Business and Tax Laws Project FINAL

8/3/2019 Business and Tax Laws Project FINAL

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TAX

A fee charged ("levied") by a government on a product, income, or activity. If tax is levied

directly on personal or corporate income, then it is a direct tax. If tax is levied on the price of

a good or service, then it is called an indirect tax. The purpose of taxation is to finance

government expenditure. One of the most important uses of taxes is to finance public goods and services, such as street lighting and street cleaning. Since public goods and services do

not allow a non-payer to be excluded, or allow exclusion by a consumer which tend to

finance themselves largely through taxes., there cannot be a market in the good or service,

and so they need to be provided by the government or a quasi-government agency,

TAXATION in INDIA

India has a well developed tax structure with a three-tier federal structure, comprising the

Union Government, the State Governments and the Urban/Rural Local Bodies. The power to

levy taxes and duties is distributed among the three tiers of Governments, in accordance with

the provisions of the Indian Constitution. The main taxes/duties that the Union Government is

empowered to levy are Income Tax (except tax on agricultural income, which the State

Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The

principal taxes levied by the State Governments are Sales Tax (tax on intra-State sale of

goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of

alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty

on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to

levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption

within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities likewater supply, drainage, etc.

According to the Constitution of India, the government has the right to levy taxes on

individuals and organizations. However, the constitution states that no one has the right to

levy or charge taxes except the authority of law. Whatever tax is being charged has to be

backed by the law passed by the legislature or the parliament.

The main body which is responsible for the collection of taxes is the Central Board of Direct

Taxes (CBDT). It is a part of the Department of Revenue under the Ministry of Finance of the

Indian government. The CBDT functions as per the Central Board of Revenue Act of 1963.

CLASSIFICATION OF TAXES

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DIRECT TAX

A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directlyto the government by the persons (juristic or natural) on whom it is imposed. A direct tax is

one that cannot be shifted by the taxpayer to someone else. The some important direct taxes

imposed in India are as under:

Income Tax:

Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided

families or firms or co-operative societies (other tan companies) and trusts (identified as

bodies of individuals associations of persons) or every artificial juridical person. The

inclusion of a particular income in the total incomes of a person for income-tax in India is

based on his residential status. There are three residential status, viz., (i) Resident &Ordinarily Residents (Residents) (ii) Resident but not Ordinarily Residents and (iii)

NonResidents. There are several steps involved in determining the residential status of a

person. All residents are taxable for all their income, including income outside India. Non

residents are taxable only for the income

received in India or Income accrued in India. Not ordinarily residents are taxable in relation

to income received in India or income accrued in India and income from business or

profession controlled from India.

INCOME TAX ACT

Income tax is an annual tax on income. The Indian Income Tax Act (Section 4) provides that

in respect of the total income of the previous year of every person, income tax shall be

charged for the corresponding assessment year at the rates laid down by the Finance Act for

that assessment year. Section 14 of the Incometax Act further provides that for the purpose of

charge of income tax and computation of total income all income shall be classified

under the following heads of income:

A. Salaries

B. Income from house property

C. Profits and gains of business or profession.

D. Capital gains

E. Income from other sources.



The total income from all the above heads of income is calculated in accordance with the

provisions of the Act as they stand on the first day of April of any assessment year.

SALARY

Salary is the remuneration received by or accruing to an individual, periodically, for service

rendered as a result of an express or implied contract. The actual receipt of salary in the

previous year is not material as far as its taxability is concerned. The existence of employer-

employee relationship is the sine-quanon for taxing a particular receipt under the head

“salaries.” For instance, the salary received by a partner from his partnership firm carrying

on a business is not chargeable as “Salaries” but as “Profits & Gains from Business or

Profession”. Similarly, salary received by a person as MP or MLA is taxable as “ Income

from other sources”, but if a person received salary as Minister of State/Central Government,

the same shall be charged to tax under the head “Salaries”. Pension received by an assessee

from his former employer is taxable as “Salaries” whereas pension received on his death bymembers of his family (Family Pension) is taxed as “Income from other sources”.

WHAT DOES “SALARY” INCLUDE

Section 17(1) of the Income tax Act gives an inclusive and not exhaustive definition of

“Salaries” including therein

(i) Wages

(ii) Annuity or pension

(iii) Gratuity

(iv) Fees , Commission, perquisites or profits in lieu of salary

(v) Advance of Salary

(vi)Amount transferred from unrecognized provident fund to recognized provident fund

(vii) Contribution of employer to a Recognised Provident Fund in excess of the prescribed

limit

(viii)Leave Encashment

(ix) Compensation as a result of variation in Service contract etc.

(x) Contribution made by the Central Government to the account of an employee under a

notified

Pension scheme



INCOME FROM HOUSE PROPERTY

Under the Income Tax Act what is taxed under the head Income from House Property’ is the

inherent capacity of the property to earn income called the Annual Value of the property.

The above is taxed in the hands of the owner of the property.

3.2 COMPUTATION OF ANNUAL VALUE

(i) GROSS ANNUAL VALUE (G.A.V.) is the highest of

(a) Rent received or receivable

(b) Fair Market Value.

(c) Municipal valuation.

(If however, the Rent Control Act is applicable, the G.A.V. is the standard rent or rent

received, whichever is higher). It may be noted that if the let out property was vacant for

whole or any part of the previous year and owing to such vacancy the actual rent received or

receivable is less than the sum referred to in clause(a) above, then the amount actually

received/receivable shall be taken into account while computing the G.A.V. If any portion of

the rent is unrealisable, (condition of unrealisability of rent are laid down in Rule 4 of I.T.

Rules) then the same shall not be included in the actual rent received/receivable while

computing the G.A.V.

(ii) NET VALUE (N.A.V.) is the GAV less the municipal taxes paid by the owner. Provided

that the taxes were paid during the year.

iii) ANNUAL VALUE is the N.A.V. less the deductions available u/s 24.

DEDUCTIONS U/S 24

Are exhaustive and no other deductions are available:-

(i) A sum equal to 30% of the annual value as computed above.

(ii) Interest on money borrowed for acquisition/construction/ repair/renovation of property is

deductible on accrual basis.

Interest paid during the pre construction/acquisition period will be allowed in five successive

financial years starting with the financial year in which construction/acquisition is completed.

This deduction is also available in respect of a self occupied property and can be claimed up

to maximum of R.30,000/-. The Finance Act, 2001 had provided that w.e.f. A.Y. 2002-03 the

amount of deduction available under this clause would be available up to Rs.1,50,000/- in

case the property is acquired orconstructed with capital borrowed on or after 1.4.99 and such

acquisition or construction is completed before 1.4.2003. The Finance Act 2002 has further



removed the requirement of acquisition/ construction being completed before 1.4.2003 and

has simply provided that the acquisition/construction of the property must be completed

within three years from the end of the financial year in which the capital was borrowed.

SOME NOTABLE POINTS

In case of one self occupied property, the annual value is taken as nil. Deduction u/s 24 for

interest paid may still be claimed therefrom. The resulting loss may be set off against income

under

other heads but can not be carried forward. If more than one property is owned and all are

used for self occupation purposes only, then any one can be opted as self occupied, the others

are deemed to be let out.

Annual value of one house away from workplace which is not let out can be taken as NIL

provided that it is the only house owned and it is not let out. If a let out property is partly self occupied or is self occupied for a part of the year, then the value in proportion to the portion

of selfccupied property or period of self occupation, as the case may be is to be excluded

from the annual value. From assessment year 1999-2000 onwards, an assessee who apart

from his salary income has loss under the head “Income from house property”, may furnish

the particulars of the same in the prescribed form to his Drawing and Disbursing Officer who

shall then take the above loss also into account for the purpose of TDS from salary.

A new section 25B has been inserted with effect from assessment year 2001-2002 which

provides that where the assessee, being the owner of any property consisting of any buildings

or lands appurtenant thereto which may have been let to a tenant, receives any arrears of rentnot charged to income tax for any previous year, then such arrears shall be taxed as the

income of the previous year in which the same is received after deducting therefrom a sum

equal to 30% of the amount of arrears in respect of repairs/collection charges. It may be noted

that the above provision shall apply whether or not the assessee remains the owner of the

property in the year of receipt of such arrears.

PROPERTY INCOME EXEMPT FROM TAX

• Income from farm house (Sec.2(1A)(c) read with sec. 10(1)).

• Annual value of any one palace of an ex-ruler (Sec.10(19A)).

• Property income of a local authority (Sec.10(20)), university/ educational institution

(Sec.10(23C)), approved scientific research association (Sec.10(21)), political party

(sec.13A).

• Property used for own business or profession (Sec.22).

• One self occupied property (sec.23(2)).

INCOME FROM BUSINESS OR PROFESSION



Under the Income Tax Act, 'Profits and Gains of Business or Profession' are also subjected to

taxation. The term "business" includes any (a) trade, (b) commerce, (c)manufacture, or (d)

any adventure or concern in the nature of trade, commerce or manufacture. The term

"profession" implies professed attainments in special knowledge as distinguished from mere

skill; "special knowledge" which is "to be acquired only after patient study and application".

The words 'profits and gains' are defined as the surplus by which the receipts from the

business or profession exceed the expenditure necessary for the purpose of earning those

receipts. These words should be understood to include losses also, so that in one sense 'profit

and gains' represent plus income while 'losses' represent minus income.

The following types of income are chargeable to tax under the heads profits and gains of

business or profession:-

Profits and gains of any business or profession

Any compensation or other payments due to or received by any person specified in

section 28 of the Act

Income derived by a trade, profession or similar association from specific services

performed for its members

Profit on sale of import entitlement licences, incentives by way of cash compensatory

support and drawback of duty

The value of any benefit or perquisite, whether converted into money or not, arising

from business

Any interest, salary, bonus, commission, or remuneration received by a partner of a

firm, from such a firm

Any sum whether received or receivable in cash or kind, under an agreement for not

carrying out any activity in relation to any business or not to share any know-how,

patent, copyright, franchise, or any other business or commercial right of similar

nature or technique likely to assist in the manufacture or processing of good

Any sum received under a keyman insurance policy

Income from speculative transactions.

