India has a combination of a federal as well as a decentralized system of levying taxes. The Central Government of India, the Governments of each individual state and the local authorities are empowered to impose various indirect taxes. The key indirect taxes include:
A. The Central taxes, which are levied by the Central Government, such as:
- Customs Duty
- CENVAT (or excise duty)
- Service Tax
- Central Sales Tax(CST levy is governed by the law legislated by the Central government but administered and collected by the State VAT authorities.)
- Research and Development Cess.
B. The State taxes, which are levied by the respective State Governments, such as:
- Value Added Tax (VAT)
- Entry Tax
- Octroi(Octroi is levied and collected by Municipal Authorities and is presently imposed only in the state of Maharashtra.)
- Other Local Taxes
C. The Government of India is planning to introduce a single uniform Goods and Services Tax (GST) in the financial year 2011-12 which would subsume many of the above taxes.
1. CUSTOMS DUTY
Customs duty is applicable on import of goods into India. It is payable by the importer of goods into India.
Customs duty comprises of the following elements:
- Basic Customs Duty (BCD);
- Additional customs duty (ACD) (this is in lieu of CENVAT, i.e. excise duty, levied on goods manufactured in India);
- Education Cess(E-cess);
- Secondary and Higher Education cess (SHEC); and
- Special Additional duty (SAD)
The applicable customs duty rate on the import of any goods into India is based on the universally accepted Harmonized System of Nomenclature (HSN) code assigned to the said goods. In India, the Customs Tariff Act, 1975 outlines the HSN codes assigned to various goods determining the duty rate on the import of such goods.
The generic BCD rate is 10 percent at present and the effective customs duty rate (i.e. the aggregate of the abovementioned components, i.e. BCD, ACD, SAD and cesses) with BCD at 10 percent is 26.85 percent (with ACD at 10 percent, SAD at 4 percent and cesses at 3 percent).
The ACD paid as part of customs duty would be available as credit (set-off) to the manufacturers / service providers using the imported goods as inputs in their manufacturing / service provision activity. The SAD paid as part of customs duty would be available as credit to the manufacturer, whereas for a trader, the same would be available as refund (subject to the prescribed procedure). This refund of SAD is available to a trader subject to VAT being paid on the subsequent sale of the imported goods. Further, an exemption from SAD has been provided to importers trading in pre-packaged and other
2. FOREIGN TRADE POLICY (FTP)
The FTP provides a broad policy framework for the import and export of goods and services outlined by the Ministry of Commerce. The objective of the FTP is to promote the exports and to regulate the imports of the country.
The FTP outlines export promotion schemes for enterprises in designated areas such as Software Technology Parks, Export Oriented Units and Units in SEZs. Such enterprises are inter alia granted exemptions from customs duty and CENVAT on the procurement.
- Export Promotion Capital Goods (EPCG) : Under the EPCG Scheme, capital goods (including second hand capital goods) can be imported at a concessional customs duty rate of 0 percent and 3 percent (depending on the goods imported). This concession is available subject to fulfilment of the export obligation of 8 times the duty saved (owing to the concessional duty rate) over a period of 8 years.
- Served From India Scheme (SFIS) :Under the SFIS, service providers exporting their services are allowed to import goods without payment of duty upto 10 percent of the realisations from such service exports in the current/previous financial year. Services exported means services rendered to any other country or to a consumer of any other country or through presence in any other country. The consideration received for such export services can be received in foreign exchange or in Indian rupees which are otherwise considered by the RBI to be paid in foreign exchange.
- Duty Free Import Authorization (‘DFIA’) : Under the DFIA Scheme, the raw materials for manufacture of goods meant for export are allowed to be imported without payment of duty. This exemption from duty is available subject to prescribed Standard Input Output Norms depending on the quantity and value of imported and exported goods. Further, there is an additional requirement of achieving a minimum value addition of 20 percent.
3. RESEARCH AND DEVELOPMENT CESS (R&D CESS)
R&D Cess is leviable at the rate of 5 percent on import of technology under a foreign collaboration. The term ‘foreign collaboration’ has been defined to include Joint ventures, partnerships, etc.
Import of any designs/ specifications from outside India or deputation of foreign technical personnel, under a foreign collaboration, would also be liable to R&D Cess.
R&D Cess paid is available as deduction with respect to service tax payable for Consulting Engineer’s services and Intellectual Property Right related services.
CENVAT, also known as Excise duty, applies on goods manufactured in India. It is payable by the person undertaking manufacturing activity and the point of payment is when manufactured goods are removed out of the factory of manufacture. Further, certain prescribed processes undertaken would also qualify as manufacture, commonly known as ‘deemed manufacture’ and would be chargeable to CENVAT. It can be recovered from the buyer of the
The applicable CENVAT rate on the manufacture of any goods into India is based on the universally accepted HSN code assigned to the said goods. In India, the Central Excise Tariff Act, 1985 outlines the HSN codes assigned to various goods determining the rate on the manufacture of such goods.
The generic CENVAT rate is 10.30 (including 2 percent E-Cess and 1 percent SHEC).
