CHAPTER - 5

TAXATION
Concept, Nature and Characteristics of Taxation and Taxes.
Meaning of Taxation Taxation is the inherent power of the state, acting through the legislature, to impose and collect revenues to support the government and its recognized objects. Simply stated, taxation is the power of the State to collect revenues for public purpose. Purpose of Taxation Primary Purpose - is to provide funds or property with which the government discharges its appropriate functions for the protection and general welfare of the its citizens. Non Revenue Objectives Aside from purely financing government operational expenditures, taxation is also utilized as a tool to carry out the national objective of social and economic development. 1. to strengthen anemic enterprises by granting them tax exemptions or other conditions or incentives for growth; 2. to protect local industries against foreign competition by increasing local import taxes; 3. as a bargaining tool in trade negotiations with other countries; 4. to counter the effects of inflation or depression; 5. to reduce inequalities in the distribution of wealth; 6. to promote science and invention, finance educational activities or maintain and improve the efficiency of local police forces; 7. to implement police power and promote general welfare. Meaning of Taxes

Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the state by virtue of its sovereignty for the support of the government and all public needs.

Tax in a general sense, is any contribution imposed by the government upon individuals for the use and service of the state, whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid, supply or other name. Tax, in its essential characteristics , is not a debt.

Essential characteristics of tax. 1. it is an enforced contribution 2. it is generally payable in money. 3. It is proportionate in character, usually based on the ability to pay 4. it is levied on persons and property within the jurisdiction of the state 5. it is levied pursuant to legislative authority, the power to tax can only be exercised by the law making body or congress 6. it is levied for public purpose 7. it is commonly required to be paid a regular intervals.

All know that the provisions of Sales tax law will undergo a drastic change with effect from April, 2003. This is on account of the introduction of the VAT i.e. Value Added Tax. Value Added Tax (VAT) has gained substantial importance due to decision of Government to introduce VAT in the States from April 1. VAT has been introduced with the primary objective of bringing into the legal system, a neutral tax regime and removes the overlapping effect of the tax. MEANING OF VAT VAT is a multipoint levy of sales tax that enables the person to claim set off of tax which he pays on the purchases. The system of VAT is so designed that the final levy and burden of the tax on the goods is borne by the final consumer of the goods. LEVY OF VAT VAT is levied at every stage of production. It is levied only on the value added by the last seller. The seller is accordingly liable to pay tax on the net value added to the gross value as reduced by the value of intermediate materials purchased. VAT means a tax on sale of goods at every stage when it changes hands with the provision of credits for input tax paid at the time of purchase of goods (intended for resale, to be used as raw material for the purpose of manufacturing or for packing) or capital goods for the purpose of manufacturing. Firstly, tax liability on sale made by the dealer will be calculated on similar lines as is presently being done under the Sales tax Act and thereafter tax paid on purchases will be deducted and the net amount will be paid/claimed for refund will be made by the dealer. The procedure can be summarized as under: 1.Calculate the tax liability of sales, i.e. gross turnover x rate of tax. 2.Less: Tax paid on purchase of goods, capital goods to be used for purpose of manufacturing. OBJECTIVES OF VAT The primary objective of VAT is to remove the cascading effect of taxes and levies, which is generally prevailing in other types and manner of levy. The VAT concept is simple, transparent, and consistent in

