordingly, notifications on service tax have been issued by the Central Government from time to time. These notifications usually declare date of enforceability of service tax provisions, provide rules relating to service tax, make amendments therein, provide or withdraw exemptions from service tax or deal with any other matter which the Central Government may think would facilitate the governance of service tax matters. (4) Circulars or Office Letters (Instructions) on service tax: The Central Board of Excise and Customs (CBEC) issues departmental circulars or instruction letters from time to time to explain the scope of taxable services and the scheme of service tax administration etc. These circulars/instructions have to be read with the statutory provisions and notifications on service tax. The circulars clarify the provisions of the Act and thus, bring out the real intention of the legislature. However, the provisions of any Act of the Parliament cannot be altered or contradicted or changed by the Departmental circulars.

172 Basic Concepts of Service Tax 2.4 (5) Orders on service tax: Orders on service tax may be issued either by the CBEC or by the Central Government. Rule 3 of the Service Tax Rules, 1994, empowers the CBEC to appoint such Central Excise Officers as it thinks fit for exercising the powers under Chapter V of the Finance Act, Accordingly, orders have been issued by the CBEC, from time to time, to define jurisdiction of Central Excise Officers for the purposes of service tax. (6) Trade Notices on service tax: Trade Notices are issued by the Central Excise/Service Tax Commissionerates. These Commissionerates receive various instructions from the Ministry of Finance or Central Board of Excise & Customs for effective implementation and administration of the various provisions of service tax law. The same are circulated among the field officers and the instructions which pertain to trade are communicated to them in the form of trade notices. Trade Associations are supplied with the copies of these trade notices. Individual assesses may also apply for copies of trade notices. The trade notice disseminate the contents of the notifications and circulars/letters/orders, define their jurisdiction; identify the banks in which service tax can be deposited; give clarifications regarding service tax matters, etc. The various components making service tax law have been represented in the following diagram: Trade Notices Orders Circulars or Office Letters (Instructions) SOURCES OF SERVICE TAX LAW Finance Act, 1994 Rules Notifications 2.5 Selective vs. comprehensive coverage Depending on the socio-economic compulsions, each country evolved a taxation system on services adopting either a comprehensive approach or a selective approach. In comprehensive approach all services are made taxable and a negative list is provided to exempt some of the services. In selective approach, selective services are subjected to service tax. While most of the developed countries, tax is levied on all the services with very few and limited exemptions.

173 2.5 Indirect Taxes India began its journey of taxation of services on July 1, 1994 with a selective approach for taxation of services. The first year had very modest collections of ` 407 crore. After appearing largely as just-another-tax for the first 8 years, with collections touching ` 3,302 crore in , service tax took some giant leaps in the next 7 years, both on the back of wider coverage as well as increase in tax rate, reaching ` 60,941 crore in Next two years saw the growth somewhat moderating with collections reaching ` 70,896 crore in The buoyancy began once again on the back of some policy initiatives and service tax contributed ` 97,444 crore during , an increase of nearly 37% over the previous year. While the revenue expectations were often exceeded in all these years the administrative challenge began to assume unmanageable proportions. The newer additions to the list of services often raised issues of overlaps with the previously existing services, confounding both sides as to whether some activities were taxed for the first time or were already covered under an earlier, even if a little less specific head. There was also a near unanimity across a wide section of thinkers that potential of service tax remained huge and largely untapped. Part of the problem identified was the lack of comprehensive taxation of services, not so much in the lack of coverage but more on account of lack of clarity and significant gaps in existing definitions, exposing the tax collection process to avoidable leakages and litigation. Budget 2012 ushered a new system of taxation of services; popularly known as Negative List effective from There was a paradigm shift from the earlier system where only services of specified descriptions were subjected to tax. In the new system all services, except those specified in the negative list, are subject to taxation. 2.6 Administration of service tax The Department of Revenue of the Ministry of Finance exercises control in respect of matters relating to all the direct and indirect taxes through two statutory Boards, namely, the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC) respectively. Matters relating to the levy and collection of all the direct taxes (income tax, wealth tax etc.) are looked after by CBDT, whereas those relating to levy and collection of indirect taxes (customs duties, central excise duties etc.) fall within the purview of CBEC. The two Boards were constituted under the Central Board of Revenue Act, The responsibility of administration and collection of service tax has also been vested upon the CBEC ('Board'). The Board administers service tax matters through the Central Excise Zones and each Zone, in turn works through Central Excise Commissionerate falling under its territory. Each zone is headed by a Chief Commissioner of Central Excise, while each Commissionerate is headed by a Commissioner of Central Excise. The Chief Commissioner of Zone exercises supervision and control over the working of the Commissionerates in the Zone and is mainly responsible for monitoring revenue collection, disposal of pendencies, redressal of grievances of trade, etc. He also ensures coordination among the Commissionerates within the Zone.

174 Basic Concepts of Service Tax Director General (Service Tax): Considering the increasing workload due to the expanding coverage of service tax, it was decided to centralise all the work and entrust the same to a separate unit supervised by a very senior official. Accordingly, the office of Director General (Service Tax) was formed in the year It is headed by the Director General (Service Tax). The functions and powers of Director General (Service Tax) are as follows: (1) To ensure that proper establishment and infrastructure has been created under different Central Excise Commissionerates to monitor the collection and assessment of service tax. (2) To study the staff requirement at field level for proper and effective implementation of service tax. (3) To study as to how the service tax is being implemented in the field and to suggest measures as may be necessary to increase revenue collection or to streamline procedures. (4) To undertake study of law and procedures in relation to service tax with a view to simplify the service tax collection and assessment and make suggestions thereon. (5) To form a data base regarding the collection of service tax from the date of its inception in 1994 and to monitor the revenue collection from service tax. (6) To inspect the service tax cells in the Commissionerate to ensure that they are functioning effectively. (7) To undertake any other functions as assigned by the Board from time to time. The Directorate of Service Tax coordinates between the CBEC and Central Excise Commissionerates. It also monitors the collection and the assessment of service tax. It compiles the service tax revenue reports received from various Central Excise Commissionerates and monitors the performances of the Commissionerates. It scrutinises the correspondences received from field formations and service providers and replies to the clarifications sought for, wherever possible. In cases where the doubts/clarification sought involves policy matter, the Directorate appraises the Board for issuing clarification/instruction. The administrative machinery of the service tax law can be understood with the help of the following diagram:

175 2.7 Indirect Taxes ADMINISTRATION OF SERVICE TAX Ministry of Finance (1) Department of Revenue (2) Central Board of Excise and Customs(3) Central Excise Zones headed by Chief Commissioners (4) Central Excise Commissionerates headed by Commissioners (5) DIRECTOR GENERAL OF SERVICE TAX (Co-ordinator between 3 & 5) Service Tax Commissionerates (6) Additional Commissioner (7) Joint Commissioner (8) Assistant Commissioner /Deputy Commissioner (9) Superintendent (10) Inspector (11) 2.7 Role of a Chartered Accountant Since with the introduction of the negative list the gamut of service tax has expanded substantially, there would be a great need for professionals to advice and assist the assessees. A Chartered Accountant with strong grounding in accounting coupled with his training and experience is well-equipped to position himself in the role as an advisor and facilitator for due compliance of service tax law. The nature of professional services could be: (1) Advisory services: With the comprehensive coverage of service tax, a great deal of professional acumen would be required to interpret and understand the law and advise the applicability of service tax qua an activity or service. A Chartered Accountant would be able to fill this void. (2) Procedural compliance: The service tax law envisages registration, payment of tax, filing returns and assessments involving interface with the Excise Department. A Chartered Accountant with his experience and expertise would be the best person to assist the assessee in all the above functions and ensure compliance. (3) Personal representation: As per the service tax law read with the Central Excise Act and Rules, a Chartered Accountant is allowed to appear before the assessment authority, Commissioner (Appeals) (first appeal) and Tribunal (second appeal). Here too with his experience and expertise a chartered accountant would be well positioned to represent his clients. When the matter goes up to the High Court or Supreme Court, the

176 Basic Concepts of Service Tax 2.8 Chartered Accountant can assist/ advise the advocates. (4) Certification and audit: With the widening of tax base there will be a phenomenal growth in the number of service tax assessees. In the ensuing years the department would have to evolve a mechanism where there is management by exception i.e. generally accept all the returns as correct and pick and choose those returns which need detailed scrutiny. In this mechanism a chartered accountant could be of great assistance. Service tax returns and financial statements could be certified by the Chartered Accountant from the perspective of service tax similar to an audit under section 44AB of the Income-tax Act. (5) Onerous task to keep pace: The service tax like excise is administered more by way of trade notices issued by various Commissionerates. A chartered accountant will have to keep himself abreast of the latest notifications and trade notices in addition to the changes in law so as to meet the client expectations. Thus, in order to render good value added services in the area of service tax a Chartered Accountant has an onerous task to keep pace with the latest in the legal front. 2.8 Extent, Commencement and Application [Section 64] (1) Extent & commencement: The Finance Act, 1994 came into force from Vide section 64(1), the provisions of the Act extends to the whole of the country except the State of Jammu and Kashmir, and vide section 64(3), the levy applies to all taxable services provided. Provisions of the Act do not extend to Jammu & Kashmir (a) Service provided in Jammu & Kashmir not liable to service tax: Since the provisions of the Finance Act, 1994 do not extend to Jammu & Kashmir, services provided in the State of Jammu and Kashmir are not liable to service tax. (b) Reason: As per Article 370 of the Constitution, any Act of Parliament applies to Jammu & Kashmir only with concurrence of State Government. Since, no such concurrence has been obtained in respect of the Finance Act, 1994; the provisions of service tax are not applicable in the state of Jammu and Kashmir. (c) Services provided from Jammu & Kashmir outside Jammu & Kashmir liable to service tax: Service tax will not be payable if services are provided in Jammu & Kashmir. However, if a person from Jammu & Kashmir provides the service outside Jammu & Kashmir in any other part of India, the service will be liable to service tax, as the location where service is consumed is relevant. Merely because the office of the service provider is situated in Jammu & Kashmir, it does not mean that service is provided in Jammu & Kashmir. (2) Levy of service tax: Levy of service tax extends to whole of India except Jammu and Kashmir. India means,

177 2.9 Indirect Taxes (a) the territory of the Union as referred to in clauses (2) and (3) of article 1 of the Constitution; (b) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976; (c) the seabed and the subsoil underlying the territorial waters; (d) the air space above its territory and territorial waters; and (e) the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof [Section 65B(27)]. Indian territorial waters extend upto 12 nautical miles from the Indian land mass. 2.9 Definition of service [Section 65B(44)] Earlier, under the selective approach of taxation of services, the word service was nowhere defined in the Finance Act, In the negative list approach of taxation of services, the definition of service gains paramount importance. In order to determine whether a person is liable to pay service tax, the first question he needs to answer is whether the activity undertaken by him comes within the ambit of definition of service. Consequently, section 65B(44) defines the word service. For ease of understanding, the definition of service tax may be divided into three sections:- I. Meaning of service Service means (i) (ii) any activity for consideration carried out by a person for another and (iii) includes a declared service. II. Exclusions However, a service shall not include:- (a) an activity which constitutes merely, (i) (ii) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment;

178 Basic Concepts of Service Tax 2.10 (c) fees taken in any Court or tribunal established under any law for the time being in force. III. Explanations Explanation 1: For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to, (A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or (B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or (C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. Explanation 2: For the purposes of this clause, transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. Explanation 3: For the purposes of this Chapter, (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. Explanation 4: A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory. I. ANY ACTIVITY FOR CONSIDERATION (a) What is an Activity? Meaning of service The word activity is a term with very wide connotation. It has not been defined in the Finance Act, However, in terms of the common understanding of the word, activity would include:- (i) an act done (ii) a work done (iii) a deed done (iv) an operation carried out

179 2.11 Indirect Taxes (v) execution of an act (vi) provision of a facility etc. Activity could be active or passive and would also include forbearance to act. Agreeing to an obligation to refrain from an act or to tolerate an act or a situation has been specifically listed as a declared service under section 66E of the Act. (b) What is a consideration? Explanation (a) to section 67 of the Act provides an inclusive definition of consideration. Hence, for better understanding, it would be preferable to refer definition of the consideration as given in section 2(d) of the Indian Contract Act, 1872 as follows- When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. In other words, consideration means everything received or recoverable in return for a provision of service which includes monetary payment and any consideration of non- monetary nature or deferred consideration as well as recharges between establishments located in a non-taxable territory on one hand and taxable territory on the other hand. Monetary consideration and non-monetary consideration 1. Monetary consideration means any consideration received in the form of money. Money means legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any such similar instrument but shall not include any currency that is held for its numismatic value. 2. Non-monetary consideration essentially means compensation in kind such as the following: Supply of goods and services in return for provision of service Refraining or forbearing to do an act in return for provision of service Tolerating an act or a situation in return for provision of a service Doing or agreeing to do an act in return for provision of service. Examples of non-monetary consideration are as follows:- (a) Rohit agrees to dry clean Shobit s clothes, and in return, Shobit agrees to click Rohit s photograph. (b) Sagar agrees not to open dry clean shop in Naresh s neighborhood, and in return, Naresh agrees not to open photography shop in Sagar s neighborhood. (c) Pushkar agrees to design Bharat s house, and in return, Bharat agrees not to object to construction of Pushkar s house in his neighborhood.

180 Basic Concepts of Service Tax 2.12 (d) Akash agrees to construct 3 flats for Bhola on land owned by Bhola, and in return, Bhola agrees to provide one flat to Akash without any monetary consideration. (c) Activity for consideration (i) Implications of the condition that activity should be carried out for a consideration :- To be taxable, an activity should be carried out by a person for a consideration. Activity carried out without any consideration like donations, gifts or free charities are therefore outside the ambit of service. For example, grants given for a research where the researcher is under no obligation to carry out a particular research would not be a consideration for such research. An act by a charity for consideration would be a service and taxable unless otherwise exempted. Conditions in a grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service. (ii) Concept of activity for consideration: The concept activity for a consideration involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e. without the express or implied contractual reciprocity of a consideration would not be an activity for consideration even though such an activity may lead to accrual of gains to the person carrying out the activity. The significant points to be noted in this regard are as follows:- 1. Direct and immediate link between activity and consideration (i) Direct link: It implies that there should be a direct link and not any casual link between activity and consideration. Services received from government against taxes paid not taxable per se, as no direct link is there. Free seminar to educate about prudent investment indirectly promoting a mutual fund, in this case also direct link is missing. Services received from a club against membership, there is a direct link of making the facilities available for use, whether or not immediately used. (ii) Immediate connection: It implies that there should be an immediate and not remote connection between activity and consideration. Consideration may actually be payable at a later point of time but linkage should be immediate. For instance, in case an award is received in consideration for life time contribution, there is no immediate connection and hence, it is not taxable e.g. Nobel Prize. 2. Not to include any activity in the absence of contractual reciprocity (i) Activity without consideration not taxable

181 2.13 Indirect Taxes Examples of an activity without consideration are as follows:- Tourism information free of charge Access to free TV channels An artist performing on a street where passersby may drop some coins in his bowl kept either after feeling rejoiced or out of compassion Large number of governmental activities for citizens (ii) Consideration without activity not taxable Examples of consideration without an activity are as follows:- Personal obligations e.g. pocket money Amount paid as alimony for divorce Donations without conditions Pure gifts Tips and ex-gratia payments 3. Consideration for service may be paid by a person other than the person receiving the benefit of the service: The consideration for a service may be provided by a person other than the person receiving the benefit of service as long as there is a link between the provision of service and the consideration. For example, holding company may pay for services that are provided to its associated companies. Whether following payments constitute a consideration for provision of service? S.No. Nature of payment Whether it is consideration for service? 1. Imposition of a fine or a penalty for violation of a provision of law. Is fine or penalty the consideration for the activity of breaking the law? 2. Amount received in settlement of dispute. In order to be service, an activity has to be carried out for a consideration. Therefore fines and penalties which are legal consequences of a person s actions are not in the nature of consideration for an activity. Would depend on the nature of dispute. Per se such amounts are not consideration unless it represents a portion of the consideration for an activity that has been carried out. If the dispute itself pertains to consideration relating to service then it would be a part of consideration. 3. Amount received as advances Such advances are consideration for the