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In the following cases, income from trading or business is not taxable under the head "profits

and gains of business or profession":-

Rent of house property is taxable under the head " Income from house property".

Even if the property constitutes stock in trade of recipient of rent or the recipient of

rent is engaged in the business of letting properties on rent.

Deemed dividends on shares are taxable under the head "Income from other sources".

Winnings from lotteries, races etc. are taxable under the head "Income from other

sources".

Profits and gains of any other business are taxable, unless such profits are subjected to

exemption.

General principals governing the computation of taxable income under the head "profits andgains of business or profession:-

Business or profession should be carried on by the assessee. It is not the ownership of

business which is important , but it is the person carrying on a business or profession,

who is chargeable to tax.

Income from business or profession is chargeable to tax under this head only if the

business or profession is carried on by the assessee at any time during the previous

year. This income is taxable during the following assessment year.

Profits and gains of different business or profession carried on by the assessee are not

separately chargeable to tax i.e. tax incidence arises on aggregate income from all

businesses or professions carried on by the assessee. But, profits and loss of a

speculative business are kept separately.

It is not only the legal ownership but also the beneficial ownership that has to be

considered.

Profits made by an assessee in winding up of a business or profession are not taxable,

as no business is carried on in that case. However, such profits may be taxable as

capital gains or as business income, if the process of winding up is such as to involve

the carrying on of a trade.

Taxable profit is the profit accrued or arising in the accounting year. Anticipated or

potential profits or losses, which may occur in future, are not considered for arriving

at taxable income. Also, the profits, which are taxable, are the real profits and not

notional profits. Real profits from the commercial point of view, mean a gain to the



person carrying on the business and not profits from narrow, technical or legalistic

point of view.

The yield of income by a commercial asset is the profit of the business irrespective of

the manner in which that asset is exploited by the owner of the business.

Any sum recovered by the assessee during the previous year, in respect of an amount

or expenditure which was earlier allowed as deduction, is taxable as business income

of the year in which it is recovered.

The Income tax act is not concerned with the legality or illegality of business or

profession. Hence, income of illegal business or profession is not exempt from tax

CAPITAL GAINS

CAPITAL GAINS

Profits or gains arising from the transfer of a capital asset during the previous year are taxable

as “Capital Gains” under section 45(1) of the Income Tax Act. The taxability of capital gains

is in the year of transfer of the capital asset.

CAPITAL ASSET

As defined in section 2(14) of the Income Tax Act, it means property of any kind held by theassessee except:

(a) Stock in trade, consumable stores or raw materials held for the purpose of business or

profession.

(b) Personal effects, being moveable property (excluding Jewellery, archaeological

collections, drawings, paintings, sculptures or any other work of art) held for personal use.

(c) Agricultural land, except land situated within or in area upto 8 kms, from a municipality,

municipal corporation, notified area committee, town committee or a cantonment board with

population of at least 10,000.

(d) Six and half percent Gold Bonds, National Defence Gold Bonds and Special Bearer

Bonds.

TYPES OF CAPITAL GAINS

When a capital asset is transferred by an assessee after having held it for at least 36 months,

the Capital Gains arising from this transfer are known as Long Term Capital Gains. In case of

shares of a company or units of UTI or units of a Mutual Fund, the minimum period of

holding for long term capital gains to arise is 12 months. If the period of holding is less thanabove, the capital gains arising there from are known as Short Term Capital Gains.



COMPUTATION OF CAPITAL GAINS (Sec.48)

Capital gain is computed by deducting from the full value of consideration, for the transfer of

a capital asset, the following:-

(a) Cost of acquisition of the asset(COA):- In case of Long Term Capital Gains, the cost of

acquisition is indexed by a factor which is equal to the ratio of the cost inflation index of the

year of transfer to the cost inflation index of the year of acquisition of the asset. Normally,

the cost of acquisition is

the cost that a person has incurred to acquire the capital asset.

However, in certain cases, it is taken as following:

(i) When the capital asset becomes a property of an assessee under a gift or will or by

succession or

inheritance or on partition of Hindu Undivided Familyor on distribution of assets, or

dissolution of a firm, or liquidation of a company, the COA shall be the cost for which the previous owner acquired it, as increased by the cost of improvement till the date of

acquisition of the asset by the assessee?

(ii) When shares in an amalgamated Indian company had become the property of the assessee

in a scheme of amalgamation, the COA shall be the cost of acquisitionof shares in the

amalgamating company.

(iii) Where the capital asset is goodwill of a business, tenancy right, stage carriage permits or

loom hours the COA is the purchase price paid, if any or else nil.

(iv) The COA of rights shares is the amount which is paid by the subscriber to get them. In

case of bonus shares, the COA is nil.

(v) If a capital asset has become the property of the assessee before 1.4.81, the assessee may

choose either the fair market value as on 1.4.81 or the actual cost of acquisition of the asset as

the COA.

(b) Cost of improvement, if any such cost was incurred. In case of long term capital assets,

the indexed cost of improvement will be taken.

(c) Expenses connected exclusively with the transfer such as brokerage etc.

SOME IMPORTANT EXEMPTIONS FROM LONG TERM CAPITAL GAINS

(a) Section 54:

In case the asset transferred is a long term capital asset being a residential house, and if out

of the capital gains, a new residential house is constructed within 3 years, or purchased 1 year

before or 2 years after the date of transfer, then exemption on the LTCG is available on the

amount of



investment in the new asset to the extent of the capital gains. It may be noted that the amount

of capital gains not appropriated towards purchase or construction may be deposited in the

Capital Gains Account Scheme of a public sector bank before the due date of filing of Income

Tax Return. This amount should subsequently be used for purchase or construction of a new

house within 3 years.

(b) Section 54F:

When the asset transferred is a long term capital asset other than a residential house, and if

out of the consideration, investment in purchase or construction of a residential house is made

within the specified time as in sec. 54, then exemption from the capital gains will be available

as:

(i) If cost of new asset is greater than the net consideration received, the entire capital gain is

exempt.

(ii) Otherwise, exemption = Capital Gains x Cost of new asset/Net consideration.

It may be noted that this exemption is not available, if on the date of transfer, the assessee

owns any house other than the new asset. It may be noted that the Finance Act 2000 has

provided that with effect from assessment year 2001-2002, the above exemption shall not be

available if assessee owns more than one residential house, other than new asset, on the date

of transfer. Investment in the Capital Gains Account Scheme may be made as in Sec.54.

(c) Section 54EA:

If any long term capital asset is transferred before 1.4.2000 and out of the consideration,

investment in specified bonds/debentures/shares is made within 6 months of the date of

transfer, then exemption from capital gains is available as computed in Section 54F.

(d) Section 54EB:

If any long term capital asset is transferred before 1.4.2000 and investment in specified assets

is made within a period of 6 months from the date of transfer, then exemption from capital

gains will be available as :-

(i) If cost of new assets is not less than the Capital Gain, the entire Capital Gain is exempt.

(ii) Otherwise exemption = Capital Gains x Cost of New asset Capital Gains

(e) Section 54EC:



This section has been introduced from assessment year 2001-2002 onwards. It provides that if

any long term capital asset is transferred and out of the consideration, investment in specified

assets (any bond issued by National Highway Authority of India or by Rural Electrification

Corporation redeemable after 3 years), is made within 6 months from the date of transfer,

then exemption would be available as computed in Sec. 54EB. The Finance Act, 2007 has

laid an annual ceiling of Rs. 50 lakh on the investment made under this section w.e.f.

1.4.2007.

(f) Section 54ED:

This section has been introduced from assessment year 2002-03 onwards. It provides that if a

long term capital asset, being listed securities or units, is transferred and out of the

consideration, investment in acquiring equityshares forming part of an eligible issue of

capital is madewithin six months from the date of transfer, then exemption would be available as computed

in Sec. 54EB. As per the Finance Act 2006 it has been provided that with effect from

assessment year 2007-08, no exemption under this Section shall be available.

LOSS UNDER CAPITAL GAINS

Can not be set off against any income under any other head but can be carried forward for 8

assessment years and be set off against capital gains in those assessment years.

Income from other sources

All income other than income from salary, house property, business and profession or capital

gains is covered under ‘Income from other sources’. Provisions in respect of some importantsources of ‘other income’ are summarised below.

Dividends - Dividends on shares of domestic companies or units of UTI or mutual fund

received from a company on or after 1-4-2003 will not be taxable at the hands of the assessee

[section 10(34) and 10(35)]. [The dividend distribution tax (DDT) will be payable by

company/mutual fund u/s 115-O] However, deemed dividend as defined in section 2(22) of

Income Tax Act will be considered as ‘income from other sources’.

Winning from lotteries, races etc. - Winning from lotteries, card games, horse races are

taxable as other income. This is taxable @ 30.3% without claiming any allowance or

expenditure.



Interest on securities, bank deposits and loans - Interest on bank deposits and loans is

treated as ‘other income’, if not taxable u/s 28.

Gifts - Gifts in a year exceeding Rs 50,000, except gifts from certain relatives and gifts on

certain specified occasions will be taxable [section 56(2)(vi) of Income Tax Act]

Income from letting - Income from letting of furniture, machinery, plant and building whichis not separable fro, composite letting with machineries is taxable as other income. Current

repairs, insurance and depreciation are allowed as deductions [section 56(2)(ii) and (iii) of

Income Tax Act]

. DEDUCTIONS

The Income Tax Act provides that on determination of the gross total income of an assessee

after considering income from all the heads, certain deductions therefrom may be allowed.

These

deductions detailed in chapter VIA of the Income Tax Act must be distinguished from the

exemptions provides in Section 10 of the Act. While the former are to be reduced from thegross total

income, the latter do not form part of the income at all.

The chart given below describes the deductions allowableunder chapter VIA of the I.T. Act

from the gross total income of the assessees having income from salaries.

REMARKS

SECTION NATURE OF

DEDUCTION

REMARKS

80CCC Payment of premium for

annunity plan of LIC or

any other insurer

Deduction is available

upto a maximum of

Rs.10,000/-

The premium must be

deposited to keep in

force a contract for an

annuity plan of the LIC

or any other insurer for

receiving pension from

the fund.The Finance

Act 2006 has enhanced

the ceiling of deduction



under Section 80CCC

from Rs.10,000 to

Rs.1,00,000 with effect

from 1.4.2007.

