INDIRECT TAXATION - ICSI

READING MATERIALINDIRECT TAXATIONi

INTRODUCTIONIndirect taxes are the taxes levied on goods and services on the basis of production, sale or purchaseof goods or provision of services, in the form of import and export duty, excise, sales tax, Value AddedTax (VAT), service tax, entertainment tax, electricity duty, tax on passenger fares and freights etc. Theyare called indirect taxes as the burden on tax is passed on to the consumer unlike direct taxes which aresupposed to be borne by the persons on whom these taxes are levied.Broadly, the existing indirect tax regime can be looked at from the point of view of Central and State laws.For the Central Government, Central Excise, Customs and Service tax were the three main componentsof indirect taxes. Similarly, for the State Governments, Value Added Tax and Central Sales Tax were majortaxes along with Octroi , Entertainment Tax etc.The taxation reforms in India go back right from liberalization and globalization in the early 1990s to therecent Goods and Services Tax (GST). Goods and Services Tax is one of the most comprehensive singletax reforms of independent India. GST is a comprehensive indirect tax levied on goods as well as servicesat the national level. It consolidated multiple indirect tax levies into a single tax thus subsuming an arrayof tax levies. However, Basic Customs Duty continues to be levied on imports.GST consists of the following four Acts :Central Goods& Services TaxAct, 2017State Goods &Services TaxAct, 2017Union TerritoryGoods &Services TaxAct, 2017Goods &Services(Compensationto States) Act,2017This is a comprehensive study material updated till December, 2017. The material contains the indirecttax portion with the purpose of guiding the students appearing in June, 2018 examination.ii

CONTENTSINDIRECT TAXATIONLESSON 1CONCEPT OF INDIRECT TAXES AT A GLANCELESSON 2BASICS OF GOODS AND SERVICES TAX22LESSON 3CONCEPT OF TIME, VALUE AND PLACE OF TAXABLE SUPPLY38LESSON 4INPUT TAX CREDIT AND COMPUTATION OF GST LIABILITY59LESSON 5PROCEDURAL COMPLIANCE UNDER GST75LESSON 6LESSON 71BASIC OVERVIEW ON IGST, UTGST AND GST(COMPENSATION TO STATES) ACT114OVERVIEW OF CUSTOMS LAW137iii

Lesson 1Concept of Indirect Taxes at a GlanceLESSON OUTLINE–Background–Constitutional Powers of Taxation–Indirect Taxes in India – An Overview–Pre GST Tax Structure and Deficiencies–Administration of Indirect Taxation in India–Existing Tax Structure1

2BACKGROUNDTaxation is one of the essential and decisive elements in the working of machinery of a Nation. It forms aquintessential part of development of any country. The revenue that is collected in the form of taxes is used forproviding goods and services for public utility such as infrastructure, transportation, facilities like rain shelters andcommon areas, sanitation and all other such amenities which are provided by the government of the country.A tax can be said to be a non-penal, yet compulsory transfer of resources from the private to the public sectorlevied on the basis of a predetermined criteria. Taxes are collected for serving the primary purpose of providingsufficient revenues to the State and have become a mechanism through which the social and economicobjectives of a welfare state could be achieved. Every amount that is collected is contributed towards providingbetter infrastructure facilities for public at large. The same is also utilized towards rural revival and social wellbeing of general public. Taxation system is instrumental in removing poverty and inequality from the society.On the other hand, tax reform is fundamental equipment in strategy development aiming at holistic growth ofthe society. Thus, the importance of an efficient tax system and reforms in tax system cannot be undermined.There are two types of taxes levied in India, i.e., Direct tax, which is levied directly on income, profession, etc,of an individual and where the tax burden cannot be passed on to any other person. Indirect tax, on the otherhand, is not paid on the direct income of an individual person but is levied indirectly on the ultimate consumerof goods and services for consumption of goods and services. Hence, the former is levied on the income whilelatter is levied on the goods and services. In indirect taxes, immediate burden is on one person and ultimateburden is on some other person i.e., the person who ultimately consumes.Goods and Services Tax (GST) was rolled out in India with effect from 1st July, 2017. GST is one of the greatesttax reforms in India. It transforms the system of taxation and tax administration into a digital world by adoptingthe latest information technology. With the introduction of GST, India has joined the club of developed andprogressing Nations which are already having a common tax on goods and services.Following are some of the distinctions between direct and indirect taxes :DIRECT TAXESINDIRECT TAXESThese are mainly on income, wealth, profession etc. These are consumption based taxes on goods andof personsservicesTax payer pays taxes directly to governmentTax payer pays taxes indirectly through intermediarieslike importers , suppliers etc.Direct taxes become payable after the benefit/ income Indirect taxes are payable even before the goods/reaches the tax payerservices reach the tax payer.Income tax, corporation tax are main sources of direct Customs and GST are major indirect taxes in India.taxCONSTITUTIONAL POWERS OF TAXATIONConstitution of India is the supreme law of India. It lays down the framework defining fundamental politicalprinciples, establishes the structure, procedures, powers and duties of government institutions and sets outfundamental rights, directive principles and the duties of citizens. Constitution of India thus lays down thefoundation brick for arranging the powers, duties and the supremacy to legislate all laws of India. The authorityto levy a tax is hence derived from the Constitution of India.Article 246 of the Indian Constitution, lays down three types of lists and distributes legislative powers includingtaxation, between the Parliament of India and the State Legislatures. It lays down the subject matters withrespect to which only the Parliament can make rules, where the State Legislatures can exclusively lay down therules and a Concurrent List whereby both the Parliament as well as State Legislatures can legislate. Thus theConstitution of India allocates the power to levy various taxes between the Centre and the states.

