Relevant Indirect Tax provisions

Vikas Gupta

Indirect Tax system in India

*Custom Duties *Central Excise Duty *Service Tax etc.

*Sales Tax / VAT*State Excise Duty*Entry Tax etc.

By The Central Govt.

By The State Govt.

Applicable Indirect Tax

Avana being a Project organization, the following Indirect Taxes are applicable to it:

Customs Duty on Import

Excise Duty on local Manufactured Products

Central Sales Tax

State VAT (Value Added Tax)

Works Contract Tax – VAT as well as Service Tax

Service Tax

Customs Duty

Customs Duty applicability

Customs duty is on imports into India and export out of India.

In case of imports, taxable event occurs when goods mix with landmass of India.

In case of exports, taxable event occurs when goods cross territorial waters of India, Territorial waters of India extend up to 12 nautical miles inside sea from baseline on coast of India and include any bay, gulf, harbor, creek or tidal river. (1 nautical mile = 1.1515 miles = 1.853 Kms).

It is Made up of various duties and Cess

Effective Maximum rate approximately 26.85% of Assessable value

Various Duties and Cess involved in Customs Duty

Basic Custom Duty

Basic Custom Duty levied under the Custom Act for import of goods into India . Basic customs duty levied u/s 12 of Customs Act is generally 10% on non-agricultural goods, w.e.f. 1-3-2007

Countervailing Duty

CVD equal to excise duty is payable on imported goods u/s 3(1) of Customs Tariff Act to counterbalance impact of excise duty on indigenous manufactures, to ensure level paying field Equal to excise duty levied on like product manufactured or produced in India .

CVD is payable equal to excise duty payable on like articles if produced in India. It is payable at effective rate of excise duty. General excise duty rate is 10.30% w.e.f. 27-2-2010 (10% basic plus 2% education cess and SAH Education cess of 1%).

CVD is payable on assessable value plus basic customs duty.

CVD can be levied only if there is ‘manufacture’

Various Duties and Cess involved in Customs Duty

Special CVD

Special CVD is payable @ 4% on imported goods u/s 3(5) of Customs Tariff Act. This is in lieu of Vat/sales tax to provide level playing field to Indian goods. Traders importing goods can get refund. CVD is not payable if goods are covered under MRP valuation provisions

Education Cess

Education cess of customs @ 2% and SAH Education cess of 1% is payable

Total duty

Total import duty considering all duties plus education cess on non-agricultural goods is generally 26.85% of Assessable value

Methodology of Custom Duty Calculation

S. No.

Particulars Amount (Rs)

Percentage

A CIF 10,00,000 100%

B Landing cost @ 1% of CIF 10,000 1%

C Assessable Value 10,10,000 101%

D Basic Customs Duty @ 10% of Assessable value

1,01,000 10%

E Sub Total for Calculating CVD (C+D) 11,11,000 111%

F CVD @ 10.3% on E (10% plus education Cess @3%)

1,14,434 10.3%

G Total of Duties (D+F) 2,15,433

H Education Cess (@3% on G) 6,463 3%

I Special CVD (@4% on (C+D+F+H) 49,276 4%

J Total Duties Payable 2,71,172 27.12%

CENVAT Credit available out of various components of Customs Duty

Buyer who is Manufacturer

Such importer is eligible to avail CENVAT Credit of:

Countervailing duty (CVD) including education cess on the same

Special CVD

Buyer who is Service Provider

Such importer is eligible to avail CENVAT Credit of:

Countervailing duty (CVD) including education cess on the same

Buyer who is Trader of imported goods

Such importer is eligible to get Refund of:

Special CVD

Excise Duty

Excise Duty applicability

Central excise duty is an indirect tax which is charged on such

goods that are manufactured in India and are meant for domestic

consumption.

The term 'excisable goods' means the goods which are specified

in the first schedule and the second schedule to the Central

Excise Tariff Act, 1985, as being subject to a duty of excise and

includes salt

The taxable fact is "manufacture" and the liability of central

excise duty arises as soon as the goods are manufactured.

The tax is on manufacturing, it is paid by a manufacturer, which is

then passed on to the customer

This tax is now known as the Central Value Added Tax (CENVAT)

Types of Excise DutyThere are three different types of central excise duties which exist in India:

Basic - Excise Duty, imposed under section 3 of the 'Central Excises and Salt Act' of 1944 on all excisable goods other than salt produced or manufactured in India, at the rates set forth in the schedule to the Central Excise tariff Act, 1985, falls under the category of basic excise duty in India.

Additional - Section 3 of the 'Additional Duties of Excise Act' of 1957 permits the charge and collection of excise duty in respect of the goods as listed in the schedule of this act. This tax is shared between the central and state governments and charged instead of sales tax.

