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LOVELY SCHOOL OF BUSINESS (LSM)
Term PAPER
OF
Corporate and Business Law
TOPIC: - Impact of indirect taxes on an
organization/ sale
SUBMITTED TO: SUBMITTED BY:
Harendar, Sir
NAME: Sanjeev kumar
REG. NO: 10907431
ROLL NO: RS1905A34
Section: 1905
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MEANING OF TAX
Tax is the amount paid by person staying with a territorial limit of sovereign State and is
levied compulsory on individuals, goods, property, business, services etc. tax constitutes
government revenue. The purpose of taxation is to apportion the cost of Government
among those who in some measures are privileged to enjoy its benefits and hence must
bear its burden. Therefore, the ordinary notion of taxation that it is a penalty imposed on
the subject by the sovereign power is not correct. Tax is also not a liability on the subject
emanating from any contract. But it is a payment without any direct Quid Pro Quo.
CHARACTERISTICS OF TAX;
Taxation is devoid of rational approach, Rates of taxation depend entirely on the will of the
Finance bill of country or State. There is no uniformity either in coverage of items or quantum of
levy in the state as the concept of fiscal policy for levy of tax differs. Though there may not be
any uniformity in taxation, determination of the rates of taxes is a part of fiscal policy pursued
by the Central Government or State Government as the case may be for economic growth in the
country. High or Low rates of taxes, exemption full or partial, inclusions or otherwise of a
particular section or taxation, etc., are broad policy issues decided by Government, keeping in
view the socio-economic compulsions, and revenue need. The incidence may vary depending on
ones abilities to pay, though attempts are made to see that persons with equal financial status
should make equal tax payment. The great Economist and Statesman Kautilya had cautioned the
sovereign power on arbitrary taxation policy when he observed that ones own root should not
be destroyed by giving up taxes not that of others (subject) by excessive taxation. John
Marshall had a dig at taxation when he observed that The power to tax involves power to
destroy and there appears a lot of sanity in the statement. Common man is burden by taxation
directly or indirectly.
INDIRECT TAX :
Indirect Taxes accordingly to John Stewart Mill, are those which are demanded from
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one person on the expectation and intention that he shall indemnify himself at the expense
of another such are the Excise and customs. The tax is levied on goods and services
and not on income or profits. The incidence of tax is carried by the commodity to the
actual point of consumption.
TAXATION IN INDIA
Taxes in India are levied by the Central Government and the State Governments. Some
minor taxes are also levied by the local authorities such the Municipality or the Local
Council. The authority to levy a tax is derived from the Constitution of India which allocates the
power to levy various taxes between the Centre and the State. An important restriction on
this power is Article 265 of the Constitution which states that "No tax shall be levied or
collected except by the authority of law." Therefore each tax levied or collected has to be
backed by an accompanying law, passed either by the Parliament or the State Legislature.
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INDIRECT TAX
Indirect Tax or the tax that is levied on goods or services rather than on persons or
organizations are of different types in India like Excise Duty, Customs Duty, Service Tax,
and Securities Transaction Tax. In India, there are a series of Tax laws and regulations in
order to control the indirect taxation, which can be either law, made by the central
government or even can be state specific laws. As a result these taxes are an important
part of the total cost of material sold. It is thus essential to make appropriate planning for
such payments, collection and payment of taxes in input, input services & collection of
the said taxes on sale of goods and services and payment of such taxes to the credit of
Government of India.
In general, the Indirect Tax in India is a complex system of interconnecting laws and
regulations, which includes specific laws of different states. For this there are many
reliable organizations in India, which employs efficient Indirect Tax professionals to help
the industry and/or to their clients. These tax professionals with their in-depth knowledge
and wide-ranging experience offers effective planning methods to their clients in order to
help in their cost minimization. The Indirect Taxation regime encompasses various types
of taxes like Sales Tax, Service Tax, Custom and Excise Duties, VAT and Anti-Dumping
Duties, and the organizations provide services in all these related fields.
In the recent year, the Indian government has undertaken significant reform of
indirect taxation system. This includes the initiation of a region-based and state-level
VAT on goods. However, it may be noted that as taxes still forms a barrier to inter-state
trading in order to attain a secured market for the activities related to services and goods more
reform is needed. Some of the reforms that can be introduced for a better indirect
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taxation system in India are
The serialized set of Indirect Taxes so far activated at the central and state
levels should be amalgamated and treated as a single tax.
The integrated Indirect Tax should be neutral at all levels such that chances of
fraudulence would be minimized.
The Central Sales Tax, which obstructs easy trading between different states,
is being under the process of termination that would help to abolish the control
measures on the inter-state trade.
By the year 2011 the Indian government has planned to activate a goods and service
tax [GST} neutral at all levels in order to fulfill these objectives. The government can
undertake either an introduction of a national VAT or a system, which would permit both
a state VAT, or a central VAT. Along with this if the government also can incorporate a
central VAT that can be rebated, on the trade across the boundary lines, then there would
be minimum chances of fraudulence.