80CCD Deposit made by an

employee in his pension

account to the extent of

10% of his salary.

Where the Central

Government makes any

contribution to the

pension account,

deduction of such

contribution to the

extent of 10% of salary

shall be allowed.

Further, in any year

where any amount is

received from the

pension account such

amount shall be charged

to tax as income of that

previous year. The

Finance Act, 2009 has

extended benefit to any

individual assesse, not

being a Central

Government employee

80CCF Subscription to long term

infrastructure bonds

Subscription made by

individual or HUF to the

extent of Rs. 20,000 to



notified long term

infrastructure bonds is

exempt from A.Y. 2011-

12 onwards.

80D Payment of medical

insurance premium.

Deduction is available

upto Rs.15,000/ for self/

family and also upto Rs.

15,000/- for insurance in respect of

parent/

parents of the assessee

The premium is to be

paid by any mode of

payment other than cash

and the insurance

scheme should be

framed by the General

Insurance Corporation

of India & approved by

the Central Govt. or

Scheme framed by any

other insurer and

approved by the

Insurance Regulatory &

Development Authority.

The premium should be

paid in respect of health

insurance of the

assessee or his family

members. The Finance

Act 2008 has also

provided deduction upto

Rs. 15,000/- in respect of

health insurance

premium paid by the



assessee towards his

parent/parents. W.e.f.

01.04.2011, contributions

made to the Central

Government Health

Scheme is also covered

under this section.

80DD Deduction of Rs.40,000/

- in respect of (a)

expenditure incurred on

medical treatment,

(including nursing),

training and

rehabilitation of

handicapped dependant

relative. (b) Payment or deposit to

specified

scheme for maintenance

of dependant

handicapped relative.

W.e.f. 01.04.2004 the

deduction under this

section has been

enhanced to Rs.50,000/

-. Further, if the

dependant is a person

with severe disability a

The handicapped

dependant should be a

dependant relative

suffering from a

permanent disability

(including blindness) or

mentally retarded, as

certified by a specified

physician or psychiatrist.

Note: A person with

severe disability means

a person with 80% or

more of one or more

disabilities as outlined in

section 56(4) of the

“Persons with

Disabilities (Equal

opportunities, Protection

of Rights



deduction of

Rs.1,00,000/- shall be

available under this

section.

and Full Participation)

Act.,”

80DDB Deduction of Rs.40,000

in respect of medical

expenditure incurred.

W.e.f. 01.04.2004,


section shall be

available to the extent of

Rs.40,000/- or the

amount actually paid,

whichever is less. In

case of senior citizens, a

deduction upto

Rs.60,000/- shall be

available under this

Section.

Deduction

Expenditure must be

actually incurred by

resident assessee on

himself or dependent

relative for medical

treatment of specified

disease or ailment. The

diseases have been

specified in Rule 11DD.

A certificate in form 10

I is to be furnished by

the assessee from a

specialist working in a

Government hospital.

80E Deduction in respect of

payment in the previous

year of interest on loan taken from a

financial

institution or approved

charitable institution for

higher studies.

This provision has been

introduced to provide

relief to students taking loans

for higher studies.

The payment of the

interest thereon will be

allowed as deduction

over a period of upto 8



years. Further, by

Finance Act, 2007


section shall be available

not only in respect of

loan for pursuing higher

education by self but

also by spouse or

children of the assessee.

W.e.f.01.04.2010 higher

education means any

course of study pursued

after passing the senior

secondary examination

or its equivalent from

any recognized school,

board or university.

80G Donation to certain

funds, charitable

institutions etc.

The various donations

specified in Sec. 80G

are eligible for

deduction upto either

100% or 50% with or

without restriction as

provided in Sec. 80G

80GG Deduction available is

the least of

1) Assessee or his

spouse or minor



(i) Rent paid less 10% of

total income ii) Rs.2000 per month

(iii) 25% of total income

child should not

own residential

accommodation at the

place of employment.

(2) He should not be in

receipt of house rent

allowance.

(3) He should not have

a self occupied

residential premises in

any other place.

80U Deduction of Rs.50,000/

- to an individual who

suffers from a physical

disability (including

blindness) or mental

retardation.Further, if the

individual is a person

with severe disability,

deduction of Rs.75,000/

- shall be available u/s

80U. W.e.f. 01.04.2010

this limit has been raised

to Rs. 1 lakh.

Certificate should be

obtained on prescribed

format from a notified

‘Medical authority’.

80RRB Deduction in respect of

any income by way of

royalty in respect of a

patent registered on or

The assessee who is a

patentee must be an

individual resident in

India. The assessee must



after 01.04.2003 under

the Patents Act 1970

shall be available as :-Rs.

3 lacs or the income

received, whichever is

less.

furnish a certificate in

the prescribed form duly

signed by the prescribed

authority alongwith the

return of income.

80QQB Deduction in respect of

royalty or copyright

income received in

consideration for

authoring any book of

literary, artistic or

scientific nature other

than text book shall be

available to the extent

of Rs. 3 lacs or income

received, whichever is

less.

The assessee must be

an individual resident in

India who receives

such income in

exercise of his

profession. To avail of

this deduction, the

assessee must furnish

a certificate in the

prescribed form along

with the return of

income.

80C This section has been

introduced by the

Finance Act, 2005.

Broadly speaking, this

section provides

deduction from total

income in respect of

various investments/



expenditures/payments

in respect of which tax

rebate u/s 88 was

earlier available. The

total deduction under

this section is limited to

Rs.1 lakh only.

Wealth Tax

Wealth tax is an annual tax like income tax. It is another type of direct tax by which tax is

imposed on individuals coming within its purview. Pensioners, retired persons or senior

citizens have not been accorded any special benefits under this Act. The important

provisions concerning the Act are mentioned below -

1. Wealth Tax

Wealth tax is charged for every assessment year in respect of net wealth of correspondingvaluation date, inter alia, on every individual Hindu Undivided Family (HUF) and company

at the rate of one per cent (1%) of the amount by which net wealth exceeds Rs. 15 lakhs.

“Valuation Date” is 31st March immediately preceding the assessment year [S.2(a)],

Assessment year, as under the Income-tax Act, means a period of 12 months commencing

from 1st day of April every year falling immediately after the valuation date [S.2(d)]. Net

wealth means taxable wealth. It means the amount by which the aggregate value of all assets

(excluding exempted assets) belonging to the assessee on the valuation date including assets

required to be included in the net wealth, is in excess of the aggregate value of all debts owed

by the assessee on the valuation date which have been incurred in relation to the taxable

assets.

2. Incidence of Wealth Tax

Incidence of tax in the case of an individual depends upon his residential status and

nationality. Residential status is decided as per the provisions of the Income-tax Act (Chapter

I Supra).

The scope of liability to wealth tax is as follows :



a. In the case of an individual who is a citizen of India and resident in India, a resident—

HUF and company resident in India;

Wealth tax is chargeable on net wealth comprising of

i. All assets in India and outside India;

ii. All debts in India and outside India are deductible in computing the netwealth.

b. In the case of an individual who is a citizen of India but non-resident in India or not

ordinarily resident in India, HUF, non-resident or not ordinarily resident in India and

a company non-resident in India;

i. All assets in India except loan and debts interest whereon is exempt from

income-tax under section 10 of the Income-tax Act are chargeable to tax.

ii. All debts in India are deductible in computing the net wealth.

iii. All assets and debts outside India are out of the scope of Wealth Tax Act.c. In the case of an individual who is not a citizen of India whether resident, non-

resident or not ordinarily resident in India:

Same as in (b):

Explanation

The credit balance in a Non-resident (External) Account is exempt from wealth tax provided

the depositor is a person resident outside India as defined in the Foreign Exchange Regulation

Act, 1973.

Valuation Date

Wealth Tax is levied on the net wealth of a person as on a particular date. This date is known

as valuation date. According to section 2(Q) the valuation date is the last day of the previous

year relevant to the assessment year. Hence, valuation date is March 31, immediately

proceeding the assessment year.

3. Assets

The assets liable to wealth tax as per the definition given in section 2(ea) of the Wealth Tax

Act are as under :

(1) Any building or land appurtenant thereto which shall include :

i. commercial buildings;

ii. residential buildings;

iii. any guest house;



iv. a farm house situated within 25 kilometres from the local limits of any municipality

(whether known as Municipality, Municipal Corporation or by any other name) or a

Cantonment Board.

However, the following buildings will not be included to assets:

i. a house meant for residential purposes which is allotted by a company to an employeeor an officer or a director who is in whole time employment, having a gross annual

salary of less than Rs. 5,00,000/-.

ii. any house for residential or commercial purposes which forms part of stock-in-trade;

iii. any house which the assessee may occupy for the purposes of any business of

profession carried on by him.

The following buildings shall also not be an asset w.e.f. A.Y. 1999-2000:

a. any residential property that has been let out for a minimum period of 300 days in the

previous year.b. any property in the nature of commercial establishments or complexes.

(2) Motor Cars (excluding those used by the assessee in the business of running them on hire

or as stock-in-trade).

(3) Jewellery, bullion, furniture, utensils or any other, article made wholly or partly of gold,

silver, platinum or any other previous metal or any alloy containing one or more of such

precious metals (excluding those held as stock-in-trade by the assessee). Jewellery includes:

i. ornaments made of gold, silver, platinum or any other precious metal of any alloy

containing one or more of such precious metals, whether or not” containing any

precious or semi-precious stones, and whether or not set in any furniture, utensils or other article or worked or sewn into any wearing apparel;

ii. precious or semi-precious stones, whether or not set in any furniture, utensils or other

articles or worked or sewn into any wearing apparel.

For the removal of doubts it has been clarified by explanation 2 to section 2(ea) that the term

jewellery does not include the Gold Deposit Bonds issued under the Gold Deposit Scheme,

1999 notified by the Central Government.

