Indrajit

This paper seeks to provide a bird eyes view of the taxation structure in India. The topics broadly
covered here are Direct Taxes (Income Taxes) and Indirect taxes (At Central Government level and State
Government level). The other level of classification can be based on who levies the taxes. It is an overview
and not supposed to be a comprehensive in-depth analysis of different taxes.

Central Government levies taxes on the following:

Income Tax: Tax on income of a person

Customs duties: Duties on import and export of goods

Central excise: Taxes on Manufacturing of dutiable goods

Service tax: Taxes on provision of services

State Governments can levy the following taxes:

Value Added Tax (VAT): This is tax on sale of goods. While intra-state sale of goods are covered by
the VAT Law of that state, inter-state sale of goods is covered by the Central Sales Tax Act. Even the
revenue collected under Central Sales Tax Act is done so by the State Governments themselves
and actually the Central Government has no role to play so.

Stamp duties and Land Revenue: Since land is a matter on which only State Governments can
govern, thus the Stamp duties on transfer of immovable properties are levied by State
Governments.

State Excise on Liquor and certain agricultural goods.

Apart from the above, certain powers of taxation have been devolved in the hands of local bodies. These
local governing bodies can levy taxes on water, property, shop and establishment charges etc.

Direct Taxes

They are called so as the burden of taxation falls directly on the tax payer.

Under the Income Tax Act, 1961 The Central Government levies direct taxes on the income of individuals
and business entities as well as Non business entities also. The taxation level depends on the residential
status of individuals. The thumb rule of residential status is that an individual becomes resident in India if
he has remained in India for more than 182 days in a particular residential year. If he becomes resident in
India, then his global income i.e. income earned even outside India is taxable in India. This has to be noted
very carefully by Expatriates on deputation to India. They need to plan their stay in such a manner as to
avoid becoming a resident in India. The following para explains this in a slightly more detailed manner:

Tax Resident

An individual is treated as resident in a year if present in India:

1. For 182 days during the year or

2. For 60 days during the year and 365 days during the preceding four years.
So an expatriate has to time his stay in India by taking into account the above.

So what is taxable for a Resident but Not Ordinarily Resident?

A resident who was not present in India for 730 days during the preceding seven years or who was
nonresident in nine out of ten preceding years is treated as not ordinarily resident. A person not ordinarily
resident is taxed like a non-resident but is also liable to tax on income accruing abroad if it is from a
business controlled in or a profession set up in India.

What is taxable for a Non-Resident?

Non-residents are taxed only on income that is received in India or arises or is deemed to arise in India. He
is entitled to get benefit of any double taxation avoidance agreement that his country of residence has
signed with India. Then he shall be liable for taxes at rates mentioned in the Indian domestic tax laws or the
rates mentioned in the Double Taxation Avoidance Agreement whichever is lower.

What is taxable for a Resident?

His global income is taxable irrespective of whether earned or related or received in India.

Thus any expatriate needs to plan his stay so that he does not, unwittingly, become a Resident for tax
purposes.

Taxation slabs for Individuals for the FY2015-16:

1. Individual resident aged below 60 year.

Income Slabs Tax Rates

Where the taxable income does not NIL

exceed Rs. 2,50,000/-.

Where the taxable income exceeds 10% of amount by which the taxable income exceeds Rs.
Rs. 2,50,000/- but does not exceed 2,50,000/-.Less ( in case of Resident Individuals only ) : Tax Credit u/s
Rs. 5,00,000/- 87A 10% of taxable income upto a maximum of Rs. 2000/-

Where the taxable income exceeds Rs. 25,000/- + 20% of the amount by which the taxable income
Rs. 5,00,000/- but does not exceed exceeds Rs. 5,00,000/-.
Rs. 10,00,000/-.

Where the taxable income exceeds Rs. 125,000/- + 30% of the amount by which the taxable income
Rs. 10,00,000/-. exceeds Rs. 10,00,000/-
2. Individual resident who is of the age of 60 years or more but below the
age of 80 years at any time during the previous year

Income Slabs Tax Rates

1. Where the taxable income NIL

does not exceed Rs. 3,00,000/-

2. Where the taxable income 10% of the amount by which the taxable income exceeds Rs.
exceeds Rs. 3,00,000/- but 300,000/-.Less : Tax Credit u/s 87A 10% of taxable income upto
does not exceed Rs. 5,00,000/- a maximum of Rs. 2000/-.

