Self Learning Material

Indirect Tax Laws (BBA-505)

Course: Bachelors in Business

Administration

Semester-V

Distance Education Programme

I.K. Gujral Punjab Technical University

Jalandhar

Syllabus

Max. Marks: 100

External Assessment: 60

Internal Assessment: 40

Objectives: the aim is to provide an understanding regarding the existence of various indirect

tax laws in India. The course will make student understand correct, complete and timely

reporting of Indirect Tax returns.

UNIT-I

Central Sales Tax Act—Its features, terms, definitions, registration of dealer, procedure of

assessment, filing of returns, Sales Tax Authorities—its powers and functions, penalty and

appeal.

UNIT-II

Customs Act, 1962—An overview, Levy, Collection & Exemptions from custom duty, date

of determination of duties & tariff valuation. Prohibitions/restrictions of export & import,

determination of duty where Goods consist of articles of different rate of duties, warehousing,

duty drawbacks u/s 74 & 75, special provisions regarding baggage, postal goods.

UNIT-III

Central Excise Act, 1944—Its meaning, definitions, levy and collection, classification of

goods, valuations, assessment, payment of duty and removal of goods, refund of duties,

Appeals and

Penalties and CENVAT

UNIT 1V

Value Added Tax Service Tax

Note: The paper setter will consider the changes upto 30th September of relevant year.

Suggested Readings:

1. Indirect Taxes- Law & Practices- V.S. Datey, Taxmann

2. Indirect Taxes-Snowwhite Publications.

3. VAT Ready Reacnor- Saxena

4. Elements of Indirect Taxes- Law & Practices- V.S. Datey, Taxmann

Table of Contents

Reviewed by:

Dr. Sanjeev Bansal, Assistant Professor,

I. K. Gujral Punjab Technical University, Jalandhar

© IK Gujral Punjab Technical University Jalandhar

All rights reserved with IK Gujral Punjab Technical University Jalandhar

Lesson No. Title Written By Page No.

1 Indirect Tax Laws - Introduction Ms. Amanjot Kaur, Assistant Professor,

SGGS College, Chandigarh 1

2 Central Sales Tax and Value Added

Tax

Ms. Amanjot Kaur, Assistant Professor,

SGGS College, Chandigarh 16

3 Basic Concepts of Customs Law

Ms. Amanjot Kaur, Assistant Professor,

SGGS College, Chandigarh 32

4 Central Excise Law Ms. Amanjot Kaur, Assistant Professor,

SGGS College, Chandigarh 50

5 Service Tax

Ms. Amanjot Kaur, Assistant Professor,

SGGS College, Chandigarh 72

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Lesson 1

Indirect Tax Laws- Introduction

Structure:

1.1 Introduction

1.2 Features of Indirect Taxes

1.3 Constitutional Validity points

1.4 Model Questions

1.5 Suggested readings

1.1 Introduction

Funds are required by the government for maintenance of law and order, health services, defence

of the country etc. As far as Govt. is concerned taxation is the main source of funds for the

government which is used for various developmental projects in order to boost the economy.

India is a great republic and the constitution of India is supreme law of the country. It has been

specifically provided in the Constitution that in our country no tax can be levied or collected

except by the Authority of Law. The Seventh Schedule of constitution contains three lists which

provide authority to the Government (Central Government as well as the State Governments) to

levy and collect taxes on the subjects stated in these lists. So it is clear that as far as our country

is concerned ,here the taxation matters are decided on by the central and state government with

local governments deciding on smaller taxes to be levied within their particular jurisdiction.

Benefits of taxes:

Taxes are a compulsory payment by citizens of a country for the goods and services they

collectively provide for themselves and for each other. Justice Holmes of US Supreme Court, has

very rightly remarked that tax is the price which we pay for a civilized Society. The following

are the benefits of taxes:

1. By way of taxation, Government get funds for various purposes like maintenance of law

and order, defence, social/ health services, etc. The necessary funds needed for running

the government are basically acquired by way of taxation mainly.

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2. By way of taxation, Government get funds needed for creating public utilities and

amenities like, education, medication, highways, roads, and for creating job opportunities

for the youth of the nation.

3. The money collected by way of taxation can be used to strengthen the national security of

the country, to maintain law and order, to promote peace, and to provide social security

and to perform its social responsibility activities.

Kinds of Taxes:

Basically taxes are of two types i.e. direct taxes and the indirect taxes. These can be described in

brief as under:

(a) Direct Taxes: These types of taxes are the taxes which are imposed basically on a

person‘s income or wealth etc. These are levied on the person concerned and the ultimate

burden is borne by the same person on whom it is imposed. In other words, these types of

taxes are paid directly to the government by the person liable to pay tax. The main types

of direct taxes are income tax, corporate tax, wealth tax etc.

(b) Indirect Taxes: Indirect taxes are the taxes which are basically imposed on goods or

services. In these cases, the initial liability to pay these types of taxes lies on the

manufacturer or the seller or the service provider but finally the burden of these types of

taxes is shifted to the ultimate users of such goods or services. In fact, it must be noticed

that as far as the burden is concerned,it is shifted not in form of taxes, but, as a

component of the price of goods or services concerned. Therefore, it can be remarked that

these types of taxes are indirectly paid by the ultimate consumer to the government. The

main types of indirect taxes are the Excise Duty, the Customs Duty, Service Tax, Central

Sales Tax (CST). Value-Added Tax (VAT) etc.

Indirect Tax in India

There are a number of indirect taxes applied by the government. Taxes are levied on import,

manufacture, sale and even purchases of goods and services. These laws aren‘t also well-defined

in terms of Acts from the government; rather orders, circulars and notifications are given out by

relevant government bodies to this end. As such, it can be cumbersome trying to understand

every feature of indirect taxes in India. Taxation is a core element of modern citizenship in

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democracies. Our country has been mobilising revenue through indirect tax collection. In 2015-

16, direct taxes contributed only 51 per cent of the tax revenue. Indirect tax collections rose by

41 per cent to Rs 64,394 crore in April, the first month of financial year 2016-17, primarily due

to a sharp increase in excise collections. Central excise collections shot up by 70 per cent to Rs

28,252 crore in April as against Rs 16,546 crore in the last year. For April, 22 per cent growth

was seen for customs collection, which increased to Rs 17,495 crore from Rs 14,286 crore in the

same month last year. Service tax mop-up registered a growth of 27 per cent, rising to Rs 18,647

crore in April as against Rs 14,585 crore last year. During 2015-16, the growth in indirect tax

collections was considered as ―excellent‖. The Union Budget for 2016-17 has projected net tax

collections at Rs 10.54 lakh crore, out of which indirect tax collections, a reflection of production

and trade activities in the country, are estimated to be Rs 7.79 lakh crore. Indirect tax collections

have shown a healthy trend over the last financial year as well whereas direct tax collections

have fallen short of the revised Budget estimate for 2015-16. Indirect taxes are touted to be

streamlined following the introduction of the uniform Goods and Services Tax (GST).

Difference between Direct Taxes and Indirect Taxes:

There are a number of differences which exist between direct taxes and indirect taxes. A few

major differences have been described as under:

1. Direct Taxes are paid directly to the government by the person liable to pay tax. On the

other hand, indirect taxes are paid to government by one person but finally these are

recovered from another person, i.e. the ultimate consumer.

2. Direct Taxes are directly paid by taxpayer from his income/wealth/estate etc. On the

other hand, indirect taxes are paid indirectly by the taxpayer i.e. while purchasing goods

or commodities, or when availing the services.

3. Direct Taxes are progressive in nature. On the other hand, indirect Taxes are regressive in

nature.

4. Direct Taxes are paid when the income reaches the hands of the taxpayer. On the other

hand, indirect taxes are paid before the goods or services reach the final consumer.

5. Direct Taxes do not affect prices of goods and services. On the other hand, indirect taxes

are levied on goods or services. Therefore as a result, there is an increase in the prices of

goods and services.

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6. In the case of Direct Taxes, the control is relatively difficult and therefore it is difficult to

collect. On the other hand, in the case of indirect taxes, control is easy and it is easy to

collect.

7. Direct Taxes are levied after the income for a year is earned or valuation of assets is

determined on the valuation date. Whereas the indirect taxes come into picture at the time

of sale or purchases or rendering of services.

8. In the case of Direct Taxes, the chances of tax evasion are more as the majority of the

transactions are in unorganized sector. On the other hand, in case of indirect taxes, the

chances of tax evasion are less because of presence of organized sector

9. The main examples of direct taxes are income tax, corporate tax, wealth tax etc. On the

other hand, the main examples of indirect taxes are central sales tax, excise duty, service

tax, VAT, custom duty, octroi, luxury tax etc.

1.2 Features of Indirect Taxes:

Taxation policy is really a powerful tool to control and regulate an economy in an effective way.

The following are the salient features of Indirect Taxes in India:

1. Paid by taxpayer and borne by customer

It is levied on goods and services sold by an intermediary to final consumers. Consumers

then pay the tax in the form of higher price of items.

2. Basis of levy

It is broadly divided into categories such as sale of goods, imported/exported goods, offering of

services and manufacture of goods. Likewise, excise duty is levied on manufactured goods,

custom duty is levied when goods enter the Indian boundaries and service tax at the time of

rendering of services.

3. Source of revenue to the Govt.

It is major source of revenue to the government to the state and the centre. For instance, VAT

is levied by the state governments whereas CST is levied by the central government. A major

portion of revenue of the central government accrues from indirect taxes.

4. Taxable event

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Indirect taxes are levied on clearance of goods and services from the origin, instead of actual

sale of the products to the customers. What this means is that the intermediary will pay excise

duties irrespective of whether they could sell the good or service to consumers.

In fact, the system has become extremely complicated with rapidly changing provisions and

rates. Frequently, these provisions have been contradictory to each other and self-defeating in

nature. All this has made the system a highly complex one, and according to one opinion,

counter productive. The authorities have always recognized the need to simplify the tax system

but steps taken to this effect have only added to its complexities.

Main Types of Indirect Taxes:

Indirect taxes has a special place in indian economy. The following are the main kinds of the

indirect taxes which are there in India:

(A) Excise Duty:

Excise Duty is levied on production. It has nothing to do with sales.It is a duty on production

itself. It is levied on all the goods manufactured in India. The manufacturer of the goods are

required to pay the excise duty to the government. In this regard, it must be noted that it can also

be collected from those entities receiving manufactured goods and employing people to transport

these goods from the manufacturer to themselves. The Central Excise Rules provide that every

person that produces or manufactures any 'excisable goods', or who stores such goods in a

warehouse, shall have to pay the duty applicable on such goods . As per the provisions of the Act

and the Rules applicable, no excisable goods, on which any duty is payable, may be allowed to

move without payment of duty from any place, where these are produced or manufactured. The

following may be noted in this regard:

Basic Excise Duty

This is the duty charged under section 3 of the Central Excises and Salt Act,1944 on all excisable

goods other than salt which are produced or manufactured in India at the rates set forth in the

schedule to the Central Excise tariff Act,1985.

Additional Duty of Excise

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Section 3 of the Additional duties of Excise (goods of special importance) Act, 1957 authorizes

the levy and collection in respect of the goods described in the Schedule to this Act. This is

levied in lieu of sales Tax and shared between Central and State Governments. These are levied

under different enactments like medicinal and toilet preparations, sugar etc. and other industries

development etc.

Special Excise Duty

Special excise Duty was attracted on all excisable goods on which there is a levy of Basic excise

Duty under the Central Excises and Salt Act,1944.It was introduced in 978,and since then each

year the relevant provisions of the Finance Act specifies that the Special Excise Duty shall be or

shall not be levied and collected during the relevant financial year.

(B) Custom Duty:

Custom duty is there when something is purchased and imported to India from another country.

Basically it is a charge which is known as customs duty. It applies to all the products that are

imported to India by any mode viz. land, sea or air. In some cases,a customs duty can be levied

even on goods purchased in other countries and brought in India. The basic purpose of levying

the customs duty is to ensure that all the goods entering the country have been properly taxed.

(C) Sales Tax:

Sales tax is another important indirect tax. It is levied under both central and state legislations.

Basically it levied on the sale of a product which has been produced in India and can even cover

services rendered. As far as the technical aspect is concerned, the sales tax is levied on the seller

of the product who then transfers it onto the ultimate buyer who purchases the final product with

the sales tax already added to the price of the product. The major limitation of sales tax is that it

can be levied only once for a particular product meaning thereby that if the product is sold a

second time, this tax cannot be applied to it. There is Central Sales Tax Act in India. Apart from

it, a few states also levy other additional charges like purchase tax ,turnover tax, works

transaction tax etc. Therefore, the sales tax is one of the largest revenue generators for various

state governments.

(D) Value Added Tax:

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The value added tax is a tax that is levied at the discretion of the state government and a number

of states in India implemented it when it was first introduced. The tax is levied on various goods

sold in the state and the amount of the tax is decided by the concerned state itself. For example in

Gujarat the government has put all the goods into various categories called schedules and each

schedule having its own VAT percentage.

(E) Service Tax:

Like sales tax is added to the price of goods sold in India, so is service tax added to services

provided in India. Now a days the service tax is 15%(14% + 0.5%-Swachh Bharat

Cess+0.5%Krishi Kalyan Cess). It is applicable on companies that provide services and is

collected every month or once every quarter based on how the services are provided. If the

establishment is an individual service provider then the service tax is paid only once the

customer pays the bills however, for companies the service tax is payable the moment the

invoice is raised, irrespective of the customer paying the bill.

Advantages of Indirect Taxes:

Indirect taxes comprise a major portion of our tax revenue. The main advantages of Indirect

Taxes are as under:

1. In the case of indirect taxes, as the price of commodity or service already contain in itself

the component of indirect taxes, therefore the ultimate customer (who is also the final tax

payer)does not feel the direct burden while paying these indirect taxes and, resistance to

pay the indirect taxes is much less as compared to resistance to pay the direct taxes.

2. In case of indirect taxes, the producer of goods is also happy as he is having the

perception that he is only collecting the taxes and is not paying out of his own pocket,

because ultimately the burden of these taxes is to be borne by the ultimate consumer of

the concerned goods or services.

3. As far as the collection aspect is concerned, it is comparatively easier to collect the

indirect taxes because these are levied mainly on goods or services, for which record

keeping, verification and control is relatively easy, as it is mainly in the organized sector

where records and controls are kept generally in a better way.

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4. Another prominent benefit of indirect taxes is that, the tendency and chances of tax

evasion are comparatively very less in indirect taxes in organized sector, whereas it is not

so in case of direct taxes. At the same time, the collection costs of indirect taxes as

percentage of tax collected are also very much lower in indirect taxes compared to direct

taxes.

5. By way of imposing certain types of indirect taxes,the Government can even reduce the

wasteful expenditure For example,by levying higher taxes on luxury goods, this objective

can be achieved.

6. The Government collects more money by way of indirect taxes, the money so collected

can be used for the development of the nation. The govt can also use the mechanism of

indirect taxes in order to develop the backward areas by offering some incentives to

operate in such backward areas. Govt. Authorities may even try to encourage exports by

levying customs duties on imports and by providing some relief on income from exports.

Over the years, the government has made a systematic effort to reform indirect taxes by

converting the base of excise duties from specific to value added, and by replacing excise

duties with VAT.

Disadvantages of Indirect Taxes:

The following are the main disadvantages of indirect taxes:

1. Indirect Taxes are regressive in nature. The indirect tax is uniform, the tax payable on

commodity will be the same, whether it is purchased by a poor person or a rich person.

This is due to this reason; the indirect taxes are termed as ‗regressive‘. Indirect taxes

affect all Indians in the same manner. Indeed, given that the poor generally spend a

greater fraction of their income on essentials than the rich do, with wider indirect

taxation, they end up paying a higher individual tax rate than people considerably

wealthier. Selective exemption of items from indirect taxes has not been able to reduce

their regressive nature because of widespread evasion.

2. Indirect taxes are levied on goods or services. Therefore as a result, there is an increase in

the prices of goods and services. Increase in prices may reduce demand of goods and

services, and lesser demand may adversely affect the growth of industrialization in a

country, and it may have a special concern for a developing nation like India. Indirect

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taxes increase the prices of products and hence are often perceived as inflationary.