(4) Yachts, boats and aircrafts (excluding those used by the assessee for commercial

purposes).

(5) Urban land; “Urban Land” means land situated :i. in any area which is comprised within the jurisdiction of a local authority and which

has a population of not less than ten thousand according to the last proceeding census

of which the relevant figures have been published before the valuation date; or

ii. any area within such distance, not being more than eight kilometres from the local

limits of a local authority as the Central Government may, having regard to the extent,

and scope for urbanisation of that may, and other relevant considerations, specify in

this behalf by notification in the Official Gazette.

However, the following urban land shall not be included in assets;



i. land on which construction of a building is not permissible under any law for the time

being in force in the area in which such land is situated;

ii. land occupied by any building which has been constructed with the approval of the

appropriate authority;

iii. any unused land held by the assessee for industrial purposes for a period of two yearsfrom the date of its acquisition by him.

iv. land held by an assessee as stock-in-trade for a period of five years from the date of

its acquisition by him. (Ten years w.e.f. A.Y. 1999-2000).

Note: Agricultural land situated in urban area is not liable to wealth-tax.

(6) Cash in hand;

a. In case of an individual and HUF cash in hand in excess of Rs. 50,000/- shall be

included in assets.

b. In cash of any other person cash in hand not recorded in the books of account shall beincluded in assets.

4. Deemed Assets

In computing the net wealth of an assessee, the following assets are included as belonging to

the assessee by virtue of section 4(l)(a) of the Wealth Tax Act, 1957.

a. Assets transferred by one spouse or another.

b. Assets held by minor children.

Whether the assets are held by a physically or mentally handicapped minor child

(specified in section SOU of the Income Tax Act) such assets will not be clubbed with

the net wealth of the parent. In such a case the net wealth of the handicapped minor

child shall be determined separately and assessee in his hands.

c. Assets transferred to a person or an Association of Persons for immediate or deferred

benefit of the transferrer, his or her spouse without adequate consideration.

d. Assets transferred under revocable transfer.

e. Assets transferred to son’s wife.

Assets transferred to a person or Association of Persons for the benefit of

son’s wife.

5. Exempt Assets

The following assets are totally exempt from Wealth Tax (Section 5).



a. Property held under a trust or other legal obligation for any public purpose of a

charitable or religious nature in India subject to the satisfaction of the stipulated

conditions;

b. Coparcenary interest in a HUF property;

c. One residential building belonging to a former Ruler;

d. Former Ruler’s jewellery (excluding his personal jewellery) which has been

recognized as a heirloom by the Central Government before 1.4.1957 or by the CBDT

after that date;

e. Assets belonging to the Indian repatriates for 7 years on fulfillment of the conditions

prescribed;

f. One house or part of a house (with effect from 1.4.1999 one house or part of a

house or a plot of land) belonging to an individual or HUF is exempt from Wealth

Tax.

6. Debts Owned

Wealth tax is levied on the ‘net wealth’ which means that from the aggregate of all assets

(including deemed assets but excluding exempt assets) the value of debts owed on the

valuation date shall be deducted subject to the satisfaction of the following two conditions

viz.a. Only debts which are ‘owed’ on the valuation date are deductible.

b. Debts should have been incurred in relation to those assets which are included in the

net wealth of the assessee.

Broadly, a debt could be defined as an obligation to pay a liquidated or certain sum of money.

A sum which may or may not become due or the payment of which depends upon

contingencies which may or may not happen is not a debt.

7. Wealth Tax Liability—Whether a Debt Owed?

Wealth tax liability is not deductible in computing the net wealth liable to tax. This position

has been made clear by the amendment of section 2(m) with effect from the assessment year

1993-94. Liability under the Wealth-tax Act has been considered as a ‘debt owed’ by the

assessee incurred in relation to the assets taxable under the Wealth-tax Act. Such a liability

has been considered to be the personal liability of the assessee and is not a debt incurred but a

debt created by statute. Hence this deduction is not permissible



8. Valuation of Assets

For the purpose of Wealth-tax the value of any asset (other than cash) shall be its value as on

the valuation date determined in the manner laid down in Section 7(2) and in Schedule III to

the Wealth Tax Act.

9. Return of Wealth Tax

Every person is requaired to file a return of net wealth in Form ‘A’ if his net wealth or net

wealth of any other person in respect of which he is assessable under the Act on the valuation

date is such an amount as to render ‘ him liable to wealth tax. The dates of filing the return

are the same as under the Income-tax Act for filing returns. Where wealth tax is payable on

the basis of return to be furnished, the assessee is required to pay the tax before filing of the

return and such return is to be accompanied by the proof of payment.

10. An Illustration

For the assessment year 2001-2002, ‘R’ an Indian National and resident and ordinary resident

in India furnishes the following particulars regarding his assets and liabilities.

1 Residential House outside India 50,00,0002 Jewellery in India 50,00,0003 Loans taken:

i) For residential house

outside India 10,00,000ii) For acquiring

jewellery5,00,000

Computation of taxable wealth :

1 Jewellery in India 50,00,000 Less: Debt owed

concerning jewellery 5,00,000 —————

Net value of jewellery 45,00,000

2 Property outside India 50,00,000



Less : Debt owed 10,00,000 —————

Net value of property 40,00,000

=========

Total net wealth 85,00,000

In cases of non-resident or resident but not ordinarily resident or a foreign national who is a

non-resident, no wealth tax would be leviable on property outside India. In their cases,

wealth-tax would be leviable on a sum of Rs. 45,00,000 lakhs only.

INDIRECT TAX

A tax that is not assessed on and collected from those who are intended to bear it. Unlike a

direct tax,it cannot take individual circumstances into account. Although levied on

producers, the burden of an indirect tax may be 'shift' to consumers.

Ex: value added tax, sales tax, payroll tax and excise duties.

Overview of indirect taxes

Type of Tax Central

Excise

Sales

Tax / vat

Service

Tax

Imports

(Customs)

Exports

Customs)

Tax is on

specified

Goods Goods Services Goods Goods

Taxable

Event

Manufacture Sale (Or

Deemed

Sale)

Rendering

Service

Import Export

Time Of

Payment

5th of each

month except

March (31st

March)

Specified

Time By

The States

Quarterly/mo

nthly as

Specified

Clearance For

"Home

Consumption"

"Let Export"

Rate of Tax As at the time

of clearance

from place of

manufacture

As on date

of sale or

deemed

sale

As per

Finance Act

As on date of

Bill of Entry or

"Entry Inward"

whichever is

later

As on date of

export



CENTRAL EXCISE ACT

Central excise is the duty that is collected on a product, that is manufactured or produced in

india. It comes under indirect taxes as it is collected from the manufacturers or producers of the goods. It is levied on every product that is manufactured or produced, irrespective of its

sale/realization of value. It is governed by the central excise act,1944.

Central Excise Law is a combined study of:

1. Central Excise Act (CEA), 1944;

2. Central Excise Tariff Act (CETA), 1985;

3. Central Excise Rules, 2002; and

4. CENVAT Credit Rules, 2004

DEFINITIONS

Central Excise Law is levied on manufacturer or production of goods. The liability of paying the

central excise is on the manufacturer. So let us examine the concept and definitions of goods,

manufacture and manufacturer in detail.

FACTORY

According to section 2(e) Factory means any premises where any part of the excisable goods

other than salt are manufactured or any manufacturing process is carried out.

GOODS

Goods have not been defined in Central Excise Act. As per Article 366(12) of Constitution of

India, Goods includes all material commodities and articles.

Sale of Goods Act defines that “Goods” means every kind of movable property other than

actionable claims and money; and includes stocks and shares, growing crops, grass and things

attached to or forming part of the land which are agreed to be severed before sale or under the

contract of sale.



Goods must be:

i) Movable

Moveable means goods, which can be shifted from one place to another place, e.g., motor

car, mobile phone, computer etc.

The goods attached to earth are immovable goods, such as, Dams, Roads, and Buildings etc.

ii) Marketable

Marketable means goods which are capable of being sold, e.g., Molten iron ore at 1300degree to 1400 degree Celsius is not marketable, therefore not a good. Similarly, flour

produced in own factory for use as raw material in own factory for further production of

bread is a good because it is marketable.

Actual sales are not relevant for calling any item as goods. Moveable Goods are

manufactured or produced but immoveable goods are constructed. Excise duty is applicable

on production of goods. Actual sale is not relevant.

Goods produced for free distribution, as sample, gifts, or replacement during warranty period

is also liable of excise duty.

Excisable Goods are those goods, which are mentioned in the items of tariff in CETA. Sec

2(d) defines “Excisable Goods as goods specified in the schedule of CETA 1985 as being

subject to a duty of excise and includes salt.”

MAUFACTURE OR PRODUCTION

According to Section 2(f) of Central Excise Act “manufacture” includes any process: -

i. Incidental or ancillary to the completion of manufactured product or

ii. Which is specified in relation to any goods in the Section or Chapter notes of the Schedule

to the Central Excise Tariff Act, 1985 as amounting to manufacture, or

iii. Which, in relation to goods specified in third schedule to the CEA, involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers or



declaration or alteration of retail sale price or any other treatment to render the product

marketable to consumer.

Clause (ii) and (iii) are called deemed manufacture. Thus, definition of ‘manufacture’ isinclusive and not exhaustive.

The word Manufacture as specified in various Court decisions shall be called only when a

new and identifiable goods emerge having a different name, character, or use; e.g.,

manufacture has taken place when table is made from wood or of pulp is converted into base

paper, or sugar is made from sugarcane.

DEEMED MANUFACTURE – Deemed manufacture is of two types: –

i. CETA specifies some processes as ‘amounting to manufacture’. If any of these processes are

carried out, goods will be said to be manufactured, even if as per Court decisions, the process

may not amount to ‘manufacture’ [Section 2(f) (ii)].

ii. In respect of goods specified in third schedule of Central Excise Act, repacking, re-labelling,

putting or altering retail sale price etc. will be ‘manufacture’. The goods included in Third

Schedule of Central Excise Act are same as those on which excise duty is payable u/s 4A on basis

of MRP printed on the package. [Section 2(f) (iii)].