its form, content, structure and approach. It further ensures revenue neutrality and mechanism must be self regulated. ADVANTAGES OF VAT The cases under VAT are more likely to be accepted as such and only limited cases would be taken for scrutiny. The method would be more or less identical to the one followed under the Excise law. There are minimum exemptions and hence reduced complications and complexities. The cost of compliance by the dealer is less and is transparent. There are limited possibilities of litigation and the protracted litigation can be avoided. It is easy to administer the levy of VAT due to its simplicity. The possibility of tax evasion is less, as the dealer is liable only for part of the amount of tax. Hence, one may not indulge into tax evasion techniques for a small amount. Further, the dealer would not indulge into purchase of goods out of books since otherwise he would not get any set off tax paid. The VAT does not have a cascading effect. The cost of purchase reduces, as the dealer is able to claim set off tax paid on purchase against tax payable on sales. LIMITATIONS OF VAT There could be cases where the VAT is collected by the dealer, but not paid to the Government. As a result, the set off of such VAT paid by the purchaser may not be allowed to the purchasers. A mechanism has to be devised to tackle such situations. A situation of refund would arise is no VAT is payable on the final sale. As a result, the set off cannot be availed. In such cases, the tax paid becomes the cost or the same has to be claimed as refund. Hence, the mechanism of refund has to be framed. VAT would also contain multiple rates of tax due to multiple types of items. In countries such as India where in there exist sales taxes already covering a wide range of commodities, replacement of those taxes by a revenue neutral value added tax should lead to no inflationary consequences. The dealers will now be required to maintain upto date records of purchase and sales in order to claim set off. Many small dealers maintain only primitive accounts, which were accepted by the department. Since Central Sales Tax Act continues to remain in force, there can be conflict between the VAT and CST. Merits of VAT Common rates India, a common market No declaration forms, collect tax and pay to Government Dealer in true sense an agent of Government to collect and pay tax Cascading effect avoided Larger Tax base - lower rates of taxes. Also minimum slab rates Self policing lesser incentive for evasion Transparent system

Demerits of VAT Every dealer becomes tax payer In some of the cases it may result in price rise CST impediment In absence of declarations many cases may result in refunds Difficulties in getting refunds known Other taxes like Octroi, Excise duty, cess, luxury tax, entry tax to remain harsh penal provisions etc.

Certain Issues under VAT with Special Reference to Indian Economy

Though above are the broad benefits of VAT, the system is not without certain substantial effects on the business Organization. The issues are not from VAT system as such, but because of peculiar nature of Indian Economy. (i) Partial Implementation of VAT The VAT introduced in Indian States is not full-fledged system as such. In ideal VAT regime set off is allowed for all the taxes paid on purchases irrespective of its use. However in present VAT system in India the set off is not allowed fully. There are so many restrictions and conditions and hence the setoff gets denied on many items. Therefore to make the system an ideal VAT system such artificial restrictions/conditions are required to be deleted. (ii)Re-organization of business transactions One of the fall outs is that the business transactions are restructured, particularly the inter-state transactions. The set off/ input tax credit is restricted to the tax paid in the particular state and no such set off or input tax credit is allowed of CST paid on inter-state purchases. Thus the preference for buyers is to effect local purchases. The inter-state sellers are required to open local depots to retain their business. There is also a proposal for abolishment of CST from 1.4.2011, by introduction of Goods on Service Tax (GST) but we have to wait. (iii)The other implication, which cannot be lost sight of, is that ultimately the consumers are be paying certain high tax burden, as the prices, till consumer, are getting taxed. Though input tax credit compensates to certain extent, not to full extent. (iv)There is also proposal to levy tax on imports to augment resources. The implications will depend upon the overall policy decision but certainly it will make imports costly to some extent. (v)The Trading community is also worried about elaborate accounting it has to maintain. The frequency of making payments of tax has increased. They are also fearing harassment at the hands of tax officials. The Trading Community also expects that all other taxes like octroi, cess should be clubbed in VAT. However it appears that this will not be fulfilled in immediate near future. (vi)Coupled with above, the trading community also apprehends that under the garb of VAT, many obnoxious and harsh provisions have been brought into the Act. There is fear of inspector raj bringing more harassment and corruption. The provisions for check posts are also worrying them equally.

Defects that had cropped up in sales tax system in India

Since intra-state sales tax is a State subject, the provisions of local sales tax are implemented by States. Even in respect of Central Sales Tax, the CST Act is implemented by respective State Governments and revenue of CST goes to State from which movement of goods commenced. CST Act authorizes State government to grant exemption from central Sales Tax by issuing a notification in official gazette. - Over the years, many defects entered into structure of sales tax, due to aforesaid peculiarities. Unhealthy Competition among States - There was competition among States to increase the sales tax revenue. Business tended to be diverted where sales tax rates were low. Some States reduced rates of Central Sales Tax and even waived the condition of submission of C form. Thus, buyers found it