Compared with direct taxes, they feed inflationary forces. They are more burdensome and

cause widespread distortions in the allocation of resources.

3. Another main disadvantage of indirect taxes is that the high rate of these types of taxes

may result in increase in smuggling activities which is harmful to a nation in many ways.

In fact, higher rates of indirect taxes may also result in more cases of tax evasion. Even if

there is no smuggling or tax evasion, even then higher rate of certain types of indirect

taxes may result in an increase in the cost of modern machinery and technology.

CHECK YOUR PROGRESS A

Whether the following statements are True or False:

1. There are three lists in the Seventh Schedule of constitution which provide authority to

the Central Government and the State Governments to levy and collect taxes on subjects

stated in these lists.

2. It has been specifically provided in the Constitution that ‗no tax shall be levied or

collected except by Authority of Law‘.

3. The income tax, wealth tax, corporate tax etc. are the main examples of indirect Taxes.

4. The Excise Duty, the Customs Duty, Service Tax, Central Sales Tax (CST). Value-Added

Tax (VAT) etc. are the main types of direct taxes.

5. The main control of indirect taxes is through Central Board of Excise and Customs

(CBEC) which is the apex body on Indirect Taxes in India .

6. The State Governments get tax revenue from sales tax, excise from liquor and alcoholic

drinks, tax on agricultural income.

7. The tendency and chances of tax evasion are comparatively more in indirect taxes in

organized sector, whereas it is not so in case of direct taxes.

8. The collection costs of indirect taxes as percentage of tax collected are very high in

indirect taxes compared to direct taxes.

9. Higher rate of indirect taxes may result in increase in smuggling activities which is

harmful to a nation in many ways.

1.3 Constitutional Validity

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The Constitution is the foundation and source of power to legislate laws in India. The Article 265

of Constitution of India specifically provides that no tax shall be levied or collected except by

Authority of Law. Schedule VII divided it into three categories:

i. Union list (power of legislation with the central government)

ii. State list (power of legislation with the state government)

iii. Concurrent list (central and state government have the power of legislation)

Powers of Taxation, as per the Constitution of India are as under :

The Central Government gets tax revenue from Income Tax (except on Agricultural

Income), Excise (except on alcoholic drinks) and Customs.

The State Governments get tax revenue from sales tax, excise from liquor and alcoholic

drinks, tax on agricultural income. State Governments can levy the following taxes:

VAT : It stands for Value Added Tax. It is basically a tax on sale of goods. While inter-

state sale of goods is covered by the Central Sales Tax Act, intra-state sale of goods are

covered by the VAT Law of that particular state. It must be noted in this context that the

revenue collected under Central Sales Tax Act is done so by the State Governments

themselves and actually the Central Government has no specific role.

Stamp duties and Land Revenue: As far as land is concerned, it is a matter on which only

State Governments can govern, that is why the Stamp duties on transfer of immovable

properties are levied by State Government itself.

State Excise on Liquor and certain agricultural goods.

Further there are some local indirect taxes levied like Octroi. The existence of octroi duty

is considered a great hurdle in the development of the domestic market. It is known to

cause delays in transport of goods and increase cost of production and marketing

activities. Some States have taken steps towards abolishing octroi or replacing it with

some other form of indirect taxation, but on the whole not much has been achieved.

Apart from the above, Local Self Governments (like local bodies and municipalities, etc.)

also enjoy small powers of taxation These institutions can levy water tax, property tax,

shop tax, entry tax and establishment charges, etc.

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Administration and Relevant Procedures:

In our country, the main control of indirect taxes is through Central Board of Excise and

Customs (CBEC) which is the apex body on Indirect Taxes in India. It is basically a part of the

Department of Revenue under the Ministry of Finance, Government of India. It deals with the

tasks of formulation of policy concerning levy and collection of Customs & Central Excise

duties and Service Tax, prevention of smuggling and administration of matters relating to

Customs, Central Excise, Service Tax and Narcotics to the extent under CBEC's purview. The

Board is the administrative authority for its subordinate organizations, including Custom Houses,

Central Excise and Service Tax Commissionerates and the Central Revenues Control Laboratory.

At present,Sh.Najib Shah is the Chairman of Central Board of Excise and Customs (CBEC). He

will serve the office till 11 March 2017.

Under Article 246 of the Constitution, there has been provision of the authority for levy of

various taxes and the subject matters enumerated under the three lists set out in the Schedule-VII

to the Constitution. The following are the important types of taxes in the three lists:

(a) Important taxes in Union List:

Entry No. 82 deals with tax on income (other than agricultural income).

Entry No. 83 deals with custom duty (including export duties.)

Entry No. 84 deals with excise duty on tobacco and other goods manufactured or

produced in India (except alcoholic liquors for human consumption, narcotic drugs,

opium, but including medicinal and toilet preparations containing alcoholic liquor,

narcotics or opium)

Entry No. 85 deals with the issues of corporation tax.

Entry No. 86 deals with the provisions related to taxes on the capital value of assets,

exclusive of agricultural land, of individuals and companies; taxes on capital of

companies

Entry No. 92A deals with the 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.

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Entry No. 92B deals with the taxes on consignment of goods where such consignment

takes place during inter-state trade or commerce.

Entry No. 92C deals with tax on services.

Entry No. 97 deals with the residual powers.

(b) Important taxes in State List

Entry No. 46 deals with taxes on agricultural income.

Entry No. 51 deals with excise duty on alcoholic liquors, opium and narcotics.

Entry No. 52 deals with tax(like Octroi) on entry of goods into a local area for consumption, use

or sale therein.

Entry No. 54 deals with tax on sale or purchase of goods other than newspapers except tax on

inter-state sale or purchase.

Entry No. 55 deals with tax on advertisements other than advertisements in newspapers.

Entry No. 56 deals with tax on goods and passengers carried by road or inland waterways.

Entry No. 59 deals with tax on professions, trades and employment etc.

(c) Important taxes in Concurrent List

Entry No.17A deals with the issues related to forest income

Entry No. 25 deals with education income

CHECK YOUR PROGRESS B

Fill in the blanks.

1. VAT stands for…………………….

2. Excise Duty is a tax that is levied on all the goods ……………..in India.

3. It is comparatively……………to collect the indirect taxes because these are levied

mainly on goods or services, for which records and controls are kept generally in a better

way.

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4. In case of ………….both central and state government have the power of legislation.

5. CBEC stans for……………………..

6. GST stands for……………………....

7. ……………..of the Constitution lays down that no tax shall be levied or collected except

by the authority of law.

8. At present………………is the Chairman of Central Board of Excise and Customs

(CBEC).

Concluding Remarks:

To conclude, it may be remarked that indirect taxes play an important role in Indian

economy. But still there are a lot of weaknesses as far as these indirect taxes are

concerned. It is the need of the hour that indirect taxation is rationalised. Therefore the

policymakers should try to reframe tax governance priorities and redesign the indirect tax

more equitably and progressively. However, it is very encouraging to note that the

Government intends to create one single tax everywhere which shall be called as the

Goods and Service Taxes (GST), which will be a major tax reform intending to create

one major market. The GST is expected to come by April 2017. It will help in avoiding

the cascading effect of various types of duties and also to avoid the specific problem of

non-availability of input credit for one type of tax against another. Further, the

introduction of Goods and Service Taxes (GST) will result in abolishing/clubbing a

number of levies.

Summary:

In a welfare state like India, the Government has to perform many functions in the discharge of

its duties. The main requirement is the requirement of finance in order to perform all such

functions in an effective way. They required capital may be collected by the government from

the public in the form of taxes and other dues. Taxes are the compulsory payment levied by the

government on the persons or companies to meet the expenditure incurred on conferring

common benefits upon the people of a country. Direct taxes are those taxes whose burden cannot

be shifted to others and the person who pays it to the government has to bear it. Indirect taxes are

those whose burden can be shifted to others so that those who pay these taxes to the government

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do not bear the whole burden but pass it on wholly or partly to others. Various types of taxes

may be imposed and collected at different levels. Central government levies-income tax,

education cess, wealth tax, central excise and customs duty, central sales tax, etc. Whereas

various taxes like VAT, state excise duty, entertainment tax, agriculture revenue tax etc. may be

levied by the State government. In a similar way, Local bodies- may impose property tax,

professional tax, octroi, education cess, etc. In India, the main control of indirect taxes is through

Central Board of Excise and Customs (CBEC) which is the apex body on Indirect Taxes in India

.It is basically a part of the Department of Revenue under the Ministry of Finance, Government

of India.

GLOSSARY

CBEC: In our country, the main control of indirect taxes is through Central Board of Excise and

Customs (CBEC) which is the apex body on Indirect Taxes in India.

Concurrent list: It contains entries where both Union and State Governments can exercise power.

In such cases, the power of legislation lies with both the central and state government.

Custom duty :It is levied when something is imported to India from another country. It applies to

all the products that are imported to India by any mode viz. land, sea or air.

Direct Taxes: These are the taxes which are imposed on a person‘s income, wealth, etc. These

are levied on the person concerned and the burden is borne by the person on whom it is imposed.

Indirect Taxes: Indirect taxes are the types of taxes which are indirectly paid by the ultimate

consumer to the government.

Sales Tax: Sales tax is a tax that is levied on the seller of the product who then transfers it onto

the ultimate buyer of that particular product with the sales tax portion already added to the final

price of the product.

Service Tax: It is the tax levied on services provided in India. Now a days the service tax is

15%(14% + 0.5%-Swachh Bharat Cess+0.5%Krishi Kalyan Cess).

State list: It contains entries under exclusive jurisdiction of State Government. In such cases, the

power of legislation lies with the state government.

Union List: It contains entries under exclusive jurisdiction of Union Government. In such cases,

the power of legislation lies with the central government.

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Value Added Tax: The value added tax is levied on various goods sold in the state and the rate of

the tax is decided by the state itself.

ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress A

1.True 2. True 3.False 4.False 5. True 6. True 7.False 8.False 9. True.

Check Your Progress B

1. Value-Added Tax 2. manufactured or produced 3.easier 4. Concurrent list. 5. Central

Board of Excise and Customs 6. Goods and Service Taxes 7. Article 265 8. Sh.Najib Shah

1.4 Model Questions

Q1. What is the difference between direct and indirect tax?

Q2. Discuss the important features of indirect tax.

Q3. What are the various advantages of indirect taxes?

Q4. What are the various disadvantages of indirect taxes?

Q5. Write a descriptive note on Constitutional Validity of indirect taxes in India.

Q6. Write a brief note on Central Board of Excise and Customs.

1.5 Suggested Readings

1. Datey V.S., Indirect taxes, law and practice, Taxmann‘s Publication.

2. Sodhani Vineet, Indirect Taxes, Taxmann‘s Publications.

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Lesson 2

Central Sales Tax and Value Added Tax

Structures

2.1 Introduction to CST

2.2 Definition of sale under CST

2.3 Stock transfer

2.4 Declaration forms

2.5 Sales outside territorial waters under CST

2.6 VAT

2.7 Salient features of VAT

2.8 Procedure

2.9 Test Questions

2.10 Suggested Readings

2.1 Introduction to CST

Central Sales Tax is an indirect tax which is levied by the Central Government. Central sales tax

is levied on sale of goods in course of inter-state trade or commerce. The central sales tax act

1956 is applicable to whole of India including the state of Jammu & Kashmir. Entry 92A of the

List-I (Union Iist) to the Seventh Schedule of the Constitution of India empower the Union

Government to levy tax on the sale or purchase of goods in the course of inter-state trade.

Objective of the CST Act:

The objects of the Central Sales Tax Act, 1956 as given in the Preamble of the Act are as

follows:

1. To formulate principles for determining when a sale or purchase of goods takes place:

(a) In the course of interstate trade or commerce (Sec 3)

(b) Outside a state (Sec 4)

(c) In the course of import into or export from India (Sec 5).

2. To provide for the levy, collection and distribution of taxes on the sale of goods in the course

of interstate trade or commerce (Sec 9).

3. To declare certain goods to be of special importance in inter-state trade or commerce (Sec 14).

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4. To specify the restrictions and conditions on the State laws imposing taxes on the sale or

purchase of such goods of special importance (Sec 15).

2. To provide for collection of taxes from companies under liquidation (Sec 16 - 18).

Features of Central Sales Tax Act:

Sales Tax is an important indirect tax. The following are the main features of CST is payable in

the state in which the movement of goods commences.

In the case of Central Sales Tax Act, the taxable event is ‗sale of goods inter-state‘. Every

dealer who makes an inter-state sale must be a registered dealer. It explains the liability

of a dealer to pay Central Sales Tax.

Sec.3 explains when the sale of goods will be called an Inter-state sale.

Sec.4 explains when a sale will be outside all other States.

Section 5 explains what an import and export sale is.

Normally CST is charged at a single point, but in some cases there can be multiple point

tax on account of subsequent sale.

Goods for the purpose of CST have been divided into - Declared & other goods.

CST is levied on the first sales made in the course of Inter-state sale.

The Central Sales-tax is levied under this Act but it is collected by the State Government

from where the goods have been sold.

2.2 Definition of sale under CST

Sale includes any transfer of property in goods by one person to another for cash or for deferred

payment or for any other valuable consideration. It also includes a transfer of goods on the hire-

purchase or other system of payment by installment but does not include a mortgage or

hypothecation or pledge of goods.

CATEGORIES OF SALE:

Sales is of various types:

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INTER STATE SALE (SECTION 3)

A sale of goods shall be named as Inter-state sale under the following situations:

If the sale results in the movement of goods from one State to another. In other words

sale is not inter-State if movement of goods is not related to contract for sale Or

If the sale is effected by a transfer of documents of title to the goods during their movement from

one State to another

Meaning of movement: For this purpose, it should be noted that movement of goods

commences at the time of delivery to a carrier for transportation and terminates at the time

when delivery is taken from such carrier. In other words, so long as the goods are in the

custody of the transporter, the goods are deemed to be in movement

What is ‘Document of Title of Goods’: A receipt is given to the seller when the goods are

handed over to the carrier/transporter. This receipt is sent by the seller to the buyer. On the basis

of this particular receipt, the buyer gets delivery of goods by submitting it to the concerned

carrier/transporter. The receipt of carrier is ‗document of title of goods‘. It may be Railway

Receipts (RR) – incase of movement of goods by rail, Lorry Receipts (LR) – in case of

movement of goods by road, Air way Bill (AB) – in case of movement of goods by air, Bill of

Lading (BL) – in case of movement of goods by sea.

SALES

DOMESTIC SALE

SALE WITHIN STATES (SECTION 4)

TAX = VAT

SALE BETWEEN 2 OR MORE STATES (SECTION 3)

TAX = CST

SALE IN THE COURSE OF IMPORT OR

EXPORT (SECTION 5)

TAX = IMPORT/EXPORT

DUTY

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Temporary movement through another State is not Inter State sale: There could be

instances where the movement of goods commences and terminates in the same State but during

the course of such movement the goods pass through another State. Any such case would not

amount to a sale in the course of inter-State trade.

SALE OUTSIDE A STATE (SECTION 4)

1. Outside state sale – Section 4(1): When a sale or purchase is said to take place inside a State,

such sale or purchase is deemed to have taken place outside all other States. (E.g.: A sale

takes place inside Andhra Pradesh. It should be intra State sale only. It should not be inter-

State sale. This sale taking place inside Andhra Pradesh is outside Kerala, Karnataka,

Tamilnadu etc. This sale inside one State is outside all other States. The other States have no

nexus with the sale & hence they can‘t levy tax on such sales).

2. Inside state sale – Section 4(2):

In the case of Specific or Ascertained goods, a sale is deemed to take place inside the

State where such goods are situated at the time when the contract of sale is made. The

criterion is where the goods are at the time of sale contract.

In the case of Unascertained or Future goods, a sale is deemed to take place inside a State

where such goods are situated at the time of their appropriation to the contract of sale by

the seller or by the buyer. The criterion is where the goods are at the time of

appropriation.