182 Basic Concepts of Service Tax 2.14 for performance of service. 4. Deposits returned on cancellation of an agreement to provide a service. 5. Advance forfeited for cancellation of an agreement to provide a service. 6. Security deposit that is returnable on completion of provision of service. 7. Security deposits forfeited for damages done by service receiver in the course of receiving a service. 8. Excess payment made as a result of a mistake 9. Demurrages payable for use of services beyond the period initially agreed upon e.g. retention of containers beyond the normal period. agreement to perform a service. Returned deposits are in the nature of a returned consideration. If tax has already been paid the tax payer would be entitled to refund to the extent specified and subject to provisions of law in this regard. Since service becomes taxable on an agreement to provide a service such forfeited deposits would represent consideration for the agreement that was entered into for provision of service. Returnable deposit is in the nature of security and hence do not represent consideration for service. However if the deposit is in the nature of a colorable device wherein the interest on the deposit substitutes for the consideration for service provided or the interest earned has a perceptible impact on the consideration charged for service then such interest would form part of gross amount received for the service. Also security deposit should not be in lieu of advance payment for the service. If the forfeited deposits relate to accidental damages due to unforeseen actions not relatable to provision of service then such forfeited deposits would not be a consideration in terms of clause (vi) of sub-rule (2) of rule 6 of the Valuation Rules. If returned it is not consideration. If not returned and retained by the service provider it becomes a part of the taxable value. This will be consideration. II. ACTIVITY MUST BE CARRIED OUT BY A PERSON FOR ANOTHER

183 2.15 Indirect Taxes The phrase provided by one person to another signifies that there must be two distinct entities-service provider and service receiver. Hence, services provided by a person to self are outside the ambit of taxable service. For instance, services provided by one branch of a company to another or to its head office or vice-versa are not services provided by one person to another. Person includes, (i) (ii) an individual, a Hindu undivided family, (iii) a company, (iv) a society, (v) a limited liability partnership, (vi) a firm, (vii) an association of persons or body of individuals, whether incorporated or not, (viii) Government, (ix) a local authority, or (x) every artificial juridical person, not falling within any of the preceding sub-clauses [Section 65B(37)]. Exceptions General rule - Only services provided by a person to another are taxable. Explanation 2 carves out two exceptions to the general rule:- an establishment of a person located in taxable territory and another establishment of such person located in non-taxable territory are treated as establishments of distinct persons. an unincorporated association or body of persons and members thereof are also treated as distinct persons. Hence, such persons shall be deemed to be separate persons and thus, services provided by these persons would be taxable. For example, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multi-national company located outside India would be taxable provided other conditions relating to taxability of service are satisfied. III. SERVICE INCLUDES DECLARED SERVICE The provisions relating to declared service have been discussed in detail at the Final level in Paper 8: Indirect Tax Laws.

184 Basic Concepts of Service Tax 2.16

185 2.17 Indirect Taxes Exclusions (i) Exclusions from definition of service I mmovable property M ovable property A ctionable claims G oods E mployee Clause (a)(i) of exclusions: Activity to be taxable should not constitute only a transfer in title of goods or immovable property by way of sale, gift or in any other manner Mere transfer of title in goods or immovable property by way of sale, gift or in any other manner for a consideration does not constitute service. However, a transaction which in addition to a transfer of title in goods or immovable property involves an element of another activity carried out or to be carried out by the person transferring the title would not be outrightly excluded from the definition of service. Meaning of goods and immovable property Goods means every kind of movable property other than actionable claim and money; and includes securities, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale [Section 65B(25)]. Immovable property has not been defined in the Act. Therefore the definition of immovable property in the General Clauses Act, 1897 will be applicable which defines immovable property to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. (ii) Clause (a)(ii) of exclusions: Activity to be taxable should not constitute merely a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution It may be noted that although the transfer of title by way of sale of goods is already excluded under clause (i) above, deemed sales have been excluded specifically by this clause. The reason for the same is that some categories of deemed sales do not involve transfer of title in goods like transfer of goods on hire-purchase or transfer of right to use goods. Accordingly, deemed sales have been specifically excluded. The six categories of deemed sales as defined in article 366(29A) have been discussed in details in Unit 4: Central Sales tax.

186 Basic Concepts of Service Tax 2.18 (iii) Clause (a)(iii) of exclusions: Transactions only in money or actionable claims do not constitute service Clause (a)(iii) of exclusions has to be read in conjunction with Explanation 2. Explanation 2 clarifies that for the purposes of this clause, transaction in money shall not include any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. The implications of this explanation are that while mere transactions in money are outside the ambit of service, any activity related to a transaction in money by way of its use or conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination would not be treated as a transaction in money if a separate consideration is charged for such an activity. While the transaction in money, per-se, would be outside the ambit of service the related activity, for which a separate consideration is charged, would not be treated as a transaction of money and would be chargeable to service tax if other elements of taxability are present. For example, a foreign exchange dealer while exchanging one currency for another also charges a commission (often inbuilt in the difference between the purchase price and selling price of forex). The activity of exchange of currency, per-se, would be a transaction only in money, the related activity of providing the services of conversion of forex, documentation and other services for which a commission is charged separately or built in the margins would be very much a service. Whether the following transactions come under transaction only in money? S.No. Nature of transactions 1. A business chit fund 2. Making of a draft or a pay order by a bank be a transaction Whether come under transaction only in money? No. In business chit fund since certain commission received from members is retained by the promoters as consideration for providing services in relation to the chit fund, it is not a transaction only in money. The consideration received for such services is therefore chargeable to service tax. No. Since the bank charges a commission for preparation of a bank draft or a pay order it is not a transaction only in money. However, for a draft or a pay order made by bank the service provided would be only to the extent of commission charged for the bank draft or pay order. The money received for the face value of such instrument would not be consideration for a service since to the extent of face value of the instrument it is only a transaction in money. 3. An investment Investment of funds by a person with another for which the return on such investment is returned or repatriated to the investors without retaining any portion of the return on

187 2.19 Indirect Taxes 4. Debt collection services or credit control services 5. Sale, purchase, acquisition or assignment of a secured debt like a mortgage 6. Remittance of foreign currency in India from overseas such investment of funds is a transaction only in money. Thus a partner being admitted in a partnership against his share will be a transaction in money. However, if a commission is charged or a portion of the return is retained as service charges, then such commission or portion of return is out of the purview of transaction only in money and hence taxable. Also, if a service is received in lieu of an investment it would cease to be a transaction only in money to the extent the investment represents the consideration for the service received. No. Such services provided for consideration are taxable. Yes. However, if a service fee or processing fee or any other charge is collected in the course of transfer or assignment of a debt then the same would be chargeable to service tax. Yes. Remittance of foreign currency in India from overseas is a transaction in money Money means legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any such similar instrument but shall not include any currency that is held for its numismatic value [Section 65B(33)]. Actionable claim means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent [Section 65B(1)]. Illustrations of actionable claims are - --Unsecured debts --Right to participate in the draw to be held in a lottery.

188 Basic Concepts of Service Tax 2.20 (iv) Clause (b) of exclusions: Provision of service by an employee to the employer is outside the ambit of service Not all services provided by an employee to the employer are outside the ambit of services. Only services that are provided by the employee to the employer in the course of employment are outside the ambit of services. Services provided outside the ambit of employment for a consideration would be a service. For example, if an employee provides his services on contract basis to an associate company of the employer, then this would be treated as provision of service. Whether the following be regarded as services in course of employment S.No. Nature of services Whether regarded as services in course of employment 1. Services provided on contract basis by a person to another 2. Services provided by a casual worker to employer who gives wages on daily basis to the worker. 3. In case the casual workers are employed by a contractor, like a building contractor or security agency services, who deploys them for execution of a contract or for provision of security services to a client. No. Services provided on contract basis i.e. principal-to-principal basis are not services provided in the course of employment. Yes. These are services provided by the worker in the course of employment. Yes. Services provided by the worker to the contractors are in the course of employment. However, services provided by the contractor to his client by deploying such workers would not be a service provided by the workers to the client in the course of employment. The consideration received by the contractor would therefore be taxable if other conditions of taxability are present. Explanations Explanation 1 clarifies that service does not cover functions or duties performed by Members of Parliament, State Legislatures, Panchayat, Municipalities or any other local authority, any person who holds any post in pursuance of the provisions of the Constitution or any person as a Chairperson or a Member or a Director in a body established by the Central or State Governments or local authority and who is not deemed as an employee. Explanation 2 & 3 have already been discussed at the relevant places. Explanation 4 explains that a branch or an agency of a person through which the person carries out business is also an establishment of such person.

189 2.21 Indirect Taxes 2.10 Charge of Service Tax [Section 66B] Section 66B is the charging section of the Act, which provides that there shall be levied a tax (hereinafter referred to as the service tax) at the rate of 12% on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. The effective rate of service tax is 12%; plus education cess of 2% and secondary & higher education cess of 1%. (a) Provided or agreed to be provided: The implications of this phrase are Services which have only been agreed to be provided but are yet to be provided are also taxable. Receipt of advances for services agreed to be provided become taxable before the actual provision of service. Advances that are retained by the service provider in the event of cancellation of contract of service by the service receiver become taxable as these represent consideration for a service that was agreed to be provided. However, it is important to note that the liability to pay the service tax on a taxable service arise the moment it is agreed to be provided without actual provision of service. The liability to pay tax arises in such cases at the point of taxation which is determined as per the Point of Taxation Rules, 2011 (discussed in detail in Chapter 3). (b) Provided in the taxable territory: The service must have been provided in the taxable territory. Taxable territory means the territory to which the provisions of this Chapter apply i.e. the whole of territory of India other than the State of Jammu and Kashmir [Section 65(51)]. (c) Service should not be specified in the negative list: As per section 66B, to be taxable a service should not be specified in the negative list. The negative list of services has been specified in section 66D of the Act Education Cess and Secondary and Higher Education Cess (a) Education cess (EC): An education cess is 2%, calculated on the service tax on all taxable services. The education cess so collected is utilized for providing and financing universalized quality basic education. (b) Secondary and higher education cess (SHEC): Further, a secondary and higher education 1% is also being imposed on services liable to service tax. Thus, the effective rate of service tax becomes 12.36%. Points to be noted regarding EC & SHEC (a) Service tax, education cess and secondary and higher education cess should be shown separately in the invoice.

190 Basic Concepts of Service Tax 2.22 (b) These cesses paid on input services are available as credit for payment of cesses on output services or final products. (c) The education cess and secondary and higher education cess on taxable services are in addition to the tax chargeable on such taxable services, under Chapter V of the Finance Act, (d) The provisions of Chapter V of the Finance Act, 1994 and the rules made thereunder, including those relating to refunds and exemptions from tax and imposition of penalty, apply in relation to the levy and collection of the education cess and secondary and higher education cess also, as they apply in relation to the levy and collection of tax on such taxable services. (e) In case of a partial exemption, say by way of abatement, the cesses would be calculated on the net tax paid and not on the entire amount of tax that would have been payable. Reference to erstwhile section 66 to be construed as reference to section 66B [Section 66BA] With effect from July 1 st, 2012, references to erstwhile section 66 (charging section under the positive list approach) in Chapter V of the Finance Act, 1994 or any other Act, would be construed as reference to section 66B (charging section under the negative list approach). Consequently, reference to section 66 appearing in the Finance (No.2) Act, 2004 [in the context of education cess] and the Finance Act, 2007 [in the context of secondary and higher education cess] will also be read as 66B, in accordance with this new section Negative list of services [Section 66D] The charging section-section 66B of the Finance Act, 1994, inter alia, provides that service tax shall be levied on all services, except the services specified in the negative list. Accordingly, section 66D of the Act has specified the list of services consisting of 17 heads of services which is termed as 'Negative List'. In a comprehensive tax regime, this 'Negative List' is of paramount importance because every activity not covered under this list is chargeable to service tax. The negative list shall comprise of the following services, namely: (a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere (i) services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers; or

191 2.23 Indirect Taxes (iv) support services, other than services covered under clauses (i) to (iii) above, provided to business entities; (b) services by the Reserve Bank of India; (c) services by a foreign diplomatic mission located in India; (d) services relating to agriculture or agricultural produce by way of (i) (ii) agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or testing; supply of farm labour; (iii) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market; (iv) renting or leasing of agro machinery or vacant land with or without a structure incidental to its use; (v) loading, unloading, packing, storage or warehousing of agricultural produce; (vi) agricultural extension services; (vii) services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce; (e) trading of goods; (f) any process amounting to manufacture or production of goods; (g) selling of space or time slots for advertisements other than advertisements broadcast by radio or television; (h) service by way of access to a road or a bridge on payment of toll charges; (i) betting, gambling or lottery; (j) admission to entertainment events or access to amusement facilities; (k) transmission or distribution of electricity by an electricity transmission or distribution utility; (l) services by way of (i) pre-school education and education up to higher secondary school or equivalent; (ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force; (iii) education as a part of an approved vocational education course; (m) services by way of renting of residential dwelling for use as residence;

192 Basic Concepts of Service Tax 2.24 (n) services by way of (i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount; (ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers; (o) service of transportation of passengers, with or without accompanied belongings, by (i) a stage carriage; (ii) railways in a class other than (A) first class; or (B) an airconditioned coach; (iii) metro, monorail or tramway; (iv) inland waterways; (v) public transport, other than predominantly for tourism purpose, in a vessel between places located in India; and (vi) metered cabs, radio taxis or auto rickshaws; (p) services by way of transportation of goods (i) by road except the services of (A) a goods transportation agency; or (B) a courier agency; (ii) by an aircraft or a vessel from a place outside India up to the customs station of clearance in India; or (iii) by inland waterways; (q) funeral, burial, crematorium or mortuary services including transportation of the deceased. ANALYSIS: Analysis of each of the entries of negative list in detail is given below:- 1. Entry (a): Services by Government or Local Authority, entry (o): Transportation of passengers & entry (p): Transportation of goods All the services provided by the Government or a local authority are not chargeable to service tax. Meaning of Government: Government has nowhere been defined in the Finance Act, 1994 or the rules made thereunder. As per General Clauses Act, 1897, Government shall include both the Central Government and any State Government [Section 3(23) of the General Clauses Act, 1897].

