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Indirect Taxes


Unlike Income Tax which is levied on persons, Indirect taxes are levied on goods and services. Customers indirectly pay this tax in the form of higher prices. For example, if you walk into retail shop to buy goods, along with the price of the goods, you will end up paying VAT (Value Added Tax) also. The seller who collects VAT from you will eventually passes this tax to the respective authority. The indirect tax, actually raises the price of a good and the customers purchase by paying more for that product.

Thus in a sense, indirect tax is the charge that is collected by intermediary (like retail store) from the individual who actually suffers the economic burden of the tax (i.e. end customer). The intermediary just collects the tax and passes it on to the government.

Some of the important indirect taxes are as under:
  • Central Excise - governed by the Central Excise Act, 1944, Central Excise Tariff Act, 1985, and Rules made under these Acts. Important ones are Central Excise Rules, Cenvat Credit Rules and Central Excise Valuation Rules
  • Customs Duty - governed by the Customs Act, 1962, Customs Tariff Act, 1975, and Rules and Regulations made under these Acts
  • Services Tax - There is no separate Act for Service Tax at present. The law which appeared in the Finance Act, 1996 (Finance Act is passed every year) has continue to stay and operate from this Act. However, may Rules has been made under this Act to implement the law and important ones are Service Tax Rules, Service Tax Valuation Rules, and Export of Services Rules
  • Central Sales Tax - governed by the Central Sales Tax Act, 1956, and Rules made under this Act
  • Value Added Tax - governed by the Acts passed by the respective State governments
  • Purchase Tax / Entry Tax / Octroi - governed by the Acts passed by the respective State governments
  • Satmp duty - governed by the Acts passed by both the Central government and the respective State governments
  • Other duty - governed by the Acts passed by the respective State governmentsNow let us deal with each of these laws in brief.
Let us now deal with each of these taxes in brief.

Excise Duty

Unlike in many countries, there is no GST (Goods and Service Tax) in India. Goods are charged separately and so are the services. Even under the goods, manufacture of goods is charged separately from sale of goods. Central Excise is levied on the ‘manufacture’ of goods and therefore it is also known as manufacturing tax. Whenever there is manufacture of goods, then the duty liability will get fastened to the goods. The term Manufacture means bringing into existence a new article having a distinct name, character, use and marketability and includes packing, labeling etc.

Central Excise is regulated by Central Excise Act, 1944 which deals with substantive part of law and Central Excise Tariff Act, 1985 which deals of classification of goods are corresponding rates of duty, both enacted by the Central Government. In addition, the Central Government has made several Rules under the Act.

The rate of duty varies with the goods, but however, most goods attract excise duty of 8%. There is also two kinds of cesses (tax on tax) viz: Eduction Cess which is 2% and Higher and Secondary Education Cess which is 1% of the Excise duty. Duty paid on goods which are used as inputs for manufacture can be set off against the duty payable on the output or final goods. Excise duty is levied on ad valorem basis or based on the maximum retail price in some cases.

Central Excise duty is administered by the Central Board of Excise and Customs. For further information, please visit their website at http://www.cbec.gov.in/
Excise Tariffs - Central Excise Tariff Act 2005 - http://www.cbec.gov.in/excise/cx-tariff0708/cxt0708-idx.htm
Central Excise Manual - http://www.cbec.gov.in/excise/cx-manual/manual/index1.htm
Central Excise Act 1944 http://www.cbec.gov.in/excise/cx-act/cx-act-idx.htm
FAQ http://www.cbec.gov.in/faq.htm

Beware that there is also State Excise which is a duty on the manufacture of liquor. Since manufacture of liquor comes under the purview of the State, the same excluded from the Central Excise.

Customs Duty

Customs Duty is a duty payable on import of goods. The various types of Customs Duties are:

  • Basic Customs Duty (Rate applicable as per the Customs Tariff) which depend on class of goods imported
  • Additional Customs or Countervailing Duty on certain goods which is equivalent to the excise duty payable on similar goods manufactured in India;
  • Special Additional Duty on certain goods which is is equivalent to the Central Sales Tax payable on similar goods sold in India
  • Protective or Anti-dumping duty
Like excise duty, Customs duty is regulated by Customs Act, 1962, which deals with substantive part of the law and Customs Tariff Act, 1975 which deals of classification of goods are corresponding rates of duty, both made by Central Government. In addition, the Central Government has made several Rules under these Acts.