economical to purchase goods from neighboring State. Often, goods from the State were sent to another State on stock transfer basis and brought back in the Same State as Inter-State Sale. [In many cases, it is said that only papers were going, goods were not going]. Sales tax incentives to new industries - Sales tax Incentives were offered to attract new industries in the State. This distorted the tax structure. When one State started giving sales tax incentives, other States had no option but to grant similar incentives. When all States grant more or less same incentives, it no more remains an incentive. Such incentives totally ruined State finances. Many malpractices started. Often unit was started merely for purpose of obtaining sales tax incentives. It was closed as soon as incentive period was over. Bogus invoices were prepared to show sales from developing area, while actual manufacture and dispatch was from developed area. This defeated the basic purpose of granting incentives. - - Old industries suffered as they could not compete with new industries to whom sales tax incentives were available. Steps taken to stop the menace - Luckily, the problems were realized and all States agreed to take necessary steps. In the Conference of Chief Ministers of States held on 16-11-1999, it was decided to implement uniform floor rates of sales-tax for the entire country. States could charge sales tax rates higher than the floor rate but not lower. It was also decided to phase out sales-tax based incentive scheme for industries, reform the Central Sales Tax system and implement VAT. Most of the States have taken steps to implement these decisions. Steps taken by States to introduce VAT - Discussion papers on VAT has been issued by many States. Some State governments have published draft VAT Act and rules. Some States have even sent draft Acts to President for approval. Each State is implementing VAT in its own way to suit its needs. [Assent of President is required as the State VAT Acts propose introduction of check posts and transit passes. As per Article 304(b), State can impose reasonable restrictions on freedom of trade with other States or within the State, if Bill or amendment is introduced after sanction of President. - - Otherwise, tax on sale within the State is a State subject and assent of President is not required]. Though basic concepts are same in VAT Acts of all States, provisions in respect of credit allowable, credit of tax on capital goods, credit when goods are sold inter-state are not uniform. Even definitions of terms like business, sale, sale price, goods, dealer, turnover, input tax etc. are not uniform. Schedules indicating tax rates on various articles are also not uniform.

Customs Duties (Import Duty and Export Tax) Customs Duty is a type of indirect tax levied on goods imported into India as well as on goods exported from India. Taxable event is import into or export from India. Import of goods means bringing into India of goods from a place outside India. India includes the territorial waters of India which extend upto 12 nautical miles into the sea to the coast of India. Export of goods means taking goods out of India to a place outside India.

In India, the basic law for levy and collection of customs duty is Customs Act, 1962. It provides for levy and collection of duty on imports and exports, import/export procedures, prohibitions on importation and exportation of goods, penalties, offences, etc. The Constitutional provisions have given to Union the right to legislate and collect duties on imports and exports. The Central Board of Excise & Customs (CBEC) is the apex body for customs matters. Central Board of Excise and Customs (CBEC) is a part of the Department of Revenue under the Ministry of Finance, Government of India. It deals with the task of formulation of policy concerning levy and collection of customs duties, prevention of smuggling and evasion of duties and all administrative matters relating to customs formations. The Board discharges the various tasks assigned to it, with the help of its field organizations namely the Customs, Customs (preventive) and Central Excise zones, Commissionerate of Customs, Customs (preventive), Central Revenues Control Laboratory and Directorates. It also ensures that taxes on foreign and inland travel are administered as per law and the collection agencies deposit the taxes collected to the public exchequer promptly. Types of Customs Duties Export duties are levied occasionally to mop up excess profitability in international prices of goods in respect of which domestic prices may be low at the given time. But the sweep of import duties is quite wide. Import duties are generally of the following types:Basic Duty :- it may be at the standard rate or, in the case of import from some other countries, at the preferential rate. Additional customs duty :- equal to central excise duty leviable on like goods produced or manufactured in India. Additional duty is commonly referred to as Countervailing duty or C.V.D. It is payable only if the imported article is such as, if produced in India, its process of production would amount to 'manufacture' as per the definition in Central Excise Act,1944. Exemption from excise duty has the effect of exempting additional duty of customs. Additional duty is calculated on a value base of aggregate of value of the goods including landing charges and basic customs duty. Other duties like anti-dumping duty, safeguard duty etc are not taken into account. In case of goods covered by provisions of the Standards of Weights and Measures Act,1976, the value base would be the retail sale price declared on the package of the goods less the rebate as notified under the Central Excise Act,1944 for such goods True Countervailing duty or additional duty of customs :- is levied to offset the disadvantage to like Indian goods due to high excise duty on their inputs. It is levied to provide a level playing field to indigenous goods which have to bear various internal taxes. Value base for this additional duty would be as in the case of C.V.D, under Customs Tariff Act,1975 minus the retail sale price provision. This additional duty will not be included in the assessable value for levy of education cess on imported goods. Manufacturers will be able to take credit of this additional duty for payment of excise duty on their finished products.