193 2.25 Indirect Taxes It would include various departments and offices of the Central or State Government or the Union Territory Administrations which carry out their functions in the name and by order of the President of India or the Governor of a State. Meaning of local authority Local authority means (a) Panchayat as referred to in clause (d) of article 243 of the Constitution. (b) Municipality as referred to in clause (e) of article 243P of the Constitution. (c) Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund. (d) Cantonment Board as defined in section 3 of the Cantonments Act, (e) Regional council or a district council constituted under the Sixth Schedule to the Constitution. (f) Development board constituted under article 371 of the Constitution. (g) Regional council constituted under article 371A of the Constitution [Section 65B(31)]. Exceptions: However, the following services, even if provided by the Government or local authority, are taxable:- (i) (ii) Services by the Department of Posts by way of speed post, express parcel post, life insurance, and agency services provided to a person other than Government; Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) Transport of goods or passengers; or (iv) Support services, other than services covered under clauses (i) to (iii) above, provided to business entities. Rationale behind taxing certain activities of the Government or local authorities Only those activities of Government or local authorities are taxed where similar or substitutable services are provided by private entities. The rationale is as follows- to provide a level playing field to private entities in these areas as exemption to Government in such activities would lead to competitive inequities; and to avoid break in CENVAT chain as the support services provided by Government are normally in the nature of intermediary services. I. SERVICES BY THE DEPARTMENT OF POSTS PROVIDED TO A PERSON OTHER THAN GOVERNMENT Following services provided to a person other than Government, by the Department of Posts are taxable:-

194 Basic Concepts of Service Tax 2.26 II. (a) Speed post: provides time-bound and express delivery of letters, documents and parcels across the nation and around the world. Now-days, speed posts can be tracked on a daily basis with the help of speed post tracking service started by Postal Department of India. (b) Express parcel post: Express Parcel Post is fast and relaible service for sending the parcels upto 35 kg within India. It provides convenience to the customers by picking up from customer s premises and delivering to consignee. (c) Life insurance: Post offices offer insurance under two schemes: (a) Postal Life Insurance (b) Rural Postal Life Insurance. (d) Agency services: includes distribution of mutual funds, bonds, passport applications, collection of telephone and electricity bills, which are provided by the Department of Posts to non-government entities. Services provided by Department of Posts NOT liable to service tax: Therefore, the following services provided by Department of Posts are not liable to service tax:- Basic mail services known as postal services such as post card, inland letter, book post, registered post provided exclusively by the Department of Posts to meet the universal postal obligations. Transfer of money through money orders, operation of savings accounts, issue of postal orders, pension payments and other such services. SERVICES IN RELATION TO AN AIRCRAFT OR A VESSEL, INSIDE OR OUTSIDE THE PRECINCTS OF A PORT OR AN AIRPORT Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport provided by Government or local authority are taxable. 1. Aircraft means any machine which can derive support in the atmosphere from reactions of the air, other than reactions of the air against the earth's surface and includes balloons, whether fixed or free, airships, kites, gliders and flying machines [Section 65B(7)]. 2. Airport means a landing and taking off area for aircrafts, usually with runways and aircraft maintenance and passenger facilities and includes aerodrome**[section 65B(8)]. **Aerodrome means any definite or limited ground or water area intended to be used, either wholly or in part, for the landing or departure of aircraft, and includes all buildings, sheds, vessels, piers and other structures thereon or appertaining thereto. 3. As per section 65B(38), port covers two types of ports:- (i) Major ports as defined under section 2(q) of the Major Port Trusts Act, 1963:

195 2.27 Indirect Taxes III. Port means any major port to which this Act applies within such limits as may, from time to time, be defined by the Central Government for the purposes of this Act by notification in the Official Gazette, and, until a notification is so issued, within such limits as may have been defined by the Central Government under the provisions of the Indian Ports Act. (ii) Other ports as defined under section 3(4) of the Indian Ports Act, 1908 Port includes also any part of a river or channel in which this Act is for the time being in force. 4. Vessel includes anything made for the conveyance, mainly by water, of human beings or of goods and a caisson [Section 65B(53)]. TRANSPORT OF GOODS OR PASSENGERS Services of transport of passengers and goods have been specifically dealt with in clause (o) and (p). Here we are discussing the complete taxability of transport of passengers and goods. As a result of the combined study of the clause (o), (p) and this part of entry (a), the taxability of transport of passengers and goods is under:- A. Transport of passengers Transport of passengers by Government or local authority is generally taxable. However, following services of transportation of passengers,(whether provided by Government or otherwise) with or without accompanied belongings are not taxable: (i) Transport of passengers by a stage carriage: Vehicles which can carry more than six passengers shall be included here. In other words, carriages running under public transport shall not be taxable. It may be noted that transport of passengers by vehicles under contract carriage is outside the purview of this entry. However, specific exemption under mega exemption notification (discussed in Chapter -5) is available to services of transport of passengers by a contract carriage for transportation of passengers, excluding tourism, conducted tours, charter or hire. Stage carriage means a motor vehicle constructed or adapted to carry more than six passengers excluding the driver for hire or reward at separate fares paid by or for individual passengers, either for the whole journey or for stages of the journey [Section 65B(46)]. (ii) Transport of passengers by railways in a class other than (A) first class; or (B) an air conditioned coach Thus, journey by rail in 2 nd class, sleeper class or general class is not taxable.

196 Basic Concepts of Service Tax 2.28 Transport of passengers in railways in first class or an air conditioned coach is taxable. However, it may be noted that such services were exempt from service tax between and (both inclusive). (iii) Transport of passengers by metro, monorail or tramway: Transport of passengers by metro, monorail or tramway is not taxable. (iv) Transport of passengers by inland waterways Inland waterways means:- (i) National waterways as defined in section 2(h) of the Inland Waterways Authority of India Act, 1985, or (ii) Other waterway on any inland water as defined in section 2(b) of the Inland Vessels Act, 1917 [Section 65B(29)]. As per section 2(h) of the Inland Waterways Authority of India Act, 1985, National waterway means the inland waterway declared by section 2 of the National Waterway (Allahabad-Haldia Stretch of the Ganga-Bhagirathi-Hooghly River) Act, 1982, to be a national waterway. Explanation If Parliament declares by law any other waterway to be a national waterway, then from the date on which such declaration takes effect, such other waterway (i) (ii) shall be deemed also to be a national waterway within the meaning of this clause; and the provisions of this Act shall, with necessary modifications (including modification for construing any reference to the commencement of this Act as a reference to the date aforesaid), apply to such national waterway As per section 2(b) of the Inland Vessels Act, 1917, Inland water means any canal, river, lake or other navigable water. (v) Transport of passengers by public transport, other than predominantly for tourism purpose, in a vessel between places located in India: The words other than predominantly for tourism purpose qualify the preceding words public transport. This implies that the public transport by a vessel should not be predominantly for tourism purposes. Normal public ships or other vessels that sail between places located in India would be covered in the negative list entry even if some of the passengers on board are using the service for tourism as predominantly, such service is not for tourism purpose. However, services provided by leisure or charter vessels or a cruise ship, predominant purpose of which is tourism, would not be covered in the negative list even if some of the passengers in such vessels are not tourists.

197 2.29 Indirect Taxes For instance, services by way of transportation of passengers on a vessel, from Kolkata to Port Blair (mainland island) or Port Blair to Rose Island (inter island), is covered in the negative list entry. (vi) Metered cabs, radio taxis or auto rickshaws: Metered cab means any contract carriage on which an automatic device, of the type and make approved under the relevant rules by the State Transport Authority, is fitted which indicates reading of the fare chargeable at any moment and that is charged accordingly under the conditions of its permit issued under the Motor Vehicles Act, 1988 and the rules made there under [Section 65B(32)]. B. Transportation of goods Transport of goods by Government or local authority is generally taxable. However, following services of transportation of goods, (whether provided by Government or otherwise) are not taxable:- (i) Services by way of transportation of goods by road except the services of (A) a goods transportation agency; or (B) a courier agency. Transportation of goods by road is not taxable. However, services of goods transportation agency and courier agency services are excluded from the negative list entry relating to transportation of goods by road thereby making these two services taxable. (A) Goods transportation agency services: When the goods are transported by road by a goods transport agency, it is liable to tax. Further, the provisions relating to reverse charge, i.e. service tax is liable to be paid by the consigner or consignee in specified cases, are applicable even after the introduction of negative list. Goods transport agency means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called [Section 65B(26)]. (B) Courier agency: Courier agency services are liable to service tax. Express cargo service: The nature of service provided by Express Cargo Service falls within the scope and definition of the courier agency. Hence, the said service is liable to service tax. Angadia: Angadia undertakes delivery of documents, goods or articles received from a customer to another person for a consideration. Therefore, angadias are covered within the definition of a courier and services provided by angadia are liable to service tax. Courier agency means any person engaged in the door-to-door transportation of timesensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles [Section 65B(20)].

198 Basic Concepts of Service Tax 2.30 (ii) Services by way of transportation of goods by an aircraft or a vessel from a place outside India up to the customs station of clearance in India: Transportation of goods either by air or by sea for outside India upto custom station of clearance in India is not taxable. 1. Aircraft means any machine which can derive support in the atmosphere from reactions of the air, other than reactions of the air against the earth's surface and includes balloons, whether fixed or free, airships, kites, gliders and flying machines [Section 65B(7)]. 2. Vessel includes anything made for the conveyance, mainly by water, of human beings or of goods and a caisson [Section 65B(53)]. 3. Customs station means any customs port, customs airport or land customs station [Section 65B(21)]. (iii) Services by way of transportation of goods by inland waterways: Almost any water transport within India would be covered under the negative entry for transportation of goods by inland waterways. IV. SUPPORT SERVICES, OTHER THAN SERVICES COVERED UNDER CLAUSES I. TO III. ABOVE, PROVIDED TO BUSINESS ENTITIES Other support services provided by the Government or a local authority to the business entities are taxable services. 1. Business entity means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession [Section 65B(17)]. 2. Support services means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves, but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis [Section 65B(49)]. 2. Entry (b): Services provided by Reserve Bank of India All the services by the Reserve Bank of India gets covered in the negative list, and become non taxable. Accordingly, the services provided by banks to RBI would be taxable as these are neither in the negative list nor covered in any of the exemptions. Note: Any services PROVIDED TO the Reserve Bank of India are NOT in the negative list and would be taxable unless otherwise covered in any other entry in the negative list or in any exemption.

199 2.31 Indirect Taxes 3. Entry (c): Services by a Foreign Diplomatic Mission located in India All the services rendered by a foreign diplomatic mission located in India are not chargeable to service tax. This entry does not cover services, if any, provided by any office or establishment of an international organization. Note: In the past regime there was no exemption or exclusion similar to the above. This entry in the negative list may have been inserted in view of every activity for consideration becoming a taxable service. 4. Entry (d): Services relating to agriculture or agricultural produce Following services relating to agriculture or agricultural produce are not taxable- (i) Agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or testing Activities like breeding of fish (pisciculture), rearing of silk worms (sericulture), cultivation of ornamental flowers (floriculture) and horticulture, forestry are included in the definition of agriculture. Plantation crops like rubber, tea or coffee would be also covered under agricultural produce. The processes contemplated in the definition of agricultural produce are those as are 'usually done by the cultivator or producer'. Thus agricultural products like cereals, pulses, copra and jaggery where certain amount of processing on these products is done by a person other than a cultivator or producer may not get covered in the ambit of 'agricultural produce'. 1. Agriculture means the cultivation of plants and rearing of all life-forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products [Section 65B(3)]. 2. Agricultural produce means any produce of agriculture on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market [Section 65B(5)]. (ii) Supply of farm labour: The service provider who is providing the desired farm labour to the service receiver is not liable to pay service tax on the said services. (iii) Processes which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market: The processes carried out at an agricultural farm including tending, pruning, cutting, harvesting; drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market are not taxable. However, following processes are taxable:-

200 Basic Concepts of Service Tax 2.32 (a) Process which alters the essential characteristics of the agricultural produce: Potato chips or tomato ketchup does not qualify as agricultural produce because in terms of the definition of agricultural produce, only such processing should be carried out as is usually done by cultivator producers which does not alter its essential characteristics but makes it marketable for primary market. Potato chips or tomato ketchup are manufactured through processes which alter the essential characteristic of farm produce (potatoes and tomatoes in this case). (b) Process which makes agricultural produce marketable in the retail market: The processes of grinding, sterilizing, extraction packaging in retail packs of agricultural products, which make the agricultural products marketable in retail market, would NOT be covered in the negative list. Only such processes are covered in the negative list which makes agricultural produce marketable in the primary market. (iv) Renting or leasing of agro machinery or vacant land with or without a structure incidental to its use: Leasing of vacant land with a green house or a storage shed which is incidental to its use for agriculture would be covered in the negative list. (v) Loading, unloading, packing, storage or warehousing of agricultural produce (vi) Agricultural extension services: Agricultural extension means application of scientific research and knowledge to agricultural practices through farmer education or training [Section 65B(4)]. (vii) Services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce: Agricultural Produce Marketing Committees or Boards are set up under a State Law for purpose of regulating the marketing of agricultural produce. Such marketing committees or boards have been set up in most of the States and provide a variety of support services for facilitating the marketing of agricultural produce by provision of facilities and amenities like, sheds, water, light, electricity, grading facilities etc. They also take measures for prevention of sale or purchase of agricultural produce below the minimum support price. APMCs collect market fees, license fees, rents etc. Services provided by such Agricultural Produce Marketing Committee or Board are covered in the negative list. However, any service provided by such bodies which is not directly related to agriculture or agricultural produce will be liable to tax e.g. renting of shops or other property. Service provided by commission agent for sale or purchase of agricultural produce are also covered under the negative list entry. 5. Entry (e): Trading of goods The above entry refers to the activity of trading of goods. Thus, the check has to be twofold (1) the activity should be of trading and (2) trading should be of goods.

201 2.33 Indirect Taxes Whether the following would be covered under trading of goods? (a) Forward contracts in commodities: Forward contracts would be covered under trading of goods as these are contracts which involve transfer of title in goods on a future date at a pre-determined price. (b) Commodity futures: Commodity futures would be covered under trading of goods. In commodity futures actual delivery of goods does not normally take place and the purchaser under a futures contract normally offset all obligations or closes out by selling an equal quantity of goods of the same description under another contract for delivery on the same date. These are in the nature of derivatives. (c) Auxiliary services relating to future contracts or commodity futures: Such services provided by commodity exchanges clearing houses or agents would not be covered in the negative list entry relating to trading of goods. Note: It is relevant to note here that in common parlance whenever the term 'trading' is used, it is considered as 'trading in goods'. The term 'trading of service' seems to be little uncommon to use but these kind of activities commonly takes place where a person procures services from one person and provides to another, practically such transactions most of the times get recognised as commission agent's services though may not be strictly commission based. Goods means every kind of movable property other than actionable claim and money; and includes securities, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale [Section 65B(25)]. Securities include (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) Units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ii) Government securities; (iia) such other instruments as may be declared by the central Government to be Securities; and (iii) rights or interest in securities [Section 65B(43)]. 6. Entry (f): Processes amounting to manufacture or production of goods Any process amounting to manufacture or production of goods shall not be taxable. Points to be noted This entry covers manufacturing activity carried out on contract or job work basis, which does not involve transfer of title in goods, provided duties of excise are leviable on such processes under the Central Excise Act, 1944, the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 or any of the State Acts.

202 Basic Concepts of Service Tax 2.34 In other words, if Central Excise duty is leviable on a particular process, as the same amounts to manufacture, then such process would be covered in the negative list even if there is a central excise duty exemption for such process. However if central excise duty is wrongly paid on a certain process which does not amount to manufacture, with or without an intended benefit, it will not save the process on this ground and service tax would still be leviable on such process. Process amounting to manufacture or production of goods means (i) (ii) a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 or the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force [Section 65B(40)]. 7. Entry (g): Selling of space/time slots for advertisements other than advertisements broadcast by radio or television This entry covers selling of space or time slots for advertisements other than advertisements broadcast by radio or television. Taxable/Not covered by negative list entry (g) Sale of space or time for advertisement to be broadcast on radio or television Sale of time slot by a broadcasting organization. Non-taxable Sale of space for advertisement in print media Sale of space for advertisement in bill boards public places (including stadia), buildings, conveyances, cell phones, automated teller machines, internet Aerial advertising* *Aerial advertising is a form of advertising that incorporates the use of aircraft, balloons or airships to create, transport, or display, advertising media. The media can be static, such as a banner, logo, lighted sign or sponsorship branding. It can also be dynamic, such as animated, lighted or audio. Advertisement means any form of presentation for promotion of, or bringing awareness about, any event, idea, immovable property, person, service, goods or actionable claim through newspaper, television, radio or any other means but does not include any presentation made in person [Section 65B(2)]. Points to be noted Making or preparing advertisements: Services provided by advertisement agencies relating to making or preparation of advertisements would not be covered in this entry and thus, would be taxable. This would also not cover commissions received by advertisement agencies from the broadcasting or publishing companies for facilitating business, which may also include some portion for the preparation of advertisement.

