Indirect Taxes in India and their basic definitions and their point of Incidence and Impact

What are the various kinds of taxes levied in the Union Budget? Explain them.

There are two main types of taxes levied - direct and indirect taxes. Direct taxes are collected by the government directly from the tax-payer through levies such as income tax, wealth tax and interest tax. Indirect taxes are the taxes paid while purchasing goods and services. These include excise, customs, sales tax and value-added tax.

What are the different kinds of indirect taxes?

Customs duty, central excise duty, service tax, sale tax, octroi, wealth tax and entertainment tax are a few types of indirect taxes.

Read about Direct Taxes and Types & Various Committees on Tax Reforms

1.Customs duty: What is customs duty?

Customs duty is a tax collected on goods imported into or exported out of the boundaries of a country. Customs duty now forms a significant source of revenue for all countries, more so in the case of developing countries like India.

On what is customs duty levied?

In India, customs duty is levied on goods imported and at the rates specified in the Schedules to the Customs Tariff Act, 1975.

Why is customs duty imposed?

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subjected to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency.

Is export duty also levied in India?

Export duties are practically non-existent at present. They are levied occasionally to mop up excess profitability in international prices of goods in respect of which domestic prices may be low at a given time.  

Is import duty levied on all goods?

Import duty is widely levied, barring a few goods like food grains, fertilizer, life-saving drugs and equipments.  What does import duty consist of?

Import duty consists mainly of a basic duty, additional customs duty and special additional duty. Basic duty may be at the standard rate or, in the case of import from some countries, at the preferential rate. Additional customs duty is equal to central excise duty leviable on like goods produced or manufactured in India. It is commonly referred to as countervailing duty (CVD).

Special additional duty is levied at the rate of 4% to provide a level-playing field to indigenous goods which have to bear sales tax. And it is computed on the aggregate of assessable value, basic customs duty, surcharge and additional customs duty leviable under Section 3 of Customs Tariff Act, 1975. Plus, there is also an anti-dumping duty for imports to specified goods with a view to protecting domestic industry from unfair injury.

2.Excise duty: What is excise duty?

The primary meaning of excise duty is tax on articles produced or manufactured in the taxing country and intended for home consumption.  

On whom is excise duty levied?

Excise duty is an indirect duty which the manufacture or producer passes on the ultimate consumer. What basically attracts this duty is the activity of production or manufacture of goods. 

When is excise duty levied?

Excise duty, though it becomes payable on the manufacture of goods, is collected at the time of removal of goods from the factory.  

Under whose authority is the duty collected?

The Central Excise duty is collected under the authority of the Central Excise Act, 1944, at the rates specified under Central Excise Tariff Act, 1985. This duty is commonly referred as the Basic Excise Duty.  

What is Additional excise duty?

In addition to basic excise duty, a few textile items like fiber and yarn also attract Additional Excise Duty under Additional Duties of Excise (Textiles and Textile Articles) Act, 1975. The Additional Duties of Excise (Goods of Special Importance) Act, 1957 and Miscellaneous Cess Acts provide authority for collection of Additional Excise Duty and Cess respectively on several manufactured items over and above the basic excise duty. 

What are the types of excise duties?

Excise duty is either ad valorem (a fixed percentage) or a specific duty (a fixed amount). Excise duty is levied on the sale price of goods at the place of clearance. If the sale is made from the manufacturer's depot or warehouse, then excise duty is calculated on the sale price of goods at the depot. 

What is Modvat?

The excise law provides for a scheme known as Modified Value Added Tax (Modvat). Modvat seeks to limit the cascading effect of the incidence of duty on exciseable goods used as inputs for the manufacture of other exciseable goods.  

On what does Modvat apply?

Modvat applies to all exciseable goods except for those specifically excluded.

3.Service Tax: What is service tax?

Service Tax is a central tax imposed on consumers of selective services and is the latest addition to the genus of indirect taxes like customs and central excise duty.  

On what is service tax levied?

Service tax is a tax levied by the Central Government on the following services: 

• Stock broking services
• Telephone services
• Insurance
• Insurer services
• Advertising services
• Radio paging services
• Courier services.

At what rate is service tax levied?

Service tax is levied at the rate of 5% of the value of the taxable service provided. Service tax is recoverable from the customer as a part of the consideration received towards rendering the service.