Special - According to Section 37 of the Finance Act, 1978, Special Excise Duty is levied on all excisable goods that come under taxation, in line with the Basic Excise Duty under the Central Excises and Salt Act of 1944. Therefore, each year the Finance Act spells out that whether the Special Excise Duty shall or shall not be charged, and eventually collected during the relevant financial year.

Liability to pay Excise Duty

The liability to pay tax excise duty is always on the manufacturer or producer of goods. Three types of parties who can be considered as manufacturers: Those who personally manufacture the goods in question Those who get the goods manufactured by employing

hired labour Those who get the goods manufactured by other partiesit is mandatory to pay duty on all goods manufactured, unless exempted. For example, duty is not payable on the goods exported out of India. Similarly exemption from payment of duty is available, based on conditions such as kind of raw materials used, value of turnover (clearances) in a financial year, type of process employed etc.

Under the different sections of the central excise act, the fines for evading tax can range from twenty-five to fifty per cent of the amount of duty evaded.

Manufacture under Excise Duty

The term "manufacture" refers to any process:

Related or supplementary to the combination of a manufactured product.

Which is specified in relation to any goods in the Section or Chapter Notes of the First Schedule to the Central Excise Tariff Act 1985 as amounting to manufacture or

Which in relation to the goods specified in the Third Schedule involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration or alteration of retail sale price on it or adoption of any other treatment on the goods to render the product marketable to the consumer.

Excise Duty applicability

Presently Excise Duty Rates vary from 0% to 10.3% depending upon the commodity

There are four basic conditions for levy of Central Excise Duty: The duty is on Goods The goods must be excisable The goods must be manufactured or produced Such manufacture or production must be India

Chart showing Excise DutyLiability

Central Sales Tax

Sales Tax Basic Concepts

Sales can be broadly classified in three categories:

Inter-State Sale

Sale during import/export

Intra-State (i.e. within the State) sale

Sale tax on Inter State sale is levied by Union Government under Entry 92A of List I (Union List), while sales tax on intra-State sale (sale within State) (now termed as Vat) is levied by State Government under Entry 54 of List II (State List)  of Seventh Schedule to constitution of India

Even if CST is levied by Union Government, the revenue goes to State Government. State from which movement of goods commences gets revenue. CST Act is administered by State Government

“Goods” under Central Sales Tax (CST)CST is on “Goods” Goods include all kinds of Movable property but not:

News Paper

Actionable Claims e.g. Lottery Tickets

Stocks, Shares and Securities

Electricity is goods. Newspapers are ‘goods’ but sales tax cannot be imposed in view of specific exclusion from definition of ‘goods’

Intangible or incorporal articles are ‘goods’ e.g. patent, copyright

DEPB and Advance Authorisation are ‘goods’ and are taxable

Plant and machinery erected at site is not goods

Software (branded as well as unbranded) is goods - TCS v. State of Andhra Pradesh (SC 5 member Constitution bench)

Simple sale of SIM card can be taxed, but not when supplied as incidental to service

“Dealer” under Central Sales Tax (CST)

“Dealer” means any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distribution of goods, directly or indirectly, for cash, or for deferred payment, or for valuable consideration

Definition of ‘dealer’ is wide, but only those who ‘effect’ sale are liable to register and pay CST

Government is ‘dealer’ if it carries on business. Railways are ‘dealers’. Insurance company is also ‘dealer’

Bank can be dealer in respect of sale of pledged goods

A ‘club’ can also be ‘dealer’

An auctioneer is not a dealer, if he does not transfer the property in the goods to the successful bidder

Central Sales Tax (CST) applicability

This Act Applicable to Sales/Purchases taking place in Course of Inter-state Trade & Commerce There is no threshold Limit for registration-Even a

Single Transaction will make Liable for registration. Interest/Penalty/Return/assessment provision

applicable under Local Act are also applicable to CST Act.

Two basic conditions for deciding whether “C” Form can be issued or not: Item being purchased is used in the process of

manufacture or used for Trade & Commerce Item is stated in the Registration certificate as an

item for used in the process of manufacture or used for Trade & Commerce

Present Interstate System

MA

NU

FA

CT

UR

ER

(HA

RY

AN

A)

State ‘Delhi’

Customer

S2State

‘Haryana’

Stock Transfer

Inter State Sales

Inter State Sales

2% CST “C” Form

State ‘Delhi’ Dealer

S1State ‘UP’

State

‘Delhi’ Depot

State ‘Delhi’Dealer

State ‘Delhi’