203 2.35 Indirect Taxes Canvassing advertisement for publishing on a commission basis: Merely canvassing advertisement for publishing on a commission basis by persons/agencies is not covered in the negative list entry and is taxable. 8. Entry (h): Access to a road or a bridge on payment of toll charges This entry covers the services of providing access to road and charging toll charges. National highways or state highways are also roads and hence covered in this entry. 9. Entry (i): Betting, gambling or lottery Services of betting, gambling or lottery are included in this entry. Betting or gambling means putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring [Section 65B(15)]. 10. Entry (j): Entry to entertainment events and access to amusement facilities Following two services are not taxable:- (i) Entry to entertainment events (ii) Access to amusement facilities Points to be noted Cultural programme, drama or a ballet held in an open garden and not in a theatre qualifies as an entertainment event: The words used in the definition are theatrical performances and not performances in theatres. A cultural programme, drama or a ballet preformed in the open does not cease to be a theatrical performance provided it is performed in the manner it is performed in a theatre, i.e. before an audience. Standalone ride set up in a mall qualifies as an amusement facility: A standalone amusement ride in a mall is also a facility in which fun or recreation is provided by means of a ride. Access to such amusement ride on payment of charges would be covered in the negative list. Entry to video parlors exhibiting movies played on a DVD player and displayed through a TV screen is covered in the entry: Entry to video parlors exhibiting movies played on a DVD player and displayed through a TV screen is covered in the entry because such exhibition is an exhibition of cinematographic film. Membership of a club DOES NOT qualify as access to an amusement facility: A club does not fall in the definition of an amusement facility. Hence, membership of a club does not mean access to an amusement facility. 1. Entertainment event means an event or a performance which is intended to provide recreation, pastime, fun or enjoyment, by way of exhibition of cinematographic film, circus, concerts, sporting event, pageants, award functions, dance, musical or theatrical

204 Basic Concepts of Service Tax 2.36 performances including drama, ballets or any such event or programme [Section 65B(24)]. 2. Amusement facility means a facility where fun or recreation is provided by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks, theme parks or such other places but does not include a place within such facility where other services are provided [Section 65B(9)]. 11. Entry (k): Transmission or distribution of electricity The above entry covers the services of transmission or distribution of electricity by an electricity transmission or distribution utility. Electricity transmission or distribution utility means the Central Electricity Authority a State Electricity Board the Central Transmission Utility a State Transmission Utility notified under the Electricity Act, 2003 a distribution or transmission licensee any other entity entrusted with such function by the Central or State Government [Section 65B(23)]. 12. Entry (I): Specified services relating to education The following services relating to education are specified in the negative list :- (i) Pre-school education and education up to higher secondary school or equivalent; (ii) Education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force; (iii) Education as a part of an approved vocational education course. Vocational education course offered by the Government/Local Authority also not liable to service tax Service tax is not leviable on vocational education courses (VEC) offered by the institution of the Government (Central Government or State Government) or a local authority because in terms of section 66D(a), only specified services provided by the Government are liable to tax and VEC is excluded from the service tax. However, if the VEC is offered by an institution, as an independent entity in the form of society or any other similar body, service tax treatment would be determined by either sub-clause (ii) or (iii) mentioned above. In the context of VEC, qualification implies a Certificate, Diploma, Degree or any other similar certificate. The words recognized by any law will include such courses as are approved or recognized by any entity established under a central or state law including delegated legislation, for the purpose

205 2.37 Indirect Taxes of granting recognition to any education course including a VEC [Circular No.164/15/2012 ST dated ] (i) Pre-school education and education up to higher secondary school or equivalent 1. Services provided by international schools giving certifications like IB (International Baccalaureate) are also covered in this entry. 2. Private tuitions are NOT covered in this entry. Hence, they are also liable to pay service tax if their aggregate values of taxable services exceed the threshold exemption. (ii) Education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force (a) In order to be covered in the negative list, a course should be recognized by an Indian law. Services provided by way of education as a part of a prescribed curriculum for obtaining a qualification recognized by a law of a foreign country are NOT covered in the negative list entry. (b) Services of conducting admission tests for admission to colleges are exempt in case the educational institutions are providing qualification recognized by law for the time being in force. Education as a part of curriculum for obtaining a qualification recognized by law means that only such educational services are in the negative list as are related to delivery of education as a part of the curriculum that has been prescribed for obtaining a qualification prescribed by law. It is important to understand that to be in the negative list the service should be delivered as part of curriculum. Conduct of degree courses by colleges, universities or institutions which lead grant of qualifications recognized by law would be covered. Training given by private coaching institutes would not be covered as such training does not lead to grant of a recognized qualification. (iii) Education as a part of an approved vocational education course Approved vocational education course means, (i) a course run by an industrial training institute or an industrial training centre affiliated to the National Council for Vocational Training or State Council for Vocational Training offering courses in designated trades notified under the Apprentices Act, 1961; or (ii) a Modular Employable Skill Course, approved by the National Council of Vocational Training, run by a person registered with the Directorate General of Employment and Training, Union Ministry of Labour and Employment [Section 65B(11)]. Note: Educational institutes such as IITs, IIMs charge a fee from prospective employers like corporate houses/ MNCs, who come to the institutes for recruiting candidates through campus interviews. Service tax is liable on services provided by such institutions in relation to campus recruitment as such services are not covered in the negative list.

206 Basic Concepts of Service Tax Entry (m): Services by way of renting of residential dwelling for use as residence The above entry covers services - by way of renting of a residential dwelling for use as residence 1. Renting means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property [Section 65B(41)]. 2. Residential dwelling: The phrase residential dwelling has not been defined in the Act. It has therefore to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, camp site, lodge, house boat, or like places meant for temporary stay. Whether the following renting transactions are included in the negative entry? 1. Residential house taken on rent used only or predominantly for commercial or nonresidential use: The said renting transaction is not covered in this negative list entry. 2. House given on rent and the same being used as a hotel or a lodge: The said renting transaction is not covered in this negative list entry because the person taking it on rent is using it for a commercial purpose. 3. Rooms in a hotel or a lodge let out whether or not for temporary stay: The said renting transaction is not covered in this negative list entry because a hotel or a lodge is not a residential dwelling. 4. Houses allotted by Government department to its employees and a license fee is charged for the same: Such service would be covered in the negative list entry relating to services provided by Government and hence non- taxable. 5. Furnished flats given on rent for temporary stay (a few days): Such renting as residential dwelling for the bonafide use of a person or his family for a reasonable period shall be residential use; but if the same is given for a short stay for different persons over a period of time the same would be liable to tax. 14. Entry (n): Specified financial services Following services are included in this entry:- (i) Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount; (ii) Services by way of inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers.

207 2.39 Indirect Taxes Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount Any such service wherein moneys due are allowed to be used or retained on payment of interest or on a discount are covered here. It is important to note that the words deposits, loans or advances have to be taken in the generic sense. They would cover any facility by which an amount of money is lent or allowed to be used or retained on payment of what is commonly called the time value of money which could be in the form of an interest or a discount. Examples of services covered in this entry: Loan or overdraft facility or a credit limit facility provided in consideration for payment of interest. Mortgages or loans with a collateral security to the extent that the consideration for advancing such loans or advances are represented by way of interest. Fixed deposits or saving deposits or any other such deposits in a bank or a financial institution for which return is received by way of interest. Corporate deposits to the extent that the consideration for advancing such loans or advances are represented by way of interest or discount. Note: This entry would not cover investments by way of equity or any other manner where the investor is entitled to a share of profit. Whether the following financial transactions are covered in this negative list entry? S.No. If Then 1. any service charges or administrative charges or entry charges are recovered in addition to interest on a loan, advance or a deposit 2. there is invoice discounting or cheque discounting or any other similar form of discounting 3. services are provided by banks or authorized dealers of foreign exchange by way of sale of foreign exchange to general public such charges or amounts collected over and above the interest or discount amounts would not be part of this negative entry and thus would represent taxable consideration such discounting is covered only to the extent consideration is represented by way of discount as such discounting is nothing else but a manner of extending a credit facility or a loan. such services would not be covered in this entry because this entry only covers sale and purchase of foreign exchange between banks or authorized dealers of foreign exchange or between banks and such dealers.

208 Basic Concepts of Service Tax transactions are entered into by banks in instruments like repos and reverse repos* 5. there is a subscription to or trading in Commercial Paper (CP) or Certificates of Deposit (CD)** they are more appropriately excluded from the definition of service itself being the sale and purchase of securities, which are goods. since these are instruments for lending or borrowing money where in consideration is represented by way of a discount, issue or subscription to CPs or CDs, they would be covered in the negative list entry relating to serivces by way of extending deposits, loans or advances in so far as consideration is represented by way of interest or discount. It may also be borne in mind that promissory note is included in the definition of money in the Act as given in clause (33) of section 65B. *Repos and reverse repos are financial instruments of short term call money market that are normally used by banks to borrow from or lend money to RBI. The margins, called the repo rate or reverse repo rate in such transactions are nothing but interest charged for lending or borrowing of money. **Commercial Paper ( CP ) and Certificate of Deposit ( CD ) are understood as unsecured money market instruments which may be issued in the form of a promissory note or in a dematerialized form through any of the depositories approved by and registered with SEBI. CPs are normally issued by highly rated companies, primary dealers and financial institutions at a discount to the face value. CDs can be issued by Scheduled Commercial Banks (excluding RRBs and Local Area Banks) and All India Financial Institutions (FIs) permitted by RBI. 15. Entry (q): Funeral, burial, crematorium or mortuary services Funeral, burial, crematorium or mortuary services including transportation of the deceased are included in this entry and hence are not liable to service tax Date of determination of rate of tax, value of taxable service and rate of exchange [Section 67A] Section 67A provides that the rate of service tax, value of a taxable service and rate of exchange will be the one as in force or as applicable at the time when the taxable service has been provided or agreed to be provided. For the purposes of this section, "rate of exchange" means the rate of exchange (i) determined by the Board, or (ii) ascertained in such manner as the Board may direct, for the conversion of Indian currency into foreign currency or foreign currency into Indian currency.

209 3 Point of Taxation 3.1 Introduction Point of taxation means the point in time when a service shall be deemed to have been provided. Point of Taxation Rules, 2011 determine the point of taxation. As per these rules, point of taxation is the time when the invoice for the service provided or agreed to be provided is issued; if invoice is not issued within prescribed time period (30 days except for specified financial sector where it is 45 days) of completion of provision of service, then the date of completion of service; the date of receipt of payment where payment is received before issuance of invoice or completion of service. Therefore agreements to provide taxable services will become liable to pay tax only on issuance of invoice or date of completion of service if invoice is not issued within prescribed period of completion or on receipt of payment. The detailed provisions of the said rules along with their analysis are as under: Determination of point of taxation-general rule [Rule 3] For the purposes of these rules, unless otherwise provided, point of taxation shall be- (a) the time when the invoice for the service provided/ agreed to be provided is issued. However, in case the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994 (30 or 45 days, as the case may be) of the completion of the provision of the service, the point of taxation shall be date of such completion. (b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment. For the purposes of clauses (a) and (b), - (i) in case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date

210 3.2 Indirect Taxes of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service; (ii) wherever the provider of taxable service receives a payment up to ` 1,000 in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined in accordance with the provisions of clause (a) [Proviso to rule 3]. Point of taxation in case of advance received by service provider For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance. ANALYSIS As per rule 3 of the said rules, point of taxation would be determined as follows:- S.No. In case Point of taxation would be 1. the invoice is issued within the prescribed period of 30 days* from the date of completion of provision of (a) Date of invoice or service (b) Date of payment whichever is earlier 2. the invoice is not issued within the prescribed period of 30 days* from the date of completion of provision of (a) Date of completion of service or service (b) Date of payment whichever is earlier The principle of point of taxation can be better understood with the help of the following tabular summary followed by an illustration:- Case In case where Point of Taxation I Invoice is issued within 30 days* from the Date of invoice completion of service and payment is received after invoice II Invoice is issued within 30 days* from the Date on which payment is received. completion of service, but payment is received before invoice III Invoice is not issued within 30 days* from the completion of service and payment is received after completion of service Date of completion of service

211 Point of Taxation 3.3 IV Invoice is not issued within 30 days* from the completion of service. However, part payment is received before the completion of service and remaining payment is received after the completion of service. For the payment received before the date of completion of service after the date of completion of service Point of taxation is the date on which payment is received. the date of completion of service. *45 days in case of in case of banking and other financial institutions including NBFCs. Illustration In case of provision of the taxable services other than banking and other financial institution including NBFCs, point of taxation would be determined as under:- Case Date of completion of service I September 5, 2013 II September 5, 2013 III September 5, 2013 IV September 5, 2013 Date of invoice Date on which payment received September 28, 2013 Point of Taxation October 10, 2013 September 28, 2013 October 03, 2013 September 20, 2013 September 20, 2013 October 8, 2013 September 25, 2013 September 5, 2013 October 8, 2013 Amount received partly on September 3, 2013 and remaining on September 20, 2013 September 3, 2013 and September 5, 2013 for respective amounts Determination of date of completion of service (i) Date of completion of service in cases other than continuous supply of services: CBEC vide Circular No. 144/13/2011- ST dated has clarified that the test for the determination whether a service has been completed would be the completion of all the related activities that place the service provider in a situation to be able to issue an invoice. The Service Tax Rules, 1994 require that invoice should be issued within a period of 30 days from the completion of the taxable service. The invoice needs to indicate inter alia the value of service so completed. Thus, it is important to identify the service so completed. This would include not only the physical part of providing the service but also the completion of all other auxiliary activities that enable the service

212 3.4 Indirect Taxes provider to be in a position to issue the invoice. Such auxiliary activities could include activities like measurement, quality testing etc. which may be essential pre-requisites for identification of completion of service. However, it has been clarified that such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice. (ii) Date of completion of service in case of continuous supply of services: The Board has elucidated that the above interpretation also applies to determination of the date of completion of provision of service in case of continuous supply of service. Further, in case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service. Point of taxation in case where payment upto ` 1,000 received in excess of the invoiced amount: Wherever the provider of taxable service receives a payment up to ` 1,000 in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined on the basis of invoice or completion of service, as the case may be, rather than payment. Purpose of the aforesaid provision:-as a measure of added facilitation, an option has been provided to determine the point of taxation in respect of small advances up to ` 1000, in excess of the amount indicated in the invoice, on the basis of invoice or completion of service rather than payment. Such provision is expected to address the accounting problems faced by service providers in telecommunications, credit card businesses who regularly receive minor excess payments from their customers. 3.3 Determination of point of taxation in case of change in effective rate of tax [Rule 4] Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a change in effective rate of tax in respect of a service, shall be determined in the manner laid down in the following table namely:- In case a taxable service has been provided (i) BEFORE the change in effective rate of tax. Invoice has been issued AFTER the change in effective rate of tax PRIOR to the change in effective rate of tax Payment received for the invoice AFTER the change in effective rate of tax AFTER the change in effective rate of tax Point of taxation shall be (a) date of issuance of invoice or (b) date of receipt of payment whichever is earlier date of issuance of invoice

213 Point of Taxation 3.5 (ii) AFTER the change in effective rate of tax. AFTER the change in effective rate of tax PRIOR to the change in effective rate of tax PRIOR to the change in effective rate of tax AFTER the change in effective rate of tax PRIOR to the change in effective rate of tax AFTER the change in effective rate of tax PRIOR to the change in effective rate of tax PRIOR to the change in effective rate of tax 3.4 Payment of tax in cases of new services [Rule 5] date of receipt of payment date of receipt of payment (a) date of issuance of invoice or (b) date of receipt of payment whichever is earlier date of issuance of invoice Where a service is taxed for the first time, then, (a) no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable; (b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within 14 days of the date when the service is taxed for the first time. ANALYSIS This rule specifically discusses the situation where a service is charged to tax for the first time i.e. becomes taxable for the first time. The rule provides that:- (a) If an invoice has been issued and payment is received before a service becomes taxable, no tax would be charged even if the service is provided after the same has become taxable. This provision is consistent with the other similar provisions in these rules, and ensures that a financial transaction which has achieved finality before a service was taxable shall not be reopened for collection of tax. (b) If any payment has been received prior to a service being chargeable to tax, no tax shall be chargeable if an invoice has also been issued within 14 days of the date when the service is taxed for the first time.

214 3.6 Indirect Taxes 3.5 Determination of point of taxation in case of person liable to pay service tax under reverse charge or in case of associated enterprises [Rule 7] Notwithstanding anything contained in these rules, the point of taxation in respect of the persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994 shall be the date on which payment is made. However, where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist. Moreover, in case of associated enterprises, where the person providing the service is located outside India, the point of taxation shall be the date of debit in the books of account of the person receiving the service or date of making the payment whichever is earlier. ANALYSIS (i) Point of taxation in case of services taxed under reverse charge mechanism 1 : In respect of the persons liable to pay service tax under reverse charge mechanism, the point of taxation shall be the date on which payment is made subject to the condition that the payment is made within a period of six months of the date of invoice. In case the payment is NOT made within a period of six months of the date of invoice, the point of taxation shall be determined as if rule 7 does not exist. It implies that if the service receiver fails to make the payment within six months from the date of invoice, the point of taxation shall be determined under the general rule-rule 3. (ii) Point of taxation in case of import of services by associated enterprises In case of associated enterprises, where the person providing the service is located outside India, the point of taxation shall be:- (a) the date of debit in the books of account of the person receiving the service or (b) date of making the payment whichever is earlier. 3.6 Determination of point of taxation in case of copyrights, etc. [Rule 8] Rule 8 applies where in case of royalties and payments pertaining to copyrights, trademarks, designs or patents, the whole amount of the consideration for the provision of service is not ascertainable at the time when service was performed, and subsequently the use or the benefit of these services by a person other than the provider gives rise to any payment of consideration. 1 The concept of reverse charge has been discussed in Chapter 6: Service Tax Procedures.