3Broadly, the previous indirect tax regime consisted of Central and State laws. For the Central Government,Central Excise, Customs and Service tax were the three main components of indirect taxes. While for StateGovernment, Value Added Tax (VAT) and CST were the major taxes along with Octroi, Entertainment Tax etc.Taxation of goods and services was governed under separate legislatures. In respect of goods, the Centre hadthe powers to levy tax on the manufacture of goods (except alcoholic liquor for human consumption, opium,narcotics etc.) while the states had the powers to levy tax on the sale of goods. In the case of inter-state sales,the Centre had the power to levy a tax (the Central Sales Tax) but, the tax was collected and retained entirelyby the states. As far as services were concerned, it was the Centre alone that was empowered to levy servicetax governed by the Finance Act.Introduction of the Value Added Tax (VAT) was considered to be a major step and an essential breakthroughin the field of indirect taxes. Although primarily VAT was successful, there were certain shortcomings in thestructure of VAT. The reasons for such shortcomings was that there was a mosaic of taxes being levied ongoods and services, such as luxury tax, entertainment tax, etc., which were not subsumed in the VAT therebymarginalizing the benefits of comprehensive tax credit mechanism. Further to this, many other taxes werelevied by both the Central Government and the State Government on production, manufacture and distributivetrade, where no set-off was available in the form of input tax credit. These taxes added to the cost of goods andservices and led to tax on tax i.e., cascading of taxes and the erstwhile indirect tax regime was ineffective toremove this cascading effect of taxes.These taxes were being levied and collected exclusively under their respective entries in Union and State listsas demarcated by Article 246.Goods & Services Tax regime of indirect taxes brought a single tax which was levied on supply of goods orservices or both with concurrent jurisdiction of Centre and states. This led to bringing about amendments in theConstitution so that they may simultaneously levy and collect Goods & Services Tax.The Constitution of India has been amended by the Constitution (One Hundred and First Amendment) Act, 2016for this purpose.To bring out GST laws governing goods and services, Article 246A has been inserted to enable levy of tax ongoods and services simultaneously both by Centre and states/ union territories.CONSTITUTION AMENDMENT ACT, 2016Article 246AArticle 246A was inserted by Constitution (101st) Amendment Act, 2016, especially for the Goods & ServicesTax. Article 246A provides that:(1)Notwithstanding anything contained in Article 246 and Article 254, Parliament, and subject to clause(2), the Legislature of every State, has the power to make laws with respect to goods and services taximposed by the Union or by such State.(2)Parliament has exclusive power to make laws with respect to goods and services tax where the supplyof goods, or of services, or both takes place in the course of inter-State trade or commerce.Explanation : Provisions of Article 246A, shall, in respect of goods and service tax referred to Article 279A (5),will be effective from the date recommended by the Goods and Services Tax Council.Article 246 deals with subject matter of laws made by Parliament and by the legislatures of the States andArticle 254 with Inconsistency between laws made by the Legislatures of State.Amendment to Article 248Article 248 contains the Residuary Powers of legislation. Article 248(1) reads as follows –