Customer

State ‘Delhi’ Dealer

UKInter State Sales

0% CST”H” Form

Export

Local Sale

VAT

0% Tax

0% CST “F” Form

Local Sale

Local Sale

VAT VAT

2% CST

C Form

Local Sale

VAT

Central Sales Tax (CST) Rate of Tax

From 1st June 2008 onwards

S. No.

Local VAT rate Supported by Form C

Without Form C

1 Declared Goods 2% 4%

2 Exempted Goods Exempt Exempt

3 1% 1% (No C form required) 1%

4 4% 2% 4%

5 12.5% 2% 12.5%No CENVAT credit is available against CST irrespective of whether with or without C Form or tax payable at whatever rate

Central Sales Tax (CST) Various Forms

S. No.

Forms Purpose / Reason to Submit

1 CWhen Inter-State Transaction takes place bytransfer of document of title of goods—obtain C FORM from BUYER

2 E-I & E-IIDealer to Claim Exemption on above Clause must obtain FORM E-I from Vendor if Such vendor is 1st Seller else FORM E-II

3 J Sale to notified foreign Diplomat authorities

4 H Sale to a dealer for export by the dealer

5 I Inter State sale to units situated in SEZ

Sample of C Form under CST

Value Added Tax (VAT)

Status of VAT in India

Tamil Nadu

J & K

Orissa

Bihar

Jharkhand

Chattisgarh

Uttaranchal

Pondicherry

Gujarat WB

Punjab

Assam

Kerala

DelhiHaryana

MP

UP

Maharashtra

Goa

Rajasthan

AP

Karnataka

Chandigarh

20 States VAT live April 1, 2005

2 State/ UT implementing VAT between the period April 1, 2005 to March 31, 2006

5 States implementing VAT wef April 1, 2006

2 State/UT implementing VAT on or after January1 ,2007

Applicability of VAT / CST

StateSales Tax Act

Sales tax is a tax on sales of movable goods

CST ACT

StateVAT Act

State“Delhi”

State“Haryana”

StateSales Tax Act

StateVAT Act

Concept of VAT

No way different from Local Sales Tax (LST) with respect to the fundamentals, however, method of levy differs in the two system

The traditional system of levying tax-

First Point Tax - Avoid cascading effect but Govt. loses its control on last point sales with added value - leakage of revenue due to various tax management in the subsequent sales after First Point.

Next Point Tax (especially for banded goods) - Burden of tax is shifted to the next point

Last Point Tax- Govt. gets revenue on value addition up to last point but loses its control on origin of manufacture - possibility for leakage of revenue / escaped taxation – Not popular with Govt.

Multipoint Tax- The Govt. keeps control on overall sales but cost increases due to cascading nature of taxation

Concept of VAT

VAT is a solution to overcome all the above problems and acceptable

both to the Assessor (Govt.) and the Assessee (Dealer)

VAT in common man's language “is a tax levied on the value added to

any product or service AT EVERY STAGE”

Destination based tax system

Sales to Registered Dealer by a Registered Dealer

Provision for input tax credit paid at the previous point of purchase.

The tax paid by a registered dealer is netted.

Tax is ultimately borne by the consumer

VAT Chain

Purchase Full Tax credit

Manufacturer Wholesaler

VAT Full Tax credit

Wholesaler to Retailer

VAT

Retailer

Full Tax credit

Retailer to Consumer

No Tax credit

Consumer

VAT Chain

1st

Point Sale Manufacturer

/Importer

2nd Point Sale

Wholesale dealer

3rd Point Sale

Distributors

Small time Retail Sellers

0.551554th

1101503rd

4401402nd

10-1001st

VAT

@10

%

Value

addition

Sale

price

Stage

State 1 State 2

Inter State purchase(CST)

Local purchase(Local sales tax)

(Local sales tax)

(No sales tax)

Interstate sale(CST)

(Local sales tax)

Imports(No sales tax)

Stock transfer(No tax)

Retail sales(Local sales tax

after limited credit of LST)

Manufacturer

Distributor

Depot/CSARetailer

Retail sales

Stockist

Stock transfer(No sales tax)

Customer(No sales tax)

Customer

(No sales tax)

Customer

(No sales tax)

VAT in India – Pre VAT Scenario

State 1 State 2

Inter State purchase(CST) + Possible Entry

Tax Local purchase(Local sales tax)

VAT

(Local sales tax)

(No sales tax)

Interstate sale(CST)

(Local sales tax)

Imports(No sales tax)

Possible Entry Tax

Stock transfer(No tax) (Possible entry tax in State 2. Possible denial of credit in State 1

Retail sales(Local sales tax

after limited credit of LST) VAT after full Credit

Manufacturer

Distributor

Depot/CSARetailer

Retail sales

Stockist

Stock transfer(No sales tax) (Possible entry tax & Possible denial of credit in exporting State

Customer(No sales tax)

VAT after Credit

Customer(No sales tax)

Customer

(No sales tax)

VAT in India – Post VAT Scenario

(Possible tax on entry in State 2)(VAT after credit of

entry tax)