215 Point of Taxation 3.7 In such a case, the service shall be treated as having been provided each time when:- (a) a payment in respect of such use/benefit is received by the provider in respect thereof or (b) an invoice is issued by the provider whichever is earlier. 3.7 Determination of point of taxation in other cases [Rule 8A] Rule 8A is the residual rule to determine the point of taxation by way of best judgment to handle situations where the tax-payer is unable to furnish one or more of the details needed i.e. date of payment or date of invoice or both to determine point of taxation. It provides as follows:- Where the point of taxation cannot be determined as per these rules as the date of invoice or the date of payment or both are not available, the Central Excise Officer, may, require the concerned person to produce such accounts, documents or other evidence as he may deem necessary and after taking into account such material and the effective rate of tax prevalent at different points of time, shall, by an order in writing, after giving an opportunity of being heard, determine the point of taxation to the best of his judgment. Important definitions 1. Definitions under rule 2 In these rules, unless the context otherwise requires, (a) Act means the Finance Act, (b) Continuous supply of service means (i) any service which is provided, or agreed to be provided continuously or on recurrent basis, under a contract, for a period exceeding three months with the obligation for payment periodically or from time to time, or (ii) where the Central Government, by a notification in the Official Gazette, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition. Services notified by the Central Government In this regard the Central Government has prescribed the provision of following services to be a continuous supply of service:- (i) Telecommunication Services (ii) Works Contract Services (c) Invoice means the invoice referred to in rule 4A of the Service Tax Rules, 1994 and shall include any document as referred to in the said rule.

216 3.8 Indirect Taxes (d) Point of taxation means the point in time when a service shall be deemed to have been provided. (e) Change in effective rate of tax shall include a change in the portion of value on which tax is payable in terms of a notification issued in the Official Gazette under the provisions of the Act, or rules made there under. 2. Definition of date of payment under rule 2A Date of payment shall be:- (a) date on which the payment is entered in the books of accounts (b) or date on which payment is credited to the bank account of the person liable to pay tax whichever is earlier. (A) Date of payment in case of change in effective rate of tax or a new levy between the above two dates In case, (i) there is a change in effective rate of tax or when a service is taxed for the first time during the period between such entry in books of accounts and its credit in the bank account; (ii) the bank account is credited after four working days from the date when there is change in effective rate of tax or a service is taxed for the first time; and (iii) the payment is made by way of an instrument which is credited to a bank account, the date of payment shall be the date of credit in the bank account instead of the date of recording of payment in the books of accounts. (B) If any rule requires determination of the time or date of payment received: the expression date of payment shall be construed to mean such date on which the payment is received.

217 4 Valuation of Taxable Service 4.1 Valuation of taxable services for charging service tax [Section 67] Section 67 provides for the valuation of taxable services. The provisions of this section are discussed below: (1) Consideration in terms of money: If the consideration for a taxable service is in terms of money, the value of such service shall be the gross amount charged by the service provider for such service provided or to be provided by him. (2) Consideration not wholly or partly in terms of money: If the consideration for a taxable service is not wholly or partly in terms of money, then the value of such service shall be such amount in money, with the addition of service tax charged, is equivalent to the consideration. (3) Consideration not ascertainable: If the consideration for a taxable service is not ascertainable, the value of such service shall be the amount as may be determined in the prescribed manner. (4) Where the gross amount charged is inclusive of service tax payable: Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. Illustration Rishabh provides a taxable service to Padam for a consideration of ` 10,000 inclusive of service tax at 12.36%. The value, in such case, shall be computed as 10, or , = ` 8,900. (5) Gross amount charged includes amount received before/during/after the provision of such service: The gross amount charged for the taxable service shall include any amount received towards the taxable service either before, during or after the provision of such service. (6) Subject to the aforementioned provisions, the value of a taxable service shall be determined in such manner as may be prescribed [prescribed in the Service Tax (Determination of Value) Rules, 2006].

218 4.2 Indirect Taxes 1. Gross amount charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called suspense account or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise. 2. Consideration includes any amount that is payable for the taxable services provided or to be provided. 4.2 Service Tax (Determination of Value) Rules, 2006 Notification No.12/2006-ST, dated has notified the Service Tax (Determination of Value) Rules, They came into force from The words and expressions used in these rules and not defined but defined in the Finance Act, 1994 shall have the meaning respectively assigned to them in the Act. (1) Determination of value of service in relation to money changing [Rule 2B]: Rule 2B provides the manner of determination of the value of taxable service provided so far as the services so provided pertains to purchase or sale of foreign currency, including money changing. The value of service shall be determined as follows:- (a) For a currency, when exchanged from, or to, Indian Rupees (INR): For a currency, when exchanged from, or to, Indian Rupees (INR), the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India (RBI) reference rate for that currency at that time*, multiplied by the total units of currency. *Note: Where the RBI reference rate for a currency is not available Where the RBI reference rate for a currency is not available, the value shall be 1% of the gross amount of Indian Rupees provided or received, by the person changing the money. Example I: US$ 1,000 are sold by a customer at the rate of ` 45 per US$. RBI reference rate for US$ is ` for that day. Value of taxable service= (RBI reference rate for $ Selling rate for $) Total units = ` ( ) 1,000 =` ,000 The taxable value shall be ` 500. Example II: INR 70,000 is changed into Great Britain Pound (GBP) and the exchange rate offered is ` 70, thereby giving GBP RBI reference rate for that day for GBP is ` 69. The taxable value shall be ` 1,000. (b) Where neither of the currencies exchanged is Indian Rupee: Where neither of the currencies exchanged is Indian Rupee, the value shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by RBI.

219 Valuation of Taxable Service 4.3 (2) Manner of determination of value when such value is not ascertainable [Rule 3]: The value of taxable service, where such value is not ascertainable, shall be determined by the service provider in the manner described below. Subject to the provisions of section 67, the value of taxable service, where such value is not ascertainable, shall be determined by the service provider in the following manner:- (a) Value of similar services: The value of taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person subject to fulfillment of the conditions below: 1. Such service is in the ordinary course of trade. 2. The gross amount charged is the sole consideration. (b) When value of similar services cannot be ascertained: Where the value cannot be determined in accordance with clause (a), the service provider shall determine the equivalent money value of such consideration. However, such value shall, in no case be less than the cost of provision of such taxable service. (3) Rejection of value by Central Excise Officer and its determination thereon [Rule 4] (a) Central Excise Officer empowered to verify the value adopted by the service provider: The Central Excise Officer shall have the power to satisfy himself as to the accuracy of any information furnished or document presented for valuation. In other words, where there are adequate reasons warranting verification of the value adopted by the service provider for payment of service tax, rule 4 specifically enables verification of records in such cases. (b) Rule 3 would not restrict such power: The provisions contained in rule 3 shall not restrict or put to question such power of the Central Excise Officer. (c) Issue of show cause notice (SCN): A show cause notice (SCN) shall be issued to the service provider, if the Central Excise Officer is satisfied that the value determined by such service provider is not in accordance with the provisions of the Act or these rules. (d) SCN to specify the amount of service tax fixed: Such show cause notice will specify the amount of service tax fixed by the Central Excise officer. (e) Provision of opportunity of being heard and determination of value of taxable service: The Central Excise Officer shall provide a reasonable opportunity of being heard, to the service provider. Thereafter, he shall determine the value of such taxable service for the purpose of charging service tax in accordance with the provisions of the Act and these rules. (4) Inclusion in or exclusion from value of certain expenditure or costs [Rule 5] (a) General provision: The expenditure or costs incurred by the service provider in the course of providing taxable service forms integral part of the taxable value of the service provided or to be provided. Therefore, they shall be included in the value for the purpose of charging service tax on the said service. It shall not be relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service

220 4.4 Indirect Taxes provider to his client. This is a general rule which makes it clear that even when such expenditure or costs are recovered separately by service provider from the service receiver should be includible for discharging the service tax. Explanation to rule 5(1)-Value of taxable service for the telecommunication service For the removal of doubts, it is hereby clarified that for the telecommunication service, the value of the taxable service shall be the gross amount paid by the person to whom telecom service is provided by the telegraph authority. Hence, in case of service provided by way of recharge coupons or prepaid cards or the like, the value shall be the gross amount charged from the subscriber or the ultimate user of the service and not the amount paid by the distributor or any such intermediary to the telegraph authority. Individual components of total consideration even if indicated separately in invoice would also form part of value of taxable service: It is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice. Illustration 1 - In the course of providing a taxable service, a service provider incurs costs such as travelling expenses, postage, telephone, etc., and may indicate these items separately on the invoice issued to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procures such inputs or input service on his own account for providing the taxable service. Such expenses do not become reimbursable expenditure merely because they are indicated separately in the invoice issued by the service provider to the recipient of service. Illustration 2 - A contracts with B, an architect for building a house. During the course of providing the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the taxable service for charging service tax is what A pays to B. Illustration 3 - Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight accommodation and any other incidental expenses such as parking fees by the Company X during the tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his expenses and the relevant bills. Company X charges these amounts from the recipients of service. The cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount charged for the provision of services by the Company X.

221 Valuation of Taxable Service 4.5 (b) Amounts paid to the third party by the service provider as a pure agent of the client not to be included in the taxable value: There could be situations where the client of the service provider specifically engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases, such goods or services so procured are treated as supplied to the client rather than to the contracting agent. The service provider in such cases incurs the expenditure purely on behalf of his client in his capacity as an agent, i.e. pure agent of the client. Amounts paid to third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and shall not be included in taxable value. Conditions to be satisfied in this regard:- Subject to the provisions mentioned in point (a) above, the expenditure or costs incurred by the service provider as a pure agent of the recipient of service shall be excluded from the value of the taxable service if all the following conditions are satisfied: (i) the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured; (ii) the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service; (iii) the recipient of service is liable to make payment to the third party; (iv) the recipient of service authorises the service provider to make payment on his behalf; (v) the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party; (vi) the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service; (vii) the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and (viii) the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account. Meaning of pure agent Pure agent means a person who (a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service; (b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service; (c) does not use such goods or services so procured; and (d) receives only the actual amount incurred to procure such goods or services.

222 4.6 Indirect Taxes Illustration X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in television. Y billed X including charges for Television advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. Y does not act as an agent on behalf of X when obtaining the television advertisement even if the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising service is an input service for the estate agent in order to enable or facilitate him to perform his services as an estate agent. Above illustration provides the distinction between payment made as pure agent and payment made as principal. (c) Clarification Issue The principal job of a custom house agent (CHA) is to get the import/export consignments cleared through customs. However, at times they also provide services for packing, unpacking, loading, unloading, bringing or removing the goods to or from the customs area, vessels or aircrafts for their customers (i.e. importers or exporters). CHAs initially pay the service charges to these agencies and later recover these charges from the customer along with their own charges CHAs. Similar arrangement can occur for payment of statutory levies like custom duties, port charges, cesses etc. leviable on the said goods. Whether the charges which are said to be paid by the CHAs and later recovered from the customers (i.e. reimbursable charges) should be added to the value for charging service tax from CHAs? Clarification It is clarified that the aforesaid reimbursable charges would be excluded from the value of taxable service if all the following conditions are satisfied, - (a) The activity/service for which a charge is made should be in addition to provision of CHA service. (b) There should be arrangement between the customer & the CHA which authorizes or allows the CHA to:- (i) arrange for such activities/services for the customer; and (ii) make payments to other service providers on his behalf; (c) The CHA does not use the activities/services for his own benefit or for the benefit of his other customers; (d) The CHA recovers the reimbursements on actual basis i.e. without any mark-up or margin. (e) CHA should provide evidence to prove nexus between such other than CHA services provided and the reimbursable amounts. Similar would be the case for statutory levies, charges by carriers and custodians, insurance agencies and the like. (f) Each charge for separate activities/services is to be covered either by a separate invoice or by a separate entry in a common invoice. Any other miscellaneous/out of pocket expenses charged by the CHA would not be excluded. [Circular No. 119/13/2009-S.T. dated ]

223 Valuation of Taxable Service 4.7 (5) Service specific inclusion/exclusion of certain items from the value of taxable service [Rule 6] (A) Inclusions: Subject to the provisions of section 67, the value of the taxable services shall include (i) (ii) the commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker; the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit; (iii) the amount of premium charged by the insurer from the policy holder; (iv) the commission received by the air travel agent from the airline; (v) the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer; (vi) the reimbursement received by the authorised service station, from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; (vii) the commission or any amount received by the rail travel agent from the Railways or the customer; (viii) the remuneration or commission, by whatever name called, paid to such agent by the client engaging such agent for the services provided by a clearing and forwarding agent to a client rendering services of clearing and forwarding operations in any manner; and (ix) the commission, fee or any other sum, by whatever name called, paid to such agent by the insurer appointing such agent in relation to insurance auxiliary services provided by an insurance agent. (x) The amount realised as demurrage or by any other name whatever called for the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service. (B) Exclusions: Subject to the provisions contained in sub-rule (1), the value of any taxable service, as the case may be, does not include (i) (ii) initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit; the airfare collected by air travel agent in respect of service provided by him;

224 4.8 Indirect Taxes (iii) the rail fare collected by rail travel agent in respect of service provided by him; (iv) interest on delayed payment of any consideration for the provision of services or sale of property, whether moveable or immoveable and (v) the taxes levied by any Government (including foreign Governments, where a passenger disembarks) on any passenger travelling by air, if shown separately on the ticket, or the invoice for such ticket, issued to the passenger. (vi) accidental damages due to unforeseen actions not relatable to the provision of service. (vii) subsidies and grants disbursed by the Government, not directly affecting the value of service.

225 5.1 Introduction 5 Exemptions and Abatements Under the negative list approach of taxation of services, in order to ascertain the taxability of an activity, one needs to consider the following questions:- (i) Whether the service has been provided in the taxable territory by one person to another? (ii) Is the service not mentioned in the negative list of services under section 66D? (ii) Is it not a declared service as per section 66E? If the answers to the aforesaid questions are in affirmative, then the last aspect which needs to be examined is whether the service is exempted by CBEC. In case exemption has been granted to a service from whole of the service tax, it will also include exemption to education cess and secondary and higher education cess [Circular No. 134/3/2011-ST dated ]. Exempted services vs. Services included in the negative list An exempted service is a taxable service which has been exempted by the Central Government by issuing a notification under section 93(1) of the Finance Act, 1994 whereas a negative list service is not taxable at all as it is outside the scope of the charging sectionsection 66B of the Finance Act, Further, any change in the existing exemptions or any new exemption can be granted by the Central Government by issuing a notification in the Official Gazette whereas for amending the negative list of services under section 66D, Finance Act, 1994 has to be amended seeking approval from both houses of the Parliament. This chapter discusses in detail the exemptions and abatements available in respect of various services under the negative list regime. 5.2 Mega exemption notification EXEMPTIONS Notification No. 25/2012-ST dated is the mega exemption notification wherein most of the exemptions have been consolidated at one place for ease of reference. The notification has been detailed as below:- 1. Services to United Nations/specified international organization: Services provided To the United Nations and specified international organisations are exempt. However, it is important to note that services provided BY these organizations are chargeable to service tax.

