1. 1. 1 Classification of Modern Taxes: Taxes, nowadays, are broadly classified into: (a)Direct Taxes; and (b)Indirect Taxes. 1. 1. 1. 4. 1 Direct Taxes Direct Taxes are those, which are paid by the taxpayers directly from their income. The government collects direct taxes, directly from the taxpayers through levies such as Income Tax, Wealth Tax ,etc. as part of the direct tax revenue. Direct taxes are considered to be harsh and form a minor part of government’s revenue. Indirect taxes are those taxes, which are paid by the taxpayers indirectly, when purchasing some goods or commodity or when hiring some services, which are taxable.
These taxes are although borne by the taxpayers, but not paid by them directly to the Government. Examples Excise duty, Customs duty, Service tax, Sales tax, Octroi, Entry tax, Luxury tax, Trade tax, Consignment tax, Value added tax, etc. Indirect taxes are paid before the goods reach to the hands of the taxpayer, unlike the direct taxes, which are paid after the income accrues or reaches to the hands of the taxpayer. Indirect taxes form major part of government’s revenue, both at the Centre as well as States. Almost 90% of the Indian tax revenue comes from the levy of indirect taxes.
The proceeds from the duties of Custom and Excise go to the Central Government. The proceeds from Sales tax go to the State Governments and the proceeds from Octroi or Entry tax to the local governments. In today’s global markets, indirect taxes have assumed great significance and can affect every link in the supply chain, both domestically and internationally, since one person’s sale is another’s purchase and one country’s export is another’s import. 1. 1. 2 Features of Indirect Taxes Some essential features of indirect taxes can be briefly stated as follows: (a) Indirect taxes are levied on: ) Manufacture of goods, ii) Import of goods into India, iii) Entry of goods into a local territory, iv) Purchase of goods, or v) Hiring of services, etc. ; (b) These taxes are borne by the taxpayers, but not paid directly to the government; (c) The tax is paid before the goods reach to the hands of taxpayer or services are enjoyed by him; (d)Indirect taxes are levied at the time of manufacture of goods or their transfer from one hand to another; (e)Indirect taxes form major part of the government’s revenue. 1. 1. 3. Advantages of Indirect Taxes
The indirect taxes have following advantages: (a) Indirect taxes are major source of Governments’ revenue in India, both at the Centre as well as at the States. About 90% of the gross government revenue is generated from indirect taxes, while direct taxes contribute only a minor portion of around 10%. (b)The collection cost of indirect taxes is much less than the cost of collection of direct taxes. It is estimated that in 2001-2002, the cost of collection of indirect taxes was about 1. 05% and that of direct taxes about 1. 38% of tax collected. c) The tax evasion is also much less in case of indirect taxes, due to simplicity of procedures and convenience in compliance and better control. It is comparatively easier to detect tax evasions in case of indirect taxes, as compared to evasion in case of direct taxes. (d) Indirect taxes play significant role in planning industrial growth and encouraging setting of industries in selected backward areas by offering concessions, rebates and holidays. (e)The role of indirect taxes is also important in regulating international rade competition by levying customs duties in accordance with the domestic needs. By levy of high custom duty and antidumping duty, the Government controls import of goods into India and thus, provides protection to the trade and industry in India. (f)All indirect taxes are paid by a taxpayer indirectly. Therefore, it does not cause a pinch to him and hence taxpayers have no resistance. (g)Payment of indirect taxes is made by a taxpayer at the time of purchase of goods or hiring of services. Therefore, one does not feel as if he is paying something additional or extraneous.
Thus, tax payers’ psychology favors indirect taxes. (h) Indirect taxes also help in regulating wasteful expenditure by levying taxes on items of luxury, like luxury tax etc. This helps the Government even in setting directions for industrial growth, by regulating demand as well as import and export. Indirect taxes do not give rise to protracted litigation. (i) The process of disputes resolution and settlements relatively easier. In case of direct taxes, the litigation is protracted, multiple and difficult. j) The record keeping of indirect taxes is easier and simple. Therefore, the manufacturers and traders do not find it difficult to handle. This also holds good for the tax administrators, as the verification and scrutiny of records is comparatively easy in assessment proceedings. (k)The assessees of indirect taxes i. e. the manufacturers and traders do not pay, as much attention on indirect tax planning as they do in case of direct tax planning. Thus, manufacturers’ psychology also favors indirect taxes. 1. 1. 4 Disadvantages of Indirect Taxes
The indirect taxes have following disadvantages: (a)Indirect tax is levied on goods and services. This increases the price of goods, commodities and services. The indirect taxes are, therefore, called inflationary. (b)Indirect taxes increase the cost of projects. The customs duty on imports, excise duty, even on the plant and machinery fabricated at the sites and sales tax etc. enhance the cost of a project, even in case of government projects. This requires more means of finance and in turn distracts investment in industries.