Most of the goods attract Basic Customs Duty of 10%.

Eduction Cess and Higher and Secondary Education Cess are also applicable. Except for Additional Customs or Countervailing Duty levied in lieu of excise duty and Education Cess and Secondary Education Cess, other types of duties are not available for set off against any duty.

Customs duties in India are administrated by Central Board of Excise and Customs under Ministry of Finance.

Schedule of Customs duties- The Customs Tariff Act 2005 http://www.cbec.gov.in/customs/cst-0708/cst-main.htm
Website of Central Board of Excise and Customs http://www.cbec.gov.in/
The Customs Act 1962 http://www.cbec.gov.in/customs/cs-act/cs-act-idx.htm
Customs Manual http://www.cbec.gov.in/customs/cs-manual/manual_idx.htm
FAQ http://www.cbec.gov.in/faq.htm

Service Tax


Service tax is payable on taxable services at rate of 10% + Eduction Cess of 2% + Secondary Education Cess of 1%. At present, over hundred different services have been notified for the purposes of levy of service tax. As in excise duty, service tax paid on input services can be set off against the duty payable on the output goods or services.

Central Excise duty is administered by the Central Board of Excise and Customs. For further information, please visit their website at http://www.cbec.gov.in/
Website of Central Board of Excise and Customs relating to Service Tax is - http://www.servicetax.gov.in/
FAQ http://www.cbec.gov.in/faq.htm

Central Sales Tax

CST is applicable on inter-state sales (sale between two States) where commencement and termination of journey of goods happen in two different States. If the goods purchased from another state is meant to be used for furher processing or manufacture, there is a concessional scheme available which attracts only 2% CST. If that is not the case, the CST will be equivalent to VAT. It is proposed that the CST would be eliminated gradually.

CST cannot be set off against VAT or any other duty.

While Central Sales Tax is made by the Central government, it is administered CST collected will be appropriated by the respective State governments.

Value Added Tax / Local Sales Tax

VAT is applicable on intra-state sales (sale within a particular State) where commencement and termination of journey of goods happen in the same State. Most of the Indian States have replaced the Local Sales tax with a new Value Added Tax (VAT) from April 01, 2005.

Generally, there are four slabs of VAT:
  • 0% for essential commodities
  • 1% on bullion and precious stones
  • 4% on certain industrial inputs, capital goods and items of mass consumption
  • All other items 12.5% Petroleum products, tobacco, liquor etc., attract higher VAT rates that vary from State to State.
VAT is applied on each stage of sale with a mechanism of credit for the input VAT paid.

VAT is implemented at the State level by the respective State Governments.

Purchase Tax / Entry Tax / Octroi

Purchase Tax, Entry tax or Octroi is payable when the goods are brought from outside certain local area limits. The tax rates vary from 1 to 25% depending on the state and nature of goods. While Purchase Tax and Entry Tax are paid by the buyer every month on the consolidated purchases, octroi is paid at the toll gates before entering the city.

Purchase Tax, Entry Tax or Octroi cannot be set off against VAT or any other duty.

Each State governments have their own websites relating to VAT / Purchase Tax / Entry Tax . Octoi (all put together known as Commercial Taxes). For example, Karnataka VAT department is at http://164.100.80.16/ctax/ and Maharashtra VAT department is at http://www.mahavat.gov.in/mahavat/index.jsp.

Stamp Duty

The Stamp Duty is payable on any prescribed instrument or document by which any right or liability is or purports to be created, modified or recorded. This duty is levied both by Central Government by virtue of the Indian Stamp Act, 1899 for certain documents and by the respective State governments on other prescribed documents. The rate of duty is calculated based on the place where the instrument is executed and the type of instrument executed.

Each State governments have their own websites relating to Stamp duty and registration of documents. For example, Karnataka Stamp and Registration department is at http://www.karigr.org/ and Maharashtra Stamp and Registration department is at http://igrmaharashtra.gov.in/.

Other duties

In addition to the above duties, there are various other types of duties levied at the State level viz: Entertainment tax, Luxury tax, Property tax, agriculture income tax, tax on liquor, etc.

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