Indirect Tax

1. INTRODUCTION OF TAXES

Constitution of India has the right to collect and levy taxes. In Article 245 of the Constitution, it
is stated that only two bodies uphold the power for enacting laws i.e. the Parliament and the
Legislature. Article 245 states that:
i. Subject to the provisions of this Constitution, Parliament may make laws for the
whole or any part of the territory of India, and the legislature of a State may make
laws for the whole or any part of the state.
ii. No law made by the Parliament shall be deemed to be invalid on the ground that it
would have extra territorial operation.
Article 246 gives Union and State Government rights for levying tax Seventh Schedule to Article
246 states three lists which enumerate the matters under which the Union and the State
Governments have the authority to make laws.

ListI Union List

List II State List

List III Concurrent List

List Union List: It contains the matters in respect of which the Parliament (Central Government)
has the exclusive right to make laws.
List II: State List: It contains the matters in respect of which the State Government has the
exclusive right to make laws.
List III: Concurrent List: It contains the matters in respect of which both the Central and State
Government have the exclusive right to make laws.

WHAT ARE TAXES ?

A charge which is mandatory imposed by the Government on income earned by individual or

corporate, goods, services or any activity in order to raise revenue. It is considered as the penalty
to live in this world. Taxes are charged to raise funds for various public expenditure. In terms of
law failure to pay tax is a punishable act. There are various types of taxes, such as income tax,
property tax, capital gain tax, service tax, value added tax, excise duty tax, GST etc.

Taxes are divided into two parts:

a. Direct Tax
Income Tax
Capital Gain Tax
Professional Tax
Taxes which are paid directly to the government are known as direct tax. It cannot be
transferred to another person. Income tax, Corporate Tax. Capital Gain tax, Property tax
 etc. are considered as direct tax. Direct taxes may be adjusted to the individual
characteristics of the taxpayer. Under this system government collects the tax from the
person on whom tax it is imposed. Under direct tax system, the taxpayer and tax bearer
are the same person. Direct tax is progressive in nature which means that if the income
increases, percentage of tax charged will also increase. i.e. tax payers in the higher tax
bracket have to pay higher rate of tax.
The incidence of tax is borne by the person who pays tax to the Government. It is
progressive in nature.
Burden of tax is borne by person himself.

b. Indirect Tax
VAT
CST
Excise Duty
Import Duty
GST
A tax which is collected by the intermediary from the person who bears the burden of tax
and then pays the taxes to the government is known is indirect tax. It can be transferred to
another person. Sales tax, value added tax excise tax, GST are the few types of indirect
taxes. Indirect taxes are collected by supplier of goods and services and are paid by the
consumer of goods and services. Thus, the burden of tax is shifted to the final consumer.
Hence, indirect tax is regressive in nature i.e. all the consumers have to bear the burden
of tax irrespective of their capacity to bear tax. Under indirect tax system, tax payer and
tax bearer are two different persons.
The incidence of tax is borne by the end consumer. It means that the person who pays tax
to the government collects it from his customer. It is regressive in nature) Burden of tax
is shifted to other person.

FEATURES OF INDIRECT TAXES

1. Charged from the final consumer of goods and services.
2. Collected by intermediary and deposited to government
3. It falls both under central and state government depending upon the specific type of tax.
For example, VAT is levied by state government where as CST by central government.
Now, GST by both State and Central Government.
4. Applied on all the sections of society whether rich or poor.
5. The price of the product on which indirect taxes are imposed increases.
6. Incidence and impact of tax does not fall on same entity.
7. It includes Ad Valorem tax and Specific tax, of which Ad Valorem (VAT, GST) is
proportional and Specific tax is fixed.
Excise Duty

An excise or excise tax (sometimes called an excise duty) is a type of tax charged on goods
produced within the country (as opposed to customs duties, charged on goods from outside the
country). It is a tax on the production or sale of a good. This tax is now known as the Central
Value Added Tax (CENVAT). It is mandatory to pay duty on all goods manufactured, unless
exempted.

The Excise Duty Act, 1944 governs the regulations related to excise duty in India and the tax is
administered by the Central Board of Excise and Customs.

Acts governing the Central Excise

Central Excise Act, 1944

Central Excise Tariff Act, 1985

The Act may be called the Central Excise Act, 1944, and

a. It extends to the whole of India

b. Further extended to designated area and continental shelf & Ex Economic Zone (upto 200
NM)

c. No excise duty on area beyond 200 Nm and SEZ (in India)

d. It shall come into force on such date as the Central Government may, by notification in
the Official Gazette, appoint in this behalf. The rates at which duties of excise shall be
levied under the [Central Excise and Salt Act, 1944] (1 of 1944) are specified in3 [the
first Schedule and the Second Schedule].