The increased cost of project may also render certain marginal projects economically and financially unviable. The cost of new and latest technology also becomes costly, which hinders modernization of industries and improvisation of quality. (c) While the indirect taxes provide the Government, a measure to regulate international competition with the domestic industries and provide protection, they render the domestic industries lethargic and lacking quality consciousness, which, ultimately, costs high on consumers. (d) The incidence of indirect taxes is uniform without discrimination.
It does not distinguish between the rich and poor. Direct taxes are rather progressive, as the same are levied on the income of the persons. It is said that “indirect taxes have not only made taxpayers out of beggars but also the governments, who pay taxes to each other or to themselves, when they purchase anything from the market”. (e) The relationship indirect taxes is heterogeneous between a state and its Citizens. It is an unnatural relationship inflating only pile up budgets of the governments having no practical impact on the revenue.
For instance, in case of petrol and diesel, the Central Government pays to itself the customs and excise duties on the commodity used by it and collects the same from other governments also. The same is true for state sales taxes and local octroi on other commodities like cement, steel, wood, etc. (f) Because of such heterogeneous relationship, the budgetary estimates go haywire and the governments increase the rates of taxes in the subsequent year to cover the deficits without any consideration, as to how the poor would live with consequent price rise.
This vicious circle renders the indirect taxes as an evil, of course, when levied without careful consideration of incidence. (g) The political parties, all of them in chorus, plead for enhancement of limit for income tax, which is paid by less than one percent of the people, but they maintain a studied silence over other indirect taxes extracted from each and everybody, from hundred percent of the people. h) High incidences of indirect taxes and duties, like customs duties, excise and sales tax etc. gives rise to smuggling and tax evasions. The prevalent mafia activities and havala transactions are also result of high tax incidence. Tax evasions are also result of high rates of duties, which ultimately cost high to the taxpayers only. I. 1. 5 Distinction between Direct and Indirect Taxes Direct taxes are imposed on persons |Indirect taxes are imposed on goods and services | |The amount of tax payable by a person is determined on the basis of |The amount of tax payable is determined on the basis of value of | |income or wealth |goods or services | |The burden is not shifted and is borne by the tax payer |Tax burden is shifted to the consumer or service receiver and not | | |borne by the person liable to tax. | |Collection of tax is difficult. |Tax collection is easier and cost of collection relatively less. | 1. 1. Indirect Tax Laws Indirect taxes comprise of the taxes like Excise duty, Customs duty, Service tax, sales tax Octroi, Entry tax, Luxury tax, Trade tax, Consignment tax, Value added tax, property tax, etc. Indirect tax laws can be classified into two groups, namely: (i)Central Indirect Tax Laws – i. e. laws related to Central Excise, Customs, Central Sales-tax and Service-tax; and (ii)Indirect Tax Laws of the States – i. e. laws related to State Excise, Sales tax or trade tax, luxury tax, Consignment tax, Property tax, Entry tax or Octroi. 2. 1. 1. What is Excise Duty Central Excise duty is an indirect tax, levied on goods manufactured in India.
The tax is administered by the Central Government under the authority of Entry 84 of the Union list (List I) under Seventh Schedule, read with Article 256 of the Constitution of India. The word “Excise” is derived from a Dutch term “Acise”, which itself is derived from (he Latin word “Accensay”, which means: “to tax”. “Excise” is a word of wide import and according to dictionary meaning, denotes “an indirect tax on commodities manufactured, produced, sold, used or transported within the country. ” Excise duty is a duty levied on goods manufactured and not on sales or the proceeds of sale of goods’. It is, thus, a duty on goods that are indigenously manufactured.