Now we defines different types of Indirect taxes in India.
Excise duty
Excise duty is imposed on the manufacturer of excisable products and is levied on a wide
variety of commodities manufactured in India. This duty is an important source of revenue for
the central government.
Rates vary depending on the type of commodity, and even for the same type of commodity the
rates often differ depending on circumstances such as end-use and taxability of inputs. Although
generally ad valorem, the rates may also be specific or a combination of ad valorem and specific.
They are prescribed in the Central Excise Tariff Act and are revised from time to tie by the
annual Finance Acts or through notifications. Reference to the former Act is required to
determine the applicable rate for any commodity in question.
Sales tax
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Sales tax is the most important source of revenue to the states and is imposed on virtually all
sales of goods. It is primarily the liability of the seller, who generally recovers it from the
purchaser. Each state has its own sales tax act under which tax is imposed at different rates.
Sales of imported items and sales by way of export are generally exempt from sales tax. Luxury
goods are normally taxed at a higher rate than other commodities. The sales tax acts of certain
states provide for certain additional levies, i.e., works contracts tax (imposed on a contractor for
manufacture, erection, repairs, etc.), turnover tax (imposed on the value of turnover exceeding a
certain limit) and purchaser tax (imposed on the value of goods purchased from suppliers that are
not registered under the sales tax laws).
The Central Sales Tax Act covers interstate sales. A concessional rate of sales tax is applicable if
the buyer is registered with the Sales Tax authorities.
It is advisable for an investor to be aware of sales tax liability under any proposed contract,
because its impact can be considerable.
Excise duty must be paid before the goods are cleared from the factory. Small-scale industries
enjoy exemption from excise tax up to the specified value of goods cleared. The state
governments are also empowered to levy excise duty on a few commodities, such as liquor, if
they are not taxed by the central government. Excise drawback is available if the goods
manufactured are exported.
Customs duties
Customs duties are levied on commodities imported into India. However, drawbacks may be
available if the imported items are reexported or used in manufacture for export. Customs duty is
also imposed on the value of certain exports. The rates are prescribed in the Customs Tariff Act,
1975 and are revised from time to time by the annual Finance Act or by various notifications.
Customs duties, particularly on imports, may be a significant cost factor in an Indian project due
to the generally high rates of duties, unless corresponding drawbacks are available upon export.
Stamp duty
Stamp duty is levied at various rates on documents, such as bills of exchange, promissory notes,
insurance policies, contracts effecting a transfer of shares, debentures, and conveyances for the
transfer of immovable property. Stamp duty on the transfer of shares and conveyances of
immovable property is normally payable by the purchaser. The rates are prescribed by central
government legislation, the Indian Stamp Act 1899, but rates on some documents have been
revised through state government legislation.
Expenditure tax
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Expenditure tax is levied under the Expenditure Tax Act, 1987 at the rate of 10 percent on
payments made to hotels toward room charges, food, beverages, and other services. This tax is
collected by hotels from their customers and deposited with the central government. However, it
is not applicable to hotels with room charges of less than Rs 1,200 per day pr person.
Service tax
Service tax, introduced for the first time in 1994, is imposed at 5 percent on commissions and
brokerage fees charged by stockbrokers, the gross amount of telephone bills, and premiums for
nonlife insurance.
Wealth tax
Wealth tax is essentially a direct tax and is levied on the taxable wealth of individuals and
companies.
Other taxes
Various other taxes or rates are levied by the municipal authorities (e.g., on goods entering their
jurisdiction and on the annual value of property), by state governments (e.g., on motor vehicles
and amusements) and by the central government (e.g., on foreign travel and domestic air travel).
VALUE ADDED TAX [VAT]
VAT is a multi-stage tax levied at each stage of the value addition chain, with a provision to
allow input tax credit (ITC) on tax paid at an earlier stage, which can be appropriated against the
VAT liability on subsequent sale. VAT is intended to tax every stage of sale where some value is
added to raw materials, but taxpayers will receive credit for tax already paid on procurement
stages. Thus, VAT will be without the problem of double taxation as prevalent in the present tax
laws Presently VAT is followed in over 160 countries. The proposed Indian model of VAT will
be different from VAT as it exists in most parts of the world. In India, VAT will replace the
existing state sales tax system. One of the many reasons underlying the shift to VAT is to do
away with the distortions in our existing tax structure that carve up the country into a large
number of small markets rather than one big common market. In the present sales tax structure
tax is not levied on all the stages of value addition or sales and distribution channel which meansthe margins of distributors/ dealers/ retailers et al are not subject to sales tax at present. Thus, the
present pricing structure needs to factor only the single-point levy component of sales tax and
the margins of manufacturers and dealers/ retailers etc, are worked out accordingly. Under the
VAT regime, due to multi-point levy on the price including value additions at each and every
resale, the margins of either the re-seller or the manufacturer would be reduced unless the
ultimate price is increased. The States have reiterated their commitment to introduce Value
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Added Tax (VAT) from April 1, 2003, after the Centre agreed to compensate them for any
revenue loss due to the introduction of this new taxation measure by up to 100 per cent.