3. Suppose there is a single contract of sale of goods situated at more than one place, it shall be

treated as if there are separate contracts in respect of the goods at each of such places.

SALE IN COURSE OF EXPORT OR IMPORT SALE (SECTION 5)

The sale shall be deemed to take place in the course of export or import:

a. Sale either occasions export (Called export sale) or sale is effected by a transfer of

documents of title to the goods after the goods have crossed the customs frontiers of India

(Called deemed export sale) (Section 5(1)).

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b. Sale either occasions import (Called import sale) or sale is effected by a transfer of

documents of title to the goods before the goods have crossed the customs frontiers of India

(Called deemed import sale) (Section 5(2)).

PENULTIMATE SALE [SECTION 5(3)]

It is defined a sale done prior to the export sale or ‗sale to comply the order of export‘. Export is

a specialised business and many small units are unable to export directly. Export is often affected

through specialised agencies like export Houses etc. Such indirect exports also need exemption

from taxes to make the products competitive. Hence, such penultimate sale before export is also

deemed to be in the course of export under Sec.5(3) and are fully exempted from CST.

Example: A of Delhi receives an order for export of certain goods from G of Germany. To

execute this order, he buys the goods from B of Ludhiana. The sale by B to A, which is the last

sale before actual export sale, shall also be deemed to have taken place in the course of export,

although B has sold the goods to A in India. This sale shall therefore, not be taxable under State

Sales-tax law or Central Sales-tax law.

2.3 Stock transfer

If a person sends goods outside its state to its branch office in another state then it is not sale

because you cannot sell goods to self. Similarly if a dealer sends goods to its agent in another

state who stocks and sells goods on behalf of the dealer, such agent is called consignment agent

and such stock transfer is also not considered as interstate sales since there is no sales involved in

it, sales will take place when such agent will sell goods. But to prove such stock/branch transfer,

F form is required to be produced as proof. As per section 6A(1) submission of F form is

mandatory to prove stock transfer. Otherwise, the transaction will be treated as sale for all

purposes of CST Act.

F Form is issued by the branch office/consignment agent receiving goods as branch/stock

transfer to its head office/principal who is sending the goods by way of stock/ branch transfer.

The H.O./Principal produces such F forms to its assessing authority to prove such stock/branch

transfer.

2.4 DECLARATION FORMS

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FORM NO. PARTICULARS

A Application for Registration of dealers

B Certificate of Registration is granted

C Section 8(4)(a), therefore, provides that a concessional rate is applicable only if

the purchasing dealer submits a declaration in Form ―C‖ as prescribe by

department Presently concessional rate against C form is 2%. Submission of C

Form is mandatory. If It is not submitted within time frame then concession will

be reversed & dealer shall be liable for balance tax (difference of normal tax &

concessional tax) along with interest. Frequency for obtaining C form is on

quarterly basis.

One declaration will cover all the transactions related to one quarter. Earlier one

C form was used for entire year transactions of a party.

C Form Buyer will issue Form C to Seller A which will be submitted by seller

to the department for claiming concession.

D It was used for making govt. purchases. From 01.04.2007 It has been withdrawn

EI

&

EII

This is used for the sale made to the buyer who does not take physical delivery.

Entire transaction is performed during the movement of goods from one state to

another state. Section 3(b) provides that a sale or purchase affected by transfer

of documents of title to the goods during their movement from one state to

another shall be deemed to take place in the course of interstate trade or

commerce For subsequent transaction of above mention E1 nature transaction

where second buyer also does not take delivery for the same & sale the material

to another one during movement of goods.

F This form is used when goods are dispatched to branch in another state. The

dealers who dispatch material will collect Form F from the branch where goods

have been delivered & will submit the same to department. Form-F is issued by

transferee of goods to transferor of goods and one single form may cover

consignments of goods transferred during one calendar month

G Indemnity Bond for Registration of Dealers

SELLER

(STATE A)

BUYER

(STATE B)

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H This form is used for penultimate sale to an exporter. The seller will collect the

form from exporter & submit to the department.

I Inter-state sale, made to a Special Economic Zone (SEZ) dealer registered under

the Central Sales Tax Act, 1956 for use by him in authorized operations in the

unit in SEZ, is exempt from payment of the Central Sales Tax if the selling

dealer furnishes Form I to its assessing authority after obtaining it from the SEZ

dealer.

J This certificate is issued by foreign diplomatic mission or UN in the case of sale

to diplomats. Dealer will collect the form within prescribe time limit & will

submit the same to the Sales tax authority.

2.5 Sales outside territorial waters under CST

CROSSING THE CUSTOMS FRONTIERS OF INDIA [SECTION 2(ab)]

It means crossing the limits of the area of a customs Station in which imported goods or export

goods are ordinarily kept before clearance by the customs authorities. In the customs law

crossing is reckoned at the 12th nautical mile in the sea whereas in the in CST the crossing is

reckoned in the main land at the harbor gate. Sales made by transfer of documents of title (Bill of

Lading) before crossing the customs frontier are import sales and sales made after the crossing is

export sales.

CHECK YOUR PROGRESS A

Whether the following statements are True or False:

1. The damaged goods of the insured are taken possession by the insurance company. The

insurance company is a dealer if such goods are sold by it later on.

2. Shahrukh of Ambala of Haryana comes to Ajmer of Rajasthan and purchases goods and brings

them with him to Ambala of Haryana. The sale is an Inter-State Sale.

3. During the course of penultimate sale, the declaration is to be signed by the dealer selling the

goods.

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4. The burden of proving that the transfer of goods is otherwise than by way of sale shall be on

the Dealer.

2. The copy of every order passed by the Appellate Authority shall be sent to Appellant and

Assessing Authority.

6. Government subsidy forms part of sale price.

7. A publisher sold the unsold copies of the books as waste. This sale is liable to Central Sales

tax.

8. Salim effected his first inter-State sale on 26.3.15 and applied for registration on 16.4.16. The

effective date of registration will be 26.3.12.

2.6 Value Added Tax (VAT)

Value Added Tax (VAT) is a general consumption tax which is applicable to all the commercial

activities involving the production and distribution of goods and services. It is considered a

consumption tax because its ultimate burden is on the final consumer.

Basically it is charged as a percentage of price, which means that the actual tax burden is visible

at each stage in the production. The objective is to avoid 'cascading', which can have a

snowballing effect on prices. It is assumed that due to cross-checking in a multi-staged tax; tax

evasion will be checked, resulting in higher revenues to the government. India already has a

system of sales tax collection wherein the tax is collected at one point (first/last) from the

transactions involving the sale of goods. VAT is collected fractionally, via a system of

deductions whereby taxable persons can deduct from their VAT liability the amount of tax they

have paid to other taxable persons on purchases for their business activities. In other words, it is

a multi-stage tax, levied only on value added at each stage in the chain of production of goods

and services with the provision of a set-off for the tax paid at earlier stages in the chain.

The introduction of VAT in our country was not as smooth as it appeared after its successful

implementation. An empowered committee of Finance Ministers of all the states was constituted

under the chairmanship of Dr. Asim Das Gupta, the Finance Minister of West Bengal. First it

was decided that the VAT would be introduced in 2003 i.e. from 1st. April 2003 but due to

political situation and scheduled elections in most of the states VAT was postponed though

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Haryana was the only state to adopt VAT in 2003 itself. Later in 2005, it was introduced in 20

states as stated in the schedule given above and before introduction of VAT a white paper was

prepared by this Empowered committee of state Finance Ministers and released by the Finance

Minister of the Country. In this White paper various modalities were set regarding procedural

aspect of VAT along with the broad suggestive guidelines regarding this new concept of taxation

in our country. The white paper also suggested a broad rate structure having minimum number of

rates.

VAT would, however, be collected in stages (installments) from one stage to another. The

mechanism of VAT is such that, for goods that are imported and consumed in a particular state,

the first seller pays the first point tax, and the next seller pays tax only on the value-addition

done - leading to a total tax burden exactly equal to the last point tax.

Benefits of VAT:

VAT structure is superior to the present sales tax system. In fact, it

eliminates cascading effect of existing sales tax system by setting off the tax paid earlier at every

stage of sale. More transparency is there. It is comparatively easier to understand also.

The tax structure becomes simpler and it improves compliance

It results in competitive exports which is very helpful for a nation like India.

Suppose Mr. A buys raw material from Mr. X for Rs. 1,000. After value addition, such goods are

sold by Mr. A for Rs. 2,500 to Mr. B. further such goods are sold for Rs. 3,000 to R. Further Mr.

R sells such goods to final consumer for Rs. 4,000. VAT payable is 4%.

Therefore, Mr. X will pay Rs. 40 as tax. On the second transaction, the liability of Mr. A comes

out to be = 2,500 X 4% = 100. VAT payable will be = 100-40 = 60 (Rs. 40 credit taken on

purchases). Mr. B will pay, VAT = 120-100 = 20 (Rs. 100 credit already taken).

Mr. R will pay = 4,000 X 4% = 160-120 = 40.

Therefore, the total VAT payable on the above transaction shall be = 40(Mr. X) + 60(Mr. A) +

20(Mr. B) + 40(Mr. R) = 160.

Common rates of VAT

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RATE GOODS FALLING IN THIS CATEGORY

0% Agriculture produce, natural production tec. in unorganized sectors

1% Precious stones, metals, gold and silver articles

4% Agricultural or industrial goods, goods of basic necessities

5% Declared goods (goods of special importance)

20% Luxurious goods

12.5% Other goods

Difference Between Central Sales-tax and VAT:

The major points of difference between Central Sales-tax and VAT are as under:

BASIS CST VAT

Meaning It is levied by Central

Government on inter-state sale

It is levied on the value

addition at each stage of

production of goods

Basis of levy Levied on inter-state sale Levied on intra-state sale

Kind of tax It is a production based tax It is a consumption based tax

Power to levy tax It is levied by central government It is levied by state government

Retention of tax It is retained by state government

from where the goods are sold

It is retained by the state

government

Kinds of Value Added Tax:

The main types of VAT have been described as under:

Production type- Value Added Tax

In such types of VAT, the total tax will be imposed on sales. The basis of production value added

tax (P-VAT) is equal to all the government expenses in the gross national product except

government wages expenses. In general, this kind of value added tax can be applied on the

consumption and capital goods basis.

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Consumption type- value added tax (C-VAT)

In such types of VAT, in addition to depreciation, costs of capital goods are excluded

from the tax basis. In fact, by excluding the costs of capital goods from production costs,

what remains is equal to the value of the production of consumption goods.

Income type- value added tax (I-VAT)

In such type of VAT, the tax doesn't include depreciation in tax calculation and thus, net

investment costs is included in the tax calculation. The tax basis in this model is equal to

total payment of government to production factors after deduction of government wages

expenses, and for this reason this type of tax is called income type– value added tax.

Methods of calculation of VAT:

The following are the main methods of calculation of VAT:

Addition Method: Under this method all the value additions are added. Example: labour

is Rs. 100 and expenses are Rs.500 and the profit of the dealer is 400. The value addition

is Rs.1000.00 which is the difference between the sale and purchase price. Add all the

expenses and profit say Rs. 100.00 + 500+ 400.00(Profit) = 1000.00 and calculate 12.5%

of Rs.1000.00 and this amount is Rs. 122.00 and this is the tax payable by the dealer.

Since the tax is payable on addition of all expenses and profit hence this is called addition

method of calculation of tax. However, it is not a very popular method because of its

various limitations.

Invoice Method: Under this method tax is calculated on invoices. Example: sale price :

Rs. 10,000. VAT @ 12.5% = 1,250 (output tax). Therefore, total sales invoice = Rs.

11,250. Purchase price is 9,000 and VAT @ 12.5% = 1,125 (input tax). Total purchase

price = 10,122. Therefore, tax payable is = Output tax – Input tax = 1,250 – 1,125 = Rs.

122.

Subtraction Method: This method is very simple and in this method one has to pay tax

directly on the difference between the sale and purchase price. There may be two

versions of Substraction method.

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Direct subtraction Method: - The tax is calculated by applying the rate on difference

between sale and purchase (exclusive of Tax). Example: Goods sold by a manufacturer to

distributor is Rs. 5000 exclusive of tax and the distributor is selling it on Rs. 6250

exclusive of Tax then the difference in purchase and sale price is Rs. 1250 and if the rate

of tax is 12.5% then the tax payable is 12.5% on Rs. 1250 and comes to Rs. 156.22.

Intermediate subtraction Method:- The tax is calculated by applying the rate on difference

between sale and purchase (inclusive of Tax.) The system is used when no separate tax is

mentioned in the bill and it is not very popular.

2.7 Salient features of VAT

The following are the salient features of VAT:

This system of value added tax generally covers a majority of goods and services. Taxes

which are collected with the objective of balancing the distribution of incomes or

achieving economic efficiency usually have the smaller tax basis and higher tax rates.

Chances of tax evasion are reduced to a great extent due to the lower rate of tax and as a

result a reliable source of income will be created for government. In fact, the system is

self- enforcing and that makes tax evasion difficult.

Due to various factors like necessity of unified model of taxation system in economic

relations between the members of protocols, creation of unified tax burden, motivating

the members towards efficiency, industrial developments, using the benefit of

neutralization, and increasing the internal competition, various countries/groups have

made the implementation of the value added tax as one of the criteria, for acceptance of

the members in the protocols and treaties.

Due to the fact that in value added tax system, the invoices of sales are the basis of tax

calculation and the amount of sales of goods and services are recorded in the specified

columns of invoice; the value added tax is calculated and collected on that basis Since the

invoices are recorded in the general journal and ledgers of the firms, the system of

auditing and control will be simple and effective.

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Value added tax is a neutral tax; because it has least effects on production factors

(investment, employment, etc.) and on economic decisions of the business units. The

reason is that the value added tax system is calculated proportionally on value added

generated by production factors in production cycle and hasn't any bias to any kind of

production method.

The operation of a VAT resembles that of the income tax more than that of other taxes,

and an effective VAT greatly aids income tax administration and revenue collection. It

must be stressed once again that if properly implemented VAT can ultimately lead to a

reduction in overall rates of tax. Revenues will not be sacrificed but would in fact be

enhanced as a consequence of the broadened tax base.

VAT has a very unique element of neutrality. Neutrality means that the taxation system

does not interfere in the choice of the purchaser. Hence he has to consider the other

merits excluding the rate of tax while selecting the raw material.

There is a major element of transparency in VAT. Buyer knows what he is contributing to

tax. In earlier system, tax is paid on first point and in the series of sales the last

consumers did not know what amount has been included in the price of goods towards

Tax.

It is basically easier to collect VAT. In fact, it results in better collection of tax to the

revenue. This in turn makes the VAT stable and flexible source of revenue, i.e.,

Government will get tax without evasion and flexible in the sense if the price increased

then government will get the higher amount of tax.

2.8 Procedures

VAT incentives are granted by state government to industries or dealers in the backward area in

the form of exemption or remission of VAT. It leads to development of such areas by providing

infrastructure, employment and other opportunities.

Different Incentives under VAT:

i. Exemption scheme on purchases and sales

ii. Deferment scheme, i.e. payment of output VAT on deferred basis in installments

iii. Remission scheme, i.e. output VAT is collected by dealer and not by Govt.

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Registration

Under registration, a dealer obtains a Registration Certificate from the State authorities. A

valid certificate is a must for carrying out business. However, any business with gross

turnover of less than Rs. 10 lakhs may not register him and may claim exemption from

registration.

CHECK YOUR PROGRESS B

Fill in the blanks.

1.Beyond ........nautical miles from the base line called as High Seas. Goods purchased from

High Seas, VAT does not attract. Hence, High Seas purchases are not eligible for input tax

credit.

2.Farm products are ............. from the VAT in the hands of farmers.

3. Purchase account should be debited with net amount. VAT credit receivable on purchases

should go to ............

4. A VAT invoice is also called as ...............

2. The dealer, who is required to be compulsorily registered under VAT Act, will have to

apply in the ..............

6. A new dealer is allowed 30 days time from the date of liability to get registered. An

application for registration should be made to the ................