Anti-dumping Duty/ Safeguard Duty :- for import of specified goods with a view to protecting domestic industry from unfair injury. It would not apply to goods imported by a 100% EOU (Export Oriented Units) and units in FTZ (Free Trade Zones) and SEZ (Special Economic Zones). On export of goods, anti-dumping duty is rebatable only by way of a special brand rate of drawback. Safeguard duties do not require the finding of unfair trade practice such as dumping or subsidy on the part of exporting countries but they must not discriminate between imports from different countries. Safeguard action is resorted to only if it has been established that a sudden increase in imports has caused or threatens to cause serious injury to the domestic industry. Education cess :- at the prescribed rate is levied as a percentage of aggregate duties of customs. If goods are fully exempted from duty or are chargeable to nill duty or are cleared without payment of duty under prescribed procedure such as clearance under bond, no cess would be levied. Export Procedure For clearance of export goods, the exporter or his agents have to undertake the following formalities:-

Registration The exporters have to obtain PAN based Business Identification Number (BIN) from the Directorate General of Foreign Trade prior to filing of shipping bill for clearance of export goods. The exporters are also required to register authorised foreign exchange dealer code (through which export proceeds are expected to be realised) and open a current account in the designated bank for credit of any drawback incentive. Whenever a new Airline, Shipping Line, Steamer Agent, port or airport comes into operation, they are required to be registered into the Customs System. The exporters intending to export under the export promotion scheme need to get their licences/DEEC book etc, registered at the Customs Station. Processing of Shipping Bill In case of export by sea or air, the exporter must submit the 'Shipping Bill', and in case of export by road he must submit 'Bill of Export' in the prescribed form containing the prescribed details such as the name of the exporter, consignee, invoice number, details of packing, description of goods, quantity, FOB value, etc. Along with the Shipping Bill, other documents such as copy of packing list, invoices, export contract, letter of credit, etc. are also to be submitted. There are 5 types of shipping bills :-

1. Shipping Bill for export of duty free goods. This shipping bill is white colored. 2. Shipping bill for export of goods under claim for duty drawback. This shipping bill is green colored. 3. Shipping bill for export of duty free goods ex-bond i.e. from bonded warehouse. This shipping bill is pink colored. 4. Shipping Bill for export of dutiable goods. This shipping bill is yellow colored. 5. Shipping bill for export under DEPB scheme. This shipping bill is blue in colour. The Bills of Export are: Bill of export for goods under claim for duty drawback Bill of export for dutiable goods Bill of export for duty free goods Bill of export for duty free goods ex-bond

Let Export Order After the receipt of the goods in the dock, the exporter may contact the Customs Officer designated for the purpose and present the checklist with the endorsement of Port Authority and other declarations along with all original documents. Customs Officer may verify the quantity of the goods actually received and thereafter mark the Electronic Shipping Bill and also hand over all original documents to the Dock Appraiser, who may assign a customs officer for the examination of the goods. If the Dock Appraiser is satisfied that the particulars entered in the system conform to the description given in the original documents, he may proceed to allow "let export" for the shipment.

Customs Duties (Import Duty and Export Tax): Classification of Goods and the Rates of Customs Duty All goods must be classified into groups and sub-groups in order to levy the customs duty. The Customs Tariff Act 1975, gives the classification of goods and accordingly specifies the rate of duty. The act contains two schedules:

Schedule 1 classifies the goods for import and prescribes the rate of import duties. It specifies the various categories of import items in a systematic and in accordance with an international scheme of classification of internationally traded goods termed as harmonized system of commodity classification'. Schedule 2 classifies the goods for export and prescribes the rate of export duties.