3. Where the taxable income Rs. 20,000/- + 20% of the amount by which the taxable income
exceeds Rs. 5,00,000/- but exceeds Rs. 5,00,000/-
does not exceed Rs.
10,00,000/-

4. Where the taxable income Rs. 120,000/- + 30% of the amount by which the taxable income
exceeds Rs. 10,00,000/- exceeds Rs. 10,00,000/-.

3. Individual resident who is of the age of 80 years or more at any time

during the previous year

Income Slabs Tax Rates

1. Where the taxable income does NIL

not exceed Rs. 5,00,000/-

2. Where the taxable income 20% of the amount by which the taxable income exceeds Rs.
exceeds Rs. 5,00,000/- but does 5,00,000/-.
not exceed Rs. 10,00,000/-

3. Where the taxable income Rs. 100,000/- + 30% of the amount by which the taxable income
exceeds Rs. 10,00,000/- exceeds Rs. 10,00,000/-

Amounts invested in certain investments like Employee Provident Fund, Public Provident Fund, Tax saving
Fixed Deposits, are also eligible for deduction under section 80C upto Rs.1,50,000 per year.
Corporate Taxation:

The rate at which Corporates are taxed in India is 30% plus a 3% cess. Thus the total comes to 30.9%.
Further if the taxable income is more than Rs. 10 million, then there is an additional surcharge of 12% on
the base tax rate.

Dividend Distribution Tax (DDT)

Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic
company by way of dividend shall be chargeable to dividend tax. So if a company declares divided, it has to
pay an effective rate of 16.995% on the dividends declared. This is apart from the 30.9 % taxes mentioned
above. The rationale for this tax is that after paying this tax, the dividend so declared becomes tax free in
the hands of the recipient of dividend.

Minimum Alternative Tax (MAT)

Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the
income tax Act, but many a times due to exemptions under the income tax Act, there is huge actual profit
as shown in the profit and loss account of the company but no taxable income. To overcome this issue, and
in order to bring such companies under the income tax act net, the concept of Minimum Alternate Tax
(MAT) has been introduced. The present rate of MAT is 19.05%.

Another aspect which must be looked into is the concept of Witholding Taxes; also called as Tax
Deduction at Source (TDS).

Tax Deduction at Source (TDS)

This point is being specifically mentioned because the penalties of non-compliance are very stringent. As
per the provisions of the Indian tax laws, certain payments are covered under tax withholding norms.
Under this, the person responsible for making any payment is required to withhold a certain specified
percentage of the payment amount as taxes and deposit it with the Government treasury. In addition, the
person is required to prepare a certificate of tax deduction and provide it to the person on whose behalf
the deductions are made. Every quarter i.e. 3 months, returns have to be filed by the deductor and credit
must be given to the deducted in the returns.

The following are the areas where tax withholding is most common in the Indian scenario:

Salaries

The salaried employees of the drawing beyond the minimum taxable salary would be covered under the tax
withholding requirements and annual tax withholding returns are to be submitted with the Revenue
authorities.

Contractors

Payments made to a contractor for carrying out any work would require withholding of tax at source from
such payments, ifcertain threshold limits are crossed. Typical examples of such payments will include:

Advertising payments

Broadcasting and telecasting payments

 Office renovation payments

Vehicle hire payments

Catering payments.

Job Work

Courier

Professional Services

Payments made for professional and technical fees to Doctors, Chartered Accountants, Lawyers,
Management Consultants, Engineers, Architects and other professionals would fall under this section and
tax would be required to be withheld from their payments. Such withheld tax shall be deposited with the
Government.

Rentals

Payments for rentals would attract tax deduction at source.

Indirect Taxes

In India, indirect taxes is a vast ocean as there are number of taxes to be paid on manufacture, import, sale
and even purchase in certain cases. Further the law is governed less by the Acts and more by day to day
notifications, circulars and orders by the Governing bodies. So an explicit understanding is very much
essential. A simplistic way to understand Indirect taxes is as follows:

No. Nature of Applicable Law Governed By

Activity

1 Provision of Service Tax.Generally uniform rate of 12.36% As Governed by the

services (proposed to be 14% from 01-04-2015) is charged Finance Act, 1994 and
by Service tax Provider from recipient except in other subsequent
certain cases where liability is split between the Finance Acts together
provider of servicer and the recipient of read with
service.Also in some cases, where there is mixed notifications,
component of provision of service and provision circulars.Service tax is
of materials, there is some abatment given and payable to the Central
service tax charged on the remaining part. Government.