(VAT after credit)

(VAT after credit of entry tax)

(VAT after credit)

(VAT after credit)

VAT Credit

• Full VAT credit paid within state

• Tax paid on inputs both for intra-state & inter-state sale

• Total Input tax for a period and not based on input/ output ratio (variation among States)

• Credit for unsold stocks allowed

Exclusions from VAT Credit

• Petrol

• Diesel

• Aviation Turbine Fuel

• Non VAT Taxes (SAT ? & Entry Tax)

VAT Credit Utilization

• Within the same month / quarter

• Excess C/F up to next financial year end

• Refund of unutilized credit at next year end

• Capital goods credit in 36 monthly installments

• In respect of Export tax payment within the state will be

refundable at the Month / quarter end.

VAT Rates

• Few exempted goods

• 4% for Agriculture / industrial inputs & some essentials

• 12.5% general VAT rate

• Liquor - 20%

• Gold, Silver, precious & semi-precious stones - 1%

VAT in UP

Value Added Tax (VAT) was adopted by UP on 1st April 2006

Registration1. Threshold limit Rs 5 Lacs2. Auto Registration for Registered Dealer – Form VII & VIII within

60 days.3. Compulsory for Transporters, Carriers, Forwarding Agents,

Railway Agents etc. – transporting / storing goods.

Tax Payer’s Identification No (TIN):- Allotted on Form number 15 –Mandatory to

quote on all Correspondences / Return / Challan / Tax invoice etc.

Composition Scheme :- Specified for Small Traders - 5 to 50 Lakhs @ VAT 1%.

VAT Rates in UP

Four rates have been prescribed

Schedule: I - 0% for exempted goods.

Schedule: II - 4%: for manufacturing inputs & IT Products &

GSM.

Schedule: III -1%: for gold and precious stone.

Schedule: IV – 20% to 32.5% for Petrol, Diesel oil, Furnace Oil.

Schedule: V RNR - 12.5%: for goods not specified under any

schedule

RNR – Revenue Neutral Rate

Input Tax Credit (ITC)

• Allowed For intra-State purchase of goods for resale or use in

manufacture.

• Not allowed in respect of Non-VAT goods, captive power plant and

other specified capital goods like office equipment, furniture, air

conditioners etc.

• Input tax credits are not available for inter State (CST)

procurement of goods.

• Stock transfers outside the State attract a reversal of input tax

credit (ITC) to the extent of 3%.

• Developers, co-developers and units in SEZ eligible for ITC on

taxable goods for

specified operations.

Input Tax Credit (ITC)

• Specified goods to be notified under Schedule IV to be taxable at

first point.

• Provisional refund of ITC to exporters.

• Refund of excess ITC to other dealers at the end of the

assessment year next to the assessment year in which it falls due.ITC on capital goods (other than non creditable capital goods):

“Capital Goods” means plant, machine, machinery, equipment,

apparatus, tools appliances, electrical installation used for

manufacture or processing of any goods for sale by the dealer and

includes components, spare parts, accessories, mould dies etc.

• ITC on capital goods - in 3 annual installments.

• No ITC on capital goods held in stock on the date of

commencement of Act.

VAT Chart

State Existing VAT RatesVAT is

Payable on PTS / MRP

Entry Tax, if applicable

Return Filing

Rate Revision

Andhra Pradesh 4% / 14.5% PTS NA Monthly Increase in VAT wef 15-01-2010Assam 5% / 13.5% PTS NA Monthly Increase in VAT wef 31-10-09Bihar 4% / 12.5% MRP Applicable QuarterlyChandigarh 4% / 12.5% PTS NA QuarterlyChatisgarh 4% / 12.5% PTS Applicable QuarterlyGoa 4% / 12.5% PTS Applicable QuarterlyGujarat (4%+1%) / (12.5% + 2.5%) PTS NA Monthly Additional Cess wef 01-04-08Haryana 5% / 12.5% PTS NA Quarterly Increase in VAT wef 15-02-2010Jharkhand 4% / 12.5% MRP NA MonthlyKarnataka 5% / 13.5% PTS NA Monthly Increase in VAT wef 01-04-2010Kerala (4%+1%) / (12.5%+1%) MRP NA Monthly SSC wef 01-04-08Madhya Pradesh 5% / 12.5% PTS Applicable Quarterly Increase in VAT wef 01-08-09Maharashtra 5% / 12.5% PTS NA Monthly Increase in VAT wef 01-04-2010 to 5%New Delhi 5% / 12.5% PTS NA Monthly Increase in VAT wef 14-01-2010Orissa 4% / 12.5% MRP Applicable MonthlyPunjab 5% / 12.5% (10% Addl Tax/Surcharge) PTS NA Quarterly Increase in VAT wef 29-01-2010 & Addl Tax wef 05-02-2010