In addition, the Customs Tariff Act makes provisions for duties like additional duty(CVD),

preferential duty, anti-dumping duty, protective duties, etc. The duties are levied both on specific and ad-valorem basis, while there are few cases where at times specific-cum-ad valorem duties are also collected on imported items. Where ad-valorem duties (i.e. duties with reference to value) are collected, which are the predominant mode of levy, the value of the goods has to be determined for customs duty purposes as per provisions laid down under the Customs Act and the Customs Valuation (determination of prices of imports goods) Rules, 1988 issued thereunder. These provisions are essentially adoption of GATT based valuation system and followed internationally (now termed WTO Valuation Agreement). The importer as well as the assessing officer has to carefully study and apply these provisions so that the duties as due after proper valuation as per law get discharged before the goods get out of customs control. Import Procedures For clearance of import goods, the importer or his agents have to undertake the following formalities:Bill of Entry It is a document certifying that the goods of specified description and value are entering into the country from abroad. If the goods are cleared through the (Electronic Data Interchange) EDI system no formal Bill of Entry is filed as it is generated in the computer system, but the importer is required to file a cargo declaration having prescribed particulars required for processing of the entry for customs clearance. The Bill of entry, where filed, is to be submitted in a set, different copies meant for different purposes and also given different colour schemes. Bill of Entry are of three types :

Bill of Entry for home consumption: is to be submitted when the imported goods are to be cleared on payment of full duty for consumption of the goods in India. It is white colored. Bill of Entry for Warehouses : is to be submitted when the imported goods are not required immediately by the importer but here they are to be stored in a warehouse without payment of duty under a bond and cleared later when required on payment of duty. Bill of Entry for Ex-Bond Clearance : is used for clearing goods from the warehouse on payment of duty. The goods are classified and valued at the time of clearance from the Customs Port. Value and classification are not determined on such Bill of Entry. In the non-EDI system along with the bill of entry filed by the importer or his representative the following documents are also generally required:

Signed invoice Packing list

Bill of Lading or Delivery Order/Airway Bill GATT declaration form duly filled in Importers declaration License wherever necessary Letter of Credit/Bank Draft/wherever necessary Insurance document Import license Industrial License, if required Test report in case of chemicals Ad hoc exemption order DEEC Book/DEPB in original Catalogue, technical write up, literature in case of machineries, spares or chemicals as may be applicable Separately split up value of spares, components machineries Certificate of Origin, if preferential rate of duty is claimed No Commission declaration

Green Channel facility Some major importers have been given the green channel clearance facility. It means clearance of goods is done without routine examination of the goods. They have to make a declaration in the declaration form at the time of filing of bill of entry. The appraisement is done as per normal procedure except that there would be no physical examination of the goods. Only marks and number are to be checked in such cases. However, in rare cases, if there are specific doubts regarding description or quantity of the goods, physical examination may be ordered. Excise Duty Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption. The taxable event is 'manufacture' and the liability of central excise duty arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers. The term "excisable goods" means the goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 , as being subject to a duty of excise and includes salt. The term "manufacture" includes any process, 1. Incidental or ancillary to the completion of a manufactured product and 2. Which is specified in relation to any goods in the Section or Chapter Notes of the First Schedule to the Central Excise Tariff Act, 1985 as amounting to manufacture or 3. Which, in relation to the 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 the consumer.

As incidence of excise duty arises on production or manufacture of goods, the law does not require the sale of goods from place of manufacture, as a mandatory requirement. Normally, duty is payable on 'removal' of goods. The Central Excise Rules provide that every person who produces or manufactures any 'excisable goods', or who stores such goods in a warehouse, shall pay the duty leviable on such goods in the manner provided in rules or under any other law. No excisable goods, on which any duty is payable, shall be 'removed' without payment of duty from any place, where they are produced or manufactured, or from a warehouse, unless otherwise provided. The word 'removal' cannot be necessarily equated with sale. The removal may be for:1. 2. 3. 4. 5. Sale Transfer to depot etc. Captive consumption Transfer to another unit Free distribution

Thus, it can be seen that duty becomes payable irrespective of whether the removal is for sale or for some other purpose.