E.g. For restaurants, the service tax is charged

only on 40% of the bill as it is assumed by Govt
that the total bill consists of 60% materials and
40% service.

There is an exemption on payment of Service tax

if the total turnover did not cross Rs. 1 million in
the previous Financial Year.
2 Manufacture of Central Excise duties are leviable on the Central Excise Act,
Excisable Goods manufacture of goods. However, the incidence of 1944 read with
duty is postponed to the clearance of goods from Central Excise Tariff
factory or approved warehouse. It means the duty Act, 1985 along with
is payable once the manufactured goods leave the Rules prescribed and
Warehouse/ Factory.Below are some of Excise Circulars/
duties leviableBasic Basic Excise Duty is the Notifications issued
most common Excise duty on manufacture of by the Central Board
Goods. It is imposed under section 3 of the of Excise and
Central Excise Act of 1944 on all excisable goods Customs.It is payable
other than salt produced or manufactured in to the Central
India, at the rates set forth in the schedule to the Government.
Central Excise tariff Act, 1985, falls under the
category of basic excise duty in India.

it is mandatory to pay duty on all goods

manufactured, unless exempted. For example,
duty is not payable on the goods exported out of
India or if the turnover does not reach Rs. 15
million in a year or based on certain process of
production.

Excise duty rates are different for each product

and based on harmonized system of classification.

The rates can be found in the following link

http://www.cbec.gov.in/excise/cxt2013-14/cxt-
1314-idx.htm

Apart from the basic excise duty, the other types

of Excise duties are as follows but they are not of
much relevance to the vast majority of goods as
they are very specifically levied.

Special Excise Duty : This is the duty

leviable under Second Schedule to
the Central Excise Tariff Act, 1985 at the
rates mentioned in the said Schedule. At
present this is leviable on very few items.

Additional Duties of Excise (Textiles

and textile Articles) : his duty is leviable
under section 3 of the Additional Duties
of Excise (Textiles and Textile Articles )
Act, 1978. This is leviable at the rate of
fifteen percent of Basic Excise Duty
payable on specified textile articles.

Additional Duties of Excise (Goods of

Special Importance) : duty is leviable
under the Additional Duties of Excise
(Goods of Special Importance) Act,
1957. on the specified goods mentioned
 in its First Schedule.

National Calamity Contingent

Duty (NCCD): This duty is levied as per
section 136 of the Finance Act, 2001, as a
surcharge on specified goods like like pan
masala, branded chewing tobaco,
cigarettes, domestic crude oil and mobile
phone.

It should be noted that the excise duty is not on

sale but on removal or clearance of goods which
may or may coincide with sale.

3. Import of Goods Customs duty is required to be paid whenever Customs Act, 1962
goods are imported from other countries in India. read with Customs
Normally on Exports, there is no Customs Duty Tariff Act,
except for export of a few items. Thus the taxable 1975.Collected by
event is the import/ export of goods.There are Central Government
mainly two ways in which Customs is calculated
and collected:

1. Specific Duties: Specific custom duty is

a duty imposed on each and every unit of
a commodity imported or exported. For
example, Rs.5 on each meter of cloth
imported or Rs.500 on each T.V. set
imported. In this case, the value of
commodity is not taken into
consideration.

2. Advalorem Duties: Advalorem custom

duty is a duty imposed on the total value
of a commodity imported or exported.
For example, 5% of F.O.B. value of cloth
imported or 10% of C.LF. value of T.V.
sets imported. In case of Advalorem
custom duty, the physical units of
commodity are not taken into
consideration. Ad valorem duty is the
predominant mode of levy of customs.
Thus the value of goods has to be
determined as per customs law before
the Goods are released from Customs
control.

The rates of taxation in Customs can be found

here:

Apart from the basic Custom duties, there are

some other custom duties levied in certain
 circumstances like:

Countervailing Duty of Customs (CVD)

To give Indian manufacturing a level playing field,

CVD is imposed. It is equal to the excise duty on
like articles produced in India. The base of this
additional duty is c.i.f. value of imports plus the
duty levied earlier. If the rate of this duty is on ad-
valorem basis, the value for this purpose will be
the total of the value of the imported article and
the customs duty on it (both basic and auxiliary).

Anti Dumping duties

These custom duties are basically intended to

provide domestic manufacture against dumping
of goods by foreign countries in India at dirt
cheap ; even below cost prices. Mainly targeted
against cheap Chinese imports. These are allowed
after following WTO norms in this regard.