The States, on their part, have decided that all their VAT legislation would have common
provisions in respect of all important matters and a simple VAT law will replace the existing
plethora of State laws such as those on sales tax, turnover tax, purchase tax, entry tax, and thelike. The VAT by the States would have two basic rates of 10 per cent and 12.5 per cent, which
would be revenue neutral rates for most items.. The two basic rates have been selected so that
States, which have lower sales tax rates, could raise it to 10 per cent while those levying higher
rates of 17-18 per cent would have to lower them to 12.5 per cent. Over time, the VAT rates
would be merged into one uniform rate. It has also been decided to phase out Central State Tax
(CST) within three years with the introduction of VAT as this causes distortions in internal trade
and impeded development of a common market
MERIT OF INDIRECT TAXES
CONVENIENCE IN ASSESSMENT & RELATIVE DIFFICULTY IN EVASION
The tax is required to be assessed by the assessee him self on appropriate forms and is submitted
to the concerned officers who checks it and if not found in order then explanation/ demands are
raised in terms of Act/Rules. The records of the assessee are periodically audited and
genuineness and truthfulness is reconfirmed. In this system it is difficult to evade the tax.
INCLUSION OF TAX IN THE PRICE
Since it is a indirect tax the assessee is entitled to increase the price of goods by adding the tax in
the value thus, the burden of tax is transferred is shouldered by the purchaser.
MAY NOT BE REGRESSIVE IF LEVIED ON AD-VALORUM BASIS
The tax is levied on ad-valorem basis on every value addition the tax is levied progressively.
DIFFICULT TO EVADE
If attempted is made to evade the tax the result is counterproductive because of ad- valorem rates
and CENVAT system.
TAXES ON DRINKS, NARCOTICS & TOBACCO, SERVE A SOCIAL PURPOSE BY
DISCOURAGING THEIR CONSUMPTION
Tax rate on such items is more in percentage thus, making the drinks, narcotics, & tobacco
dearer.
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DEMERIT OF INDIRECT TAXES
Regressive Character.
Do not create social Consciousness as payment of tax is not felt by the payer.
Government is not certain about the proceeds of these taxes.
Burden of Indirect taxes can be shifted forward or backward as such consumers have to
bear the ultimate burden of tax.
Can be evaded by methods as Smuggling, Falsification of Account etc.
MERGER OF INDIRECT TAXES I.E.
GSTBefore parting and to bring an end to this article we summarize that GST is a harmonized
consumption tax system, whose introduction will bring an end to a varied number of
Indirect taxes presently being levied by Central Government and State Government. The
proposed date of Introduction of GST has been announced by the Government to
1st April, 2011. Till now Government has not yet issued any Draft of GST model or
various provisions to be applied, all we can do is to wait for the Draft to release. Till then
we can only predict the outlook of the GST model in India and nothing can be said with
utmost certainty. However so far the proposal is to merge following taxes collected by Centre
and State Government and to announce a composite rates of tax to be collected
and one point to be called as GST.
GOODS AND SERVICE TAX
underlying principle is that the GST will have a simple structure and goods as well as
services will be taxed at a uniform rate. It is aimed to be a simple, nation-wide.
GST is a tax on goods and services with comprehensive and continuous chain of set-off
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benefits from the producers point and service providers point up to the retailers level. It
is essentially a tax only on value addition at each stage, and a supplier at each stage is
permitted to set-off, through a tax credit mechanism.
IMPACT OF GST
It is debatable whether India Inc is ready for a rollout of GST by April 1, 2011. The
implications for India Inc are enormous. Overall, GST is expected to reduce tax incidence
for several goods and services in the country. Lesser taxes and cost means higher demand
for goods and services. GST is expected to bring in uniform indirect tax system across the
country which is easy to understand and implement. Its effective implementation will
have beneficial impact on Indian companies in the form of lower working capital needs,
better supply chain management, reduction in ware house costs, and others. Reduced
working capital requirement would result in less interest costs
A company, like, Maruti Suzuki, is readying itself for GST rollout. The
company thinks with GST, the tax incidence on their cars will come down
substantially which means the car will be dearer and demand for their cars
would go up.
Tax experts are of the opinion that GST will result in reduced taxes for many
goods and services
GST is going to change the way FMCG and other manufacturing companies
do business in India. Companies have to be better prepared for its rollout and
make their processes (IT, business, etc) stronger well before GST
implementation.
Industries, like, cement, aluminium, copper, VFY, telecom, FMCG suffer
from not only heavy taxation but also, multiple taxation and various slabs.
Once GST is implemented these sectors will be relieved of the twin problems of higher and
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multiple taxation. It will have a salutary impact on the operations of these companies.
The impact on FMCG sector will be from a different perspective also. After
GST, the need for maintaining several warehouses across the states will be
removed. This is big scope for FMCG companies to restructure their
operations, logistics and ERP systems in a big way.