Rajasthan 5% / 14% MRP NA Quarterly Increase in VAT wef 08-07-09 for 12.5% and Increase of 4% to 5% wef 09-03-2010

Tamil Nadu 4% / 12.5% PTS NA MonthlyUttar Pradesh (4%+0.5%+0.5%) / (12.5%+1%) PTS NA Monthly Additional Cess wef 01-06-09/Additional Cess of (4+0.5%)+0.5% wef 20-02-10

Uttarakhand 4%+0.5% / 12.5%+1% PTS NA Monthly Surcharge of (4+0.5%) & 12.5%+1% wef 01-03-2010 postponed 01-04-2010

West Bengal 4% / 12.5% MRP NA QuarterlyPondicherry 4% / 12.5% PTS NA MonthlyHimachal Pradesh 5% / 12.5% PTS Applicable Monthly Increase in VAT wef 29-03-2010 to 5%

REVIEW OF VAT / CST AS ON 01-APRIL-2010

Works Contract Tax

What is a Indivisible Works Contract ?

It is a Works Contract (WC) & Not a Normal Sale.

The Indivisible Works Contract is:

A Composite (Turnkey Jobs) work where both Labour & Material is involved, breaking of Price for Supply (Material) & Labour may not be separate Sale of Materials & Labour Contract.

Contract where the Contractor / Seller gets the order from the customer for definite goods or for WC.

The Clauses in the Agreement between the Contractor & the Contractee are the key factors for determining whether the Contact is of sale of goods or WC.

If the Contract is divisible then, the supply of material is a Sale Contract and the labour portion is WC. If in the Labour portion, material is also used then VAT (WC) is applicable.

Local WC are covered under the Local VAT Act & Inter-state WC are covered under the Central Sales Tax Act.

Sale Vs. Works Contract Concept)

If the thing to be delivered has any individual existence before the delivery as the property of the party who is to deliver it, then it is a Sale. If the main object of the work undertaken is not the transfer of a chattel qua chattel, the contract is one for work & labor (Hindustan Shipyard 119 STC 533 – SC).

In a Contract of Sale, the main object is the transfer of property and delivery of the possession of Chattel as a Chattel to the buyer, where it is not so, it is a contract of Works & Labour (Hindustan Aeronautics Ltd. 55-STC 314 -SC)

It is made clear that contract of building buses, ships are that of the Sale even if they are manufactured as per the specifications and under strict supervision of the buyer. (Hindustan Shipyard 119 STC 533 – SC).

The test therefore is as to whether in a particular case, it is a Contract of Sale (Chattel as a Chattel) or WC, neither the ownership of the material nor the value of skill or labour as compared with the value of the material is conclusive, although such matter may be taken into consideration depending upon the facts and circumstances of the particular case.

Works Contract is a Deemed Sale

The Scenario before the 46th Constitutional Amendment (Before 2nd Feb, 1982)

The Sales of goods covered under the sale of goods Act were only liable for Sales tax (only normal sales were covered)

The Supreme Court Judgment of Gannon Dunkerely (9 STC 353)

The Indivisible WCs were not covered under the State Sales tax Laws. The states were not empowered to levy Sales tax on Indivisible WCs.

The 46th Amendment to the Constitution of India Sub-article (29-4) reads as under: “(b) a tax on the transfer of property in goods (whether a goods or in some other form) involved in the execution of a Works Contract”

The concept of Deemed Sale under the State VAT / CST Acts: The Sales tax/VAT/CST is applicable only on the value of the goods and

not on labour portion of the Contract. Alternatives are prescribed for arriving at the material value of the

Contract.

The States are empowered to levy Sales tax/VAT/CST on such deemed sales only after the 46th Amendment to the Constitution of India

Divisible & Indivisible Works Contracts

(A) Divisible Contract :

Two separate contracts, one for supply portion and other for labour work, two separate companies, preferable.

No artificial break of sale price to avoid VAT (WC) on labour portion.

The clauses in the Agreement and intentions of the two parties is an important factor.

State “A”Contractor

X

Supply – Normal Sale

VAT 4% / 12.5%

State “A” Contractee

Y

State “A” Contractor

X or X1

Erection & Commissioning

Labour Job (WC) (if material used, the WC provisions are

attracted, otherwise pure Labour Job

State “A” Contractee

Y

Divisible contracts are more litigation prone

Divisible & Indivisible Works Contracts

(B) Indivisible Contract :

Only one Indivisible WC. (Single P.O. by the Contractee)

The clauses in the Agreement and intentions of the two parties is an important factor.

VAT (WC) applicable only on the material value of the Contract – determined by the three methods (options) under State VAT Act.

State “A”CONTRACTOR

X

Deemed Sale (WC)

VAT (WC) is applicable on contract value as per

the three options available.