PRODUCTION

Production has also not been defined in CEA but production is used to cover items like coffee,

tea, tobacco, etc. which are called to have been manufactured nut produced.

ASSEMBLY

Assembly of various parts and components amount to manufacture provided it result in movable

goods which have distinctiveidentity, use, character, name etc. e.g., assembly of computer is

manufacture.

MANUFACTURER



Manufacturer is a person who actually manufactures or produces the excisable goods. A

person who gets the production of other and sell it after putting its own brand then he will not

be called manufacturer, e.g., if Khaitan company gets the fans made from some person and

sell it after putting their brand name, the Khaitan company will not be manufacturer. The

person actually making the fans will be called manufacturer.

NATURE OF EXCISE DUTY

As per section 3 of Central Excise Act (CEA) excise duty is levied if: -

1) There is a good.

2) Goods must be moveable

3) Goods are marketable

4) Goods are mentioned in the central excise tariff act (CETA).

5) Gods are manufactured in India.

If production or manufacture is in special economic zone then no excise is levied

Therefore we can say that excise duty is not levied on:

1) Services such as doctors treating the patients, accountants preparing the accounts, in these

cases service tax are levied.

2) Immovable goods such as roads, bridges and buildings.

3) Non-Marketable goods, i.e., goods for which no market exists, e.g.,melted iron ore at 1600

degree Celsius.

4) Goods that are not mentioned in CETA; and

5) Goods manufactured or produced out of India.

TAXABLE EVENT



Taxable event means the stage when tax is levied/ applied. Manufacture or production in

India is the stage of levying tax. However, the government, at the time, when the goods are

removed from the factory, i.e., goods are taken out from factory, collects tax.

Since, excise duty is levied at the time of removal of goods. Thus, it becomes taxable at the

time of their removal and therefore, the date of its actual production is not relevant. The dateof removal is relevant and the rate of excise duty applicable on the date of removal shall be

actual rate of excise

RATES OF EXCISE DUTY

The basic rate of excise duty is 16% while in some cases there is a special duty if 8% which

makes the excise duty in those cases at 24%. There is at present a cess for education called

education cess, which is 2% of the excise duty; therefore, the effective excise duty comes out

as 16.32% or 24.48%.

CHARGABILITY OF EXCISE DUTY

Excise duty is levied on production of goods but the liability of excise duty arise only on

removal of goods from the place of storage, i.e., factory or warehouse.

Excise duty is levied even if the duty was paid on the raw material used in production.

Excise duty is levied on government undertakings also, e.g., Railways is liable to duty on the

goods manufactured by it.

Excise duty is an expense while calculating the profits in accounting.

Excise duty is levied if goods are marketable. Actual sale is not relevant.

Therefore, goods, which are given for free replacement during warranty period, are also liable

for excise duty.

VALUATION OF GOODS

Excise duty is payable on the basis of:

1. Specific duty based on measurement like weight, volume, length etc.



2. Percentage of Tariff value.

3. Maximum Retail Price.

4. Compounded levy Scheme.

5. Percentage of Assessable Value (Ad-valour duty)

Specific Excise Duty: Specified excise duty is the duty on units like weight, length, volume,

etc.

Items Basis of Specific Excise Duty

Cigarettes length of cigarette

Matches per 100 boxes

Sugar per quintal

Marble slab and tiles square meter

Colour TV screen size in cm.

Cement per tonne

Excise Duty on Tariff Value:

Tariff Value is the value fixed by government from time to time. Government can fix

different tariff value for differentclasses. Tariff Value is fixed for Pan Masala, Ready Made

Garments.

Excise Duty on MRP:

Government can specify the goods on which excise duty will be based on MRP. MRP shall

be the maximum price at which excisable goods shall be sold to the final consumers. It

includes taxes, freight and transport charges, commission to dealers etc.

Excise duty on MRP is applicable on products on which quoting of MRP is necessary under the Weights and Measurements Act, e.g., Chocolates, Biscuits, Wafers, Ice Creams, Camera,

Refrigerators, Fans, Footwear, Toothpaste etc.

Compounded Levy Scheme:

In case of small manufacturer, government allow small manufacturer to pay excise duty on

the basis of specified factors like size of equipment employed, at the specified rates.

Excise Duty on Assessable Value:



Assessable Value is the value of transaction i.e., the value at which transaction takes place, in

other words it is the price actually paid or payable for the goods on sales. It is also called

transaction value. It includes freight and transportation charges, commissions to dealer etc.

Excise duty is paid on transaction value or assessable value if:

1. Goods are sold at the time and place of removal.

2. Buyer and assessee (Manufacturer/seller) are not related.

3. Price is the only consideration for sale, i.e., money or some valuable item is received on

sale.

Assessable Value excludes amount of excise duty, sales tax or other tax actually paid.

Following items are included:

1. Primary packing or main packing or necessary packing.

2. Royalty charges.

3. Commission to sales agent.

Following items are excluded:

1. Secondary packing.

2. Returnable primary packing like cold drinks bottles, LPG cylinders.

3. Discount given at the time of sales.

Assessable Value = (Sales Price less Deductions)/ (1+rate of duty)

Illustration 19.1



If the sales price of a good is Rs. 10, which includes the cost of bottle of Rs. 2 and the excise

duty of 16% plus 2% education cess. What will be the assessable value?

Solution:

Assessable value = Price Less Deduction – Allowable deductions/ (1+ rate of duty)

Assessable Value = (10 – 2) / (1+0.1632) = Rs.9.54

REGISTRATION OF GOODS

According to section 6 of Central Excise Act, every manufacturer or producer, who producesexcisable goods, must get two types of registration:

1. Registration for manufacturer.

2. Registration for warehouse, where goods are stored. Rules of Registration

Following are the rules of registration:

1. Separate registration is required for each premise.

2. Registration is not transferable.

3. Registration certificate shall be given within 7 days of application for registration.

4. If manufacturer cease to produce i.e., stops the production permanently then he should apply

for de-registration.

5. Registration can be revoked or suspended by AC/DC if any condition of the Act or Rules is

breached.



Procedure for Registration

Following are the steps for registration under central excise act.

1. Application for registration is given in prescribed format to the Assistant Commissioner or

Deputy Commissioner in duplicate.

2. Application should be accompanied be a self-attested copy of Permanent Account number

(PAN) allotted by income tax department.

3. In case of company and partnership firms name of company or partnership should be

mentioned as name of business and not the name of owner who sign the application.

4. On receipt of application of registration the excise department allotsthe registration certificate

within 7 days.

5. The registration certificate mentions the Excise Control Code (ECC), the ECC is a 15 digit

number which has first 10 digits of PAN, next two digits are either ‘XM’ for manufacturer or

‘XD’ for dealer and the last three digits are number like 001,002 etc.

The registration certificate includes:

1. Name of assessee

2. Constitution of the business

3. Types of business (Manufacturer, Dealer or warehouse or depot or

Export Oriented Unit (EOU).

4. Address of the business

5. The Excise Control Code (ECC).

CLEARANCE OF GOODS

Clearance means taking goods out of factory. Thus, finished goods can be stored not removed

in the place of manufacture (factory) without payment of duty. There is not time limit for

removal of gods from place of manufacture i.e., factory.



The records have to be maintained by manufacturer indicating particulars regarding:

1. Description of goods manufactured or produced

2. Opening Balance of goods manufactured or produced.

3. Quantity produced or manufactured.

4. Stock of goods.

5. Quantity of goods removed

6. Assessable Value

7. Amount of duty payable; and

8. Amount of duty actually paid.

The record should be preserved for 5 years. If the records are not maintained then penalty up

to duty payable can be imposed and goods can be confiscated. If goods are stored at any other

place other than factory, then goods can be cleared from factory without payment of duty, if

commissioner permits.

VALUE ADDED TAX

What is VAT?

Value Added Tax (VAT) is a modern and progressive form of sales tax. It is charged and

collected by dealers on the price paid by the customer. VAT paid by dealers on their

purchases is usually available for set-off against the VAT collected on sales.



Why change to VAT?

VAT is a modern and progressive tax system now used in over 130 other countries. Most of

the States in India have agreed to change over to a VAT system providing uniformity. A few

remaining states have agreed to VAT in principle and are likely to join it a while later.

What are the benefits of VAT?

The following are the benefits:

1) It is simple, transparent and progressive

2) Business friendly system of taxation

3) Reduction in the number of tax rates to only two main rates - 4% and 12.5%

4) Reduction in the effective tax rate for many goods

5) Elimination of "tax on tax" existing in the sales tax system

6) Full set-off available for VAT paid on most business purchases

7) Simplification of forms and procedures

8) Greater reliance on self assessment and voluntary compliance by dealers

What types of businesses are liable for VAT?

VAT applies to all types of businesses including

1) Importers

2) Manufacturers

3) Distributors

4) Wholesalers

5) Retailers

6) Works Contractors

7) Lessors

How is VAT charged?



All registered dealers, regardless of where they are in the chain of manufacture and

production, must charge VAT on their sales of taxable goods and collect it from their

customers.

Registered dealers must issue a tax invoice to other registered dealers showing the VAT

amount being charged as a separate amount. Registered dealers who pay VAT on their purchases can normally claim a "set-off" for the VAT paid to their suppliers. As a result,

VAT is not a cost to the dealers.

Dealers must ensure that tax is charged separately in their purchase invoice in order to

be eligible to claim set-off.

Certain dealers who sell mainly to consumers at retail level can opt for a simplified

system of VAT calculation and payment under a Composition Scheme. Under the

Composition Scheme, dealers will not issue a tax invoice or show VAT as a separate amount

on a bill or cash memorandum.

What are the obligations of dealers registered for VAT?

Dealers who are required to be registered for VAT must

1) Charge and collect VAT on their sales of taxable goods

2) Issue proper tax invoices

3) Keep proper records and books of account

4) Calculate the VAT due to Government based on VAT charged on sales LESS any VAT

available as a set-off on business purchases

5) File VAT returns on a regular basis declaring their VAT liability

6) Pay any amount of VAT due to the Government with the VAT return

What is the rate of VAT?