In the existing regime, companies set up several warehouses in many states to
avoid certain taxes. With the introduction of GST, companies need not resort
to such practice of setting up warehouses in many states.
Once GST is introduced, several bottlenecks in the supply chain can be
removed and companies will save substantial costs
A corollary of the reorganization on the part of FMCG sector will be felt on
the logistics sector. This entire supply chain will undergo a thorough overhaul
and this will create huge opportunities, for integrated logistics players in India.
The dynamics involved in this massive exercise are yet to fully appreciated or
analysed in the investor community. However, industry veterans, like, Adi
Godrej, have been expressing the readiness of their companies for the GST
rollout.
The implementation of GST across the Centre and States and UTs presupposes
the existence of a robust information technology (IT) services. This is a great
opportunity for IT and IT-related companies, especially, in the medium-sized
IT players.
The operations of NBFCs too will undergo as they too suffer from various
forms of service taxes. It is hoped that the GST rollout will create tremendous
scope for NBFCs to ease their burden of multiple taxes.
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CONCLUSION
The implementation of GST in India in the form of a comprehensive value added tax is
contingent on several key decisions. While there is clarity that the tax would be in the
form of a dual VAT, that is the only detail about the tax that is available in the public
domain. Presuming that the country is going to witness considerable tax reform, it is only
fair on the taxpayers that the details be worked out well in advance so that preparations
for a smooth transition can be made.
On the key issues that needs to be resolved is the treatment of inter-state transactions in goods
and services. The existing consensus of zero-rating by itself would not be adequate to address
the potential concerns of evasion in such transactions. Zero-rating with pre-payment
appears to be a superior alternative. The related issue concerns taxation of services which
span more than one tax jurisdiction. International experience points towards self assessment in
the case of registered taxpayers and taxation in the jurisdiction of the
supplier in other cases, with some revenue sharing among the member states. Some of the
details need to be worked out before the tax on services can be implemented at the state
level. A second concern relates to the need to integrate tax administration at the two
levels in order to maximise on the efficiency of administration. While there are options
available, a final choice needs to be made, once again
Apart from these design issues, one important concern relates to the rate of tax. It is
believed and correctly so, that if the rate of tax is too high, it induces non-compliance.
In discussions on VAT in India, a rate of 20 percent has often been proposed as a feasible
rate. Section 4 demonstrates that with the informal sector accounting for 30 percent of
economic activity in taxed transactions, a rate of 20 percent with non-rebatable excises of
10 percent on a few selected commodities would be required to generate the target
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revenue. If the non-rebatable excises are assigned to the union government, this translates
into about 14 percent rate for the states and 6 percent for the centre. It may be mentioned
that in deriving this rate, all agricultural commodities were considered to be exempt. This
should mitigate the regressivity normally associated with VAT regimes. The above is
however a conservative estimate since a number of activities currently taxed have been
assumed to be exempt for the purposes of arriving at these estimates. Any expansion in
the tax base to include some of the activities would allow for a lower rate of tax to be
implemented. Further, as observed earlier, the share of informal activities in total as
proxied by the share of unregistered manufacturing in total GDP from manufacturing is
registering some decline in recent times. If this trend persists, there is scope for
considering lower rates of tax.
Finally, the impact of the tax on different states would be different. Careful assignment of
tax powers is crucial for the new regime to be acceptable. In the absence of the same,
transition to the new regime would require some other revenue transfers. With the new
regime, instruments for the same would be limited, and can generate perverse incentives
and/or unstable finances for some of the governments involved
VAT (Indirect Tax) - What happensto market prices?
There are two main types of indirect tax - a per-unit tax and an ad-valorem tax. A per-unit tax is
one where the amount charged is always the same on each unit. Examples of these in the UK are
the duties on alcohol and cigarettes. An ad-valorem tax, by contrast is one where the tax is
charged as a percentage of the value of the good. This is where VAT comes in, as it is always
17.5% of the value of the good.
The effect on the market equilibrium will be slightly different for each of these two types of tax.
Let's look first at the per-unit tax. This sort of tax will be paid over to the government by the
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firm and will therefore shift the firm's supply curve. To be willing to supply the same quantity as
before, it will now want the price to be higher by the amount of the tax. The tax has therefore
shifted the supply curve vertically upwards by the amount of the tax. The impact of this on the
market is shown below:
As you can see from the diagram, the equilibrium price has risen and the equilibrium quantity has fallen.
The extent to which this happens depends on the elasticity of demand for the good or service
For an ad-valorem tax, the principles are the same but the effects very slightly different. The tax will still
shift the supply curve vertically upwards as the firm will want a higher price to compensate it to supply the
same quantity. However, because the tax is a percentage of the value of the good, it will shift by different
amounts according to the price of the good. For example, the VAT on a good costing 10 will be 1.75,
but for a good costing 100 it will be 17.50. The effect of this on the supply curve is shown in the
diagram below:
The impact on the equilibrium price and quantity therefore depends on the amount of the tax and
the original price level. The elasticity of demand will also be important
After analyzing the above figure we come to know that increase/ decrease in tax affects the
prices in the market. In this way sale will be affected because when price increases in the market
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then according to the rule of Demand and Supply, the demand will be less from the customer
side. So changing in the indirect taxes affects the sale of an organization.