State “A” Contractee

Y

More options of levy of VAT/Composition tax available in Indivisible Works Contracts)

Activities covered under Works Contract

1. Construction Jobs

2. Civil Work

3. Erection of Plant and Machinery

4. Processing – conversion jobs.

5. Repair Jobs

6. Annual Maintenance Contracts (AMCs)

7. Customized Printing Jobs.

8. Building of bodies on chassis.

9. Electrical fittings.

10. Installation of lift / elevator in the building.

11. Air-conditioning installations.

12. Painting jobs.

13. Repairs of vehicles.

14. Re-treading of old Tyre.

15. Electro-plating, electro-galvanizing, anodizing and the like.

Applicability of VAT on various Works Contracts

Indivisible / Composite Works

ContractsJob Works Pure Labour Jobs Art Works

Construction Contract

Erection of Plant & Machinery

EPC Contracts Installation &

Commissioning of Lifts / Elevators

Civil Works

Processing – Conversion Jobs

Repair of Vehicles

Repair Jobs Electro – Plating,

Electro galvanizing, anodizing and like

Customized Printing Jobs

Pure Labour Jobs where no own material is used by the Contractors (Consumables, Chemicals which evaporate during the process are allowed).

Work of Art & Labour (Art Work)

Photography Paintings by

the Artist

VAT Applicable VAT Applicable No VAT ApplicableNo VAT

Applicable

Basic Concepts of Levy of VAT / CST On Works Contracts

1. No VAT/CST is applicable on pure labour jobs where no material of his own is used / added by the job worker (vendor).

2. VAT / CST is applicable on Material Value of the Work Contract.

3. To arrive at the Material Value in the Contract, three methods are adopted under the State VAT Acts namely :

i. Actual Non-material Deduction Method

ii. Standard Deduction Method

iii. Composition Tax Method (Non-legal Method.)

4. VAT Setoff / Credit is available under the State VAT Acts to both the Contractor & Contractee except for the Negative List items purchased

5. For Divisible Contract, supply of material is a Normal Sale Contract and the Labour Contract is subject to VAT (WC) provisions, only if the own material is used by the Contractor.

6. If the Contractor dispatches his own materials from one state to another, directly to the customer under the Indivisible WC, then it is a deemed inter-state sale of material subject to levy of CST by the state of dispatch.

Works Contract Taxation under State VAT Act

OPTION “A” (LEGAL) OPTION “B” (COMPOSITION)

A1 [VAT paid on Inputs Rs.2.00] A2 [VAT paid on Inputs Rs.2.00] VAT paid on inputs Rs.2.00 (Credit 64%) Rs.1.28

Contract Price Rs.100.00 Contract Price Rs.100.00 Contract Price Rs.100.00

(-) Actual Non-material Value

Rs. 80.00 Standard Deduction (Non-Material)

Rs. 25.00 @ 8% Composition Tax on Rs.100

Rs. 8.00

Material Value Rs. 20.00 Material Value Rs. 75.00 Rs.108.00

@ 12.5% VAT on Rs.20.00

Rs. 2.50 @ 12.5% VAT on Rs.7.00 Rs. 9.38 INVOICE

TAX INVOICE Rs.100.00 TAX INVOICE Rs.100.00 Contract Price Rs.100.00

VAT @ 12.5% on Rs.20.00

Rs. 2.50 VAT @ 12.5% on Rs.75.00 Rs. 9.38 @ 8% Composition Tax Rs. 8.00

Rs.102.50 Rs.109.38@ 5% Composition Tax ( 20-6-06)

Rs.108.00

VAT PAYABLE (2.50 – 2.00)

Rs. 0.50 VAT PAYABLE (Rs.9.38 – Rs.2)

Rs. 7.38

VAT PAYABLE (Rs.8.00 – 1.28)

Rs. 6.72

2% TDS Deduction by Contractee A2 [VAT paid on Inputs Rs.2.00] 2% TDS Deduction by Contractee

Service Tax

What is Service Tax

Service tax comes under powers of Entry 97 of List I of Seventh Schedule to

Constitution of India. Service tax was introduced w.e.f. 1-7-1994 and its

scope is being expanded every year. Service tax is not payable if service is

provided in J&K or if provided outside India

Service tax is imposed under section 66 of Finance Act, 1994, which is the

charging section [There is no separate Service Tax Act as such]. ‘Service

provided or to be provided’ is ‘taxable event’. Thus, service tax is payable

when advance is received

Service requires two parties. One cannot give service to himself

Service tax cannot be levied on value of goods. Service tax and Vat are

mutually exclusive

Rate & Liability of Service providerGeneral rate of service tax is 10.30% (including education cess and SAH

education cess) w.e.f. 24-2-2009 [During period 11-5-2007 to 23-2-2009, it was

12.36%]. In some cases, abatement is available

Education cess and SAHE cess should be shown separately in invoice and

should be paid under separate accounting head

Service tax is payable by service provider. In few cases, tax is payable by

service receiver, under reverse charge method [Section 68(2)]