Liability to pay excise duty

The liability to pay tax excise duty is always on the manufacturer or producer of goods. There
are 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 parties

Excise duty must be paid at the time of removal of goods. Assessees must pay the excise duty on
the manufacture or production of goods. Under Rule no. 8 of the Central Excise (Amendment)
Rules, 2002, excise duty should be paid on the fifth day of the following month from the date on
which the goods were removed from the warehouse or factory for the purpose of sale.
Excisable Goods: Excisable good are those goods which are included in the Schedule I (Basic
excise duty & Additional duty on goods of special importance)and Schedule II (special excise
duty and textile& Textile articles) of the CETA 1985 including salt

All the goods which are covered in the Schedule 1 of the central Excise Act 1944, Salt is covered
Ladoo / Samosa / Kachori is not covered

Goods (though not defined in the Act) Movable & Marketable, actual sale may or may not be
there and mere saleability is not enough, it must have whole sale market, commercially saleable
The term Goods include the goods which are being manufactured / Produced.
The term manufacturing indicates the those products where
a. A new product emerges i.e. where the raw material changes its form and takes a new
design or shape
b. The new product must be known by a distinct name different from its raw material
c. The products manufactured must be usable in some different use
d. The product must bear a different character
e. The products where along with the Main Product some By Product (whether intentional
or unintentional) is also obtained must be reviewed for the applicability of excise.
According to the Central Excise Act the waste which is arising during the manufacturing
process is excisable. The conditions which need to be fulfilled for waste to be excised is
that waste must be of saleable nature and must possess some usability.
f. Manufacturing includes all the types of process. Process which is incidental or ancillary
to the completion of the manufactured product is also included in the manufacturing
process
g. Deemed Manufacturing is also included under excise (in the absence of Service Tax)

Treatment of By product, Scrap, Waste and Residue

• BY Product: excise duty need to be paid when the by product are removed from the
factory
• Scrap: For scrap to be dutiable it has to arise continuously and regularly in the course of
manufacture. If the scarp is generated once or by exception in the manufacturing process,
such scarp is not excisable. Scrap if obtained every time the product is processed and thus
becomes a substantial part of the manufacturing process and cannot be avoided this is
excisable
• Waste / Residue: Waste products are rubbish and not useful, if sold in the same form, it is
not dutiable unless they can be re processed to make a product eg:
• Kumbhikasari SSK ltd Vs CCE Pune II (Sugar & Brown Sugar)
• CCE Kanpur Vs Gayathri Glass Works (Broken or molten glass)
• Central excise is collected on the goods manufactured except
• Liquor for Human consumption
• Narcotic Drugs
 • Indian Hemp

Central Excise tariff Act 1985

Section 3:Duties specified in First Schedule and the Second Schedule to the Central Excise Tariff
Act, 1985 to be levied. -
(1) There shall be levied and collected in such manner as may be prescribed, -
    (a)a duty of excise to be called the Central Value Added Tax (CENVAT)] on all excisable
goods (excluding goods produced or manufactured in special economic zones) which are
produced or  manufactured in India as, and at the rates, set forth in the First Schedule to the
Central Excise Tariff Act, 1985 (5 of 1986);
    (b) a special duty of excise, in addition to the duty of excise specified in clause (a) above, on
excisable goods excluding goods produced or manufactured in special economic zones specified
in the Second Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) which are produced or
manufactured in India, as, and at the rates, set forth in the said Second Schedule.     

CETA 1985 tells us about the Tax rates, Nil rate of duty is a also identified as a rate of Duty

Registration For Excise.—

Any prescribed person who is engaged in—
(a) the production or manufacture or any process of production or manufacture of any specified
goods included in 2[the First Schedule and the Second Schedule] to the Central Excise Tariff
Act, 1985 (5 of 1986), or
(b) the wholesale purchase or sale (whether on his own account or as a broker or commission
agent) or the storage of any specified goods included in 2[the First Schedule and the Second
Schedule] to the Central Excise Tariff Act, 1985 (5 of 1986), shall get himself registered with the
proper officer in such manner as may be prescribed.]

Registration process is mentioned in the ppt along with documents required for registration

MODVAT & CENVAT

Excise duty was renamed as MODVAT, when the government decided to introduce the system
of VAT in the computation of Excise duty. The manufacturers were facing the limitation of
cascading effect of tax and double taxation. Under the system of MODVAT manufacturers of the
goods who were dependent on the raw materials from the other manufacturers are given excise
credit on all the raw materials to avoid double taxation.

MODVAT (modified value added tax) was introduced in India in 1986 (MODVAT was re-
named as CENVAT w.e.f. 1-4-2000). The system was termed as MODVAT, as it was restricted
upto manufacturing stage and credit of only excise duty paid on manufacturing products (and
corresponding CVD paid on imported goods) was available.
The key objective of MODVAT was to avoid repetitive payment of duties from raw material to
the final product stage. The idea was that it would reduce the cost of the final product.

Later on some discrepancies were found as because of MODVAT price of few commodities got
increased. The system of MODVAT could not remove all the shortcomings of the excise duty.
The introduction of the Vat system in excise forced the manufacturers to register themselves with
the excise authorities.

Eg:

The process of manufacturing requires dealing between 2 manufacturers, where the first
manufacturer submits excise duty on the product manufactured. In case the second manufacturer
purchases processed material from manufacturer 1 (who already paid the excise duty) need to
pay excise duty to the extent of which done by him only when the 1st manufacturer certifies that
on the amount of product processed by him, excise is paid.

Such benefit of Input Tax credit can only be taken by the registered manufacturers, thus making
registration important and unavoidable by the manufacturers.

MODVAT was not able to save the tax evasion which was possible by creation of false invoices.