4 Sale of Goods Value Added Taxes (VAT) for intra-state Sales and Each state has a
Central Sales Tax (CST) for inter-state sales.VAT is specific Act.Central
actually state specific since the states and not Sales Tax Act deals
Central Government is empowered to collect with inter-state sale
Taxes on Sale of Goods. Thus each state has its of goods. However
own VAT specific Act and Rules. In Maharashtra, it even CST is actually
is the Maharashtra Value Added Tax Act (MVAT) collected only by
which governs the sale of goods.The usual rate of states.
taxes are 5% and 12.5%. Goods which are
specified are covered under 5% and others are
covered in 12.5%. Further there are some high
value transactions like trade in bullion which
attracts 1% tax. Input credit is available on the
goods purchased and can be set off against the
MVAT payable.

Under MVAT Act, if trader has a turnover of below

Rs. 1 million in previous financial year, then MVAT
is not applicable in present year upto Rs. 1 million.
Please note that it is optional and if the dealer.
Trader does collect MVAT from the purchaser
then the same will have to be deposited with the
Government.

Also MVAT is not applicable if the Goods are

exported under H Form i.e. for exports.
Please note that the above are not mutually exclusive. For example, if the goods are manufactured and
sold by manufacturer , then both Central Excise and MVAT are applicable.

Further there are some local indirect taxes levied like Local Body Taxes (LBT) or Octroi. These are
expected to be abolished some time in future after introduction of Goods and Service Taxes (GST).

Going forward, to avoid the cascading effect of different types of duties and also to avoid the specific
problem of non-availability of input credit for one type of tax against another, the Government intends to
create one single tax everywhere which shall be called as the Goods and Service Taxes (GST). This is major
tax reform intending to create one major market. It is expected to come by April 2016.

The primary difference between VAT and CST is that VAT is applied on transactions where the
goods origin and delivery destination are within the same state in India, whereas, CST is applied
when the goods originate in one Indian state but the delivery is in a different Indian state. In other
words, VAT deals with intra-state trade and is a State governments tax where as CST deals with
inter-state trade and is a Central governments tax.

For instance, when youre dealing with a business between Bangalore and Mysore (both in
Karnataka) VAT will come into play and whenever youre dealing with a business between
Bangalore and Mumbai, CST will be applied.

Indirect taxes can be either origin based or destination based. Origin based tax (also known as
production tax) is levied where goods or services are produced. Destination based tax
(consumption tax) are levied where goods and services are consumed. In destination-based
taxation, exports are allowed with zero taxes whereas imports are taxed on par with the domestic
production.

What is VAT? (Destination based)

VAT (Value Added Tax) is intended to tax every stage of sale where some value is added to raw
materials, but taxpayers will receive credit for tax already paid on procurement stages. VAT can be
imposed only when tangible goods and products are sold. Every state has a separate and distinct
VAT act reserved for their state. It is a form of indirect tax imposed only on goods sold within a
particular state, which essentially means that the buyer and the seller need to be in the same
state. Exports are exempted from VAT.

What is CST? (Origin based)

CST (Central Sales Tax) is a form of indirect tax imposed only on goods sold from one state to
another state, which particularly takes into account that the buyer and the seller needs to be in
two different states. This tax is governed by a single central act, though the chargeability is state
specific. CST registration is not dependent on amount of turnover. Simply put, registration of dealer
becomes compulsory once he affects an inter-state sale. Traders who procure from one state and
move their goods to another State with lesser VAT will not be avail of the benefits as VAT will no
longer apply and CST will automatically come into play.

Is CST compulsory in the course of inter-state trade?

Yes, Sec.6 (1) of CST Act provides that every dealer shall be liable to pay tax under this Act on all
sale of goods (other than electrical energy) effected by him in the course of inter-state trade.
Goods here include all materials/articles/ commodities and other kinds of moveable property. The
definition of goods however excludes electricity, newspapers, stocks and shares. The implication of
this definition is that no sales tax will be levied on the sale of newspapers. However if the same
newspaper is sold as waste paper, they are treated as goods and are taxable.
A dealer shall be liable to pay tax under the CST Act on the sale of any goods effected in the course
of inter- State trade though no tax can be levied under the local sales tax Act of the appropriate
State if such sale is Intra state sale. Therefore exemption in the local sales tax law is irrelevant for
the purpose of Central Sales Tax Act. For example, take Tamil Nadu; no Local sales tax is levied on
sales up to prescribed limit (For e.g. it is 3 lakhs in Tamil Nadu). However these goods, which
escape tax under local sales tax, cannot avoid tax under the CST ACT. Suppose Mr. As sales
turnover under TNGST is less than Rs.3,00,000. No tax is levied under TNGST up to a turnover of
Rs.3,00,000. However, CST is payable on the Rs.3,00,000 also.