In case of Goods Transport Agency (GTA), Import of Service, Sponsorship

service and Agent of mutual fund and insurance, service tax is payable by

service receiver

Value for purpose of Service TaxService tax is payable on gross amount charged for taxable service provided

or to be provided [section 67] (excluding material cost)

Tax is payable on reimbursement of expenses which are part of service, but

not on payments made by service provider as ‘pure agent’ of service receiver

Service tax is not payable on amounts collected by service provider from

service receiver which are not part of service but are paid by service provider

to third parties for administrative convenience and then recovered from

service receiver, even if all requirements of definition of ‘pure agent’ are not

satisfied

If value is not ascertainable, valuation can be on basis of similar service or on

basis of value which shall not be less than cost

Exemption from Service TaxSmall service providers whose total value of services provided (including

exempt and non-taxable services) is less than Rs 10 lakhs in previous year

are not required to pay service tax in current financial year till they reach

turnover of Rs 10 lakhs. Clubbing provisions can apply. Registration is

required if turnover exceeds Rs 9 lakhs per annum

The exemption is not available if service is provided under brand name of

other person

This exemption is not available when service tax is payable by service

receiver under reverse charge method

Services provided to SEZ unit or developer are exempt if wholly consumed

within SEZ. In case of services consumed by SEZ outside SEZ, refund claim

has to be filed

Classification of Services

If prima facie, a taxable service is classifiable under two or more sub-clauses

of section 65(105), classification shall be effected as per following rules –

Specific description to be preferred over a general description [section

65(2)(a)]

Classification should be as per essential character in case of composite

services [section 65(2)(b)]

Service which appears earlier in list of section 65(105), if service cannot be

classified on above basis [section 65(2)(c)]

Service should be predominantly a taxable service. A composite contract

consisting various services cannot be vivisected. An indivisible/composite

contract of goods and services can be vivisected and service part of it is

subject to service tax

CENVAT Credit

Service provider can avail CENVAT credit of service tax paid on input services

and excise duty paid on inputs and capital goods. The credit can be utilised

for payment of service tax on output services

Definition of input service is wide. Any service in relation to business is ‘input

service’

Credit can be availed on basis of proper and complete specified original duty

paying documents

If assessee is providing both taxable and exempt services and if input

services are common, CENVAT credit can either be taken on proportionate

basis or 6% ‘amount’ is required to be paid on value of exempted services

Registration

Service provider should register within 30 days from date of commencement of

providing taxable service. Application should be in form ST-1 [Rule 4(1)]. Income

Tax PAN, address proof, evidence of constitution of firm/company, list of

directors/partners are the most important document required.

Application for registration is to be filed electronically. The PAN based registration

number is generated by system immediately. However, registration certificate is

issued by Superintendent in form ST-2 after the documents are submitted.

Registration will be deemed to have been granted if not received within seven days

[Rule 4(5)]

Person providing services from more than one premises or offices can apply for

centralised registration, if he has centralised billing system or centralised

accounting system [Rule 4(2)]

Procedure to be followed

Assessee should prepare invoice in respect of his services. The Invoice should be

prepared within 14 days from date of completion of taxable service or receipt of

payment towards the value of taxable service, whichever is earlier. Invoice should

contain prescribed details [Rule 4A]

If the assessee is an individual or proprietary firm or partnership firm, the tax is

payable on quarterly basis within 5 days at the end of quarter (within 6 days in case

of e-payment) except in March. Service tax is payable by other assessee by 5th of

the month following the month in which payments are received toward value of

taxable services (by 6th in case of e-payment) except in March [rule 6(1) of Service

Tax Rules]

Service tax on value of taxable services received during month of March or quarter

of March is required to be paid by 31st March in case of all the assessee

Import of Services

In case of import of service, tax is payable by recipient of services under

method of ‘reverse charge’. Tax should be paid by cash i.e. GAR-7 Challan and

then Cenvat credit can be availed of the tax so paid, as it is his input service

Tax is payable only when service is received in India. Services provided and

used outside India cannot be taxed in India

To determine the issue whether a provision of service is ‘import of service’,

services have been classified in three categories. Criteria for each category

has been specified e.g. immovable property  India, service performed in India,

recipient is located in India

Some Illustrations of Tax computation

Case 1: Avana is Importer and Sells within State of DelhiS.