7. VAT avoids ........... Effect of Tax.

8. VAT stands for..............

Tax Payers‘ Identification Number (TIN)

It is a registration number in the form of a code to identify a dealer. It consists of an 11 digit

numerals, comprising of first two digits as State Code and next nine digits as different in

different states. It facilitates computer applications, likewise detection of stop filers and

delinquent accounts and cross-check of information on taxpayer compliance.

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VAT Invoice & VAT Records

It is an invoice that contains prescribed details and enables a buyer to take input tax credit. It

facilitates audit and investigation, evasion of tax, assurance of invoices and prevents

cascading effect of taxes. It consists of name, addresses and TIN of purchasing and selling

dealers and description of quantity, value, rate of tax and amount of VAT on goods sold.

VAT records consist of purchase records, sales records, VAT account and details of

manufacture or supply. It is mandatory to maintain them and preserve for 5 years.

VAT Return & Self-Assessment

Under self-assessment, every dealer has to inform the Department on

monthly/quarterly/annual basis. It consists of information, likewise, sales, purchases, output

VAT, input VAT, VAT paid etc. E-filing facility is also available in some states. It helps in

reducing cost of compliance and ensures efficient processing of return data.

VAT Audit

VAT audit helps in verifying the assessment and is conducted by Department. Mandatory

audit is done for turnover exceeding Rs. 40 lakhs or Rs. 1 crore, by a C.A. and report is to be

submitted within prescribed time. Another audit may be conducted on selective basis by

Department. It is performed on selected accounts of dealers every year on scientific basis to

keep a check on tax evasion.

2.9 Test Questions

Q1. Define the term sale under CST Act 1956.

Q2. Distinguish between CST and VAT.

Q3. Discuss the importance of Form C and Form EI and EII.

Q4. Concept of VAT with example.

Q2. Discuss the advantages of VAT.

Q6. Briefly explain types of VAT audit.

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ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress A

1.True 2.False 3.False 4.True 2.True 6.False 7.True 8.True

Check Your Progress B

1.200 2.exemptied 3.‗VAT Credit receivable (Input) Account. 4.Tax Invoice. 2.respective

State VAT Form. 6.VAT Commissioner. 7.Cascading 8.Value Added Tax

2.10 Suggested Readings

a. Datey V.S., Indirect taxes, law and practice, Taxmann‘s Publication.

b. Sodhani Vineet, Indirect Taxes, Taxmann‘s Publications.

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Lesson - 3

Basic Concepts of Customs Law

Structure:

3.1 Basic concepts of customs law

3.2 Territorial waters

3.3 High seas

3.4 Types of custom duties

3.5 Anti-Dumping Duty

3.6 Safeguard Duty

3.7 Valuation

3.8 Import and Export Procedures

3.9 Baggage

3.10 Exemptions

3.11Warehousing

3.12 Demurrage

3.13 Project Imports and Re-Imports

3.14 Export Promotion Schemes

3.15 EOU

3.16 Duty Drawback

3.17 Special Economic Zones

3.18 Model Questions

3.19 Suggested Readings

3.1 Basic concepts of customs law

Objectives of Customs Act 1962:

1. To regulate imports and exports by decreasing imports into India and to save foreign

exchange reserves

2. As source of revenue to the Central government

CUSTOMS LAW IN INDIA

CUSTOM ACT 1962 CUSTOMS TARIFF

ACT 1975

SCHEDULE 1

(Classification and rates of duties for

imports)

SCHEDULE 2

(Classification and rate of duties for

exports)

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3. To protect Indian industry from dumping

4. Provisions of this Act are also used for other acts like, FEMA, FTA.

FEATURES OF CUSTOMS ACT 1962:

1. Goods become liable to custom duty when there is import or export from India.

2. Goods entering or going outside the limits of territorial waters of India shall be

chargeable to custom duty.

3. Goods under Customs Act 1962 include, vessel, aircraft, vehicles, stores etc., provided

they are movable and marketable.

4. Custom duty is a union subject and power to levy is derived from the Constitution of

India.

5. Custom duty is also payable by central and state government on goods imported by them.

But in case of exemption notification by India Navy, Police, Ministry of Defense, Coastal

Guard etc., imports are fully exempted.

3.2 Territorial waters

Goods entering or going outside the limits of territorial waters shall be chargeable to Custom

Duty. Territorial waters of India extend to 12 nautical miles (w.e.f. 30th

September 1967). It

means the portion of the sea which is adjacent to the shores of India.

Section 3 of ―Territorial Waters, Continental Shelf, Exclusive Economic Zone and other

Maritime Zone Act 1976‖ specifies that:

Territorial waters extend upto 12 nautical miles from the base line on the coast of India and

include any bay, gulf, harbor, creck or tidal river.

I nautical mile = 1.853 kms

3.3 High Seas

An area beyond 200 nautical miles from the base line is called High Seas. All countries have

equal rights in this area.

3.4 Types of custom duties

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Section 2 of the custom tariff act 1975, provides the rate of duty to be applied on the value of

goods.

Basic Custom

Duty (BCD)

Section 2

It is levied as a percentage on the value of goods determined under section

14(1). It is further classified as standard rate or preferential rate. Standard rate is

applicable to all countries except for preferential countries. Preferential rate is

applicable for ‗preferential area‘, declared by central government.

Auxiliary

Custom Duty

It was levied as a surcharge on goods. It has been abolished now.

Countervailing

Duty (CVD)

Section 3(1)

It is levied on imported goods exactly equal to excise duty which is levied in

India on similar goods. The prime motive is to equalize the price of home

manufactured goods with the imported goods.

Special

Additional

Duty (SAD)

Section 3(5)

It is levied to counter balance the effect of sales tax levied on similar goods in

India. At present, it is 4%.

Protective

Duty

Section 6

It is levied in order to protect the local industry from the cheap available goods,

on the recommendation of Tariff Commission.

Anti-dumping

Duty (ADD)

Section 9A

Many a times, large manufacturers from abroad export goods at a low price in

order to cripple the market or to dispose off their excess stock. This is called

dumping and is an unfair trade practice. Therefore, anti-dumping duty is levied

and is equal to the margin of dumping.

Margin of dumping = normal value (in exporting country) – import price

Safeguard

Duty

Section 8B

It is levied in order to protect from the bulk imports. Such imports may cause a

threat to the Indian industries.

Anti-subsidy

Duty

Section 9

If any country pays any subsidy on production and exportation of goods to

India to its residents, then the central government can impose CVD on such

subsidized goods.

Maximum duty = subsidy granted by foreign country

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3.5 Anti-Dumping Duty (Section 9A)

Features:

1. When goods are exported from any country to India at less than normal value then on such

importation, the central government may by official gazette impose an anti-dumping duty which

does not exceed the margin of dumping.

2. Margin of dumping = normal value - export price

3. No anti-dumping duty on imports by 100% EOU

4. The duty so imposed shall cease to have its effect on the expiry of 5 years from the date of

such imposition

5. In case of excess payment of margin of dumping, refund may be claimed by the importer

6. The central government may levy anti-dumping duty from a date prior to the date of

imposition of provisional duty but not beyond 90 days from the date of notification of levying

such duty.

3.6 Safeguard Duty (Section 8B & 8C)

Features:

1. It is levied if goods are imported into India in bulk quantities and are causing a threat to

the domestic industry.

2. In case of imports from other than China, this duty is not levied on imports from

developing countries, if such imports exceed 3% of total imports individually and 9% in

aggregate from all developing countries. It is not levied on imports by 100% EOU/SEZ.

3. It is normally levied for 4 years and may be extended for upto 10 years.

3.7 Valuation

S. No. Particulars Duty

A Assessable value XXX

B Basic custom duty (BCD) = assessable value *rate of BCD/100 XXX

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C A+ B XXX

D CVD = C* Rate of CVD/100 XXX

E B + D XXX

F Education cess = E* 3/100 XXX

G A+B+D+F XXX

H SAD = G*4/100 XXX

I TOTAL CUSTOM DUTY PAYABLE = B+D+F+H XXX

Example: Mr. Anil imported machinery from Japan worth 20,200 Yen. BCD is 10 % and

education cess is as applicable. Excise duty on similar goods in India is 14% and SAD is 4%.

Exchange rate declared by Board is Rs. 45. Find the custom duty payable.

Assessable value in Yen = 20,200

Assessable value in INR = 20,200 X 45 = 9, 09,000 /-.

Calculation of Custom duty:

S. No. Particulars Rs.

A Assessable value 9,09,000

B Basic custom duty (BCD) = 9,09,000 * 10/100 90,900

C A+ B 9,99,900

D CVD = 9,99,900 * 14/100 1,39,986

E B + D 2,30,886

F Education cess = E * 3/100 6,926.58

G A+B+D+F 11,46,812.58

H SAD = G * 4/100 45,872.51

I TOTAL CUSTOM DUTY PAYABLE = B+D+F+H 2,83,685.08

Customs Procedures

3.8 Import and Export Procedures

IMPORT PROCEDURE:

The following is the main steps in import procedure:

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Arrival of vessel and aircrafts in India (section 29): CBEC may allow person in charge of

a vessel or aircraft to cause/ permit to call/land at a place other than customs port.

Delivery of import manifest (section 30): It means report required to be delivered under

section 30 by the person in charge of a vessel or aircraft. Such import manifest must be

files electronically in prescribed form. If such report is not delivered to the proper officer

within the specified time, such person is liable to a penalty of Rs. 50,000.

Provisions relating to unloading etc. (section 31 to 38) Imported goods are unloaded

from vessel only if such goods are mentioned in the import manifest and order of entry

inwards is granted by the proper officer. However, it must be noted that imported goods

cannot be water-borne for being landed from any vessel and export goods cannot be

water-borne for being shipped. The goods can be water-borne only if these are

accompanied by a boat-note in the form prescribed by the authorities.

Various restrictions on the custody/removal of the imported goods (section 45): All the

goods imported and unloaded in custom area will remain in the custody of such person

approved by Commissioner of Customs until and unless these are cleared for home

consumption or are warehoused or are transshipped. The Custodian is to pay duty on such

goods on the date of delivery of import manifest. If any goods are pilfered after unloading

while in the custody of custodian, then this person is liable to pay duty on goods at the

rate prevailing on the date of delivery of import manifest.

Entry of goods on importation (section 46): The importer of goods shall make an e-filing

of bill of entry for home consumption or for warehousing to the authorised officer. Bill of

entry shall include all goods mentioned in the bill of lading or other receipt given by

carrier to the consignor.

Clearance of goods for home consumption (section 47): When the proper officer is

satisfied that the goods which are entering for home consumption are not covered under

the category of prohibited goods and the prescribed amount of duty and other charges

have been paid by the importer, then these goods may be allowed for clearance for home

consumption. But in case, the importer is unable to pay the import duty within two days

from the date of returning of the bill of entry for payment of duty, a penalty will be

charged @ 15% p.a. if the custom duty is more than Rs. 1 lakh, then the importer has to

pay duty electronically.

Procedure for disposal of goods not cleared within specified period (section 48 & 49):

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In case the goods are not cleared within 30 day from the date of unloading, then the

person having the custody of such goods may sell these goods. But he can do so only

after serving a notice to the importer. In case such goods are not cleared within specified

time; such goods may be permitted to be stored in a public or a private warehouse upto

30 days only.

EXPORT PROCEDURE:

The following is the main steps in export procedure:

Entry of goods for exportation (Section 50): The exporter of the goods is required to

make an entry by presenting electronically to the Authorized officer for exported goods

in a vessel or aircraft, a shipping bill or a bill of export.

Clearance of goods for exportation (Section 51): When the proper officer is satisfied that

the goods in question are not prohibited goods and the duty and other charges have been

paid by the exporter, then such goods may be permitted to be cleared and loaded for

exportation.

Export goods not to be loaded on vessel till the grant of entry outwards (Section 39): The

master of the vessel shall permit the loading of any export goods only when it has been

prescribed. For it to happen, an order from the authorized officer regarding granting entry

outwards to such vessel is required.

Export goods not to be loaded unless duly passed by proper officer (Section 40): It must

be noted that the person–in–charge of a conveyance will not permit the loading of export

goods which is handed over by the exporter at a custom station unless a shipping bill is

duly passed by the authorised officer.

Delivery of export manifest (Section 41): Before the departure, the person-in-charge of a

conveyance carrying export goods will deliver the export manifest or export report to the

proper officer. If the authorised officer is satisfied that the export manifest is incorrect or

incomplete, but there was no fraudulent intention, then in that case, he may permit such

manifest to be amended or supplemented.

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Conveyance cannot leave without order (section 42): A written order from the proper

officer is required before departure from the customs station. It is the duty of the person

in charge of a conveyance which has brought any imported goods or has loaded any

export goods at a custom station to get these orders from the authorized officer before

permitting the conveyance to depart from that particular customs station.

3.9 Baggage

Baggage means belongings or luggage of the passenger who is on travel. It includes dutiable

goods and unaccompanied goods. However, it must be noted that motor vehicles, goods imported

through courier and alcoholic drinks etc. are not included in the term baggage.

PROVISIONS:

1. Section 77: Declaration by the owner

Declaration is done by crossing either the green channel or red channel. By passing green

channel means that the bag contains non-dutiable goods. He has to submit disembarkation card

containing written declaration about his baggage. If the passenger is carrying dutiable goods then

he passes red channel.

2. Section 78: Rate of duty and tariff valuation

Relevant date for determining rate of duty & tariff valuation will be the rate prevalent on the date

when such declaration is made by traveler.

3. Section 79: exemptions from baggage

The central government has the power to exempt the duty on baggage under Baggage rules 1998.

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Baggage fully exempted or at concessional rate of duty:

Personal property re-imported

Free replacement under warranty of articles

Foodstuff upto Rs. 50,000

Free gifts and donations to red-cross, CARE etc.

Samples, price-lists etc.

4. Section 80: temporary detention of baggage

Reasons for detention:

i. Articles are prohibited in India

ii. Goods are dutiable

In such case the passenger can collect such articles at the time of leaving the country or he can

authorize any other passenger to collect things while leaving India.

3.10 Exemptions

I. General Exemptions in Public Interest

In case the central government is satisfied that it is necessary in the public interest to exempt

goods either generally or absolutely from the whole or part of any duty, by a notification in the

official gazette.

II. Special Exemption or Ad-hoc Exemption

categories of passengers claiming

exemptions

residents tourists persons transferring

residence professionals crew members

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The Central Government may by a special order exempt in the public interest on moral grounds

or economic grounds or public welfare.

III. Clarification

The central government may clarify the scope and applicability of any notification or order by

inserting an explanation in such notification at any time within one year of issue of such

notification.

IV. Exemption may be granted in different form or method

Form or method means valuation, weight, number, length, area etc. with reference to which duty

is leviable.

V. Effective date of notification shall be published.

VI. No duty shall be collected if the amount of duty levied is upto Rs. 100.

3.11 Warehousing

WAREHOUSE [Section 2(43)] means a public warehouse appointed under section 57 or private

warehouse licensed under section 58.

Public warehouses are owned and managed by the government bodies and private warehouses

are licensed warehouses, owned and managed by private persons.

Advantages of Warehouses:

Storage benefits

Deposit of goods without payment of custom duty

Enables sufficient stock to be maintained by importer

Avoids blocking of capital

Re-packing and repair facility available

Easy sale and transfer of warehoused goods

Avoids pilferage

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A. PRIOR TO DEPOSIT IN WAREHOUSE

1. The importer shall submit the bill of entry for taking permission of the custom authorities

to deposit the goods in a warehouse.

2. Space certificate is required to be submitted before moving the goods from custom port.

3. Transit bond is executed by the importer for moving goods from the custom port to the

relevant warehouse.

4. Goods are transferred under custom supervision.

5. The importer has to execute a bond for depositing the goods in a warehouse without

payment of duty. The mount of such bond is equal to twice the amount of duty assessed.

6. The proper officer may make an order permitting the deposit of goods in a warehouse.

B. WITHIN THE WAREHOUSE

1. Deposit of goods in a public or a private warehouse.

2. Any warehoused capital goods may be stored in a warehouse till expiry of 5 years in any

100% EOU and in case of other goods for expiry of 3 years.