226 5.2 Indirect Taxes Specified International Organization means an international organization declared by the Central Government in pursuance of section 3 of the United Nations (Privileges and Immunities) Act, 1947, to which the provisions of the Schedule to the said Act apply. Illustrative list of specified international organisations is as follows: (a) International Civil Aviation Organisation (b) World Health Organisation (c) International Labor Organisation (d) Food and Agriculture Organisation of the United Nations (e) UN Educational, Scientific and Cultural Organisation (UNESCO) (f) International Monetary Fund (IMF) 2. Health care services (a) Health care services BY a clinical establishment, an authorized medical practitioner or para-medics, and (b) Services BY a veterinary clinic in relation to health care of animals or birds are exempt from service tax. ANALYSIS (i) Meaning of health care services Health care services (a) means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India and (b) includes services by way of transportation of the patient to and from a clinical establishment, but (c) does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma. Hence, the definition of health care services is both an inclusive and exhaustive. (ii) Only recognized systems of medicines exempt: Only services in recognized systems of medicines in India provided by the persons specified under this head are exempt. In terms of the clause (h) of section 2 of the Clinical Establishments Act, 2010, the following systems of medicines are recognized systems of medicines:- Allopathy Yoga Naturopathy

227 Exemptions and Abatements 5.3 Ayurveda Homeopathy Siddha Unani Any other system of medicine that may be recognized by Central Government. 1. Authorised medical practitioner means a medical practitioner registered with any of the councils of the recognized system of medicines established or recognized by law in India and includes a medical professional having the requisite qualification to practice in any recognized system of medicines in India as per any law for the time being in force. 2. Clinical establishment means a hospital, nursing home, clinic, sanatorium or any other institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India, or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases. 3. Para-medics are trained health care professionals, for example nursing staff, physiotherapists, technicians, lab assistants etc. Services by them in a clinical establishment would be in the capacity of employee and not provided in independent capacity and will thus be considered as services by such clinical establishment. Similar services in independent capacity are also exempted. Thus, paramedics need not be medical professionals possessing professional qualifications. 3. Services by an entity registered under section 12AA of the Income tax Act, 1961 by way of charitable activities In order to claim exemption under this head, following two conditions must be satisfied:- (i) (ii) The entity is registered with income tax authorities under section 12AA of the Income tax Act, 1961, and The entity carries out one or more of the specified charitable activities**. It implies that any service other than by way of charitable activities to any other person for consideration (not covered in negative list) provided by an entity registered under section 12AA of the Income tax Act, 1961 is chargeable to service tax. **Meaning of charitable activities Charitable activities means activities relating to - (i) public health by way of -

228 5.4 Indirect Taxes (ii) (a) care or counseling of (i) (ii) terminally ill persons or persons with severe physical or mental disability, persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or (b) public awareness of preventive health, family planning or prevention of HIV infection; advancement of religion or spirituality; (iii) advancement of educational programmes or skill development relating to,- (a) abandoned, orphaned or homeless children; (b) physically or mentally abused and traumatized persons; (c) prisoners; or (d) persons over the age of 65 years residing in a rural area; (iv) preservation of environment including watershed, forests and wildlife; or (v) advancement of any other object of general public utility up to a value of `18,75,000 for the year subject to the condition that total value of such activities had not exceeded ` 25 lakh during Religious places/ceremonies Services BY a person by way of- (a) renting of precincts of a religious place meant for general public; or (b) conduct of any religious ceremony are exempt from service tax. 1. Religious place means a place which is primarily meant for conduct of prayers or worship pertaining to a religion, meditation, or spirituality. 2. General public means the body of people at large sufficiently defined by some common quality of public or impersonal nature. 3. Religious ceremonies are life-cycle rituals including special religious poojas conducted in terms of religious texts by a person so authorized by such religious texts. Occasions like birth, marriage, and death involve elaborate religious ceremonies. 5. Legal services Services provided BY - (a) an arbitral tribunal to -

229 Exemptions and Abatements 5.5 (i) (ii) any person other than a business entity; or a business entity with a turnover up to ` 10 lakh in the preceding financial year. (b) an individual as an advocate or a partnership firm of advocates by way of legal services to- (c) (i) an advocate or partnership firm of advocates providing legal services ; (ii) any person other than a business entity; or (iii) a business entity with a turnover up to ` 10 lakh in the preceding financial year. a person represented on an arbitral tribunal to an arbitral tribunal are exempt from service tax. ANALYSIS Legal service means any service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority. Advocates can provide services either as individuals or as firms. Under this head, legal services provided by advocates or partnership firms of advocates are exempt from service tax when provided to the following:- an advocate or partnership firm of advocates providing legal services (Here the services are being provided to the same class of persons) any person other than a business entity a business entity with a turnover up to rupees ten lakh in the preceding financial year However, in respect of services provided to business entities, with a turnover exceeding ` 10 lakh in the preceding financial year, tax is required to be paid on reverse charge by the business entities. Business entity is defined in section 65B of the Finance Act, 1994 as any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. Thus, it includes sole proprietors as well. The business entity can, however, take input tax credit of such tax paid in terms of the CENVAT Credit Rules, 2004, if otherwise eligible. The provisions relating to arbitral tribunal are also on similar lines. 1. Arbitral tribunal means a sole arbitrator or a panel of arbitrators. 2. Advocate means an advocate entered in any roll under the provisions of the Advocates Act, Technical testing or analysis services: Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants BY a clinical research organization approved to conduct clinical trials by the Drug Controller General of India are exempt from service tax.

230 5.6 Indirect Taxes Thus, in order to claim exemption,:- (i) (ii) technical testing or analysis must be of a newly developed drugs, including vaccines and herbal remedies. it must be conducted on human participants. (iii) it must be conducted by a clinical research organization approved to conduct clinical trials by the Drug Controller General of India. 7. Recreational coaching or training: Services by way of training or coaching in recreational activities relating to arts, culture or sports are exempt from service tax. The term recreational activities is very wide. However, under this head, the scope of training or coaching in recreational activities is restricted to the area of:- (i) (ii) Arts Culture (iii) Sports Hence, the training or coaching in recreational activities in the areas other than arts, culture or sports shall be chargeable to service tax. Further, training or coaching relating to all forms of arts, culture or sports is covered under this head. In other words, the said exemption is available to coaching or training relating to all forms of dance, music, painting, sculpture making, theatre, sports etc. 8. Educational services: Services provided TO an educational institution in respect of education exempted from service tax, by way of,- (a) auxiliary educational services; or (b) renting of immovable property are exempt from service tax. Auxiliary educational services means any services relating to imparting any skill, knowledge, education or development of course content or any other knowledgeenhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government, or transportation of students, faculty or staff of such institution. 9. Sports services: Services provided TO a recognized sports body BY- (a) an individual as a player, referee, umpire, coach or team manager for participation in a sporting event organized by a recognized sports body; (b) another recognized sports body

231 Exemptions and Abatements 5.7 are exempt from service tax. Whether the following services are exempt under this head or taxable? S. No. Service provided Whether exempt under this head or otherwise taxable? 1. Services provided to a recognized sports body by an individual as a player, referee, umpire, coach or team manager for participation in a sporting event organized by a recognized sports body 2. Service of a player to a franchisee which is not a recognized sports body 3. Services by a recognized sports body to another recognized sports body 4. Services by individuals such as selectors, commentators, curators, technical experts 5. Services of an individual as umpire, referee when provided directly to a recognized sports body Exempt under this head Taxable Exempt under this head Taxable Exempt under this head Recognized sports body means (i) (ii) Indian Olympic Association Sports Authority of India (iii) A national sports federation recognised by the Ministry of Sports and Youth Affairs of the Central Government, and its affiliate federations (iv) National sports promotion organisations recognised by the Ministry of Sports and Youth Affairs of the Central Government (v) International Olympic Association or a federation recognised by the International Olympic Association, or (vi) A federation or a body which regulates a sport at international level and its affiliated federations or bodies regulating a sport in India. 10. Sponsorship of sports events: Services by way of sponsorship of sporting events organised,- (a) by a national sports federation, or its affiliated federations, where the participating teams or individuals represent any district, State or zone; (b) by Association of Indian Universities, Inter-University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India or Special Olympics Bharat;

232 5.8 Indirect Taxes (c) by Central Civil Services Cultural and Sports Board; (d) as part of national games, by Indian Olympic Association; or (e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme are exempt from service tax. 11. Artist performance: Services BY a performing artist in folk or classical art forms of (i) music, or (ii) dance, or (iii) theatre, excluding services provided by such artist as a brand ambassador are exempt from service tax. Whether the following activities are exempt under this head or taxable? S.No. Activities Taxable or exempt 1. Activities by a performing artist in folk or classical art forms of Exempt music, dance, or theatre 2. All other activities by an artist in other art forms e.g. western Taxable music or dance, modern theatres, performance of actors in films or television serials 3. Activities of artists in still art forms e.g. painting, sculpture Taxable making etc. 4. Services provided by an artist as brand ambassador**. Taxable **Brand ambassador means a person engaged for promotion or marketing of a brand of goods, service, property or actionable claim, event or endorsement of name, including a trade name, logo or house mark of any person. 12. Services by way of collecting or providing news: Services by way of collecting or providing news by an independent journalist, Press Trust of India or United News of India are exempt from service tax. 13. Hotel services: Services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a unit of accommodation below ` 1,000 per day or equivalent are exempt from service tax. Significance of declared tariff: The relevance of declared tariff is in determining the liability to pay service tax on renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes as exemption is available where declared tariff of a unit of accommodation is below ` 1,000 per day or equivalent. However, the tax will be liable to be paid on the amount actually charged i.e. declared tariff minus any discount offered. Thus if the declared tariff is ` 1100/-, but actual room rent charged is ` 800/-, tax will be required to be paid on ` 800/-.

233 Exemptions and Abatements 5.9 When the declared tariff is revised as per the tourist season, the liability to pay tax shall be only on the declared tariff for the accommodation where the published/printed tariff is above ` 1000/- However, the revision in tariff should be made uniformly applicable to all customers and declared when such change takes place. Declared tariff includes charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit. 14. Transportation of specified goods, by road/rail/vessel The following table enumerates the goods transportation of which is exempt from service tax:- Transportation of the following goods by rail/vessel have been exempted from service tax Transportation of the following goods by a goods transport agency have been exempted from service tax Railway equipments or materials (i) goods where gross amount charged for the transportation of goods on a consignment transported in a single goods carriage does not exceed ` 1500; or (ii) goods, where gross amount charged for transportation of all such goods for a single consignee does not exceed ` 750. Common exemptions (a) agricultural produce (b) foodstuff** including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages (c) chemical fertilizer and oilcakes (d) newspaper or magazines registered with the Registrar of Newspapers (e) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap (f) defence or military equipments **Note: The expression foodstuff here includes milk also. Goods carriage means any motor vehicle constructed or adapted for use solely for the carriage of goods, or any motor vehicle not so constructed or adapted when used for the carriage of goods.

234 5.10 Indirect Taxes 15. Services by way of giving on hire - (a) to a state transport undertaking, a motor vehicle meant to carry more than 12 passengers; or (b) to a goods transport agency, a means of transportation of goods are exempt from service tax. State transport undertaking means any undertaking providing road transport service, where such undertaking is carried on by,- (i) (ii) the Central Government or a State Government; any Road Transport Corporation established under section 3 of the Road Transport Corporations Act, 1950; (iii) any municipality or any corporation or company owned or controlled by the Central Government or one or more State Governments, or by the Central Government and one or more State Governments. (iv) Zila Parishad or any other similar local authority. Explanation.-For the purposes of this clause, "road transport service" means a service of motor vehicles carrying passengers or goods or both by road for hire or reward. 16. Transport of passengers, with or without accompanied belongings, by - (a) air, embarking from or terminating in an airport located in the state of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Bagdogra located in West Bengal; (b) a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire; or (c) ropeway, cable car or aerial tramway are exempt from service tax. Contract carriage means a motor vehicle which carries a passenger or passengers for hire or reward and is engaged under a contract, whether expressed or implied, for the use of such vehicle as a whole for the carriage of passengers mentioned therein and entered into by a person with a holder of a permit in relation to such vehicle or any person authorised by him in this behalf on a fixed or an agreed rate or sum- (a) on a time basis, whether or not with reference to any route or distance; or (b) from one point to another, and in either case, without stopping to pick up or set down passengers not included in the contract anywhere during the journey, and includes- (i) a maxicab; and (ii) a motorcar notwithstanding the separate fares are charged for its passengers.

235 Exemptions and Abatements Services provided to Government, a local authority or a Governmental authority by way of - (a) carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation; or (b) repair or maintenance of a vessel are exempt from service tax. 18. Services of general insurance business provided under following schemes - (a) Hut Insurance Scheme; (b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojna (earlier known as Integrated Rural Development Programme); (c) Scheme for Insurance of Tribals; (d) Janata Personal Accident Policy and Gramin Accident Policy; (e) Group Personal Accident Policy for Self-Employed Women; (f) Agricultural Pumpset and Failed Well Insurance; (g) Premia collected on export credit insurance; (h) Weather Based Crop Insurance Scheme or the Modified National Agricultural Insurance Scheme, approved by the Government of India and implemented by the Ministry of Agriculture; (i) Jan Arogya Bima Policy; (j) National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana); (k) Pilot Scheme on Seed Crop Insurance; (l) Central Sector Scheme on Cattle Insurance; (m) Universal Health Insurance Scheme; (n) Rashtriya Swasthya Bima Yojana; or (o) Coconut Palm Insurance Scheme; are exempt from service tax. General insurance business means fire marine or miscellaneous insurance business, whether carried on singly or in combination with one or more of them, but does not include capital redemption business and annuity certain business. 19. Services provided by an incubatee up to a total turnover of ` 50 lakh in a financial year subject to the following conditions, namely:- (a) the total turnover had not exceeded ` 50 lakh during the preceding financial year; and

236 5.12 Indirect Taxes (b) a period of three years has not elapsed from the date of entering into an agreement as an incubate are exempt from service tax. Incubatee means an entrepreneur located within the premises of a Technology Business Incubator (TBI) or Science and Technology Entrepreneurship Park (STEP) recognized by the National Science and Technology Entrepreneurship Development Board (NSTEDB) of the Department of Science and Technology, Government of India and who has entered into an agreement with the TBI or the STEP to enable himself to develop and produce hi-tech and innovative products. 20. Service by an unincorporated body or a non- profit entity registered under any law for the time being in force, to its own members by way of reimbursement of charges or share of contribution - (a) as a trade union; (b) for the provision of carrying out any activity which is exempt from the levy of service tax; or (c) up to an amount of ` 5,000 per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex are exempt from service tax. Trade union means any combination, whether temporary or permanent, formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen, or between employers and employers, or for imposing restrictive conditions on the conduct of any trade or business, and includes any federation of two or more Trade Unions. 21. Services by the following persons in respective capacities are exempt from service tax - (a) sub-broker or an authorized person to a stock broker; (b) authorized person to a member of a commodity exchange; (c) mutual fund agent to a mutual fund or asset management company; (d) distributor to a mutual fund or asset management company; (e) selling or marketing agent of lottery tickets to a distributer or a selling agent; (f) selling agent or a distributer of SIM cards or recharge coupon vouchers; (g) business facilitator or a business correspondent to a banking company or an insurance company, in a rural area.

237 Exemptions and Abatements Banking company means a banking company as defined in section 5 of the Banking Regulation Act, 1949, and includes the State Bank of India any subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, any corresponding new bank constituted by section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and any other financial institution notified by the Central Government in this behalf. As per section 5 of the Banking Regulation Act, 1949, "banking company" means any company which transacts the business of banking in India; Explanation. Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause. 2. Business facilitator or business correspondent means an intermediary appointed under the business facilitator model or the business correspondent model by a banking company or an insurance company under the guidelines issued by Reserve Bank of India. 3. Commodity exchange means an association an association to which recognition for the time being has been granted by the Central Government under section 6 of the Forward Contracts (Regulation) Act, 1952 in respect of goods or classes of goods specified in such recognition. 4. Distributor or selling agent means an individual or a firm or a body corporate or other legal entity under law so appointed by the Organising State through an agreement to market and sell lotteries on behalf of the Organising State and shall include distributor or selling agent authorised by the lottery-organising State. 5. Insurance company means a company carrying on life insurance business or general insurance business. 6. Rural area means the area comprised in a village as defined in land revenue records, excluding- (a) the area under any municipal committee, municipal corporation, town area committee, cantonment board or notified area committee; or (b) any area that may be notified as an urban area by the Central Government or a State Government. 7. Sub-broker means any person not being a member of stock exchange who acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers. 22. Carrying out an intermediate production process as job work in relation to - (a) agriculture, printing or textile processing;

238 5.14 Indirect Taxes (b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act, 1985; (c) any goods on which appropriate duty is payable by the principal manufacturer; or (d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines upto an aggregate value of taxable service of the specified processes of ` 150 lakh in a financial year subject to the condition that such aggregate value had not exceeded ` 150 lakh rupees during the preceding financial year are exempt from service tax. 1. Appropriate duty means duty payable on manufacture or production under a Central Act or a State Act, but shall not include Nil rate of duty or duty wholly exempt. 2. Principal manufacturer means any person who gets goods manufactured or processed on his account from another person. 23. Services by an organizer to any person in respect of a business exhibition held outside India are exempt from service tax. 24. Services by way of making telephone calls from - (a) departmentally run public telephone; (b) guaranteed public telephone operating only for local calls; or (c) free telephone at airport and hospital where no bills are being issued are exempt from service tax. 25. Services by way of slaughtering of animals are exempt from service tax. 26. Services received from a provider of service located in a non- taxable territory by - (a) Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession; (b) an entity registered under section 12AA of the Income tax Act, 1961 for the purposes of providing charitable activities; or (c) a person located in a non-taxable territory are exempt from service tax. 27. Services of public libraries by way of lending of books, publications or any other knowledge- enhancing content or material are exempt from service tax. 28. Services by Employees State Insurance Corporation to persons governed under the Employees Insurance Act, 1948 are exempt from service tax. 29. Services by way of transfer of a going concern, as a whole or an independent part thereof are exempt from service tax.