In 1939, the scope of the duty of excise was wide enough, to include even a tax onsales. However, under the provisions of the Government of India Act, 1935, power to impose tax on sales was explicitly given to another authority. Thereafter, the term excise duty was used in, rather, restricted sense 2. 1. 1. 1 Definitions The Webster’s New International Dictionary defines “Excise Duty” as: (a)any duty, toll or tax; (b)an inland duty or impost, levied upon the manufacture, sale or consumption of commodities within the country; (c) a tax upon the pursuit or following of certain sports, trades or occupation, usually taking in this case, the form of exactions for licenses. “
In the United Kingdom, the term ‘excise duties’ includes a variety of taxes imposed by the Board of Inland Revenue, including those, formerly called assessed taxes. In the United States, excise is a tax on the inland manufacture, sale or consumption of commodities or licences to follow certain occupations and these taxes are usually called ‘internal revenue taxes’. In India, term “excise duty” has not been defined, either in the Constitution of India or even in the Central Excise Act, 1944. Article 265 only provides that “No tax shall be levied except with authority of law”. The Constitution has vested in the Seventh Schedule, powers to levy various taxes and duties by the Union as well as the States. Power to the Central Government. -Entry No. 4 of the List-1 (Union List) grants to the Central Government power to impose “duties of excise on tobacco and other goods manufactured or produced in India, except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcohol”, which is called “Central Excise”. Power to the State Government. -Entry No. 51 of the List-II (State List) grants such power to impose tax on alcoholic liquors, opium and narcotics; etc. to the States, which is called “State Excise”. The Supreme Court of India has defined “Excise duty” as “a tax on the production or manufacture of excisable goods produced or manufactured within the country” in various decisions’.
In Province of Madras v Boddu Paidanna & Sons’ excise was observed to be a tax attracted by the event of manufacture, but collected at some convenient stage, which may be after the said event, which is only for administrative convenience. In Hind Lamps’ case, the Delhi High Court held that the excise duty is a tax charged on the manufacture or production of goods and is not for a tax on the sale or purchase of goods, like purchase tax or sales tax. In Tirupati Cigarettes v Collector, excise duty was observed to be an indirect tax, whose incidence, generally, ‘falls on the consumption of goods’ and ‘occurs at the time of the manufacture of goods’.
It is a tax on the consumption of goods within the country of production. Excise duty is, today, the most important source of revenue in India. It constitutes about one fifth of the total yearly receipts of the Central Government. The Finance Act, 2000 has renamed the ‘duty of excise’ as the ‘Central Value Added Tax’ (CENVAT), which term is included in the terms ‘duty’, ‘duties’, ‘excise duty’ or ‘duties of excise’. 2. 1. 1. 2 Nature of Excise Duty Central excise duty is a tax on goods or commodities. It can, thus, be called as a commodity tax.. Central Excise duty is levied under the provisions of the Central Excise Act, 1944. A few special features, describing the nature of excise duty, are as follows: I .
The duty of excise is not levied directly on the goods, but is levied on the manufacture or production of a new commodity. Hence, it is called an ‘indirect tax’ 2. Excise duty is payable by the manufacturer or producer, not by the Consumer. However, the incidence of duty is always, indirectly, on the consumer. 3. Excise duty is levied on goods and the taxable event is manufacture or production of a new commercial commodity. 4. The levy and collection of excise duty is, practically, made at a stage next to the manufacture of goods i. e. removal of goods’ . 4. The taxable event is not independent of liability to pay duty from levy of duty.