3. All warehoused goods shall be subject to control of the proper officer. He shall have

access to and power to examine the goods.

4. The owner of goods shall pay rent and charges to the warehouse keeper at the rates fixed

by law. If rent is not paid within ten days from its due date, the keeper may, after

obtaining permission from the proper officer, sell goods equivalent to the rent.

5. With the permission from the proper officer, owner may inspect, sort the goods, change

containers, show goods for sale and take sample of goods.

PROVISIONS OF WAREHOSUING

PRIOR TO DEPOSIT IN

WAREHOUSE

WITHIN THE WAREHOUSE

CLEARANCE FROM

WAREHOUSE

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6. With due permission from the Assistant Commissioner, the importer may carry on

manufacturing in the warehouse premises.

C. CLEARANCE FROM WAREHOUSE

1. The goods may be removed from one warehouse to another with the permission of proper

officer.

2. The goods may be cleared for home consumption after presenting bill of entry.

3. Warehoused goods may be removed for exportation without payment of import duty

provided shipping bill is presented, export duty, penalties, rent and interest has been paid.

4. The Assistant Commissioner may remit the duty in case the goods are found to be

deficient due to natural loss.

5. When the good are improperly removed from a warehouse by the owner, the proper

officer may demand full amount of duty chargeable, penalty, rent, interest and other

charges, from the owner.

3.12 Demurrage

DEMURRAGE charges are levied by custodians to ensure faster clearance of cargo. The

custodians approved by the Commissioner of Customs as per Section 45(1) of the Customs Act,

1962 for Ports, Airports, ICDs, CFSs, etc. collect these charges against the services rendered for

storing the imported /export goods in their custody beyond the expiry of 'free days' (ranges from

3 to 7 days). The scale of rates has been fixed in ascending order so that it acts as a compulsion

for expeditious removal of goods from the transit area. Demurrage charges are also referred to as

warehousing charges or detention charges.

Imported goods may be subjected to temporary detention due to clearance formalities and

payment of Customs duties. However, many times, goods are detained by Customs for

compliance of statutory requirements like NOC from ADC, FSSAI, WLRO, PQ, etc., production

of mandatory documents, valuation, classification, chemical test/analysis reports or like reasons.

Goods may also get detained due to adjudication proceedings which is quite time consuming.

3.13 Project Imports and Re-Imports

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In case, the imports are categorised as foreign goods and domestic goods, the import of domestic

goods is called re-import. This is the simplest method of understanding about re-import. If any

goods of a country is exported to another country and thereafter importing back the same goods,

such goods are fell under re imports. For example, machinery has been exported to a country for

testing purpose and after necessary testing, the said machinery is returning back to the country.

Here, the process of returning back such machinery is called re-imports. In many cases re-

imports happen as the exported goods are not satisfied with quality measures, goods exported not

matching with the buyer‘s requirements, goods exported for specific purpose like project,

exhibition etc. Such re import procedures can be done by filing necessary documents along with

supporting documents with customs department of respective country.

3.14 Export Promotion Schemes

The Government has formulated and implemented a number of export promotion schemes in

order to support and promote exports. Except for Duty Drawback Scheme, the policy framework

for various export promotion schemes is laid down in the Foreign Trade Policy 2004-09, whereas

the procedures governing the schemes are detailed in the Handbook of Procedures, VoI-I 2004-

09. The Department of Revenue has issued notifications to operationalise the scheme. The major

objectives of a number of such schemes are to neutralize the incidences of levies and duties on

inputs used in export products. At Present, there are duty exemption or duty remission schemes.

Duty exemption schemes are the schemes which enable duty-free import of inputs required for

export production. An Advance Licence is issued as a duty exemption scheme. On the other

hand, a Duty Remission Scheme is a scheme which enables post export replenishment /

remission of duty on inputs used in the export product. Duty remission schemes consist of DFRC

which permits duty-free replenishment of inputs used in the export product. It may also consist

of DEPB scheme which allows drawback of import charges on inputs used in the export product.

Various other schemes like Target Plus, Served from India and Vishesh Krishi Upaj Yojana are

also there to reward high performing exporters. Under these schemes, the rewards are given on

the basis of incremental exports / export turnover.

3.15 EOU

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The needs for higher level of technological and industrial progress made the Government devise

a series of export promotional schemes. EOU & SEZ Schemes are one among them, which

provides an internationally competitive duty free environment coupled with better infrastructural

facilities for export production.

Export Oriented Units (EOUs) now constitute a very important sector in the country‘s Export

Production scenario. They have become dominant players in our export strategy, and their share

in the Country‘s export performance is about 10%. The export growth rate of 30% compares

very favorably with the National export growth rate.

Under the EOU scheme, the units are allowed to import or procure locally without payment of

duty all types of goods including capital goods, raw materials, components, packing materials,

consumables, spares and various other specified categories of equipments including material

handling equipments, required for export production or in connection therewith.

General Conditions of Duty free Import:

1. The goods are required to be imported into the EOU premises directly. However, Granite

Quarrying units, agriculture and allied sector units are allowed to supply / transfer the

capital goods and the inputs in the farms/fields with prior permission of Customs.

2. Prior to undertaking import / local procurement duty free, the unit is required to get their

premises customs bonded. The unit is also required to execute a B-17 bond with surety/

security with jurisdictional Customs/ Central Excise officers and take out a licence under

section 58 of the Customs Act, 1962.

3. The goods, except capital goods and spares, are required to be utilised within a period of

one year or within such period as may be extended by the Customs authorities.

4. The importer is required to maintain a proper account of the import, consumption and

utilisation of all imported/locally procured materials and exports made and submit them

periodically to the Development Commissioner/ Customs.

5. The importer is required to achieve minimum NFEP/export performance as per the

provisions of EXIM Policy.

6. The importer is required to abide by the terms and conditions of the Letter of Permission

/Letter of Intent /Industrial License issued to the unit.

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3.16 DUTY DRAWBACK

The term drawback is applied to a few amount of duties of Customs and Central Excise,

sometimes the whole, sometimes only a part remitted or paid by Government on the exportation

of the commodities on which they were levied. In order to claim the benefit of drawback, the

goods must be exported to a foreign port, the object of the relief given by the drawback is to

enable the goods to be disposed of in the foreign market as if they had never been taxed at all.

For Customs purpose drawback means the refund of duty of customs and duty of central excise

that are chargeable on imported and indigenous materials used in the manufacture of exported

goods. The following goods are eligible for drawback:

o Export goods which have been imported into India as such;

o Export goods which have been imported into India after having been taken for

use.

o Export goods which have been produced out of imported material.

o Export goods which have been manufactured from indigenous material.

o Export goods which have been made from imported or and indigenous materials.

The Duty Drawback may be of two types: (i) All Industry Rate (AIR) and (ii) Brand Rate. The

All Industry Rate (AIR) is basically an average rate based on the average quantity and value of

inputs and duties (both Excise & Customs) borne by them and Service Tax suffered by a

particular export product. These ates are notified by the Government in the form of a drawback

schedule each and every year. The legal framework in this regard is provided under Sections 75

and 76 of the Customs Act, 1962 and the Customs and Central Excise Duties and Service Tax

Drawback Rules, 1995. On the other hand, the Brand Rate of Duty Drawback is allowed in cases

where the export product does not have any AIR of Duty Drawback or the same neutralizes less

than 4/5th of the duties paid on materials used in the manufacture of export goods. This work is

handled by the jurisdictional Commissioners of Customs & Central Excise. Exporters who wish

to avail of the Brand Rate of Duty Drawback need to apply for fixation of the rate for their

export goods to the jurisdictional Central Excise Commissionerate. The Brand Rate of Duty

Drawback is granted in terms of Rules 6 and 7 of the Drawback Rules, 1995. The Duty

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Drawback facility on export of duty paid imported goods is available in terms of Sec. 74 (It is

discussed in more detail in under mention para) of the Customs Act, 1962. Under this scheme

part of the Customs duty paid at the time of import is remitted on export of the imported goods,

subject to their identification and adherence to the prescribed procedure.

Imported goods re-exported-Drawback under Sec. 74

In case of goods which were earlier imported on the payment of duty and are later sought to be

exported within a specified period, Customs Duty paid at the time of import of the goods, with

certain cuts, can be claimed as Duty Drawback at the time of export of such goods. Such Duty

Drawback is granted in terms of Sec. 74 of the Customs Act, 1962 read with Re-export of

Imported Goods (Drawback of Customs Duty) Rules, 1995. For this purpose, the identity of

export goods is cross verified with the particulars furnished at the time of import of such goods.

Where the goods are not put into use after import, 98% of Duty Drawback is admissible. But in

cases where the goods have been put into use after import, Duty Drawback is granted on a

sliding scale basis depending upon the extent of use of the goods. No Duty Drawback is

available if the goods are exported 18 months after import. Application for Duty Drawback is

required to be made within 3 months from the date of export of goods, which can be extended

upto 12 months subject to conditions and payment of requisite fee as provided in the relevant

rules.

Pre-requisites to claim drawback:

The following are the main pre-requisites to claim drawback under Sec. 74:

The goods on which drawback is claimed must have been previously imported.

Import duty must have been paid on these goods when they were imported.

The goods should be entered for export within two years from the date of payment of

duty on their importation (whether provisional or final duty). The period can be further

extended to three years by the Commissioner of Customs on sufficient cause being

shown.

The goods are identified as the goods imported or the goods must be capable of being

identified as imported goods.

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The goods must actually be re-exported to any place outside India.

The market price of such goods must not be less than the amount of drawback claimed.

The amount of drawback should not be less than Rs. 50/- as per Sec. 76-(1) (c) of the

Customs Act.

3.17 Special Economic Zones

Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed

to be foreign territory for the purposes of trade operations and duties and tariffs.

1. Exemptions, drawbacks and concessions to every Developer and entrepreneur.

Subject to the provisions of sub-section (2), every Developer and the entrepreneur shall be

entitled to the following exemptions, drawbacks and concessions, namely:

(a) exemption from any duty of customs, under the Customs Act, 1962 or the Custom Tariff Act,

1975 or any other law for the time being in force, on goods imported into, or service provided

in, a Special Economic Zone or a Unit, to carry on the authorised operations by the Developer or

entrepreneur;

(b) exemption from any duty of customs, under the Customs Act, 1962 or the Customs Tariff

Act, 1975 or any other law for the time being in force, on goods exported from, or services

provided, from a Special Economic Zone or from a Unit, to any place outside India.

2. Domestic clearance by Units.

Subject to the conditions specified in the rules made by the Central Government in this behalf:-

(a) any goods removed from a Special Economic Zone to the Domestic Tariff Area shall be

chargeable to duties of customs including anti-dumping, countervailing and safeguard duties

under the Customs Tariff Act, 1975, where applicable, as leviable on such goods when imported;

(b) the rate of duty and tariff valuation, if any, applicable to goods removed from a Special

Economic Zone shall be at the rate and tariff valuation in force as on the date of such removal,

and where such date is not ascertainable, on the date of payment of duty.

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A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory

outside the customs territory of India for the purposes of undertaking the authorized operations.

3. A Special Economic Zone shall, with effect from such date as Central Government may

notify, be deemed to be a port, inland container depot, land station and land customs

stations, as the case may be, under section 7 of the Customs Act, 1962.

3.18 Model Questions

Q1. Explain in detail the features of Custom Duties.

Q2. Define territorial waters.

Q3. Explain anti-dumping duty.

Q4. Discuss briefly the types of custom duty.

Q5. Explain the calculation of custom duty calculation with a hypothetical example.

Q6. Differentiate between general and ad-hoc exemptions of custom duty.

Q7. Explain the procedure for clearance of goods from a warehouse.

Q8. Discuss the relevant provisions relating to baggage under Customs Act.

Q9. Explain in detail the procedure for clearance of goods imported under the Custom Law.

Q10. Discuss duty drawback.

Q11. Explain provisions of SEZ in relation to Customs Act.

3.19 Suggested Readings

1. Datey V.S., Indirect taxes, law and practice, Taxmann‘s Publication.

2. Sodhani Vineet, Indirect Taxes, Taxmann‘s Publications.

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Lesson - 4

Central Excise Law

Structure:

4.1 The Central Excise Law

4.2 Goods

4.3 Manufacture and Manufacturer

4.4 Classification of Goods

4.5 Valuation of Goods

4.6 Related Person

4.7 Captive Consumption

4.8 CENVAT Basic procedures

4.9 SSI

4.10 Job Work

4.11 Assessment

4.12 Refund

4.13 Exempted Goods

4.14 Adjudication

4.15 Appeals and Appellate Authority

4.16 CESTAT (Customs, Excise and Service Tax Appellate Tribunal)

4.17 Model Questions

4.18 Suggested Readings

4.1 THE CENTRAL EXCISE LAW

The term excise duty has been derived from Latin phrase accensare meaning ‗to tax‘. In India, it

is considered an indirect tax which is paid by producer or seller to the government on goods

manufactured in India. The power to levy excise duty lies with the central government under

Entry 84 of List I of schedule VII of the constitution of India.

Basics of Excise Duty Liability

Extent and applicability 1. Applicable on goods manufactured or produced anywhere in

india (including jammu and Kashmir)

2. India includes territorial waters (upto 12 nautical miles in

the seafrom the landmass)

3. Notified ‗designated areas‘ in the continental shelf and

exclusive economic zone of india (upto 200 nautical miles

inside sea base line)

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Taxable event The activity of production/manufacture of excisable goods in India

Levy and collection 1. Levy- when liability of excise arises on a manufacturer

2. Collection- when goods manufactured are removed from

factory for sale

Basic condition of excise

liability

1. Excise duty is on goods which are movable and marketable

2. Goods must be excisable

3. Goods must have been manufactured in India

Types of excise duty 1. Basic excise duty- levied under first schedule of CETA

1985. Present rate is 14.5%.

2. Special excise duty-levied under second schedule. Currently

all goods are exempted from this duty

3. Education cess and secondary and higher education cess-

2% and 1%. Both are exempted w.e.f. 1-3-2015.

4.2 GOODS

Goods means which are movable and marketable and includes all materials, articles and

commodities. Under sale of goods act 1930, it means 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.

a. Movability- to be movable, goods must be brought into the market for being bought or

sold. It does not include immovable properties and other things attached to earth for the

permanent beneficial enjoyment of the earth. Example: construction of buildings is not

liable to excise duty.

b. Marketability- it means the goods when brought into the market, they must be capable of

being sold and bought for a consideration to a customer.

c. Excisable goods- excitability means the goods must be specified in schedule to CETA

1985. It also includes non-dutiable and exempted goods.

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4.3 MANUFACTURE AND MANUFACTURER

U/s 2(f) of central excise act 1944, manufacturing implies a change or transformation of matter

into new substance having a distinct name or character. Deemed manufacturing is also liable to

excise duty. It includes packing, labeling, re-labeling, branding etc. It includes any process:

a. Incidental or ancillary to completion of a manufactured product, and

b. Which is specified in relation under section or chapter notes of schedule to CETA 1985,

or

c. Which in relation to the goods specified in the third schedule to the CEA 1944, involves,

- Packing or repacking of such goods in a container or

- Labeling or re-labeling of containers

- Including 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.

Manufacturer is the person, who manufactures or produces goods in India and is liable to pay

excise duty on manufactured goods. Section 2 (f) defines the word manufacture and declares that

the word manufacturer shall be:

a. A person who employs hired labor in the production of excisable goods

b. And also any person who engages in their production for his own consumption

c. A job worker or contractor

Brand owners, raw material supplier, loan licensee or franchisee agreements donot account for a

manufacturer.

4.4 CLASSIFICATION OF GOODS

Classification means determining heading or sub-heading of the first schedule to the CETA

under which the particular product is covered. It is done at the time of removal of goods.

Reasons for classification:

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a. To determine the rate of duty

b. To determine eligibility to CENVAT credit

c. To claim benefits of full or partial exemptions

d. To differentiate the products

The first schedule has been divided into 21 sections of tariff, which are further divided into 98

chapters, tariff headings, sub-headings and various tariff items. The tariff is based on

Harmonized System of Nomenclature (HSN) which is an internationally accepted product coding

system. First two digits refer to Chapter No., first four digits refer to tariff heading, first six digits

refer to sub-heading within a heading and 8-digit code refers to tariff item.