239 Exemptions and Abatements Services by way of public conveniences such as provision of facilities of bathroom, washrooms, lavatories, urinal or toilets are exempt from service tax. 31. Services by a Governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243W of the Constitution are exempt from service tax. 32. Life insurance services provided under Janashree Bima Yojana and Aam Aadmi Bima Yojana Services of life insurance business provided under following schemes are exempt from service tax- (a) Janashree Bima Yojana (JBY); or (b) Aam Aadmi Bima Yojana (AABY) 5.3 Small service provider s (SSP) exemption Central Government has exempted the taxable services of aggregate value not exceeding `10 lakh in any financial year from the whole of the service tax leviable thereon under section 66B of the Finance Act, 1994 in case the aggregate value of taxable services rendered by the service provider from one or more premises, does not exceed ` 10 lakh in the preceding financial year. A. Services in respect of which SSP exemption is not available (i) Taxable services provided under brand name: SSP exemption is not available to the taxable services provided by a person under a brand name or trade name, whether registered or not, of another person. (ii) Services taxed under reverse charge mechanism: SSP exemption is not available to such value of taxable services in respect of which service tax is payable on reverse charge mechanism by a person. B. Availability of the CENVAT credit on inputs, input services and capital goods (i) CENVAT credit on input services (a) The provider of taxable service shall not avail the CENVAT credit 1 of service tax paid on any input services used for providing the said taxable service, for which SSP exemption is availed of. (b) The provider of taxable service shall avail the CENVAT credit only on such input services received, on or after the date on which the service provider starts paying service tax, and used for the provision of taxable services for which service tax is payable. 1 The provisions relating to CENVAT credit have been discussed in Chapter-7: CENVAT credit.

240 5.16 Indirect Taxes (ii) CENVAT credit on inputs (a) Service provider shall avail the CENVAT credit only on such inputs received, on or after the date on which the service provider starts paying service tax, and used for the provision of taxable services for which service tax is payable. (b) A service provider who starts availing SSP exemption shall be required to pay an amount equivalent to the CENVAT credit taken by him, if any, in respect of such inputs lying in stock or in process on the date on which he starts availing the said exemption. Balance credit shall not be utilised in terms of rule 3(4) of the CENVAT Credit Rules, 2004 and shall lapse on the day such service provider starts availing SSP exemption. (iii) CENVAT credit on capital goods: Service provider shall not avail the CENVAT credit on capital goods received, during the period in which the service provider avails SSP exemption. C. Other points which merit consideration (i) Exemption is optional: Service provider has an option not to avail the SSP exemption and pay service tax. Option, once exercised in a financial year, shall not be withdrawn during the remaining part of such financial year. (ii) Aggregate value of all taxable services provided from all premises to be considered: Where a taxable service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services. D. Aggregate value of taxable services in case of Goods Transport Agency: In case of goods transport agency (GTA), for the purposes of determining the aggregate value not exceeding ` 10 lakh, to avail exemption under this notification, the payment received towards the gross amount charged by the GTA under section 67 of the said Finance Act for which the person liable for paying service tax is the consignor or consignee shall not be taken into account. [Notification No. 33/2012-S.T. dated ] Meaning of important terms 1. Brand name or trade name means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented word or writing which is used in relation to such specified services for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified services and some person using such name or mark with or without any indication of the identity of that person. 2. Aggregate value means the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under section 66B of the said Finance Act under any other notification.

241 Exemptions and Abatements Exemption from service tax equal to R&D cess payable on import of technology The amount of Research and development cess payable shall be allowed as a deduction from the service tax payable on the taxable service involving the import of technology. Conditions to be fulfilled:- (a) The Research & Development Cess is paid at the time of or before payment for the service subject to maximum of 6 months period from the date of invoice*. *In case of associated enterprises, the date of credit in the books of account. (b) Necessary records will have to be maintained so as to establish a linkage between the invoice or the credit entry (as the case may be) and the cess payment challan. Research and development cess Research and Development cess is levied, on the payment of technical fees/consultancy/ royalty or know-how etc. involving the import of technology, under section 3 of the Research & Development Act, The purpose of levying this cess is to encourage the commercial application of indigenously developed technology. Rate of cess: Rate of research and development cess is 5%. [Notification No. 14/2012-S.T, dated ] 5.5 Refund of service tax paid on services used in the export of goods I. Refund of service tax where service tax is paid by exporter himself under reverse charge mechanism: The exemption would be available: II. (1) on two services, viz. (i) Transport of goods by road from any container freight station (CFS) or inland container depot (ICD) to port/airport of exports or from the place of removal (i.e. factory) to CFS, ICD, port or airport of exports; (ii) service provided by a foreign commission agent who causes sale of goods abroad; (2) to exporters of goods who are registered with export promotion councils and are holding import export code number and are also registered with service tax/central excise authorities as they are otherwise required to pay service tax on the above services received, under reverse charge mechanism; (3) in case of a foreign commission agent, exemption is limited to the service tax calculated on a value of 10% of the FOB value of export goods for which the said service has been used. [Notification No. 31/2012 dated and Notification No. 42/2012-ST dated ] Rebate of service tax paid on specified services used in the export of goods: With effect from , a simplified scheme for rebate to the exporters of goods has been prescribed. Under this scheme, the exporters have been provided with an option to

242 5.18 Indirect Taxes claim refund electronically through ICES scheme. Otherwise, they can claim rebate on the basis of documents. The rebate shall be granted by way of refund of service tax paid on the specified services. Meaning of specified services Specified services means- (i) in the case of excisable goods, taxable services that have been used beyond the place of removal, for the export of said goods; (ii) in the case of goods other than (i) above, taxable services used for the export of said goods; but shall not include any service mentioned in sub-clauses (A), (B), (BA) and (C) of rule 2(l) of the CENVAT Credit Rules, Manner of claiming rebate The exporters now have a choice to opt either of the following options: A. Electronic rebate through ICES system, which is based on the notified schedule of rates on the lines of duty drawback, or B. Rebate on the basis of documents, by approaching the Central Excise/Service Tax formations. It may be noted that the rebate on the basis of documents shall not be claimed wherever the difference between the amount of rebate under ICES system and amount of rebate on the basis of documents is less than 20% of the rebate under ICES system. A. Procedure for electronic rebate through ICES system (a) An exporter should (i) have a bank account and also a central excise registration or service tax code number** and the same should be registered with Customs ICES, and (ii) declare his option to avail service tax rebate on the electronic shipping bill/bill of export while presenting the same to the proper officer of Customs. **Note: If the exporter does not have Service tax code number referred to in clause (i) above, it should be obtained by filing a declaration in Form A-2 to the jurisdictional Assistant Commissioner / Deputy Commissioner of Central Excise. (b) Service tax paid on the specified services eligible as rebate under this exemption shall be calculated electronically by the ICES system, by applying

243 Exemptions and Abatements 5.19 the rate specified in the schedule against the said goods, as a percentage of the FOB value. (c) Rebate shall be deposited in the bank account of the exporter. (d) An exporter who has claimed the rebate electronically cannot claim the refund again on the basis of documents. (e) Minimum service tax rebate for an electronic shipping bill is ` 50. B. Procedure for refund on the basis of documents (a) Actual payment of service tax: For claiming rebate, the exporter has to actually pay the service tax on the specified service used for export of goods. (b) No rebate to service provider: The service provider which provides the specified services to the exporter claiming rebate of the service tax paid on such services, will not be eligible to claim rebate. (c) Time-limit for filing the rebate claim: Time-limit for filing the rebate claim shall be one year from the date of export of the said goods. The date of export shall be the date on which the proper officer of Customs makes an order permitting clearance and loading of the said goods for exportation. (d) Minimum amount of rebate: is ` 500. (e) Realization of export proceeds: Sale proceeds in respect of exported goods must be received by or on behalf of the exporter, in India, within the period allowed by the RBI, including any extension thereof. (f) Where any rebate of service tax paid on specified service utilized for export of said goods has been allowed to an exporter but the sale proceeds in respect of said goods are not received by or on behalf of the exporter, in India, within the period allowed by the Reserve Bank of India including any extension thereof, such rebate shall be deemed never to have been allowed and recovered under the provisions of the said Act and the rules made thereunder. Documents to be submitted for rebate claim 1. Exporter registered under Central Excise Act, 1944 shall file a claim for rebate of service tax in Form A-1 to the jurisdictional Assistant Commissioner/Deputy Commissioner of Central Excise. Where the exporter is not so registered, he shall first file a declaration in Form A-2, seeking allotment of service tax code to the jurisdictional Assistant Commissioner/Deputy Commissioner of Central Excise and on obtaining the service tax code, file refund claim in Form A Relevant invoice/ bill/ challan/ any other document for each specified service, in original, evidencing payment for the specified service used for

244 5.20 Indirect Taxes export of the said goods and the service tax payable needs to be attached with the application. (g) Certification of the documents enclosed with the rebate claim [mentioned in clause 2. of point (f) above]: The documents enclosed with the rebate claim have to be certified in the following manner:- Where the amount of rebate claim is Upto 0.50% of total FOB value of export goods More than 0.50% of total FOB value of export goods In case the exporter is proprietorship concern or partnership firm documents enclosed with the claim shall be certified by the exporter himself. In case the exporter is a limited company documents enclosed shall be certified by the person authorized by the Board of Directors. documents enclosed shall be certified by the CA who audits the annual accounts of the exporter for the purposes of Companies Act, 1956 or the Income-tax Act, 1961, as the case may be. (h) Grant of refund: Assistant Commissioner/Deputy Commissioner of Central Excise, shall, after satisfying himself, shall grant the rebate to the exporter within a period of one month from the receipt of the said claim. Points to be noted:- (a) No CENVAT credit on the specified services used for export: No CENVAT credit of service tax paid on the specified services used for export of the said goods can be taken under the CENVAT Credit Rules, (b) No exemption to SEZ: The aforesaid exemption cannot be claimed by a Unit or Developer of a Special Economic Zone. [Notification No. 41/2012-S.T. dated ]

245 Exemptions and Abatements Exemption to services for use of foreign Diplomatic Mission/consular post in India or family members of diplomatic agents or career consular officers posted therein Following services are exempt from service tax:- (i) All taxable services provided by any person to foreign diplomatic missions or consular posts in India for their official use. (ii) All taxable services provided by any person for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein. The Notification also prescribes the procedure for availing the said exemption. [Notification No. 27/2012-ST dated ] 5.7 Exemption to services provided by TBI/ STEP All taxable services provided or to be provided by Technology Business Incubators (TBI)/Science and Technology Entrepreneurship Parks (STEP) recognized by National Science and Technology Entrepreneurship Board (NSTEBD) of the Department of Science & Technology have been exempted from the whole of service tax leviable thereon. Conditions to be satisfied (i) (ii) The STEP or the TBI, who intends to avail the exemption, shall furnish the requisite information containing the details of the incubator along with the information received from each incubatee to the concerned Assistant/Deputy Commissioner of Central Excise before availing the exemption; and The STEP or the TBI shall thereafter furnish the information in the formats mentioned above in the same manner before the 30th day of June of each financial year. [Notification No. 32/2012 dated ] 5.8 Exemption to services received by a developer/units of an SEZ Notification No. 40/2012-ST dated provides as follows:- (A) Eligibility for exemption The taxable services received and used for the authorized operations by any of the following are eligible for exemption under this notification:- a unit located in a Special Economic Zone (hereinafter referred to as SEZ) developer of SEZ. (B) Refund route/upfront exemption (i) Option not to pay service tax ab-intio in case the specified services are wholly consumed within the SEZ : Where the services are received in SEZ and used in

246 5.22 Indirect Taxes authorized operations are wholly consumed within SEZ, the person liable to pay service tax has the option not to pay the service tax. Hence, under this option, instead of the Unit or Developer claiming exemption by way of refund, service tax may not be paid ab intio. Example of wholly consumed services- In case architectural services are provided in relation to an immovable property which is situated in SEZ, such services shall be considered to be wholly consumed within SEZ. (ii) Refund route available where the specified services are not wholly consumed within the SEZ: Where the specified services received and used for authorised operations are partially consumed within the SEZ and partially in DTA unit, i.e. shared services, the exemption shall be provided only by way of refund of service tax paid on the specified services received for the authorised operations in a SEZ. Hence, the option of not paying the service tax ab intio is not available here. (C) Restricted amount of refund in case the specified services are not wholly consumed within the SEZ Where the specified services received by Unit or Developer, are not wholly consumed within SEZ, i.e., shared between authorised operations in SEZ Unit and Domestic Tariff Area (DTA) Unit, maximum refund shall be restricted to the extent of the ratio of export turnover of goods and services multiplied by the service tax paid on services other than wholly consumed services to the total turnover for the given period to which the claim relates. Maximum refund = where ST ET TT ST stands for service tax paid on services other than wholly consumed services (used for both SEZ and DTA Unit) ET stands for Export turnover of goods and services of SEZ Unit/Developer TT stands for Total turnover for the period Meaning of important terms (a) Refund amount means the maximum refund that is admissible for the period. (b) Export turnover of goods means the value of final products and intermediate products cleared during the relevant period and exported. (c) Export turnover of services means the value of the export service calculated in the following manner, namely:- Export turnover of services = payments received during the relevant period for export services + export services whose provision has been completed for which

247 Exemptions and Abatements 5.23 payment had been received in advance in any period prior to the relevant period advances received for export services for which the provision of service has not been completed during the relevant period (d) Total turnover means the sum total of the value of:- (i) (ii) Points to be noted:- all excisable goods cleared during the relevant period including exempted goods, dutiable goods and excisable goods exported. export turnover of services [determined in terms of clause (c) above] and the value of all other services, during the relevant period. 1. CENVAT credit of service tax paid on the specified services cannot be taken. 2. The developer or unit of a SEZ, shall maintain proper account of receipt and use of the specified services on which exemption is claimed, for authorised operations in the SEZ. The Notification also prescribes the procedure for availing the said exemption. 5.9 Exemption to specified export promotion schemes The taxable services provided or agreed to be provided against the following duty credit scrips by a person located in the taxable territory are exempt from service tax:- (i) Focus Market Scheme duty credit scrip issued to an exporter by the Regional Authority in accordance the Foreign Trade Policy. (ii) Focus Product Scheme duty credit scrip issued to an exporter by the Regional Authority in accordance with the Foreign Trade Policy. (iii) Vishesh Krishi and Gram Udyog Yojana (Special Agriculture and Village Industry Scheme) duty credit scrip issued to an exporter by the Regional Authority in accordance with the Foreign Trade Policy. [Notification No.s 6/2013 to 8/2013-ST dated ] ABATEMENT 5.10 Abatement in respect of various taxable services Following taxable services are eligible for abatement from the gross amount in the following manner:- S.No. Description of taxable service Percentage of abatement Conditions 1 Transport of goods by rail 70 Nil. 2 Transport of passengers, with 70 Nil. or without accompanied belongings by rail

248 5.24 Indirect Taxes 3 Transport of passengers by air, with or without accompanied belongings 4 Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes. 5 Services of goods transport agency in relation to transportation of goods. 6 Services provided in relation to chit 7 Renting of any motor vehicle designed to carry passengers 8 Transport of goods in a vessel 9 Services by a tour operator in relation to,- (i) a package tour (ii) a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour 60 CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, Same as above. 75 CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, Same as above. 60 Same as above. 50 Same as above. 75 (i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, (ii) The bill issued for this purpose indicates that it is inclusive of charges for such a tour. 90 (i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT

249 Exemptions and Abatements 5.25 (iii) any services other than specified at (i) and (ii) above. Credit Rules, (ii) The invoice, bill or challan issued indicates that it is towards the charges for such accommodation. (iii) This exemption shall not apply in such cases where the invoice, bill or challanissued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation. 60 (i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, (ii) The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour. Note: It may be noted that service of transportation of passengers, with or without accompanied belongings, by railways in first class or an air conditioned coach [taxable since specifically excluded from the negative list] and services by way of transportation of goods by railways were exempt from service tax between and (both inclusive). Important definitions 1. Chit means a transaction whether called chit, chit fund, chitty, kuri, or by whatever name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period and that each subscriber shall, in his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to a prize amount,