Therefore, there cannot be different taxable events for different purposes’. 5. The method of collection does not affect the essence of excise duty, but only relates to the machinery of collection for administrative convenience. 2. 1. 2 Types of Excise Duties Central Excise duties can be classified into the following four categories: (a)Basic Excise Duty; (b)Special Duties; (c)Additional Duties; (d) Cesses. All the above types of duties are levied on the goods manufactured or produced in India, in terms of the Central Excise Act, 1944 or other allied Acts or Rules made there under and collected by the Central Excise Authorities. 2. 1. 2. Basic Excise Duty The Basic excise duty (BED) is also known as CENVAT (Central Value Added Tax) and levied under section 3(1) of the Central Excise Act, 1944 on specified (excisable) goods manufactured and produced in India at the rates specified in the Central Excise Tariff Act, 1985. The basic excise duty may be: i) ‘Ad Valorem Duty’ i. e. duty levied at the specified rate on the value of goods; or ii) ‘Specific Duty’ i. e. duty levied at the specified rate on the unit, weight, volume, length or area of goods. iii) There were three rates of basic excise duty upto 29-2-2000: I. Merit Rate i. e. Rate of 8%, II. Central Rate i. e. Rate of 16%, and III. Demerit Rate i. e. Rate of 24%. However w. e. . 1-3-2001, the above three rates have been converged into a single rate of’ 16%. The basic excise duty is shared between the Union and the States. 2. 1. 2. 2 Special Duties Special duties, also known as auxiliary duties, are the regulatory duties, which are levied as surcharge on certain specified goods. The purpose of special duties is to raise additional resources for some specified objects. Special excise duty is the percentage of effective basic duty and is determined after basic excise duty is calculated and relief of exemptions and rebates is granted. Thus, if the basic excise duty is nil, the special excise duty would also be nil.
The special duties were first introduced in India in 1963, at the time of Chinese aggression. Special excise duties are, generally, announced through the Finance Bills. The table below gives the list of special duties of excise payable under various statutes: |Nature/Type of Special Duties |Relevant Statutes | |Rates of Special Duty of Excise on various goods |Schedule-II to the Central Excise Tariff Act, 1985 | |High Speed Diesel Oil |Finance Act, 1999 |
Special Excise Duty is levied on those exciseable goods, which are specified in the Second Schedule to the Central Excise Tariff Act, 1985, e. g. air-conditioners, soft drink, etc. The special excise duty is levied at the rates specified in the said Second Schedule. 2. 1. 2. 3 Additional Duties Additional duty is collected on certain specified goods and products under the provisions of separate statutes. The additional duty is levied with the object to, either curb the demand or consumption of the particular commodity or to generate revenue sources from the commodity, which can, for the time being, bear the extra load of taxation. These additional duties are in addition to the basic excise duty and special excise duty.
A few additional duties, chargeable under various statutes are listed below: |Nature/Type of Additional Duties |Relevant Statutes | |Excise Duty on Coffee |The Coffee Act, 1942 | |Goods of Special Importance |Additional Duties of Excise (Goods of | | | Special Importance) Act, 1957 | |Mineral Products like motor spirit, | Mineral Products (Additional Duties of | |kerosene, refined diesel oils, furnace oils, |Excise and Customs) Act, 1958 | |asphalt and bitumen, etc. | |Textile Articles |Additional Duties of Excise (Textile and | | | Textile Articles) Act, 1978 | |Medicinal Toilet Preparations containing | The Medicinal and Toilet Preparations | |alcohol or narcotic drugs or narcotics. | (Excise Duties) Act, 1955 | 2. 1. 2. 4 Cesses Cess is a tax imposed for specific purpose with reference to some specific class of goods. ‘ The cess is collected separately and the collecting authority is under obligation to utilise the same for the specified purposes only. The table below gives the list of cesses payable under various statutes: |! Nature/Type of Cess |Relevant Statutes | |Cess |on rubber |The Rubber Act, 1947 | |Cess on paper and pulp, paper products, |The Industries (Development and | |Automobiles |Regulation_) Act, 1951 | |Cess |on tea |The Tea Act, 1953 | |Cess |on textile machinery |The Textile Committee Act, 1963 | |Cess |on limestone and dolomite |The Limestone & Dolomite Mines | | | |Labour Welfare Fund Act, 1972 | |Nature/Type of Cess |Relevant Statutes | | Cess on unmanufactured tobacco The Tobacco Cess Act, 1975 | | Cess Iron manganese and chrome ores |The Iron Ore Mines, Manganese Ore | | |Mines & Chrome Ore Mines Labour | | |Welfare Cess Act, 1976 | |Cess on manufactured Beedi | The Beedi Workers Welfare Cess Act, | | |1976 | | Cess on sugar | The Sugar Cess Act, 1982 | |,Cess on articles of jute manufactures |The Jute Manufactures Cess Act, 1983 | 2. 1. 2. 5 Natural Calamity Contingent Duty (NCCD) This duty is in the nature of surcharge and is levied under the Finance Act, 2001, w. e. f. I st March, NCCD is levied on items specified in the Seventh Schedule to the Finance Act, 2001. These items include cigarettes, pan masala, bidi and miscellaneous tobacco products. The following were added to the schedule vide Finance Act, 2003: •1 % on the polyester filament yarn, motorcars and two-wheelers. • Rs. 50 per metric ton on the domestic crude oil. 2. 1. 2. 6 Education Cess
The Education Cess levied under section 81, in the case of goods specified in the First Schedule to the Central Excise Tariff Act, 1985, being goods manufactured or produced shall be a duty of excise (in this section referred to as the Education Cess on excisable goods), at the rate of two per cent, calculated on the aggregate of all duties of excise (including special duty of excise or any other duty of excise but excluding education Cess on excisable goods) which are levied and collected by the Central l Government in the Ministry of Finance (Department of Revenue), under the provisions of I the Central Excise Act, 1944 or under any other law for the time being in force. The education cess has, thus, been levied, on the duty of excise, on excisable goods manufactured in India. It shall be chargeable @ 2% on the aggregate duties of excise leviable on such goods. The Education cess paid on input, except on motor spirit, HSD and LDO and capital goods shall be available as credit for payment of Education cess on the final product.