GENERAL INTERPRETATIVE RULES (GIR)

RULE CONTENTS

Rule 1 Classification

according to heading,

section notes and

chapter notes

Titles of section, chapters and sub-chapters are not important for

classification rather it should be done according to headings and sub-

headings

Rule 2 (a)

classification of

incomplete goods

Incomplete goods shall be classified under the finished goods provided

they have acquired the same features. Even the unassembled and

disassembled goods will be covered under same category.

Rule 2(b) mixtures or

combinations of

materials and

substances

The mixture and combinations of goods shall be classified according to

Rule 3. Example: milk and cream with added sugar will be classified

under milk as it retains the main character.

Rule 3 (a) specific

description

Incase goods are classified under two headings then such heading shall

provide a specific description as compared to general description.

Rule 3(b) mixtures

and composite goods

When goods are made up of different materials, then such goods will be

classified under the heading which provides the essential character.

Rule 3(c) numerical

order

When goods cannot be classified under according to Rule 3 (a) or (b),

then classification is done according to occurrence in last numerical

order.

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Rule 4 akin goods Incase classification is not possible according to any above rule, then the

headings most akin/similar to the goods are used.

Rule 5 packaging

containers and

material

Packing containers and packing materials specifically made for goods

can be used for long term are also chargeable to duty under the heading

for which they are used. Example: camera cases.

Rule 6 only goods at

same level are

comparable

Goods classified under sub-heading and heading can be compared with

each other at the same level only.

Trade parlance theory Incase goods are defined under statutory definition; common parlance is

applicable which states that the ordinary meaning of the word as trade

obtained from dealers or persons trading in those goods.

4.5 VALUATION OF GOODS

There are two methods of valuation of goods under CEA 1944:

a. Valuation under section 4 A (MRP Basis)

Retail sale price is the maximum price at which goods are sold to consumers. It is

inclusive of taxes, freight, transport, commission, delivery, advertisement, packing etc.

incase there are two different MRP‘s on the goods, the maximum price will be considered

for valuation.

Format for calculation of Assessable value:

Maximum retail price XXX

Less: Abatement/rebate XXX

Assessable value XXX

Calculation of excise duty:

Excise duty = assessable value X rate of excise duty

100

b. Valuation under section 4

Under section 4 A, excise duty is calculated on the transaction value, which is defined as

the price paid or payable for the goods sold by manufacturer to the buyer. Such amount

includes any amount payable by the buyer on behalf of assessee payable at the time of

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sale, before sale or after sale. The following conditions must be satisfied for applicability

of transaction value:

- Goods should be sold at the time and place of removal

- Buyer and assessee should not be related

- Price should be the sole consideration

- Each removal of goods shall be treated as a separate transaction

Inclusions Exclusions

Bought out parts and accessories adding value All kinds of discounts (trade discount, cash

discount, quantity discount etc.)

Warranty charges Bank charges for outstation cheques

Design and engineering charges in specific to

goods produced

Interest on receivables (for delayed payments)

Consultancy charges related to design, layout

of final goods

Excise duty

Testing and inspection charges Sales tax

Dharmada or charity Other taxes

Erection, installation and commissioning

charges on movable property

Pre-delivery inspection and after sale services

Advertisement and publicity charges incurred

by buyer

Primary or secondary packing charges are

included but durable/reusable packing is

excluded

Outward handling charges (upto place of

removal)

Format for calculation (section 4) (forward method)

Price of product XXX

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Add: all inclusions XXX

Less: all exclusions XXX

Assessable value XXX

Excise duty = assessable value X rate of excise duty

100

Backward method:

Cum duty selling price XXX

Less: sales tax/VAT/CST XXX

Cum duty SP exclusive of tax XXX

Less: all exclusions XXX

Cum duty exclusions XXX

Less: excise duty

= rate of excise duty X cum duty excluding exclusions XXX

100

Assessable value XXX

4.6 Related person under section (4(3)(b) of Central excise act 1944

For levy of excise duty, manufacturer and buyer should not be related to each other otherwise

such transactions are not accepted.

Persons shall be deemed to be related if:

a. they are inter-connected undertakings,

b. they are relatives,

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c. amongst them the buyer is a relative and a distributor of the assessee or a sub-distributor

of such distributor,

d. they are so associated that they have interest, directly or indirectly in the business of each

other.

4.7 Captive Consumption

Manufactured goods which are consumed within the factory and are not sold outside the factory

are called captively consumed goods. Such goods are valued as 110% of cost of production.

Valuation= 110 % of cost of production

4.8 CENVAT

CENVAT (central value added tax) is based on VAT (value added tax). Till 1-4-2004, it was

called MODVAT. It refers to the provisions in respect of credit of excise duty paid on inputs and

capital goods and service tax paid on input services, which is available for payment of excise

duty on finished goods and service tax on output services.

Cenvat Credit on Capital Goods

Definition:-

Capital Goods means-

A. Goods namely:-

i) All goods falling under chapter 82, chapter 84, chapter 85, chapter 90, heading No. 6805,

grinding wheels and the like, and parts thereof falling under heading 6804 of the First

Schedule to Excise Tariff Act

ii) Pollution control equipment;

iii) components, spares and accessories of the goods specified at (i) and (ii) above;

iv) Moulds and dies, jigs and fixtures

v) Refractories and refractory material

vi) Tubes, pipes and fittings thereof and

vii) Storage Tank

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Used in the factory of the manufacturer of the final products, but does not include any

equipment or appliance used in an office; or outside the factory of the manufacturer of the final

products for generation of electricity for captive use within the factory; or for providing output

service.

B. Motor Vehicles are not generally regarded as capital goods. However, for certain specific

service providers, it has been considered as capital goods.

C. Components, spares and accessories of motor vehicles, dumpers and tippers, as the case may

be, used to provide taxable services.

Credit Availability:-

Cenvat Credit on Capital Goods is availed in the following manner:

50% of duty paid on purchase of capital goods is available in the financial year in which

capital goods is received in the factory.

Balance 50% may be taken in any of the subsequent financial years.

Credit can be availed in the subsequent years only when capital goods are in possession.

The exception is that in case of consumables like spare parts, components, moulds and dies,

refractories, refractory materials, abrasive powder or grain, and grinding wheels, the balance

credit can be availed in subsequent year, even if they are not in possession.

Cenvat Credit on Inputs

Definition:-

The definition of Input contained in Rule2 (k) has been revised w.e.f.01/04/2011.

Goods used in or in relation to the manufacture of the final product. All goods used in the factory

by the manufacturer of the final product.

Conditions for Availing CENVAT Credit on Inputs:-

Rule 4 of CENVAT Credit Rules 2004 provides certain conditions to be fulfilled for availing

CENVAT Credit.

CENVAT credit can be availed immediately on the receipt of the goods in the registered

premises of the person who gets the final products manufactured.

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Physical receipt of input is prerequisite for the availing of credit.

In case of removal of input as such, credit availed earlier needs to be reversed in full.

In case value of any input is written off fully or partially or provision has been made in the

books of account fully or partially before such input is being put to use, equivalent credit is

required to be written off. In case such input is subsequently used in the manufacture of final

product, credit earlier reversed may be taken back.

Cenvat credit on input, input services and capital goods is not available when the final product

manufactured by the manufacturer is chargeable to duty @ 1% under Notification 1/2011-CE.

In case of import of inputs and capital goods, cenvat credit of the Basic Customs Duty is not

available.

Input credit is not required to be reversed where final products are exported or deemed to be

exported.

Cenvat Credit on Input Service

Definition:

Any service used by the provider of taxable service for providing output service or used by a

manufacturer whether directly or indirectly in relation to manufacture of final product and

clearance of final product upto the place of removal.

Includes:

Services used in relation to modernization, renovation or repairs of a factory, premises of

provider of output service or an office relating to such factory or premises, advertisement or sale

promotion, market research, storage upto the place of removal, procurement of inputs,

accounting, auditing, financing, recruitment and quality control, coaching and training, computer

networking, credit rating, share registry, security, business exhibition, legal services, inward

transportation of inputs or capital goods and outward transportation upto the place of removal.

4.9 SSI

The government of India has given many excise concessions to SSI‘s under notification No.

8/2003 dated 1-3-2003. SSI‘s with turnover less than Rs. 4 crores are eligible for concessions.

Incase SSI unit does not avail Cenvat on inputs, turnover upto Rs. 150 lakhs is fully exempted.

Procedure of Registration

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The application for registration should be submitted to jurisdictional Range Superintendent of

Central Excise. Before 1st April 2010, the physical application was made in Form A-1and is

submitted to AC or DC. But w.e.f. 1st April 2010, all applications are done online through ACES

(Automation of central excise and service tax).

Features of exemption scheme for SSI:

1. Only such units are allowed exemption in the current year whose turnover was less than

or equivalent to Rs. 400 lacs.

2. A SSI who qualifies for the first condition, shall have two options, firstly, full exemption

upto Rs. 150 lacs turnover in the financial year. Second option is to pay 100% of full duty

on its turnover and then avail CENVAT credit.

3. The SSI‘s whose turnover exceeds the prescribed limit have to file a declaration.

4. Due date of filing quarterly return in Form ER-3 is 10th

of next month of next quarter.

5. Dues date for payment of excise duty is 5th

of following month from the end of quarter.

CHECK YOUR PROGRESS A

Whether the following statements are True or False:

10. The term excise duty has been derived from Latin phrase accensare meaning ‗to tax‘

11. Excise duty is on goods which are movable and marketable.

12. Deemed manufacturing is not liable to excise duty.

13. Retail sale price is the minimum price at which goods are sold to consumers.

14. CENVAT credit can be availed immediately on the receipt of the goods in the registered

premises of the person who gets the final products manufactured.

4.10 JOB WORK

Most of the industries get some processing done from outside the factory premises on job-work

basis. It means supplying raw material by a large scale unit to a job worker who carries out

processing likewise, drilling, welding, painting etc., and returns the material to the customer, this

is called job-work or sub-contracting.

Definition: In notification No. 214/86-CE and rule 2(n) of CENVAT Credit Rules, job work is

defined as ―processing or working upon of raw materials or semi-finished goods supplied to job-

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worker, so as to complete a part or whole of the process resulting in the manufacture or finishing

of an article or any operation which is essential for the aforesaid process.‖

The following interferences could be drawn from the above rules.

a) Finished goods cannot be removed under these Rules for the stated purposes.

b) The removal must be only for the specified purposes.

c) No permission from the department is required.

d) After the said processes, the final products can be cleared directly from the premises of the job

worker, after obtaining the permission from the Commissioner of Central Excise.

Valuation: No excise duty shall be paid if raw material is sent for job work. But if job work

results into manufacture, it is liable to excise duty. According to Rule 10 A, w.e.f. 1-4-2007, the

value at which the principal manufacturer or raw material supplied shall sell goods to an

unrelated buyer. Basis of valuation:

a. If the selling price is available, duty is levied under Rule 10 A.

b. If raw material is captively consumed by the supplier, then duty is paid on:

Value= raw material cost +job charges

c. If goods are captively consumed by principal manufacturer, then duty is paid on value =

cost of raw material + processing charges

4.12Assessment

Assessment means to determine the tax liability. Tax liability rises when goods are removed

from the factory premises.

Assessee means:

a. any person who is liable for the payment of duty assessed, or

b. manufacturer of excisable goods, or

c. a registered person of a private warehouse, where excisable goods are stored and

includes,

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d. an authorized agent of such person.

Procedure of assessment (Rule 2 c) of central excise rules 2002:

a. self-assessment

b. provisional assessment

c. best judgement assessment

Self Assessment (Rule 6)

As per rule 6 of the said Rules, a Central Excise assessee is himself (self-assessment)

required to determine duty liability at the time of removal of excisable goods and

discharge the same. In other words, the assessee should apply correct classification and

value (where duty is ad valorem) on the quantities being removed by him and indicate the

same in the invoice (except assessee manufacturing cigarettes, in which case the

Superintendent or Inspector of Central Excise has to assess the duty payable before

removal by the assessee).

Assessee is also required to check the return (in the prescribed format under form E.R.-1

and form E.R.-2) for the month for production and removal of goods and other relevant

particulars including CENVAT credit for a month and submits to the Range Office

having jurisdiction over his factory within ten days of the succeeding month.

Provisional assessment (Rule 7)

Provisional assessment is resorted to in the event the duty cannot be determined at the

point of clearance of the goods. Wherever an assessee finds that final assessment is not

possible, (in situations mentioned in rule 7 of the Central Excise Rules, 2002 (hereinafter

referred to as the said Rules) he will make a detailed request in writing to the Divisional

Deputy/Assistant Commissioner of Central Excise, indicating specific grounds/reasons,

and the documents or information, for want of which final assessment cannot be made,

time period, rate of duty and undertakes to appear before the Assistant/Deputy

Commissioner of Central Excise within 7 days or such date fixed by him, and furnish all

relevant information and documents. The assessee has to execute a bond in prescribed

form in surety or security for differential duty. AC/DC may allow provisional assessment

prior to final assessment within six months from the date of order of provisional

assessment. The differential duty shall be refunded only if the assessee does not pass the

incidence to another person. In case AC/DC feel that the reasons for provisional

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assessment are not satisfactory, they may ask him to appear before them, and if satisfies

he shall order for provisisonal assessment.

Best Judgement Assessment

In case the assessee fails to provide necessary information and the department is unable

to issue demand, then best judgement method is used where the burden to provide

information for re-determination of duty is on the assessee.

4.12 Refund

Refund of any duty of excise is governed by Section 11B of the Central Excise Act. 1944. The

refund claim can be filed within one year from the relevant date in the specified Form by an

assessee or even a person who has borne the duty incidence, to the Deputy/Assistant

Commissioner of Central Excise having jurisdiction over the factory of manufacture. In case

burden of duty has been passed on, the refund can be claimed by the person who has actually

paid the duty otherwise the amount is liable to be deposited in the Consumer Welfare Fund

created by the statute.

The Central Excise Act also provides for payment of interest on delayed payment of refund. As

per Section 11BB, if any duty ordered to be refunded under Section 11B has not been refunded

within three months from the date of receipt of the refund application in the prescribed manner,

interest at the rate notified by the Central Government shall have to be paid on such duty from

the date immediately after the expiry of three months from the date of receipt of application till

the date of refund of such duty. Any person, who deems himself entitled to refund of any duties

of excise or other dues, or has been informed by the department that a refund is due to him shall

present a claim in proper form along with the relevant documents supporting his claim and also

the copies of documents/records supporting his declaration that he has not passed on the duty

incidence.

The claim should be filed with the Deputy/Assistant Commissioner of Central Excise with a

copy to the Range Officer. The claim is to be presented in duplicate and is to be duly signed by

the claimant or by duly authorized person on his behalf and shall be pre-receipted (with revenue

stamp on original copy, where necessary). It may not be possible to scrutinize the claim without

the accompanying documents and decide about its admissibility. If the claim is filed without

requisite documents, it may lead to delay in sanction of the refund. The claim would be taken as

filed only when all relevant documents are available. In case any document is not available for

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which the Central Excise or Customs Department is solely accountable, the claim may be

received so that the claimant is not hit by limitation period.

4.13 Exemption from duty

CETA/ Custom Tariff prescribe the rate of duty for each chapter head and sub-head. This rate is

called Tariff rate and the duty payable is called Statutory Duty. Exempted goods means those

goods which are exempted by a notification under section 5A. They are not same as goods

cleared without payment of duty. Exemption means exemption by notification under section 5 A

of CEA.

Provisions:

a. goods exported under bond are not exempted goods

b. exemption from duty by a notification by Central Government

c. a party claiming exemption has to give a proof for his eligibility

d. exemption can be availed later by way of refund claim/appeal

e. area based exemption to new units in backward area

4.14 Adjudication

Adjudicate means to hear or try and decide judicially and adjudication means giving a decision.