Exemption from CST during inter-state sale

Section 6(2) of CST Act gives an exemption to subsequent inter-state sale affected by transfer of
documents of title to goods when the goods are in movement from one state to another. However
such exemption to subsequent inter-state sale is subject to production of Form E-I, as obtained
from prior vendor and C form from buyer.

A simple example can be that, suppose A of Mumbai has sold goods to B of Ahmedabad. The goods
are dispatched by lorry and L.R. is taken out by A (Mumbai), wherein A is consignor and B
(Ahmedabad) is consignee. If before taking delivery from transporter, B decides to sell his goods to
C of M.P., he can simply endorse the L.R. in name of C and the sale will be complete. This is the
second or subsequent interstate sale in the course of same movement. In this case A must have
charged 4% CST in his bill. Being a second interstate sale effected by B to C, B is equally liable to
pay CST on above transaction.

However the intention of Government is not to levy multiple taxes on sale taking place in one
course of movement. Therefore the subsequent sale is given exemption. However it is subject to
production of given forms. In above example, the sale by B to C will be exempt if B produces before
his assessing authority Form EI issued by A of Mumbai and Form C issued by C of M. P.

The case of M/s. Duvent Fans P. Ltd. vs. State of Tamil Nadu explains this point clearly. In this case a
local dealer purchased goods from other local dealer and directed to send them to his purchasers
place in other State. Madras High Court held that the first transaction is first interstate sale and the
second sale is also subsequent interstate sale exempt u/s.6 (2) of CST Act.

In light of above it is clear that the sale effected by transfer of documents of title to goods is
eligible for exemption u/s. 6(2). These exempted sales are also referred to as Sale in transit

TDS

TDS or Tax Deducted at Source is a mechanism where the payer deducts a certain portion of the payment as tax of the
receiver and deposits the same with the government. For example:A provides technical services to B for 50,000 INR,
B is liable to deduct TDS @ 10%, i.e 5,000 INR and A receives 45,000 INR
TCS

TCS or Tax Collected at Source is a mechanism where the receiver extracts a certain amount as tax of the payer and
deposits the same with the government For exampleA is selling a Motor Car worth 12 Lakhs,
A is liable to collect TCS @ 1% on the sale consideration and deposit the same with Govt.B pays 12.12 Lakhs (12 Lakhs +
1%)
WHY GST CONSTITUTIONAL AMENDMENT BILL

The Constitution provides for delineation of power to tax between the

Centre and States. While the Centre is empowered to tax services and
goods upto the production stage, the States have the power to tax sale
of goods. The States do not have the powers to levy a tax on supply of
services while the Centre does not have power to levy tax on the sale of
goods. Thus, the Constitution does not vest express power either in the
Central or State Government to levy a tax on the supply of goods and
services. Moreover, the Constitution also does not empower the States
to impose tax on imports. Therefore, it is essential to have
Constitutional Amendments for empowering the Centre to levy tax on
sale of goods and States for levy of service tax and tax on imports and
other consequential issues.

As part of the exercise on Constitutional Amendment, there would be

a special attention to the formulation of a mechanism for upholding the
need for a harmonious structure for GST along with the concern for the
powers of the Centre and the States in a federal structure.

GST is the 122nd Amendment in the constitution.

The Bill amends the Constitution to introduce the goods and services
tax (GST).

Parliament and state legislatures will have concurrent powers to make

laws on GST. Only the centre may levy an integrated GST (IGST) on the
interstate supply of goods and services, and imports.

The question is what is new in it, It was done earlier also with central
sales and other taxes.

The bill also known as 122nd Amendment basically seeks to amends the
Constitution to empower both the Centre and the states to levy GST.
This they cannot do now, because the Centre cannot impose any tax on
goods beyond manufacturing (Excise) or primary import (Customs)
stage, while states do not have the power to tax services. The proposed
GST would subsume various central (Excise Duty, Additional Excise
Duty, service tax, Countervailing or Additional Customs Duty, Special
Additional Duty of Customs, etc.), as well as state-level indirect taxes
(VAT/sales tax, purchase tax, entertainment tax, luxury tax, octroi,
entry tax, etc). Once the Bill is passed, there will only be a national-
level central GST and a state-level GST spanning the entire value chain
for all goods and services, with some exemptions.