Under the VAT, the tax rates have been simplified. There are only two main rates of VAT:

1) 4 % for items consisting mainly of raw materials used in the manufacturing process, IT

products and some goods of common consumption

2) 12.5% for all goods unless they are listed under the other rates



"Foodgrains including pulses, milk, vegetables and books are not subject to VAT”.

In addition, there are other rates for specific items:

1) 1 % for gold, silver, other precious metals, precious and semi precious stones and their

jewellery

2) 20% for liquor

The only exception to these rates is for the sale of motor spirits, which have special

tax rates based on the existing Bombay Sales of Motor Spirit Taxation Act, 1958.

The meaning of 'goods' for VAT purposes

'Goods' means every kind of moveable property including goods of incorporeal andintangible nature but there are some exclusions, such as newspapers, actionable claims,

money, shares and securities and lottery tickets.

Businesses engaged in the buying and selling of goods within the scope of the VAT law are

referred to as dealers.

The meaning of 'sale' for VAT purposes

A transaction of sale can be a:

i. normal sale of goods;

ii. sale of goods under hire-purchase system;

iii. deemed sale of goods used / supplied in the course of execution of works contract;

iv. deemed sale of goods given on lease.

The rate of tax applicable to the goods sold under various classes of sales is

uniform. However, in respect of normal sales of goods and deemed sales of goods

under works contract and specified deemed sale of goods given on lease, the Act

provides for an optional method for discharging tax liability by way of

composition. Being so, the tax liability has to be determined with reference to the

option exercised by the dealer for discharging tax liability.

Businesses covered by VAT

The VAT system embraces all businesses in the production and supply chain, from

manufacture through to retail. VAT is collected at each stage in the chain when value is

added to goods. It applies to all businesses, including importers, exporters, manufacturers,

distributors, wholesalers, retailers, works contractors and lessors.



Expectations from those liable to collect and pay VAT

1. notify Commissioner of Sales Tax, when there is any change in the

information communicated earlier

2. complete and submit returns and pay the tax by the due date3. ensure that returns are complete, correct and self consistent

4. provide promptly all the necessary information that are asked

How VAT works

When you sell goods, the sale price is made up of two elements; the selling price of the goods

and the tax on the sale. The tax is payable to the State Government.

The tax payable on sales is to be calculated on the selling price. The tax paid on purchasessupported by a valid tax invoice is generally available as set-off (input tax credit) while

discharging the. tax liability on sales.

Example

The following example shows how the VAT works through the chain from manufacturer to

retailer.

Company A buys iron ore and other consumables and manufactures stainless steel

utensils.

Partnership firm B buys the utensils in bulk from Company A and polishes them

Shopkeeper C buys some of the utensils and purchases packing material from vendor

D, packages them and sells the packed utensils to the public.

(The sale and purchase figures shown in the example are excluding tax)

Particulars Amount VAT @ 4%

Company A

Cost of iron ore and consumables 50000 2000

Sales of unpolished stainless steel utensils 150000

Value added 100000



Company A is liable to pay VAT on Rs.l,50,000 @ 4% 6000

less set off 2000

Net VAT amount to pay with the Return 4000

(Note: Tax invoice issued by Company A will show sale price as Rs.l,50,000, tax as

Rs.6,000.Therefore, the total invoice value will be Rs.l,56,000)

Particulars Amount VAT @ 4%

Partnership B

Purchases unpolished stainless steel 150000

utensils

Sales polished stainless steel utensils 180000

Value added 30000

Partnership B is liable to pay V AT on

Rs. 1,80,000 at 4% 7200

But can claim set off of tax paid on purchases 6000

Net VATamountto pay with the Return 1200

Shopkeeper C

Purchases polished stainless steel utensils 180000

Packing material

5000

Total purchases 185000

Sales

225000

Value added 40000

Shopkeeper C is liable to pay VAT 9000

on Rs.2,25,000 @ 4%



Set off of tax paid on purchases 7400

(Rs.7,200 + Rs.200 of packing material)

Net VAT amount to pay with the Return 1

Vendor D

Tax paid costs

nil

Sales 5000

Value added

5000

Vendor D is liable to pay VAT on

Rs. 5,000 @ 4%

200

The V AT due on the value added

through the chain, i.e., 4 % on Rs.2,25,000 is 9000

The State Government received the tax in stages. The payments of tax were as follows.

Suppliers of Company A 2,000

Company A 4,000

Partnership B 1,200

Shopkeeper C 1,600

Vendor D 200

Total 9,000

Thus, through a chain of tax on sale price and set off on purchase price, the cascading

impact of tax is totally eliminated.

Since set-off of tax on purchases is given only on purchases from registered dealers

where tax is collected separately, your purchases from unregistered dealers, imports, inter-



state. purchases and purchases from registered dealers without separate tax collection are not

entitled to set-off.

In practice, the tax is finally borne by the ultimate consumer, who is not a registered

dealer, in this case, people who buy utensils from the shopkeeper C.

Service tax

What is Service Tax?

Service Tax is a form of indirect tax imposed on specified services called "taxable services".Service tax cannot be levied on any service which is not included in the list of taxableservices. Over the past few years, service tax been expanded to cover new services. Theobjective behind levying service tax is to reduce the degree of intensity of taxation onmanufacturing and trade without forcing the government to compromise on the revenueneeds. The intention of the government is to gradually increase the list of taxable servicesuntil most services fall within the scope of service tax.For the purpose of levying service tax, the value of any taxable service should be the gross

amount charged by the service provider for the service rendered by him. Service tax is an

indirect levy imposed by the Union Government in terms of residuary entry No.97 in list (I)of the 7th Schedule of the constitution. The tax is applicable to services specified in the



Section 64 to 96 of chapter V of the Finance Act, 1994 as amended.

The Government have also notified the procedures to be followed for levy and collection of service tax vide Service Tax Rules, 1994 as amended. At present the rate of Service Tax is12% to be levied on the "Value of Taxable Service" and Education Cess @2% and Higher

Education Cess@1% is leviable on the Service leived and collected.

The person who provides the Taxable service on receipt of charges is responsible for payingthe service tax to the government.

Need for Service Tax

In any Welfare State, it is the prime responsibility of the Government to fulfill the increasingdevelopmental needs of the country and its people by way of public expenditure. India beinga developing economy is striving to fulfill the obligations of a Welfare State within its limited

resources. The Government's primary sources of revenue are direct and indirect taxes.

Central Excise Duty on the goods manufactured / produced in India and Customs Duties onimported goods constitute the two major sources of indirect taxes in India. But revenuereceipts from Customs & Excise are not keeping pace with the growth in economy to WTOcommitments and rationalization of commodity duties .

It is also well known that services constitute a larger proportion of the consumption of therich rather than of the poor as the demand for services is income-elastic. Depending on thesocio-economic compulsions, each country evolved a taxation system on services adoptingeither a comprehensive approach or a selective approach .

While most of the developed countries tax all the services with very few and limitedexemptions, some of the developing countries tax select services only. Hitherto, India hasadopted a selective approach to taxation of services.

Introduction of Service Tax in India

Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for the year 1994-95 introduced the new concept of Service Tax and stated that "There is no sound reasonfor exempting services from taxation, therefore, I propose to make a modest effort in this

direction by imposing a tax on services of telephones, non-life insurance and stock brokers."

Service Tax had been levied on the recommendations made in early 1990's by the TaxReforms Committee headed by Dr.Raja Chelliah. The Committee pointed out that the indirecttaxes at the Central level should be broadly neutral in relation to production and consumptionof goods and should, in course of time cover commodities and services. The Committee feltthat we should move towards full-fledged Value Added Tax (VAT) system covering servicesand commodities.

Service tax must be a part of VAT at the central level. It was envisaged that as the centralexcise duties on goods would get gradually transformed into a value added tax at the

manufacturing level, service tax would get woven into that system. Therefore, a tax could belevied on services that enter into the productive process. The Committee emphasized theimportance of moving towards VAT, for making the system of indirect taxation broadly



revenue neutral in relation to production and consumption and widening the tax base bycovering exempted commodities. The Committee also recommended charging of tax onservices such as advertising, insurance, share broking and telecom etc. to begin with on the

pattern of advanced economies. The basic objective of Service Tax is broadening the tax base, augmentation of revenue and larger participation of citizens in the economic

development of the nation .

Bringing services under taxation is not simple as the services are intangible and are provided by large groups of organized as well as unorganized service providers including retailers whoare scattered across the country. Further, there are several services, which are of intermediatenature. The low level of education of service providers also poses difficulties to both-taxadministration and assessees.

AuthorityService tax was introduced in India for the first time in 1994. Chapter V of the Finance Act,

1994 (32 of 1994) as amended, (Sections 64 to 96) and Chapter VA of the Finance Act, 2003deals with imposition of Service Tax. The Authority of levy of Service Tax on specifiedservices is contained in Section 66 of the Finance Act, 1994 as amended. At present this,section stipulates a rate of tax of 12% of the taxable value of these services and EducationCess @2% and Secondary/Higher Education Cess @1% in liable on the Service Tax leviedand collected under Section 66 of the Finance Act, 1994.

Consequently, new article 268 A has been inserted for Service Tax levy by Union Govt.,collected and appropriated by the Union Govt., and amendment of seventh schedule to theconstitution, in list I-Union list after entry 92B, entry 92C has been inserted for taxes onservices as well as in article 270 of the constitution the clause (1) article 268A has beeninclude

SCHEME FOR LEVY,ASSESSMENT & COLLECTIONOF SERVICE TAX

Service Tax payable by whom.

The Tax is normally payable by the service provider. However, in special circumstances, theGovt. may notify the payment not by the service provider by a person as notified.Considerations like administrative ease, cost of collection may require the shifting of the

burden of payment from the service provider to service receiver or any other person.To illustrate, the service Tax leviable on service provided by an insurance agent is not to be

paid by the insurance agent himself but by the insurance company accordingly to Section68(2) of the Finance Act, 1994.

Value of Taxable Service

The value of any taxable service shall be generally the gross amount charged by the Service providers for such services rendered by him (Section 67)

In other words, "Gross Amount" here indicate that no deduction shall be allowed in respect of any expenditure incurred by the service provider which has proximate connection inrendering the services by him .