Excise and custom authorities have been empowered to adjudicate upon a number of decisions

such as:

- To determine classification of goods

- To decide upon refund claims

- To determine valuation of goods

- To ascertain duty paid

- To impose fines and penalties

Adjudicating Authority

The officers of the Central Excise, Customs and Service Tax are empowered to adjudicate the

cases under law. Important and relevant provisions in this regard are as follows: (i) As per

SECTION 2 of Central Excise Act, 1944

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(a) ―Adjudicating authority‖ means any authority competent to pass any order or decision under

this Act, but does not include the Central Board of Excise and Customs constituted under the

Central Boards of Revenue Act, 1963 (54 of 1963), Commissioner of Central Excise (Appeals)

or Appellate Tribunal;

(b) ―Central Excise Officer‖ means the Chief Commissioner of Central Excise, Commissioner of

Central Excise, Commissioner of Central Excise (Appeals), Additional Commissioner of Central

Excise, [Joint Commissioner of Central Excise] [Assistant Commissioner of Central Excise or

Deputy Commissioner of Central Excise] or any other officer of the Central Excise Department,

or any person (including an officer of the State Government) invested by the Central Board of

Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963)

with any of the powers of a Central Excise Officer under this Act. (ii) As per section 2 of

Customs Act, 1962: ―adjudicating authority" means any authority competent to pass any order or

decision under this Act, but does not include the Board, Commissioner (Appeals) or Appellate

Tribunal: "Commissioner of Customs.‖

Appointment and jurisdiction of Central Excise Officers. —

(1) The Board may, by notification, appoint such person as it thinks fit to be Central Excise

Officer to exercise all or any of the powers conferred by or under the Act and these rules.

(2) The Board may, by notification, specify the jurisdiction of a Chief Commissioner of Central

Excise, Commissioner of Central Excise or Commissioner of Central Excise (Appeals) for the

purposes of the Act and the rules made thereunder.

(3) Any Central Excise Officer may exercise the powers and discharge the duties conferred or

imposed by or under the Act or these rules on any other Central Excise Officer who is

subordinate to him.

The Board has prescribed that the powers of adjudication and determination of duty shall be

exercised, based on monetary limit (duty involved in a case) as under. All cases involving fraud,

collusion, any wilful mis-statement, suppression of facts or contravention of Central Excise Act/

Rules with an intent to evade duty and/ or where extended period has been invoked in show

cause notices (including classification and valuation of excisable goods and CENVAT credit

cases) will be adjudicated as follows:-

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Central Excise Officers Powers of Adjudication (Amount of duty involved

Superintendents Upto Rs. 1 Lakh (excluding cases involving determination of rate of

duty or valuation and cases involving extended period of limitation)

Deputy/Assistant

Commissioners

upto Rs. 5 Lakh (except the cases where Superintendents are

empowered to adjudicate).

Joint Commissioners/

Additional

Commissioners

Above Rs.5 lakhs and up to Rs.50 lakhs

Commissioners Without limit

Cases related to issues mentioned under first proviso to Section 35B (1) of Central Excise Act,

1944 would be adjudicated by the Additional/ Joint Commissioners without any monetary limit.

4.15 Appeals and Appellate Authority

1. FIRST APPEAL TO COMMSSIONER (APPEALS)

Appeals against order of superintendant, assistant commissioner, deputy commissioner and

additional commissioner lies with Commissioner (Appeals),u/s 35 (1) of CEA parallel section

128 (1) of customs act and section 85(1) of finance act 1994.

Powers:

- issue summons u/s 14 of CEA

- can check any document

- examine witness on his own to enable him to dispose of the appeal

REVISION BY CENTRAL GOVT.

The act provides for appeal to Tribunal in most of the cases, but in few matters likewise, loss of

goods occurring in transit from factory or warehouse or to another factory, or rebate of duty on

exported goods and goods exported without payment of duty, it does not lie with the tribunal and

a revision application has to be made with central government. In such cases, tribunal has no

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jurisdiction, but a revision application can be filed with central government under section 35 EE

of CEA within three months.

APPEAL BEFORE TRIBUNAL

The tribunal CESTAT (customs, excise and service tax appellate tribunal) has been formed under

section 129 of customs act. It hears appeals against orders of commissioner as adjudicating

authority and commissioner (appeals) and its orders are binding on lower authorities.

APPEAL TO HIGH COURT

In case there is a substantial question of law arising out of order of tribunal, an appeal can be

made to high court within 180 days. Such appeal will be heard by two judges of high court bench

and the decision will be by majority.

APPEAL TO SUPREME COURT

Appeal can be made to Supreme Court in the following cases:

- If high court certifies it to be a fit case for appeal to supreme court

- Judgment of high court in reference

- Order of appellate tribunal relating to rate of excise duty or value of goods

- By special leave petition (SLP) under article 136 of the constitution

CHECK YOUR PROGRESS B

Fill in the blanks.

9. CENVAT stands for…………………….

10. In case of CENVAT, in case of removal of input as such, credit availed earlier needs to

be ……………..in full.

11. The government of India has given many excise concessions to SSI‘s. Accordingly,

SSI‘s with turnover less than …………are eligible for concessions. Incase SSI unit

does not avail Cenvat on inputs, turnover upto ………..is fully exempted.

12. ……………….is defined as ―processing or working upon of raw materials or semi-

finished goods supplied to job-worker, so as to complete a part or whole of the process

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resulting in the manufacture or finishing of an article or any operation which is

essential for the aforesaid process.‖

13. …………………is resorted to in the event the duty cannot be determined at the point

of clearance of the goods.

14. CESTAT stands for..................................

4.16 CESTAT (Customs, Excise and Service Tax Appellate Tribunal)

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), formerly known as

Customs, Excise & Gold (Control) Appellate Tribunal (in short CEGAT), was constituted on

11th October 1982 in terms of the powers vested in Central Government under Section 129 of

Customs Act, 1964. The CESTAT is a quasi-judicial authority. The Tribunal hears appeals

against the orders of Commissioner as adjudicating authority and Commissioner (Appeals). Its

powers are limited as compared to the powers of the Tribunal formed under Article 323B of the

Constitution of India. However, its orders are binding on lower authorities. Tribunal is final fact

finding authority, but as this Tribunal is a creature of Statute it cannot traverse beyond provisions

of Statute.

The tribunal is headed by its president and there is a provision for one or more senior vice

president, besides judicial members and technical members. For the purpose of constitution of

benches, the president and vice-president are also judicial or technical members. The work of

tribunals has been distributed among various benches, comprising of special benches located at

Delhi and regional benches, one each located at Delhi, Mumbai, Kolkata, Chennai and

Bangalore. Special benches deal with matters relating to disputes about the rate of duty of

custom or excise or value of goods, goods for purpose of assessment of duty of custom or of

excise. Special benches consist of not less than two members, atleast one being judicial member

or technical member. Regional benches deal with matters other than those falling within

jurisdiction of the special benches. There is also a provision for single member benches which

are competent to dispose of cases within the specified monetary limits falling within the

jurisdiction of regional benches.

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Functions

The CESTAT is held in high regard by all those associated with the levy of Customs, Excise &

Service Tax. The work of the tribunal has been distributed among respective benches; deal with

matters relating to settling disputes about the rate of duty of customs or excise, settlement of

valuation disputes / classification disputes. The Tribunal has jurisdiction in matters relating to

Anti Dumping and is authorized to hear appeals against the orders of the designated authority of

the Ministry of Commerce and Industries. Benches consist of one Member (Technical) and one

Member (Judicial). Members may dispose of cases pertaining to valuation disputes in which,

value of the absolute or difference in duty involved or the amount of fine / penalty involved

exceeds Rs.50,000/- As far as question of facts is concerned, CESTAT is the ultimate authority

and no further appeals are entertained against the finding of facts recorded by the Tribunal. The

decision of the Tribunal is considered final, though the order passed is appellable to the Supreme

Court of India.

Powers of Tribunal

- Discovery and inspection

- Enforcing attendance of any person and examining him on oath

- Compelling production of books of account and other documents

- Issuing commission

ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress A

1.True 4. True 3. False 4.False 5. True.

Check Your Progress B

1. Central Value-Added Tax 4. reversed 3. Rs. 4 crores, Rs. 150 lakhs 4. Job Work 5. Provisional

Assessment 6.Customs, Excise and Service Tax Appellate Tribunal.

4.17 Model Questions

Q1. What is captive consumption?

Q4. Explain the valuation rules under Central Excise Valuation Rules 2000.

Q3. Explain the GIR (interpretative rules) applicable for classification of excisable goods.

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Q4. AB Ltd. Manufactures machines. It got an order for 7,500 units. Price per machine-Rs.

5,100. Trade discount 7%, outward freight Rs. 5,000.

Internal transportation- Rs. 11,400. Bank commisiion for recovery of sale proceeds- Rs. 1,200.

Special discount on purchase @ 5% if buyer is ready to pay full payment in advance. Buyer has

paid for 1,500 units. Packaging charges are Rs. 20 per unit. Transit insurance premium Rs. 3,000.

Calculate A.V. and excise duty @ 14.5%.

(Answer: A.V. Rs. 357,33,900. Excise duty- Rs. 44,66,737.5)

Q5. A Ltd. Manufactures 2,000 units of product Z with invoice price of Rs. 5,000 per unit. He

offers 20% discount to wholesalers. During the year, he sold:

1,000 units in wholesale, 600 units in retail, 100 units distributed as free sample and the balance

of 300 units was lying in stock. Cost of production is Rs. 100 and excise duty @ 14.5%.

Calculate A.V. and excise duty payable.

(Answer: A.V. 6,13,500 , Excise duty- Rs. 76,687.5)

(Hint: Free samples will be valued at the price at which the greatest quantity is sold)

Q6. Explain CENVAT. How cascading effect is eliminated under CENVAT?

Q7. Explain the provisions regarding CENVAT credit.

Q8. Outline the procedure of assessment of excise duty under Central Excise Rules.

Q9. Discuss briefly about filing of returns and payment of Excise Duty for SSI.

Q10. What is job work. Discuss its valuation with examples.

Q11. Write a note on CESTAT.

Q14. Explain the procedure of filing an appeal to Tribunal.

Q13. Write a note on adjudicating authority.

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4.18 Suggested Readings

a. Datey V.S., Indirect taxes, law and practice, Taxmann‘s Publication.

b. Sodhani Vineet, Indirect Taxes, Taxmann‘s Publications.

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Lesson - 5

Service tax

Structure:

5.1 Introduction

5.2 Nature of Service Tax

5.3 Service Provider and Service Receiver

5.4 Registration Procedure

5.5 Records to be Maintained

5.6 Classification of Taxable Services

5.7 Valuation of Taxable Services

5.8 Exemptions and Abatements

5.9 Payment of Service Tax

5.10 CENVAT Credit

5.11 Rules Regarding Export and Import of Services

5.12 Taxable Services

5.13 Model Questions

5.14 Suggested Readings

5.1 Introduction

The Tax Reforms Committee headed by Dr. Raja J. Chelliah recommended imposition of tax on

selected services in early 1990s. On the basis of the report of this committee, the then Union

Finance Minister Dr. Manmohan Singh introduced the new concept of service tax and stated in

his budget speech for the year 1994-95 that there is no sound reason for exempting services

from taxation, when goods are taxed. The imposition of tax on services could also result in

widening the base of indirect taxes. Service tax is a tax levied by the government on service

providers on certain service transactions, but is actually borne by the customers. It is categorized

under Indirect Tax and came into existence under the Finance Act, 1994. First of all, the service

tax was imposed on just three services i.e. telephone, stockbroker and general insurance. It is

imposed on certain services which are taxable under the section 65 of Finance Act, 1994. It is

charged to the individual service providers on cash basis, and to companies on accrual basis.

This tax is payable only when the value of services provided in a financial year is more than Rs

10 lakh. The provisions regarding service tax are contained in Chapter V of the Finance Act,

1994 and administered by the Central Board of Excise & Customs (CBEC). Service tax was

imposed by amending Finance Act, 1994 and the scope has been amended time to time. At

present, the service tax is collected under the power of the Residuary Entry 97 of the Union List.

The taxable services are defined in section 65 of the Finance Act, 1994. Section 66 is the

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charging section of the said Act. Service Tax is applicable to the whole of India except the State

of Jammu and Kashmir.

Concept of Service:

The word service has been defined under section 65B(44) of the Chapter V of Finance Act, 1994.

It is an exhaustive definition and covers all the activities except those which have been

specifically excluded from the ambit of service tax. The service tax shall be levied on all the

services provided or agreed to be provided in a taxable territory other than services specified in

Negative Iist.

Service includes a declared service, but shall not include—

an activity which constitutes just

a transfer of title in goods or immovable property, by way of sale, gift or in any other

manner;

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

a transaction in money or actionable claim;

a provision of service by an employee to the employer in the course of or in relation to

his employment;

fees taken in any Court or tribunal established under any law for the time being in force.

5.2 Nature of Service Tax

The service tax is charged on the services which have been provided or agreed to be provided for

a consideration by one person to another person within taxable territory (i.e. India excluding

State of Jammu & Kashmir).The main features of levy of service tax are as under –

Service Tax is an indirect tax. For the purpose of levy of service tax, the value of taxable

service will be determined in accordance with Section 67 read with Service Tax

(Determination of Value) Rules, 2006.

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There are some services which have been specified in the negative list. On these services,

service tax is not chargeable. There are a number of heads of services that have been

specified in the negative list. In addition to services specified in negative list, a very

exhaustive exemption Notification has been issued in 2012 exempting a number of

services from payment of service tax.

Section 66E provides certain activities to be specifically treated as declared services. This

section has been incorporated in order to avoid disputes between sale of goods and

services,

The Central Government has been empowered under Section 66C to make rules for

determination of place of provision of service. In this context, the Central Government

has notified Place of Provision of Service Rules, 2012.

66F of the Act deals with the principles of interpretation. These principles have been

incorporated in order to interpretation when the services have to be treated differentially

for any reason and also for determining the taxability of bundled services.

Section 67A (inserted w.e.f. 01-07-2012) specifies that the rate of service tax, value of

taxable service & exchange rate shall be the rate in force or as applicable at the time

when taxable service has been provided or agreed to be provided. The rate of exchange

for determination of value of taxable service shall be the applicable rate of exchange as

per the GAAP(Generally Accepted Accounting Principles) on the date when point of

taxation arises.

The effective rate of service tax specified is 15% of value of taxable services. Earlier it

was 14% ,then Swachh Bharat Cess was levied u/s 119 of Finance Act, 2015 @ 0.5%

w.e.f. 15-11- 2015 on value of taxable services. Now 0.5% has also been added for Krishi

Kalyan Cess Therefore, the effective rate of charge of service tax comes out to be 15% of

value of taxable services.

The liability for payment of service tax is affixed either on service provider or on

recipient of service (in case of reverse charge). With effect from 01-07-2012, a new

scheme of taxation is brought into effect where the liability of payment of service tax will

be shared by service provider as well as service recipient in specified services. This is

called as partial reverse charge.

The credit of service tax and excise duty across goods and services are available in

accordance with Cenvat Credit Rules, 2004. Provisions have been made for registration,

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assessment including self assessment, rectification, special audit, appeals and penalties

for non compliance of the provisions of the Act and Rules.

It is a destination based consumption tax, i.e., a charge on services provided within the

territory of India.

5.3 Service Provider and Service Receiver

Service provider provides service to the service receiver. Service Provider is only a means for

depositing service tax to the credit of the Central Government.

Service receiver is a person who receives or avail the service provided by the service provider.

Service receiver has also not been defined and various terms have been used such as - any

person, policy holder, subscriber, customer, client, exhibitor, franchisee, shipping line etc.

However, Finance Act, 2008 has substituted 'any person' in all the taxable services in place of

client or customer as service tax is levied on services and status of service recipient should not

determine the tax treatment.

Service tax is payable only when a taxable service is rendered or provided to the service receiver.

In case of sale, receiver is the buyer or customer, in case of a service, service receiver is the

client. A service provider cannot be a client to himself. There must be a commercial relationship

between the two i.e., service provider must charge to the client and client should pay for the

services received. Client is an external person who avails the services of another person for an

agreed consideration. As per amendment made by Finance Act, 2008, in definitions, whenever

'customer' was appearing, has been replaced by the words 'any person'.