GST Impact on Logistic Industry
The consumption tax system in India is complicated and multi-layered with levies both at the
federal and State levels. Taxes on goods are levied by the Centre at the manufacturing level
through CENVAT, on services through the Finance Act, and on sale of goods via the Central
Sales Tax Act. States levy tax on the sale of goods independently, under their own laws. Though
some degree of uniformity had been arrived at after the introduction of the Value Added Tax,
differences do persist.
Impact of GST on industry
Manufacturing sector in India is one of the highly taxed sectors in the world. A complex and
high taxation structure has the tendency to render products uncompetitive in the international
market or eats up large portions of the cost arbitrage available in manufacturing set-ups in low
cost economies such as India. For instance, the manufacturing cost of most products in India is
nearly half than in the west. But, the incidence of multistage taxation i.e. customs duty on
imports, central excise duty on manufacture, central sales tax (CST) / value added tax (VAT) on
sale of goods, service tax on provision of services and levies such as entry tax, octroi and cess by
the State or local municipal corporations and related costs such as loss of tax credit, compliance
and litigation cost chip away this advantage to the extent of almost 50 per cent.
Cascading impact of taxes on landed costs
Let us understand the cascading impact of indirect taxes through an example of a typical value
chain.
There are multiple incidences on taxes and cascading impact on the cost of finished goods.
a) Custom Duty + Counter Veiling Duty + Cess paid on imported Goods
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Sales Tax / VAT paid on domestic purchases, which include the excise duty paid by the raw
material manufacturer. Sales Tax / VAT are also charged on the excise duty element.
b) Excise duty on the cost of manufactured goods. So, this excise duty also gets levied on thesales tax element (or custom duty & cess) paid on raw materials imported as stated above.
c) Service Tax on Transportation
Sales Tax (CST or VAT) on the sales of Finished Goods cost, which also includes the excise
duty elements, sales tax paid on raw materials and service tax paid on transportation. Practically,
the sales tax at this stage gets levied on all the taxes paid in the previous steps.
Multiple warehouses, inefficient distribution
Besides these tax implications, complex state-wise tax structures have serious repercussions on
the manufacturers. Inventory and distribution decisions are based on tax avoidance rather than
operational efficiency. Accordingly, most manufacturers maintain warehouses in different states
to evidence movement of goods from one warehouse to another to save on the CST. Also, quite a
few entities set up warehouses in locations like Pondicherry or Daman, often impractical from a
distribution point of view, as the CST rate at such locations were previously lower than the rates
prevalent in other states.
Typically, most large consumer durables or FMCG companies in India operate with 25 to 50
warehouses all over India, which is a very high number compared to developed economies (less
than 5-8) or even developing countries (less than 10-15) with similar geographical expanse. This
has severe implications on cost structure and operational efficiency levels, which is ultimately
borne by the end consumer either in terms of cost-quality trade-offs.
More sum total space & inventory requirement: It is estimated that if tax avoidance is not a
factor for deciding distribution network, the total warehouse space can be reduced by 20-50 per
cent immediately.
Small & inefficient warehouses: Given the large spread of 4,000-10,000 sq ft warehouses, the
average size of a warehouse has remained small causing duplication of overheads and making it
unviable for owners and operators to introduce racking or automation. According to a broad
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estimate, scale economies start to positively affect warehouses only when they are larger than
30,000 sq ft.
Distribution cost and inefficiencies: There are significant cost and inefficiency implications of
running a distribution network over a spread of 25-50 warehouses in terms of smaller loads,
smaller trucks, state boundaries being the determinant of transportation routes.
Other Costs: High cost ERP linkages throughout the warehousing network to ensure real-time
visibility of inventory result in higher IT costs. Further, multiple handling across the various
layers of distribution and multi-layered compliance requirements result in higher material
handling and compliance costs.
INDIRECT TAXATION IN RELIANCE COMMUNICATIONS
Reliance Communications has widened itself into group of companies in order to
look into all the services properly and carry the business smoothly. Reliance
Communications Group of Companies are:-
RICL- Reliance Communications Infrastructure Ltd.
RTIL- Reliance Infratel Ltd
RCPL-Reliance Communications Ltd
MNPL-Macronet Pvt. Ltd.
RBTV-Reliance Big TV Ltd.
RWSL-Reliance Web stores Ltd.