In case of imported goods the amount of additional duty of customs (CVD) paid under section 3 of the Customs Tariff Act, equivalent to the cess leviable on like indigenously manufactured product, be eligible to be taken as credit. The credit of Education cess so taken can be utilized only for payment of Education cess on filial products and not for payment of any other duty of excise. 2. 1. 3 Excise v Customs Duty Excise duty is levied on manufacture or production of goods within the country. Thus, it is related to industrial activity. Customs duty, on the other hand, is attracted on the movement of goods across the customs frontier. Excise duties are the duties, payable on goods produced at home, whereas customs duties are duties on goods imported into the country from abroad’. 2. 1. 4 Excise v Sales Tax
Excise duties are the duties levied upon a manufacture or production of specified goods, in respect of their manufacture and production in a factory within the country. It is not related to sale of goods or the proceeds of such sale. Sales tax, on the contrary, is levied on the vendor of goods, in respect of his sales. The Supreme Court held in the case of Sadia Bakery v State of AP’ that these two are distinct and separate taxes. In case of excise duty the taxable event is the coming into existence of a new commodity. However, in case of sales tax, the taxable event is the sale of a commodity. The event of sale of a commodity is immaterial for levy of excise duty.
In 1939, the duty of excise included the tax on sales as well. However, when the Government of India Act, 1935, delegated power to levy tax on sales to another authority, it was distinguished from excise duty. 2. 1. 5 Excise v Service Tax Service tax is a tax on the services provided by the specified category of persons to their clients and customers. On the contrary, excise duty is a tax charged on removal of goods from the place of manufacture or production, irrespective of whether the same are used by customers or not. 2. 1. 6 Excise v Entry Tax Entry tax is levied and charged on the entry of goods in a specified area. It is similar to Octroi.
However, it is distinct from excise duty, which is payable upon removal of goods from the place of manufacture or production; but before entry into the market, whether sold or not. Entry tax is a source of revenue for the Local Governments. 2. 1. 7 Excise v Octroi Octroi is charged on the entry of goods within a specified area. This is, generally, levied and collected by the Local Governments. While Excise duty is levied on the goods manufactured and produced within the country, Octroi is a kind of entry tax. The levy of excise duty is, therefore, not in conflict with the levy and imposition of Octroi. 2. 1. 8 Basic Conditions of Excise Liability
Section 3 of the Central Excise Act, 1944 provides that “there shall be levied and collected in such manner as may be prescribed, a duty of excise, to be called the Central Value Added Tax (CENVAT) on all excisable goods excluding goods produced or manufactured in special economic zones which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 …. ” From the above provision, the basic conditions for excisability of goods may be deduced as follows: •The Excise duty to be called Central Value Added Tax (CENVAT) is leviable on goods i. e. the articles which are movable and marketable; • The goods must be excisable i. e. the goods must be included in the Central Excise Tariff Act, 1985; •The goods must be manufactured or produced i. e. by the process there must emerge a new and identifiable product; •The manufacture or production must be in India, excluding the goods produced on manufactured in special economic zones. .