Who collects the service tax?

According to the mechanism adopted for collection, service tax is collected by the central excise department.

Sales Tax

What is sales tax?

Sales tax is levied on the sale of moveable goods in India at rates which vary depending upon the type and nature of goods and the state in which the sale has taken place.

On what is sale tax levied?

Sales tax is levied on the value of goods including excise duty paid on the manufacture of the same.

Who imposes sale tax?

The Central and State Government are both empowered to impose sales tax on transactions involving sale of moveable goods.

What are the types of sale taxes?

The Central Sale Tax, 1956 (CST Act) and the State Sale Tax (SST Act) are the two types of sale tax. The CST Act deals with transactions in the nature of inter-state sales, ie sales which occasion the movement of goods from one state to another. The SST Act deals exclusively with intra-state sales, ie sales within the respective states.

At what rate is sale tax levied?

Sales tax under the CST Act is levied at 10% or at the rate specified by the SST Act of the seller's state, whichever is higher. However, this rate may be reduced to 4% upon the purchaser furnishing a prescribed declaration. The declaration may be issued where the buyer purchases the goods for the purpose of use in manufacture, resale or use in mining or power generation. If goods under the SST Act of the seller's state are subject to tax lower than 4%, then rate of tax will be set at lower rate.

4.Sales Tax: Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales Tax) Legislation. Generally, each State follows its own Sales Tax Act and levies tax at various rates. Apart from sales tax, certain States also imposes additional charges like works contracts tax, turnover tax and purchaser tax. Thus, Sales Tax Acts as a major revenue-generator for the various State Governments. From 10th April, 2005, most of the States in India have supplemented sales tax with a new Value Added Tax (VAT).

5. Value Added Tax (VAT): The practice of VAT executed by State Governments is applied on each stage of sale, with a particular apparatus of credit for the input VAT paid. VAT in India classified under the tax slabs are 0% for essential commodities, 1% on gold ingots and expensive stones, 4% on industrial inputs, capital merchandise and commodities of mass consumption, and 12.5% on other items. Variable rates (State-dependent) are applicable for petroleum products, tobacco, liquor, etc. VAT levy will be administered by the Value Added Tax Act and the rules made there-under and similar to a sales tax. It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain. The value addition in the hands of each of the entities is subject to tax. VAT can be computed by using any of the three methods: (a) Subtraction method: The tax rate is applied to the difference between the value of output and the cost of input. (b) The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). (c) Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales.

6. Securities Transaction Tax (STT): STT is a tax being levied on all transactions done on the stock exchanges. STT is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity oriented Mutual Funds. Current STT on purchase or sell of an equity share is 0.075%. A person becomes investor after payment of STT at the time of selling securities (shares). Selling the shares after 12 months comes under long term capital gains and one need not have to pay any tax on that gain. In the case of selling the shares before 12 months, one has to pay short term capital gains @10% flat on the gain. However, for a trader, all his gains will be treated as trading (Business) and he has to pay tax as per tax sables. In this case the transaction tax paid by him can be claimed back/adjusted in tax to be paid.

7.Octroi: What is octroi?

Octroi is a tax levied on the entry of goods into a municipality or any other specified jurisdiction for use, consumption or sale. Octroi is levied at the time when the goods enter the municipal limits where the goods are to be ultimately sold, used or consumed.

Who bears the octroi?

Generally, octroi is borne by the purchaser. Goods in transit are exempted from octroi.

Is octroi levied on all items?

Certain items have been exempted from the payment of octroi. Further, special concessions, such as refund of octroi, are available under a special package scheme of incentives made available by the government of Maharashtra to new industrial investment.

8. Entertainment tax: What is entertainment tax?

Entertainment tax is levied on entertainment to which persons are admitted on payment.

On what is entertainment tax levied?

Entertainment tax is levied on different kinds of entertainment under the applicable state legislations. Under the Bombay Entertainments Duty Act, 1923, entertainment tax is levied in Maharashtra on any exhibition, performance or amusement, to which persons are admitted for payment. This tax is also applicable to cable operators.

At what rate is entertainment tax levied?

Entertainment tax is levied between 20-35% of charges collected by way of subscription or installation or any other charge for entertainment. An additional surcharge of 10% is also levied.