No.Particulars Amount

A. CIF 10,00,000.00

B. Landing Cost @ 1% of CIF 10,000.00

C. Assessable Value 10,10,000.00

D. Basic Custom Duty @ 10% 1,01,000.00 E. Sub Total for Calculating CVD (C+D) 11,11,000.00 F. CVD @ 10.30% on E (10% plus education Cess @3%) 1,14,433.00

G. Total of Duties (D +F) 2,15,433.00

H. Education Cess (@ 3% on G) 6,463.00 I. Special CVD @ 4% (C+D+F+H) 49,276.00 J. Total Duties Payable (D+F+H+I) 2,71,172.00

K. Transportation Cost 1,00,000.00

L. Total Cost to Avana (A+K+J) 13,71,172.00 M. Avana Margin (Say) 2,00,000.00 N. Sale Price (L+M) 15,71,172.00 O. Delhi VAT @ 12.5% 1,96,397.00 P. Invoice Amount 17,67,569.00

Note:Buyer will get the Cenvat Credit of CVD & Special CVD as well as VAT CreditNet Cost to Buyer ( P-O-I-F ) 1,407,463

Case 2: Avana is Importer and Sells to Buyer of UP

Note:Buyer will get the Cenvat Credit of CVD & Special CVD as VAT CreditNet Cost to Buyer ( P-I-F ) 14,38,886

S. No.

Particulars Amount

A. CIF 10,00,000.00 B. Landing Cost @ 1% of CIF 10,000.00 C. Assessable Value 10,10,000.00 D. Basic Custom Duty @ 10% 1,01,000.00 E. Sub Total for Calculating CVD (C+D) 11,11,000.00 F. CVD @ 10.30% on E (10% plus education Cess @3%) 1,14,433.00 G. Total of Duties (D +F) 2,15,433.00 H. Education Cess (@ 3% on G) 6,463.00 I. Special CVD @ 4% (C+D+F+H) 49,276.00 J. Total Duties Payable (D+F+H+I) 2,71,172.00 K. Transportation Cost 1,00,000.00 L. Total Cost to Avana (A+K+J) 13,71,172.00 M. Avana Margin (Say) 2,00,000.00 N. Sale Price (L+M) 15,71,172.00 O. CST Against C Form @ 2% 31,423.00 P. Invoice Amount 16,02,595.00

Case 3: Avana Maharashtra Branch (Assumed) is Importer, Buyer is located in Delhi, Avana gives the delivery to Transporter of Buyer in Mumbai Note:

Buyer will get the Cenvat Credit of CVD & Special CVD but not of Maharashtra VAT, as buyer is not registered with Maharashtra VATNet Cost to Buyer (P-I-F) 16,03,860

S. No.

Particulars Amount

A. CIF 10,00,000.00 B. Landing Cost @ 1% of CIF 10,000.00 C. Assessable Value 10,10,000.00 D. Basic Custom Duty @ 10% 1,01,000.00 E. Sub Total for Calculating CVD (C+D) 11,11,000.00 F. CVD @ 10.30% on E (10% plus education Cess @3%) 1,14,433.00 G. Total of Duties (D +F) 2,15,433.00 H. Education Cess (@ 3% on G) 6,463.00 I. Special CVD @ 4% (C+D+F+H) 49,276.00 J. Total Duties Payable (D+F+H+I) 2,71,172.00 K. Transportation Cost 1,00,000.00 L. Total Cost to Avana (A+K+J) 13,71,172.00 M. Avana Margin (Say) 2,00,000.00 N. Sale Price (L+M) 15,71,172.00 O. Maharashtra VAT @ 12.5% 1,96,397.00 P. Invoice Amount 17,67,569.00

Case 4: Avana Maharashtra Branch (Assumed)is Importer, Buyer is located in Delhi, Avana gives the delivery to Buyer in DelhiS. No.

Particulars Amount

A. CIF 10,00,000.00 B. Landing Cost @ 1% of CIF 10,000.00 C. Assessable Value 10,10,000.00 D. Basic Custom Duty @ 10% 1,01,000.00 E. Sub Total for Calculating CVD (C+D) 11,11,000.00 F. CVD @ 10.30% on E (10% plus education Cess @3%) 1,14,433.00 G. Total of Duties (D +F) 2,15,433.00 H. Education Cess (@ 3% on G) 6,463.00 I. Special CVD @ 4% (C+D+F+H) 49,276.00 J. Total Duties Payable (D+F+H+I) 2,71,172.00 K. Transportation Cost 1,00,000.00 L. Total Cost to Avana (A+K+J) 13,71,172.00 M. Avana Margin (Say) 2,00,000.00 N. Sale Price (L+M) 15,71,172.00 O. CST Against C Form @ 2% 31,423.00 P. Invoice Amount 16,02,595.00

Note:Buyer will get the Cenvat Credit of CVD & Special CVD as VAT CreditNet Cost to Buyer ( P-I-F ) 14,38,886

Thank You