Normally, it is the liability of service provider, except in a case where service receiver is liable to

pay tax. This is called ―reverse charge‖. Section 68(2) makes provision for making person other

than service provider liable to pay tax. Provision can be made that part of tax will be paid by

service receiver and part by service provider.

Provisions of reverse charge:

The small service provider exemption of Rs 10 lakhs not available when tax is payable un

der reverse charge.

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Cenvat credit cannot be used to pay tax by service receiver. Service tax as to be paid by c

ash only i.e. GAR­7 challan.

Once paid, Cenvat credit can be taken if otherwise it is his eligible ‗input service‘.

Tax should be paid under service tax registration number of service receiver and included

in his return as he is liable to pay service tax.

Service tax is payable by service receiver when actual payment is made to service

provider and not on receipt of Invoice from service provider. However, if payment is not

made to service provider within 6 months, service tax is anyway payable. Interest is

also payable. Exception is that when service provider is outside India is Associated

Enterprise (group company with at least 25% common interest), the service receiver is

liable to pay service tax as soon as the account of service provider is credited in books of

account of service receiver.

5.4 Registration procedure:

It is the duty of every person who is providing taxable service and who is liable to pay service

tax to register himself with Central Excise Department within prescribed time. The application

for registration is required to be submitted in Form No. ST-1: The Central government may also

specify such other person or class of persons, who shall make an application for registration

within such time and manner as may be prescribed. In this context, the Central Government has

put Input Service Distributor and Small service provider under Special Category Persons.

Documents to be enclosed for registration:

An application for registration has to be accompanied along with the following documents:

1. Application in the prescribed form (Form ST-1) in triplicate duly signed. The application form

must be submitted alongwith an attested copy of the PAN Card and the address proof of the

premises which is required to be registered. The application form should be accompanied by a

copy of the document governing the constitution of the organization i.e. partnership deed in case

of a partnership firm, MOA(Memorandum of Association) in case of a company and Trust Deed

in case of a trusts or associations. Further the authority letters (on the letter head of the

organization applying for registration) in favour of the person who is to collect the registration

certificate and Power of Attorney in case the documents are signed by an authorized

representative are also required to be submitted alongwith the application form.

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5.5 Records to be Maintained:

Maintenance of records under the service tax is dealt with the provisions of Rule 5 of Service

Tax Rules, 1994. According to the said rule, an assessee will keep record including the

computerised data as required as per the various laws in force from time to time. In a similar

way, every assessee has to furnish the list of records maintained by him at the time of filing of

first service tax returns to the Jurisdictional Superintendent concerned. All other financial

records maintained shall be preserved at least for a period of five years and all these records are

required to be maintained at the registered premises. The records would be maintained for

recording the accounting as well as financial transactions. The record for recording of accounting

transactions would be for the below:

a) Providing of any taxable service

b) Providing of any exempted service

c) Procurement of input services

d) Procurement or Purchase of inputs or capital goods

e) Manufacture of inputs or capital goods

f) Storage of inputs or capital goods

g) Sale or delivery of inputs and capital goods;

h) Receipt of inputs or capital goods or input services

i) Payment for such inputs or capital goods or input services

j) Other activities

5.6 Classification of Taxable Services

Classification of a service is governed by the provisions of Section 65A of Finance Act,

1994 and any service ought to be appropriately classified into one taxable service using the

guiding principles set out therein. Classification of services shall be done as per section 65A of

the Finance Act, 1994. Section 65A was inserted by Finance Act 2003 lays down the basic

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principles of classifying the taxable services. The classification is based on specific description

or essential character of the service.

The basic principles of classification of a taxable service would be as follows -

(i) A taxable service would be classified in the category which gives the most specific

description of the service provided.

(ii) In case the taxable service is a service consisting of combination of services, such taxable

service will be classified in the category which gives such service its essential character.

(iii) Where a taxable service cannot be classified in any of the above two ways, such taxable

service will be classified in the category which occurs first in sub-section (105) among those

categories which equally merit consideration

5.7 Valuation of Taxable Services (u/s 67, Finance Act 1994)

In this regard there are two methods viz.Forward Method and Backward Method. Service tax is

payable on the value of taxable services. It includes the gross amount charged by service

provider for such service rendered. The gross amount charged includes payment by cheque,

credit card, deduction from account and any form of payment by issue of credit note, any amount

credited or debited to suspense account. The service tax must be separately shown in the

bill/invoice.

Service tax payable = amount of services X rate of tax / 100

Gross amount = value of taxable services + service tax payable

As far as Backward Method is concened, under it the gross amount is inclusive of service tax.

Service tax payable = cum tax price X rate of tax / 100+ rate of tax

SECTION 67 deals with the valuation of taxable services for charging service tax. In this regard,

it must be noticed that where service tax is chargeable on any taxable service with reference to

its value, then such value shall, —

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(i) be the gross amount charged by the service provider for such service provided or to

be provided by him; where he has agreed to provide the service for a consideration in

money.

(ii) be such amount in money as, with the addition of service tax charged, is equivalent to

the consideration; in a case where the provision of service is for a consideration not

wholly or partly consisting of money,

(iii) be the amount as may be determined in the prescribed manner, in the cases where the

provision of service is for a consideration which is not ascertainable.

It must however be noted that the gross amount charged for the taxable service shall include any

amount received towards the taxable service before, during or after provision of such service.

―SECTION 67A: Date of determination of rate of tax, value of taxable service and rate of

exchange

The rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of

service tax or value of a taxable service or rate of exchange, as the case may be, in force or as

applicable at the time when the taxable service has been provided or agreed to be provided. For

the purpose of this section, '‗rate of exchange‖ means the rate of exchange determined in

accordance with such rules as may be prescribed. In the case of works contract service provider

will be having two options for payment of service tax. It will depend upon the contract service

provider to select the particular option desired by him, and when he selects one option out of the

two, then that becomes final for the given contract. However, it must be kept in mind that the

value of the taxable service is the total amount of consideration consisting of all components of

the taxable service, it is immaterial that the details of individual components of the total

consideration is indicated separately in the invoice are not.

5.8 Exemptions and Abatements

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List of General Exemptions:

1. small service provider exemption

If the value of taxable services during the previous year is less than or equal to Rs. 10 lakhs,

then no service tax is levied in the current year.

2. services provided to agencies and employees of United Nations

3. services provided to a unit of SEZ (special economic zone)

4. taxable services involving import of technology

5. all taxable services provided to foreign diplomatic missions

6. exemption on services by technology business incubate (TBI) and science and technology

entrepreneurship park (STEP) for turnover up to Rs. 50 lakhs.

List of a few Major Exemptions:

1. Healthcare services, medical services, clinical trials, veterinary clinic.

2. Charitable activities conducted by entity registered under section 12AA if IT Act

3. Conducting religious ceremonies

4. Training in recreational activities relating to arts, culture and sports

5. Mid-day meal and transportation services to educational services

6. Journalists, performing artists, guest houses

7. Air transport to north east, passengers in stage carriage, transport of fruits etc.

8. Specified services to govt. or local authority.

ABATEMENT:

Abatement means reduction in the amount of tax/duty payable. Service tax also has such

abatements as follows:

Exemptions

General Exemptions

Major Exmeptions

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Partial abatement of service tax: (few mentioned)

TAXABLE SERVICES ABATEMENT

Package tours 75%

Services in relation to financial leasing including hire purchase 90%

Goods transport agency 70%

Renting of motor cab 60%

Transport of goods by rail 70%

5.9 Payment of Service Tax:

The Service Tax payable should be paid by the 6th of the following month. In case the assessee

is an individual or proprietary firm or partnership firm (other than HUF) or Limited Liability

Partnership firm, the tax will be payable on quarterly basis within six days from the end of the

quarter. If the payment is made through any other mode, such payment can be made by the 5th of

the following month or following quarter as the case may be. If the last day of payment and

filing return is a public holiday,then in that case, the tax can be paid and return can be filed on

the next working day. In case of individual and partnership firms whose aggregate value of

taxable services provided from one or more premises is fifty lakh rupees or less in the previous

financial year, the service provider shall have the option to pay tax on taxable services provided

or agreed to be provided by him up to a total of rupee fifty lakhs in the current financial year, by

the dates specified in sub-rule (1) with respect to the month or quarter, as the case may be, in

which payment is received. Every assessee shall electronically pay the service tax payable by

him, through internet banking. But in case the Assistant Commissioner or the Deputy

Commissioner of Central Excise having jurisdiction is satisfied, he may allow the assessee to

deposit the service tax by any mode other than internet banking.

RATE OF SERVICE TAX=15%

Interest on delayed payment of service tax:

Delay in payment of service tax attracts the simple interest at the rate as prescribed below and

penalty.

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With effect from 1-10-2014

Extent of delay

up to 6 months ---------------------------18%

From 6 months and upto 1 year ------24%

More than one year ---------------------30%

Extent of delay for small assessees having annual turnover upto ` 60 lacks in the previous year

up to 6 months ---------------------------15% p.a.

From 6 months and upto 1 year ---------21% p.a.

More than one year -----------------------27% p.a.

Every assessee shall electronically pay the service tax payable by him, through internet banking.

Provided that the Assistant Commissioner or the Deputy Commissioner of Central Excise, as the

case may be, having jurisdiction, may for reasons to be recorded in writing, allow the assessee to

deposit the service tax by any mode other than internet banking. Tax paid in excess to the credit

of Government for a month/quarter may be adjusted by the assessee against the tax payable for

the succeeding month/quarter. Self adjustment of excess payment of service tax allowed under

Rule 6(4A) is when exact amount to be paid could not be calculated, or when tax is to be paid by

31st March and calculation of exact amount of service tax is difficult or in case there are some

calculation mistakes

An assessee who have centralized registration can adjust the excess service tax paid on their own

without any monetary limit provided the excess amount paid is on account of delayed receipt of

details of payments from branches. In case of an assessee with multiple registration certificates,

excess service tax paid on their own without any monetary limit w.e.f. 1.4.2012. The monetary

limit was Rs.2,00,000 upto 31-3-2012 for a month/quarter. Such adjustment can be made only in

the succeeding month or quarter. Earlier the details of self-adjustment were required to be

intimated to the Superintendent of Central Excise within a period of 15 days from the date of

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adjustment as per the rulres. But w.e.f. 1-4-2012 there is no need to intimate to the Department

about such self-adjustment. The assessee may, on his own, pay Service tax in advance and adjust

the amount towards future liability. He shall intimate details of advance payment to the

Jurisdiction Superintendent of Central Excise within 15 days of such payment. He shall indicate

the details of adjustment of advance payment in the returns.

Records to be Maintained:

Rule 5 deals with the records to be maintained. The records including computerized data as

maintained by an assessee in accordance with the various laws in force from time to time shall be

acceptable. Every assessee shall furnish to the superintendent of Central Excise at the time of

filing of return for the first time or the 31st day of January, 2008, whichever is later, a list in

duplicate, of –

(i) all the record prepared or maintained by the assessee for accounting of transactions in regard

to,-

(a) Providing of any service;

(b) receipt pr procurement of input services and payment for such input services;

(c) receipt, purchase, manufacture, storage, sale, or delivery, as the case may be, in regard of

inputs and capital goods;

(d) other activities, such as manufacture and sale of goods, if any.

(ii) all other financial records maintained by him in the normal course of business.;

All such records shall be preserved at least for a period of five years immediately after the

financial year to which such records pertain. Registered premises includes all premises or offices

from where an assessee is providing taxable services.

Returns

As far assessment is concerned, there may be self –assessment and provisional assessment. Self

Assessment is where a service provider himself assesses and pays the tax. But where in a case

where a service provider is not able to estimate the tax amount in a correct manner, then in that

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case, he may apply to the department for provisional assessment (PA). In the case of provisional

assessment, the department arrives at the provisional tax liability on the services provided by the

service provider without waiting for the complete assessment at the initial stage itself. However,

the service provider has to provide an undertaking for bearing the final liability once the final

assessment is completed. In case of provisional payment of service tax, the assessee has to file a

statement giving details of the difference between the service tax deposited and the service tax

liable to be paid for each month in a memorandum in Form ‗ST-3A‘ which should accompany

the return in ‗Form ST-3‘. The half yearly due dates are:

For half year Return to be filed on or before

1st April to 30th September 25th October

1st October to 31st March 25th April

Nil return should also be filed within the prescribed time limit. Regarding returns, it is worth

mentioning that E-filing of returns is also permissible through the internet using computer.

Where the due date is a public holiday then in that case, the return should be filed on the next

working day. Revised returns may be filed within 90 days from the date of filing of original

return. For delay in filing returns, ―late fee‖ is payable as follows:

Period of Delay Penalty to be paid

Upto 15 days Rs.500

16 days to 30 days Rs.1,000

More than 30 days

Rs.1,000 plus Rs.100 per day (from the 31st

day) till the date of filing returns (Maximum of

Rs.2,000

However, the Central Excise Officer may, on being satisfied that there is sufficient reason for not

filling the return, reduce or waive the penalty, in case the gross amount of service tax payable is

nil, In case of multiple service providers, necessary details in each of the columns of Form SR-3

have to be furnished separately for each of the taxable service rendered by him, but as far as

return is concerned,a single return is sufficient for this purpose. Thus, instead of showing a lump

sum figure for all the services together, service wise details should be provided in the return. All

records and documents concerning any taxable service, CENVAT transactions etc. must be

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preserved for a minimum period of 5 years immediately after the financial year to which such

records pertain. An assessee is allowed to rectify mistakes and file Revised Return within 90

days from the date of filing of the original return. Revised return after 90 days not allowed. From

1.3.2007 to 29.2.2008, the time limit was 60 days.

5.10 CENVAT Credit

A service provider who has paid service tax on input services, excise duty on inputs and capital

goods is also eligible to avail CENVAT credit for all of these from his tax liability on output

services.

Input service under Rule 2 (f) of CENVAT Credit Rules, 2004, means any service:

i. Used by provider of taxable service for providing an output service, or

ii. Used by a manufacturer, whether directly or indirectly, in or in relation to the

manufacture of final goods, upto place of removal.

Example: a manufacturer who manufactures tables utilized the services of painter for

painting the table and paid service tax, such service tax shall be eligible for CENVAT Credit.

CENVAT Credit is available on the following input services:

Setting up, modernization, renovation, or repairs of factory building

Advertisement or sales promotion

Market research

Storage upto place of removal

Procurement of inputs

Activities relating to business, such as accounting, auditing, finance, recruitment and

quality control etc. upto place of removal.

5.11 Rules regarding Export and Import of Services

No service tax on export of services: A service provider can export services without payment of

service tax if the following conditions are satisfied under Rule 6 A of the service tax rules:

Services are provided form India to a place outside India

Payment of such services is convertible in foreign exchange

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Service provider is located outside India

Service is not specified u/s 60 D of the Act

Service provider and recipient are not merely an establishments of a distinct person

Import of Services:

The importer of service is liable to pay service tax when the service provider is providing

services from a place outside the taxable territory of India to a receiver in the territory of

India. In such case, the importer is liable to pay service tax because:

o Service provider does not have a place of business in India, OR

o Does not have establishment in India, OR

o Does not have permanent address in India.

5.12 Taxable Services

Taxable service means any service on which service tax is leviable under section 66 B. non-

taxable eservices are:

Services provided outside taxable territory, and

Service listed in negative list.

Exempted services are taxable services. The only requirement of being a taxable service is that

service tax must be leviable under section 66B. If any activity doesn‘t amount to service, then it

cannot be regarded as taxable services.

5.13 Model Questions

Q1. What is service tax?

Q2. Explain the provisions of reverse charge.

Q3. Discuss the procedure for registration under service tax.

Q4. Explain the rule for classifying taxable services.

Q5. CENVAT credit rules for service tax.

Q6. What are the provisions for export and import of services?

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5.14 Suggested Readings

3. Datey V.S., Indirect taxes, law and practice, Taxmann‘s Publication.

4. Sodhani Vineet, Indirect Taxes, Taxmann‘s Publications.