In a case where the provision of Service is for a consideration not wholly or partly consistingof monthly, be such amount in money as with the addition of Service tax charged.In a case where the provision of service is for a consideration, which is not accountable, bethe amount as may be determined in prescribed manner.

Rules & Regulations



The Finance Act, 1994 (32 of 1994) as amended authorizes levy and collection of ServiceTax and also provides the method of levy, the circumstances in which, the levy would arise,the procedures to be followed, and allied subjects like assessments, penalty etc.

The Finance Act, 1994 empowers the Central Govt. to frame the Rules governing the

procedural aspects of Service Tax matters. The Govt. vide Notification No. 2/94 dated28.06.1994 as amended have framed the Service Tax Rules, 1994, which came into effect on1st day of July, 1994. Similarly, Export of Service Rules, 2005 vide Notification No. 9/2005ST dated 03.03.2005 as amended, taxation of services, provided from outside India andreceived in India, Rules 2006 vide Notification No. 11/2006 dated 19.04.2006, Service Tax(Registration of Special Category of Persons) Rules, 2005 vide 17/2003 ST dated 23.07.2003and Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 vide

Notification No. 32/2007 dated 22.05.2007 have been framed.

Salient Features

• No Registration Fee.

•

(Rule 4(1) Deemed Registration, if registration not granted within 7 days. (Rule 4(5)• Penalty of Rs. 500/- for non-registration or delay in registration. (Section 75A)

• No specific records has been prescribed. (Rule 5(1)) Tax on uniform rate @12%advalorem + Education Cess @2% and higher Education Cess @1% on Service Tax

• No tax on export of services.

• Payment of Tax on realization of value of taxable service. (Rule 6)

• Payment of Tax on Quarterly basis for non-corporate assessee and monthly for corporate assessee. (Rule 6)

• Simple interest @13% per annum on delay of payment of tax. (Section 75)

• Hefty penalty on delay of payment of tax. (Section 76)

• Return on Half Yearly basis for all assessee (Rule 7)

• Facility for electronically filing of return for selective services.

• Penalty for delay in filing of return. (Section 77)

• Self adjustment of excess service tax paid in some cases Credit of Service Tax paid oninput service.

• Self Assessment. (Section 70)

• Refund of Service Tax and Appeal against the rejection of refund. (Section 83)

•

Wide power to issue notice for the production of accounts, documents etc. (Section83)

• Penalty for concealment reduced to 25% from 100% to 200% w.e.f. 14.05.2003.

Administered by Central Excise Department. For this purpose, Section 83 of the Act provides

that certain specified Sections of the Central Excise Act, 1944 will also apply in relation to

Service Tax as they apply in relation to Central Excise Duty.



CENVAT CREDIT RULES, 2004 [CCR]

“Input Services” eligible to Credit

Under the present CCR, a Manufacturer / Service Provider can avail Credit in regard toDuties / Taxes paid on Inputs / Capital Goods / Inputs Services as defined under CCR. It is acardinal principle of VAT System that, Credit of all duties / taxes paid, need to be allowed for set off against output duty / tax payable.

Disallowances are however made in respect of input services used for the purpose of businessin particular leading to avoidable litigations.

Availment of Credit in cases where Manufacturer / Service Provider is also engaged inTrading activity

Under CCR only 2 types of Beneficiaries have been specified for availment of credit vizManufacturer of final product and Output Service Provider. There are no Specific provisionsunder CCR to deal with situations where Manufacturer / Service Provider is also engaged inother activities like Trading. This causes severe hardships in availment of CENVAT Credit

by persons engaged in multiple activities which is very common in business.

2.1.1 Accumulation of Unutilised CENVAT Credit

Due to reduction in rate of Central Excise duty to 4%, there has been a substantial

accumulation of Unutilized CENVAT Credit at the end of Manufacturers. This is

largely due to Credit of Service tax paid on Input Services and Payments made under

Reverse Charge in cash. This scenario results in Blockage of Funds.

The above needs to be appropriately addressed.

Suggestion

➢ Specific provisions may be made, permitting payment of Service tax under Reverse Charge, from CENVAT Credit availed and not necessarily in cash.

2.1.1 CENVAT Credit of 4% additional duty levied U/s 3(5) of Customs Tariff Act, 1985 (CTA)



In terms of third proviso to Rule 3(4) of CCR, CENVAT Credit in respect of 4%additional duty levied U/s 3(5) of CTA, can be availed only by a Manufacturer of final products. Service Providers and Traders are not entitled to avail Credit. Thereappears to be no logical reason to deny benefit of CENVAT Credit to ServiceProviders.

Suggestion

➢ Service Providers should be permitted to avail benefit of CENVAT Credit inrespect of 4% additional duty levied U/s 3(5) of CTA.

2.1.1 Rule 6 (5) of CCR - Need for expansion

Rule 6 (5) of CCR allows the CENVAT credit of the whole of service tax paid oncertain specified taxable services notwithstanding the fact that the same are used for

the purpose of manufacture of dutiable goods and exempted goods by a manufacturer

or for provision of taxable service and exempted service by a service provider.

The provision is quite pragmatic and beneficial for the manufacturers or service

providers utilizing certain taxable services for their dutiable/taxable activities and

exempted activities and where it is not possible to segregate the quantum of such

service or maintain separate records as may be utilized in these different activities.

However, with the expansion of coverage of the levy of service tax year after year, the

list of taxable services specified under Rule 6(5) needs a re-visit and inclusion of

certain other services in the list seriously merit consideration. Also, certain taxable

services, by its very nature, cannot be segregated even if used for taxable and

exempted activities. Further, the taxable service viz. ‘Works Contract Service’ is

conspicuous by its absence in Rule 6 (5) even though the services used in relation to

setting up, modernization etc. of a factory or office premises have been specifically

included in the definition of ‘Input Service’ under Rule 2 (l) of CCR.

This will also avoid the litigation and the manufacturers/service providers will also

not be subjected to demand of huge amounts on account of availing small amounts of

credit on certain services used in common by them.



Suggestion

➢ The list of taxable services specified in Rule 6 (5) of CCR needs to beexpanded to cover Works Contract Service and certain other taxable servicesviz [Telephone Services, Chartered Accountant’s Services, CompanySecretary’s Services, Cost Accountant’s Services, Legal ConsultancyServices, Manpower Recruitment and Supply Agencies Services etc.] hithertoleft out of the scope of the provision to obviate any difficulties in segregating

such services or maintaining separate records when used in common by themanufacturer or service provider for their taxable and exempted activities.

2.1.1 Rule 6 of CCR - Obligations of Manufacturer of dutiable and exempted goods

and Service Provider of taxable and exempted services.

a) Rule 6(6) of CCR provides that, provisions of restricted credit, shall not beapplicable to excisable goods dispatched / cleared from SEZ, 100% EOU etc.However, there is no mention of Services Exported in the said sub-rule.Hence, some field formations are taking a view that provisions of restrictedcredit are applicable to Exported Services. This anomaly needs to be speedilyaddressed.

b) Rule 6 (6) of CCR allows the CENVAT Credit on input or input services, as

the case may be, even if the excisable goods are removed without payment of duty in certain situations. Rule 6 (6) provides for seven such situations whenthe CENVAT Credit has been made admissible even though the goods have

been cleared without payment of duty. The provision of sub-rule (6) overridessub-rules (1), (2), (3) & (4) of Rule 6 of CCR.

One of the important omission in sub-rule (6) is job work Notification No. 214/86-CE

dated 25.03.1986. The law is now well settled that the benefit of CENVAT Credit

cannot be denied to the job worker when the goods are cleared without payment of

duty under Notification No. 214/86-CE and when the inputs are used in common by

the job worker for such job work and manufacture of goods on his own account.

The inclusion of Notification No. 214/86-CE in sub-rule (6) of Rule 6 of CCR shall

put the matter beyond any realm of doubt and will also be in consonance with the

overall scheme of CENVAT Credit and job work. This will also avoid the fruitless

litigation as the demand of CENVAT Credit in respect of job work has otherwise been

considered to be a revenue-neutral exercise and only involving increased paper

work.



Suggestions

➢ Notification No. 214/86-CE need to be included in the list of eligible and

specified clearances under sub-rule (6) of Rule 6 of CCR.

➢ Rule 6(6) of CCR should be amended to read as under :

“the provisions of sub-rules (1), (2), (3) and (4) shall not be applicablein case the excisable goods or taxable services are removed without

payment of duty/provided without payment of tax are either ……

➢ After Rule 6(6)(v) of CCR a new item (va) should be inserted to read as

under:

“(va)” taxable services which are exempted in terms of Export of Services Rules, 2005.

2.1.1 CENVAT Credit on Endorsed Bill of Entry

There is no provision under CCR for availing CENVAT credit on Endorsed Bill of Entry against import of goods. Traders who import goods and desire to pass on thecredit of CVD component of Customs duty are required to register with the CentralExcise department resulting in. Increased procedural compliances.

In the past, Customs officers at the port of import were allowing endorsement of theBill of Entry to enable the importer to pass on the credit of CVD to the registeredmanufacturer / service provider / dealer, as the case may be. The said procedure couldnow be reintroduced.

Suggestion

➢ CCR may be amended to permit Endorsed Bill of Entry as a valid document for availing credit of CVD duty paid at the time of import.

2.1 EXPORT OF SERVICES & RELATED

2.1.1 Export of Services Rules (ESR)



Introduction of Criteria based ESR (Similar for Import of Services as well) have

resulted in substantial issues between the Service Tax Dept & the Tax Payers

Providers as to determination whether a particular transaction constitutes “export” or

“Import” for the purposes of Service Tax. The same is prone to substantial litigations.

The Rules for Export / Import of Services need to be revamped on lines with

prevalent International Tax Practices & Principles evolved for Taxation of Cross

Border Transactions.

Suggestions

➢ The Rules for Export of Services & Import of Services need to be combined into One Single Set of Rules. Under the said Rules, the Criteria for Taxation,

should be specified so as to ensure that Cross Border transactions are not taxed in both the countries and at the same time transactions do not taxescape in both the countries.