The rules of the company are as such that no data was provided and the data that
was calculated via SAP was provided by the assigned authority. The process is
explained for each operation as under:-
VAT
Value Added Tax (VAT) is a general consumption tax assessed on the value added
to goods and services. It is the tax paid to the government on the sales. VAT is a
multi-point sales tax. It means tax paid by the dealer is deducted from the tax
payable collected at every point of sale and the tax already paid. The companies
paying VAT under the brand name Reliance Communications are RICL, MNPL, RCPL,
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RBTV and RWSL. These companies deals in sales of items like handsets, data cards,
PCO, DTH (Direct to Home) etc... Tax rates for these items are:-
Handsets and Data Cards 4%
PCO and DTH 12.5 %
Scrap (if any) 12.5%
Tax is calculated for the sale of these items. For calculating VAT following is the process
that gives sales reports of all these companies which helps in calculation of VAT on
monthly basis. The process of calculation of Sales report is:-
Log into SAP and enter the required command that is ZPPV for sales report. A
New dialog box opens in which select option Report-1 and then select option
Sales report-2 that gives another dialog box. Fill in the fields with company
name and date from which report is required. After filling the required fieldspress F8 and the process starts that give the sales report as per the
requirements. This report is saved by copying it to the local excel file on the
system. From this report the taxes are calculated for each and every group of
company under the brand name of Reliance Communications.
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Quarterly Returns
Quarterly returns are compilation of VAT that was paid on monthly basis. The
monthly VAT is compiled and returns are calculated, this way it becomes easy to
keep a check on the tax process of the company. The quarterly returns are alsoimportant from the governments point of view because quarterly returns helps the
company like Reliance Communications to reexamine the tax that was paid per
month. Quarter starts from month of April for all companies. For the preparation of
Quarterly Returns, we need to have the following data:- Sales report, Stock transfer
(both in and out of the state) , sales returns data, purchases (both within the sate
and outside the state and with and without C Forms) purchase returns data etc.
Haryana VAT format have separate forms for all the details mentioned above. This
format for preparing VAT is applicable only in Haryana as every state has differentformat. This format contains separate annexure for purchases, sales, returns etc...
The format of the quarterly returns is attached as Annexure No. 1.
C Forms
Form C is issued by the dealer for purchasing goods from the dealer out-side the
state. As per section 8(1) (b) of CST Act, sales tax on Inter State sale is 4% or sales
tax rate for sale within the State whichever is lower, if sale is to registered dealer
and the goods are covered in the registration certificate of the purchasing dealer. If
the selling dealer pays CST @ 2% or lower (if applicable), he has to produce proof to
his sales tax assessing authority that the purchasing dealer is eligible to get these
goods at concessional rate. Otherwise, the selling dealer will be asked to pay
balance tax payable plus penalty as applicable. Section 8(4) (a), therefore, provides
that concessional rate is applicable only if purchasing dealer submits a declaration
in prescribed form C. The amount on C Form is mentioned after deduction of
freight charges.
F Forms
Section 6A(1) of CST Act provides that when a dealer claims that the Inter State
movement of goods is not a sale, he has to prove the same & must produce a
declaration in F form received from Consignment Agent or Branch Office in
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another State. This means F Forms are meant for the purpose of showing that the
movement of stock from one state to another is not sales but stock transfer only.
When the goods are dispatched to another State on consignment basis or to branch
of dealer in another State, there is Inter State movement of goods but there is no
sale. This provision is often misused and goods are dispatched in the garb of
consignment or branch transfer though actually it may be a sale. Goods can be sent
to other State for further manufacture.
Replenishment of F forms: - In Case when the F forms are not adequate to be issued then a
procedure is followed for replenishing from the department. Firstly a letter, requesting for the
forms to be issued, is submitted in the department along with the annexure in which the details
of the forms to be issued to the vendors is mentioned. Then a Vakalatnama, Power of attorney
and the original register containing the details of forms issued earlier is submitted in the
department. Department go through all this and issues the required forms to the assigned
authority and this person issues the pending forms as per the details available.
VAT D-3 Forms
VAT D-3 Forms commonly known as ST -38 Forms are issued just for the transfer ofgoods from one state to another state or within state for the condition where the
value of goods is more than Rs 25,000/-. VAT D-3 is applicable in some states of
India only and Haryana is one of them. This form is of two types: - Inward and
Outward. Inward form is used by the consignee company at that point of time when
the purchases are made from outside state. Outward forms are issued by the
consignor to the consignee for sales made outside state as well and for within state.
The assigned authority for the issuance of ST-38 forms, submit the forms along with
the details to the department and the department keeps a track of all the forms andmaintains it in a passbook that looks like a bank passbook. This way the company
maintains the details of the forms issued to the consignee and issued by the
consignee in a passbook. The data for this purpose could be taken from SAP but in
most cases the data is sent by consignor to the consignee and in case of stock
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transfer from one state to another F form is issued and if it is sale C form is issued.
The format of ST- 38 is shown in Annexure No: - 4.
Replenishment of ST- 38 forms: - In Case when the ST-38 forms are
not adequate to be issued then a procedure is followed for replenishing from the
department. Firstly a letter, requesting for the forms to be issued, is submitted in
the department along with a Vakalatnama and the passbook containing the details
of forms issued earlier is submitted in the department. Department go through all
this and issues the required forms to the assigned authority and this person issues
the pending forms as per the details available.