The CENVAT paid on inputs used in the manufacture of final goods, is available for setoff against the tax liability on such finished goods manufactured, subject to satisfaction of prescribed conditions under the CENVAT Credit Rules, 2004.
Certain duty incentives are presently available to manufacturers having units in notified areas (such as J&K & North Eastern states etc). Such incentives are in the nature of complete exemption from duty (in which case no CENVAT would be charged by the manufacturer) or in the nature of remission of CENVAT charged (in which case CENVAT would be charged, collected and deposited by the manufacturer and subsequently refunded by the Government).
5. SERVICE TAX
Service tax was introduced in India in 1994. The levy of service tax is governed by the Finance Act, 1994 (‘the Finance Act’) and is applicable to the whole of India, except the state of Jammu and Kashmir. Currently, it seeks to levy tax on 115 categories of services specifically defined under the Finance Act.
Service tax is generally imposed at the rate of 10 percent (plus 2 percent education cess and 1 percent SHEC on service tax) (i.e. 10.30 percent) on the gross taxable value of specified services.
Service tax is generally paid by the service provider. However, in certain cases like goods transport agency, sponsorship services or services received from outside India, the service recipient would be liable to discharge the service tax liability on the services received by him on a reverse charge basis.
Further the Export of Service Rules, 2005 have provided an option to
service providers for exporting services without levy of service tax, subject to satisfaction of prescribed rules and conditions. Thus, the concept of ‘export’ is based on zero-rating principles adopted by several countries around the world.
The service tax paid on the services received can be used as set-off while payment of service tax on provision of services or CENVAT on removal of goods manufactured.
6. CENTRAL SALES TAX (CST)
This is a form of transaction tax applicable on sale transactions involving movement of goods from one state to another. Presently it is levied and collected by the seller’s state (though levied under and governed by the Central Government’s legislation) and is payable by the seller. The seller can recover it from the buyer.
Under the CST legislation, the buyer can issue declaration in Form C, subject to fulfilment of conditions, to be able to claim concessional CST rate of 2 percent (at present). Form C can be issued by the purchasing dealer provided he is registered with the VAT authorities of the relevant state and has procured the goods for any of the following purposes:
- Use in manufacture or processing of goods for sale;
- Use in telecommunication network;
- Use in mining;
- Use in generation or distribution of electricity or any other form of power
In the absence of issuance of Form C by the purchaser, the applicable tax rate would be the VAT rate applicable to the goods in the selling state.
CST paid to vendors while procuring inputs is not available as set-off for payment of VAT or CST liability at the time of sale of finished goods and hence increases the cost of procurement.
Interstate stock transfers
Goods can be transferred by a branch of a company in one state to another branch of the company in another state without payment of CST by collecting declaration in Form F from the recipient branch. In case of failure to issue Form F by the recipient branch, the VAT rate applicable in the dispatching state would be payable.
This is a form of transaction tax applicable on sale transaction involving movement of goods within the same state, i.e. buyer and seller located within the same state. The levy of VAT is state specific. Each state has prescribed the schedule of rates applicable to goods sold within the state. The generic VAT rates in the states are as follows:
|Goods||Rate (in percent)|
|Essential commodities – fruits, vegetables, staples, etc||0|
|Precious goods – jewellery, bullion, etc||1|
|Capital goods and Industrial Inputs||4-5|
|Residuary category – consumer durables||12.50- 15|
|Liquor, tobacco, fuel, etc.||Specific Rates|
It is pertinent to note that the VAT is paid to vendors for procurement of goods cans leases and mortgages, transfers of property, insurance policies, hire purchase agreements, motor vehicle registrations and transfers, etc. The rates of stamp duty vary from state to state.
8. ENTRY TAX
Entry tax is levied on the entry of specified goods into a state for use, consumption or sale therein.
The entry tax rates vary from state to state depending on the type of goods. It may be noted that, in certain states, the set-off of entry tax paid is available against the VAT payable on the sale of goods in the state, subject to state prescribed laws.
Octroi is levied on the entry of specified goods into a specified municipal limit / local areas (for eg, Mumbai) for use, consumption or sale therein. Presently, octroi is levied only in certain areas of the state of Maharashtra.
The octroi rates vary from municipal limit to municipal limit depending on the type of goods. It may be noted that the set-off of octroi paid is not available against the VAT payable and hence is a cost to the business.
10. OTHER LOCAL TAXES
Besides the abovementioned taxes, there are certain local taxes applicable within specific areas of certain identified cities, towns, villages, etc, for eg: Agricultural Produce Market Cess (APMC) and Mandi Tax.
Such taxes are generally levied on the removal of goods from the specified locations. No set-off of the taxes paid is available and hence such taxes would form part of the cost of procurement.
Further, another tax known as stamp duty is applicable on documents. The State Governments impose the stamp duty on a range of instruments such as leases and mortgages, transfers of property, insurance policies, hire purchase agreements, motor vehicle registrations and transfers, etc. The rates of stamp duty vary from state to state.