2.1.1 Service Tax Refunds to Manufacturer Exporters / Merchant Exporters

At present refund of Service tax is being granted to the Exporters under Notification

No. 17/09. Additionally, the Exporters are being granted exemption from payment of

Service tax under the Business Auxiliary Service category and Transport of Goods by

Road Service category under Notification 18/09. However, practical problems are

being noticed in this new refund/exemption mechanism introduced wef 7.7.09 such as

:

➢ Notification contains a stipulation regarding submission of original copies of some documents and that too certified by the owner/partner/director.

➢ Notification, when issued, was projected to be ‘essentially trust based’exemption by way of refund but at present the department inquires a lot aboutthe tax payments and other such details in relation to service providers and infact is denying the refund on the basis of minor shortcomings that exist in the

invoices of service providers.



It is invariably observed that, there is an inordinate delay in grant of Refunds. This

results in avoidable blockage of funds available to Exporters.

15 day time limit for filing of Return in EXP2 is too short & no provisions are madefor consequences in cases of cases of delay in filing.

Suggestions

➢ As a matter of practical expediency, the requirement of furnishing original tax

paid documents under the Simplified Refund Procedure should be done anywith, and instead Certified Copies should be accepted with an undertaking

from the Exporter to ensure revenue safeguards

➢ Detailed Guidelines need to be issued to the department officers regarding scrutiny of the Refunds claims and also the maximum time for disposal of anyclaims.

➢ Appropriate Provisions need to be made for condonation of delay in filing of

EXP 2, if substantive compliance is made.

➢ In case of 100% Exporters / Substantial Exporters, guidelines need to beissued for grant of Provisional Refunds after preliminary scrutiny [say upto70% of claim amount] with appropriate revenue safeguards.

2.1.1 SEZ Refunds

Vide notification 9/2009 and 15/2009 the Government has provided two types of

Exemptions from Service Tax for Services received by the SEZ units/developer.

Under said Notification for Services wholly consumed within SEZ full exemption is

provided however for services partially or wholly consumed outside the SEZ then the

Unit/Developer has to first pay the tax and seek refund from the department on

periodic basis. The SEZ Units / Developers are facing lot of difficulties for getting the

refund of service, tax so paid, Some of which are as under :

a) The field formations are taking a long time to clear the refund claims



b) Despite of having list of services approved by the “Approval Committee” thefield formations are arbitrarily treating certain services received are not inrelation to authorized operation and disallowing refund claimed on such

services.

c) Refund is being disallowed in cases where the SEZ unit has received theservices for authorized operations and paid taxes on said services on theground that, since the said services are wholly consumed within SEZ norefund of tax paid on said services is to be granted.

The above needs to be addressed

Suggestion

➢ Appropriate Clarifications need to be issued, to expedite Refunds to SEZ Units / Developers, in cases where substantive conditions are fulfilled and refundsdo not result in revenue loss to the Govt.

2.1.1 Exemption to Services availed for Exports

Service tax paid on Input Services availed for Exports are either availed as CENVAT

Credit or are entitled to Refunds. In order to avoid blockage of funds & cumbersome

procedural compliances, Services availed specifically for Exports may be exempted.

Suggestion

➢ All Input Services specifically availed for Exports need to be exempted from Payment of Service tax with appropriate revenue safeguards.

2.1.1 Input Services availed by 100 % EOUs

In line with the Government ‘s positive thinking that duties and levies should not be

exported and to reduce transaction costs of Exports the Ministry of Commerce had

announced that all Input services availed by 100% E O Us will be exempted from

Service Tax. However no Notification is issued till date to this effect by the Ministry

of Finance.



Suggestion

➢ In order to make Indian goods truly competitive in the international market all taxable Input Services availed / received by 100% EOUs should be exempted at source by issue of a suitable Exemption Notification.

2.1 IMPORT OF SERVICES

Section 64(1) of the Finance Act, 1994 as amended from time to time (“Act”) extendsto the whole of India except the State of Jammu & Kashmir and through Section 64(3)it applies to taxable services provided. Hence, Service Tax is a tax, on services“provided” in India. The scope of taxable service has been enlarged to cover Importof Services by inserting a new Section viz 66A in the Act. In order to give effect tothe said amendment Government has notified. Taxation of Services (Provided fromoutside India and Received in India) Rules, 2006 (“ISR”) vide Notification No. 11/06

– ST 19.4.06.

Though the intention of the amendment as evident from Section 66A of the Act / ISR

is clearly to bring “services provided from outside India to a recipient in India” within

the ambit of Service Tax by including such services within the scope of “taxable

services” liable to Service Tax, a close reading of the amendment, seems to indicate

that taxable services provided by a person based outside India to a person based in

India, even if the services are availed and consumed outside India could be considered

as services provided in India and accordingly could be liable for Service Tax. It is

possible that field formations could interpret that services availed outside India &

consumed outside could be subjected to Service Tax on the basis that recipient of

service in India could be treated as “Deemed to have been received” Service in India.

That be the case, there would be double taxation implications, whereby a transaction

would be taxed in a foreign country as well as in India.

Suggestion



➢ The Act should be amended to specifically provide that only services received and consumed in India, would be liable to Service Tax in case of Import of Services.

2.1 EXEMPTION TO SMALL SERVICE PROVIDERS

Under the current economic scenario, the Exemption Limit of Rs. 10 lakhs, needs to be increased & rationalized.

Suggestion

➢ Minimum Threshold / Exemption Limit for Small Service Providers should beincreased from Rs. 10 lakhs to Rs. 25 lakhs.

➢ On lines with SSI Exemption Scheme under Central Excise, the Eligibility Limit of Turnover of the preceeding year should be kept a higher limit vis avis the Exemption Limit, which may be around Rs. 75 lakhs.

2.1 BUSINESS AUXILIARY SERVICES

The Central Government has Vide Notification No. 8/2005 dated 1.3.2005 [N 8/05]exempted the taxable service of production of goods on behalf of the client fromservice tax subject to the following conditions:

a) goods are produced using raw material or semi – finished goods supplied by theclient;

b) the goods so produced are returned back to the client for use in or in relation to themanufacture of any other goods on which “appropriate excise duty is payable”

For the purpose of N 8-05 it has been specified in the Explanation that:

“Production of goods” means working upon raw materials or semi-finished

goods so as to complete part or whole of production, subject to the condition

that such production does not amount to “manufacture” within the meaning of

clause (f) of section 2 of the Central Excise Act, 1944.



There is an apprehension that the above Exemption may not be available in cases

where job work is done for Units under SSI Exemption Scheme / Units where goods

are exported without payment of duty. This needs to be clarified / addressed

Suggestion

➢ It needs to be clarified in the Exemption Notification itself that benefit under No 8-05 would be available in cases where Job Work is carried for Unitsworking under SSI Exemption Scheme / Units whose goods are fully exported without payment of Duty.

2.1 PACKAGING SERVICES

Vide Notification No. – 8/05, Exemption has been granted, to job work activities

falling under Business Auxiliary Services. However no such exemption has been

granted in relation to Packaging Services. [Section 65(105)(zzzf) of the Act]

Suggestion

➢ On lines with Business Auxiliary Services, Exemption Should be granted, inregard to Packaging Services carried out on Job Work basis in regard to unitswhich are discharging excise duty at the final stage.

2.1 MANPOWER RECRUITMENT OR SUPPLY SERVICES

In the context of amended definition the following has been clarified vide CBEC

Circular dt. 27.7.05.

Para 22.4

Service tax is to be charged on the full amount of consideration for the supplyof manpower, whether full-time or part time. The value includes recovery of



staff costs from the recipient e.g. salary and other contributions. Even if the

arrangement does not involve the recipient paying these staff costs to the

supplier (because the salary is paid directly to the individual or the

contributions are paid to the respective authority) these amounts are still part

of the consideration and hence form part of the gross amount.

According to practical experience, out of Gross amount charged by such Service

Providers, a sizeable amount pertains to staff costs actually incurred by such Service

Providers: However, though abatements are granted in regard various Services

Categories, no abatement is granted for Manpower Services. This results in

substantial increase in manpower costs.

Suggestion

➢ In line with Govt. Policy for other services, an abatement of 60% to 70% should be granted in regard to Manpower Recruitment & Supply Service, withSuitable revenue Safeguards

2.1 PENAL PROVISIONS

Substantial increase has been made in the penalties for various contraventions. Thesame are tabulated hereafter for ready reference.

Nature of contravention Penalty

Failure to obtain registration under section 69 of the Actor rules framed there under To the extent of Rs. 5000 or Rs.200 for every day after the due

date till the actual date of

compliance

Failure to keep, maintain or retain books of account &

documents as required under the Act or Rules framed

there under

Maximum of Rs. 5000

Failure to furnish information, produce document called

for by the Central Excise officer or to appear in

pursuance of Summons

To the extent of Rs. 5000 or Rs.

200 for every day after the due

date till the actual date of



compliance.

Failure to pay tax electronically where applicable Maximum of Rs. 5000

Failure to issue invoice in accordance with the provisions

of the Act or Rules made there under or failure toaccount for an invoice in the books of account.

Maximum of Rs. 5000

Any other contravention under the Act or Rules framed

there under for which no separate penalty is provided

Maximum of Rs. 5000

Penalty equal to tax amount is being invariably imposed even in cases where delays in

payment of tax are due to genuine / bonafide errors.

Penalty provisions are too harsh generally and goes against the spirit of law conceivedon the concept of voluntary compliance. It results in severe harassment to Trade &Industry.

Suggestions

➢ Maximum Penalty needs to be substantially scaled down. In cases where penalty is to be levied per day of default, an upper limit needs to be prescribed

➢ In cases of contraventions of a recurring nature [For e.g. issue of incompleteinvoices etc] maximum quantum of penalty needs to be specified.

➢ Suitable Provision need to be made u/s 76 of the Act, to condone levy of

penalty, in cases of non – compliance due to bonafide & inadvertant errors.

Business and Tax Laws Project FINAL

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Transcript of Business and Tax Laws Project FINAL