Works and Contract Tax
Some contracts are of contracts for labor, work or service and not for sale of goods, though
goods are used in executing the contract for labor, work or service e.g. when a contractor
constructs a building, the buyer pays for cost of building which includes cost of building
material, labor and other services offered by the Contractor. WCT is paid @ 4% for civil
construction being done by the contractor.
In most of the State VAT Acts, the provisions of Tax deducted at source (TDS) are incorporated.
The logic behind the TDS (WC) provisions is that the Contractors are not organized in many
cases and they do not pay taxes on time, therefore in this provision the contractee deducts the
prescribed % of TDS from the Contract Price and pays the same before the prescribed dates,
directly, to the respective State Government through the specified challan. The TDS is to be
deducted by the specified contractees only as notified by the State Governments. It is
responsibility of the Contractee to deduct the prescribed % of TDS (As provided in the relevant
VAT Act & Rules) and pay the same to the State Government before the prescribed date,
otherwise interest / penalty is leviable on such Contractees.
However, as per the State VAT Act a provision, the Seller (Contractor) is liable to pay VAT, if
No TDS is made by the Contractee. The State Governments have prescribed different VAT
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Forms under the provision of TDS (WC). In certain States, the Contractee has to obtain TAN
(Tax deductible Account Number) and file Annual Returns of TDS under the TDS provisions.
The process of calculating WCT is as under:-
Log into SAP and enter the code YFAP. Select the required option for the WCT data.Fill in the company code with fiscal year and press F8 that gives the report of the
contracts given and work done by the vendors. The data so obtained is then
compiled and challans are made according to the amount deducted and the same
will be filed with the department along with the Demand Draft and challans. The
data is obtained from SAP and then it is compiled and challans are made according
to the amount deducted and the same will be filed with the department along with
the Demand Draft and challans. For WCT form format refer to Annexure No: - 5.
After the payment of challans, the certificate is issued that contains the details ofthe contractor on whose name it is issued along with the name of the dealing
company. A table is made showing the date of contract, bill amount, WCT amount,
date of deposit of tax and demand draft number. The certificates are issued on
quarterly basis and for the format of the certificates refer to Annexure No: - 6.
Annual Returns
Annual returns are compilation of VAT that was paid on monthly basis and then
complied in quarterly returns .The Quarterly VAT is compiled and returns are
calculated, this way it becomes easy to keep a check on the tax process of the
company. This return calculation is necessary for every company because
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Keeps the track of the work done by the company in a financial year.
It is a way to summarize the tax payments made in a year.
One of the easiest ways for self assessment for a huge company like
Reliance Communications.
If some discrepancy was made while calculation of monthly or
quarterly returns then it can be rectified in the annual returns.
So this way the annual returns are necessary for a company in the corporate world.
For the preparation of Annual Returns, we need to have the quarterly reports of the
company for the required year which must include the sales report, stock transfer
(both in and out of the state) , sales returns data, purchases (both within the sate
and outside the state and with and without C Forms) purchase returns data etc..
Haryana VAT format have separate forms for all the details mentioned above. This
format for preparing VAT is applicable only in Haryana as every state has different
format. This format contains separate annexure for purchases, sales, returns etc.
Assessment of the Company
Assessment of a company means checking /auditing or verification of the tax
activities of the previous years of a company. For the assessment process a proper
procedure is carried in which a notice is sent to the company by the Excise and
taxation Officer of that district in which the company is registered. During the
assessment the company has to provide the quarterly returns, annual reports,
yearly form details that is all the registers of the forms like C Forms, F Forms, and
ST 38 Forms etc...Must be completed and trading accounts are shown. Apart from
this the details on the SAP of the trades done and tax descriptions are cross
checked with the tax calculated by the company. If the values of the calculated tax
mismatches then the company must have appropriate answer for it otherwise the
assessment team is liable to charge the company and the company has to pay the
penalty for this.
This way the taxation work was carried forward in Reliance Communications and
taxes were paid but unfortunately no one was allowed to provide the data to
outsiders. Hence only the processes were taught.
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THE EFFECTS OF SALES TAXES ONRETAIL ACTIVITY
There are three main ways in which sales taxes affect retail sales. First, they may increase the
after-tax price of goods and thus they may have a negative wealth effect that reduces total sales.
Second, selective taxation of goods induces substitution from the taxed goods towards the non-
taxed goods. And third, if the tax rate varies across jurisdictions, it induces geographic
substitution of purchases. This paper will consider the third of these effects. sales tax does have a
significant impact on sales, establishments and employment per capita, as well as on the size of
establishments, as measured by the number of employees per establishment. Measured by sales
per establishment, the sales tax does not seem to affect the size of establishments. The estimated
coefficients suggest that, approximately, increasing the local tax rate by 0.1 decreases the
logarithm of sales per capita by .006, the log of establishments per 10,000 inhabitants by .005,
the log of employees per 10,000 inhabitants by .008 and the log of employees per establishment
by .003.