250 5.26 Indirect Taxes 2. Package tour means a tour wherein transportation, accommodation for stay, food, tourist guide, entry to monuments and other similar services in relation to tour are provided by the tour operator as part of the package tour to the person undertaking the tour, 3. Tour operator means any person engaged in the business of planning, scheduling, organizing, arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport, and includes any person engaged in the business of operating tours. [Notification No. 26/2012-ST dated ]

251 6.1 Introduction 6 Service Tax Procedures We have already understood the concept of service, negative list of services, point of taxation, valuation, exemptions and abatement in respect of various taxable services. In this chapter, discussion is focused on procedures to be followed for complying with the provisions of the law. 6.2 Registration [Section 69 & rule 4 of the Service Tax Rules, 1994] Every person liable to pay service tax is required to register himself by making an application to the Superintendent of Central Excise [Section 69(1)]. The procedure for registration has been laid down by rule 4 of the Service Tax Rules, It prescribes the time, manner and form for registration. (1) Procedure for registration: The provisions of rule 4 are enumerated as follows:- (a) Application: Application for registration is to be made by every person liable for paying the service tax in Form ST-1: (i) (ii) within 30 days from the date on which service tax is levied or within 30 days from the date of commencement of business whichever is later, to the concerned Superintendent of Central Excise having jurisdiction. (b) Documents to be submitted along with the application of service tax registration: The following documents have been prescribed by the CBEC to be submitted along with the application for registration under service tax: (a) Copy of Permanent Account Number (PAN) (b) Proof of Residence (c) Constitution of the Applicant (d) Power of Attorney in respect of authorized person (s). The above documents must be submitted within a period of 15 days from the date of filing of the application, otherwise the application may be rejected. The time limit of

252 6.2 Indirect Taxes seven days within which the registration is to be granted by the Superintendent of Central Excise/Service Tax would be reckoned from the date the application for registration is complete in all respects. (c) Grant of Registration Certificate: The Superintendent of Central Excise shall after due verification of the application form (Form ST-1), or an intimation of change in any information or details under sub-rule (5A), as the case may be, grant a certificate of registration in Form ST-2 within 7 days from the date of receipt of the application or intimation. If the registration certificate is not granted within the said period, the registration applied for shall be deemed to have been granted. This may not be a solution for non-granting of the certificate since the registration number is required for payment of service tax, filing of returns, etc. [Sub-rule (5)]. (2) Centralised registration: Where a person, liable for paying service tax on a taxable service: (i) provides such service from more than one premises or offices; or (ii) receives such service in more than one premises or offices; or (iii) is having more than one premises or offices, which are engaged in relation to such service in any other manner, making such person liable for paying service tax, and has centralised billing system or centralised accounting system in respect of such service, and such centralised billing or centralised accounting systems are located in one or more premises, he may, at his option, register such premises or offices from where centralised billing or centralised accounting systems are located [Sub-rule (2)]. (a) Registration to be granted by the Commissioner having jurisdiction: Registration shall be granted by the Commissioner of Central Excise having jurisdiction over the premises/offices for which centralized registration is sought (i.e., the premises from where centralized billing/accounting is done) [Sub-rule (3)]. (b) Separate applications in case the assessee does not have centralized billing/ accounting systems: Where an assessee providing taxable service from more than one premises or offices, who does not have any centralized billing systems or centralized accounting systems, as the case may be, shall make separate applications for registration in respect of each of such premises or offices to the jurisdictional Superintendent of Central Excise [Sub-rule (3A)]. (3) Single application in case of assessee providing more than one taxable service: Where an assessee is providing more than one taxable service, he may make a single application mentioning therein all the taxable services provided by him [Sub-rule (4)]. Certificate of registration in Form ST-2 should indicate the details of all the taxable services provided by the service provider. Thus, an assessee rendering multiple taxable services will be assessed by one Superintendent of Central Excise in respect of all the taxable services rendered by him.

253 Service Tax Procedures 6.3 (4) Intimation of change in any information or details in the registration certificate: Change in any information or details furnished by an assessee at the time of obtaining registration or any additional information or detail intended to be furnished should be intimated in Form ST-1 in writing by the assessee to the jurisdictional Assistant/Deputy Commissioner of Central Excise. Such intimation should be made within a period of 30 days of such change [Sub-rule (5A)]. (5) Fresh registration certificate in case of transfer of business: When a registered assessee transfers his business to another person, the transferee shall obtain a fresh certificate of registration [Sub-rule (6)]. (6) Surrender of registration certificate: Every registered assessee who ceases to provide taxable service shall surrender his registration certificate immediately to the Superintendent of Central Excise [Sub-rule (7)]. On receipt of the certificate under sub-rule (7), the Superintendent of Central Excise shall ensure that the assessee has paid all monies due to the Central Government under the provisions of the Act/Rules/Notifications and thereupon cancel the registration certificate [Sub-rule (8)]. (7) Person/class of persons notified by Central Government: Every person liable to pay service tax is required to get himself registered. Besides, the Central Government may, by notification in the Official Gazette, specify such other person or class of persons, who shall make an application for registration within such time and in such manner and in such form as my be prescribed [Section 69(2)]. The following person/class of persons have been notified by the Central Government who shall make an application for registration under the provisions of section 69(2):- (i) (ii) (i) an input service distributor; and any provider of taxable service whose aggregate value of taxable service in a financial year exceeds ` 9,00,000. Input service distributor: The input service distributor shall make an application to the jurisdictional Superintendent of Central Excise in the prescribed form for registration:- (i) within a period of 30 days of the commencement of business or (ii) whichever is later.

254 6.4 Indirect Taxes The input service distributor shall furnish a return to the jurisdictional Superintendent of Central Excise in such form and at such frequency as prescribed under of rule 9(10) of the CENVAT Credit Rules, Meaning of input service distributor Input service distributor means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be [Rule 2(m) of the CENVAT Credit Rules, 2004]. A service provider may have a head office/regional office/other offices at locations other than where the service activity is carried out. The services and/or invoices for services availed may be received at such head office/regional offices/other offices. This provides a way in which a service provider can distribute the credit on invoices for the input services received at the head office/branch office or administrative office, to its premises providing output service. Had this provision been absent, credit could have been denied on such invoices addressed to a location other than from where the output service is provided. (ii) Provider of taxable service whose aggregate value of taxable service in a financial year exceeds ` 9,00,000: The provider of taxable service whose aggregate value of taxable service in a financial year exceeds ` 9,00,000 shall make an application to the jurisdictional Superintendent of Central Excise in the prescribed form for registration within a period of 30 days of exceeding the aggregate value of taxable service of ` 9,00,000. Points to be noted: (a) Meaning of aggregate value of taxable service Aggregate value of taxable service means the sum total of first consecutive payments received during a financial year towards the gross amount, as prescribed under section 67, charged by the service provider towards taxable services but does not include payments received towards such gross amount which are exempt from the whole of service tax under any notification other than Notification No. 6/2005-ST dated **. (b) Service provider providing one or more taxable services from one or more premises Where a provider of taxable service provides one or more taxable services from one or more premises, the aggregate value of all such taxable services and from The provisions relating to CENVAT credit have been discussed in detail in Chapter 7: CENVAT Credit

255 Service Tax Procedures 6.5 all such premises and not separately for each services or each premises shall be taken into account for computation of aggregate value of taxable service. **In view of the fact that the negative list approach of taxation of services has been introduced and Notification No. 6/2005-ST dated has been superseded by Notification No. 33/2012-ST dated , the said definition needs to be revisited. 6.3 Issue of invoice, bill or challan or consignment note [Rule 4A & 4B of the Service Tax Rules, 1994] (1) Issue of invoice, bill or challan Rule 4A merits importance as the credit on invoices which are not in accordance with rule 4A can be denied. As per rule 4A, every person providing taxable service shall issue an invoice or a bill, or a challan signed by such person or a person authorized by him in respect of such taxable service provided or agreed to be provided. The invoice, bill or challan shall be serially numbered. A. CONTENTS OF INVOICE/BILL/CHALLAN The invoice, bill or challan shall be serially numbered and shall contain the following details, namely: (i) (ii) Name, address and the registration number of such person; Name and address of the person receiving taxable service; (iii) Description of service provided or agreed to be provided; (iv) Value of the taxable service provided or a agreed to be provided and (v) Service tax payable thereon. Relaxations: (i) Banking companies and financial institution: A banking company or a financial institution including non-banking financial company providing services to any person enjoys the relaxation that invoice may not be serially numbered and may not contain the address of the service receiver. Meaning of important terms 1. Banking company: Banking company means a banking company as defined in section 5 of the Banking Regulation Act, 1949, and includes the State Bank of India any subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, any corresponding new bank constituted by section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and any other financial institution notified by the Central Government in this behalf [Rule 2(1)(bb)]. As per section 5 of the Banking Regulation Act, 1949, "banking company" means any company which transacts the business of banking in India;

256 6.6 Indirect Taxes Explanation. Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause. 2. Financial institution: Financial institution means any non-banking institution which carries on as its business or part of its business any of the following activities, namely: (i) (ii) the financing, whether by way of making loans or advances or otherwise, of any activity other than its own: the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature: (iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972 : (iv) the carrying on of any class of insurance business; (v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto; (vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lumpsum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person, but does not include any institution, which carries on as its principal business, (a) agricultural operations; or (aa) industrial activity; or (b) the purchase or sale of any goods (other than securities) or the providing of any services; or (c) the purchase, construction or sale of immovable property, so however, that no portion of the income of the institution is derived from the financing of purchases, constructions or sales of immovable property by other persons [Rule 2(1)(bd)]. 3. Non-banking financial company: Non-banking financial company means (i) (ii) a financial institution which is a company; a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; It may be noted that the Hire-Purchase Act, 1972 has been repealed.

257 Service Tax Procedures 6.7 (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify [Rule 2(1)(ccc)]. (ii) Goods transport agency: In case the service provider is a goods transport agency, an invoice, a bill or, a challan shall include a document containing the details of the consignment note number and date, gross weight of the consignment and other required information. It implies that the document issued by a goods transport agency need not necessarily be nomenclatured as challan. (iii) Passenger transport service: In case of transport of passengers [by any mode of transport], the ticket (in any form, including electronic form, whatever may be the name) would be deemed to be the invoice/bill/challan for the purposes of the rule. The ticket would be a valid invoice/ bill /challan even if it does not contain registration number of the service provider or address of the service receiver. For instance, in case of air-travel, the airlines or the agent may not issue a separate invoice to the passenger but may issue the ticket showing the price of such ticket as well. In such a case, the ticket issued by the airlines would be a valid invoice. (iv) Invoice not required in case where payment upto ` 1,000 received in excess of the invoiced amount: Wherever the provider of taxable service receives an amount upto ` 1,000 in excess of the amount indicated in the invoice and the provider of taxable service has opted to determine the point of taxation based on the option as given in the Point of Taxation Rules, 2011 (which is earlier of date of invoice or completion of service), no invoice is required to be issued to such extent. B. TIME LIMIT FOR ISSUE OF INVOICE/BILL/CHALLAN Such an invoice has to be issued within 30 days from the date of:- (i) completion of such taxable service or (ii) receipt of any payment towards the value of such taxable service whichever is earlier. Time limit for issue of invoice/bill/challan in case of: (a) Continuous supply of service In case of continuous supply of service, every person providing such taxable service shall issue an invoice, bill or challan, as the case may be, within 30 days of the date when each event specified in the contract, which requires the service receiver to make any payment to service provider, is completed. (b) Banking and other financial institution including NBFC The time-limit for issuance of invoice, bill or challan, as the case may be, shall be 45 days in case where the service provider is: (i) A banking company

258 6.8 Indirect Taxes (ii) A financial institution including a non-banking financial company providing service to any person. Reminder letters issued by life insurance companies to policy holders to pay renewal premiums cannot be considered as invoice In terms of practice followed, life insurance companies issue reminder notices/letters to the policy holders to pay renewal premiums. Such reminder notices only solicit furtherance of service which if accepted by policy holder by payment of premium results in a service. No tax point arises on account of such reminders. Thus, reminder letters/notices for insurance policies not being invoices would not invite levy of service tax. In case of issuance of any invoice, point of taxation shall accordingly be determined C. DOCUMENTS TO BE ISSUED BY INPUT SERVICE DISTRIBUTOR Every input service distributor distributing credit of taxable services shall, in respect of credit distributed, issue an invoice, a bill or, as the case may be, a challan signed by such person or a person authorized by him, for each of the recipient of the credit distributed, and such invoice, bill or, as the case may be, challan shall be serially numbered. (a) Contents of invoice/bill/challan: It shall contain the following details, namely: - (i) Name, address and registration number of the person providing input services and the serial number and date of invoice, bill, or as the case may be, challan; (ii) Name and address of the said input services distributor; (iii) Name and address of the recipient of the credit distributed; (iv) Amount of the credit distributed. (b) Exemption to banking companies and financial institution: An input service distributor which is an office of a banking company or a financial institution including non-banking financial company providing services to any person enjoys the relaxation that invoice may not be serially numbered. (c) Centralized registration and Input Service Distributor (ISD) being mutually exclusive: It may be noted that the centralized registration and ISD are mutually exclusive. One can be centrally registered, but still would have to be registered as ISD to enable credit from those locations where there is no service being provided. Further, one who is not centrally registered may like to accumulate the credits at one point and redistribute the same to the units whenever there is a need. (2) Issue of Consignment Note Provisions of rule 4B of the Service Tax Rules, 1994 are as follows:- Any goods transport agency, which provides service in relation to transport of goods by road in a goods carriage, shall issue a consignment note to the recipient of service.

259 Service Tax Procedures 6.9 (a) Consignment note means a document, issued by a goods transport agency against the receipt of goods for the purpose of transport of goods by road in a goods carriage, which is serially numbered. (b) Contents of consignment note A consignment note shall contain the following details - (i) (ii) Name of the consignor and consignee, Registration number of the goods carriage in which the goods are transported, (iii) Details of the goods transported, (iv) Details of the place of origin and destination, (v) Person liable for paying service tax whether consignor, consignee or the goods transport agency. Relaxation to exempted goods: Where any taxable service in relation to transport of goods by road in a goods carriage is wholly exempted under section 93 of the Act, the goods transport agency shall not be required to issue the consignment note. 6.4 Person liable to pay service tax [Section 68 & Rule 2(1)(d) of the Service Tax Rules, 1994] Section 68 of the Finance Act, 1994 is the principal section which fixes responsibility to pay service tax. The powers to decide time and manner of payment of service tax have been granted to the Central Government vide rule 6 of the Service Tax Rules, Generally, it is the service provider rendering taxable services who is liable to pay service tax to the Central Government at regular intervals of time. However, in certain cases, Government finds it convenient to collect service tax from the service receiver. The provisions related to person liable to pay service tax have been discussed below: (a) Person liable to pay service tax: Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B (12.36%) in the prescribed manner and within the prescribed period. [Section 68(1)]. The period and the manner have been prescribed in rule 6 of the Service Tax Rules, (b) REVERSE CHARGE MECHANISM-Certain specified persons in respect of certain notified services liable to pay service tax: In respect of taxable services notified by the Central Government, the service tax thereon is paid by certain specified persons in the prescribed manner. Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider [Section 68(2)]. Hence, Central Government is empowered to notify the service and extent of service tax payable each by the service provider and service receiver.

260 6.10 Indirect Taxes In pursuance of this power, the Central Government has issued Notification No. 30/2012 dated which provides as follows: Services notified by the Central Government Services where entire service tax is payable by the service receiver Services where service tax is jointly payable by both service provider and service receiver SERVICES WHERE ENTIRE SERVICE TAX IS PAYABLE BY THE SERVICE RECEIVER:- 1. Insurance agent services: The taxable services provided or agreed to be provided by an insurance agent to any person carrying on the insurance business; 2. Goods transport agency services: The taxable services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road, where the person liable to pay freight is, (a) any factory registered under or governed by the Factories Act, (b) any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India. (c) any co-operative society established by or under any law. (d) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 or the rules made thereunder. (e) any body corporate established, by or under any law, or (f) any partnership firm whether registered or not under any law including association of persons. Note: The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification. 3. Sponsorship services: The taxable services provided or agreed to be provided by way of sponsorship to anybody corporate or partnership firm located in the taxable territory. 4. Legal services: The taxable services provided or agreed to be provided to any business entity located in the taxable territory by,- (a) an arbitral tribunal, or