It has been confirmed that sales taxes play an influential role in the geographic distribution of
retail activity within a state. Controlling for some characteristics of the population, places with
higher tax rates are characterized by weaker retail industries in terms of sales and number of
employees. Second, it suggests that the traditional approach to the measurement of the sales tax
elasticity is biased. Using instrumental variables to correct for the endogeneity of the tax as it is
obtained negative, generally significant and always much larger coefficients for the effect of the
tax on retail activity. The sets of instruments passed the test of overidentifying restrictions for
the case of sales as dependent variable, but not for the rest.
Article Analysis
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Article 1. TAXATION: 'Taxes are the smallest factor
influencing fuel prices'
impact of the duty reductions on the retail price of petrol and diesel really bring in any change,
apart from short-term price reduction? Not much, if you ask Mr Vivek Mishra. Vivek is a tax
partner based in New Delhi and leads the indirect tax practice of Ernst & Young in India. "In our
view, these types of questions are slightly misplaced for one key reason. In a scenario of rising
crude oil prices, the taxes on pe trol and diesel are a small component of a much bigger
phenomenon," says the expert, who has worked with several leading companies assisting them
make the transition into the VAT regime. Business Line caught up with him over the email to
quiz on the tax angle affecting fuel prices. Here's what he had to say...
What role do you see State governments playing with the excise duty and VAT rate cuts?
Customs duty has been reduced from 5 per cent to nil on import of crude oil, 7.5 per cent to 2.5
per cent on petrol and diesel and 10 per cent to 5 per cent on naphtha and aviation turbine fuel.
There has also been a reduction of Re 1 in the excise duty on unbranded petrol and diesel.
Simultaneously, various State governments have reduced the VAT rates applicable on petroleum
products. For example, the VAT rate on sale of petrol and diesel has been reduced from 28 per
cent to 26 per cent in Maharashtra and from 25 per cent to 20 per cent in West Bengal.
Cumulatively, these measures would result in an across-the- board reduction of approximately
15 per cent in the retail price of petroleum products. The government has increased the prices of
petrol by Rs 5 per litre, diesel by Rs 3 per litre and LPG by Rs 50 per cylinder.
Article 2. India tax changes and challenges
Three changes that are likely to have the most impact on US multinationals doing business in
India are examined. Two issues come under the umbrella of indirect tax - the structural change
that accompanies broad implementation of VAT, and the expanding net of the service tax. The
transition from sales tax laws to the VAT regime entails a significant impact on companies
across the board, as it touches virtually all industries and aspects of doing business. The
expansion of the service tax net and the year-by-year rate creep both indicate that India is
moving toward a goods and services tax. Another change is the introduction of transfer pricingregulations. Transfer pricing law is still evolving in India and there is a learning curve for the
authorities and taxpayers. It is the creation of SEZs that represents the most significant change in
India's tax landscape. SEZs are geographically demarcated areas for setting up businesses.
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Article 3. What's likely on the indirect tax front
Additional duty of customs in lieu of VAT / sales tax is to be synchronised with the CST
structure. A reduction in the peak rate of customs duty especially in the case of FMCG would
adversely impact the domestic manufacturers of those goods as the Indirect tax costs in India areon the rise.
On the taxation of services-
A much-awaited clarification is in respect of the export of services as contemplated in Rule 3 (c)
of the Export of Service Rules, 2005. The Government should frame definitive guidelines in
respect of the interpretation of the words 'used' and 'delivered'
In terms of Section 66A and the Import of Rules, it is understood that the taxable service
provided from out a country other than India and received by a person in India is to be taxed in
the hands of the service recipient
However, notification No 22/2005 dated June 7, 2005 exempts the taxable service provided
outside India and consumed outside India in the course of sailing a ship. By virtue of the
exemption notification confusion is caused as to whether the services that are not specifically
exempted but consumed outside of India would be taxable. Clarification is due in respect of the
import of services
Article 4. India: Plea for a better deal
In most cases, these are not given credit by the State governments. Of the 25 States, only a few
neutralise sales tax on raw materials used for export production. Even in such cases, Central
Sales Tax (CST) and octroi are not neutralised. If the inputs used for export production pass
through more than one stage of processing/manufacture in different factories, the impact of taxes
will be at multiple stages. Therefore, if the Government proposes to neutralise only CST and
octroi at 4 per cent and 1 per cent respectively, it would only amount to partial neutralisation of
the indirect-tax cost suffered by the exporters. Moreover, the sales-tax rates applied by the
southern and western Sates is much higher than the 4 per cent taken for the purpose of the
proposed scheme. Thus, there is no rationale in restricting sales tax to 4 per cent and octroi to 1
per cent. The refund of sales tax and octroi should, like other levies, be on actual-payment basis
and not restricted to these levels. The countries which have a VAT system of indirect taxation or
a one- point tax, can identify the total impact of indirect taxes on export production.
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Conclusion
After analyzing the impact of indirect tax we come to know that an organization and its sale is
affected by the indirect taxes. An organization has to make its strategies according to the implied
indirect taxes in the particular region/ country. If imposed indirect tax will be more the price of
product or service will be more that will affect the strategies and sale of the organization,
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