Document Sample
                                  NOTE ON INDIRECT TAXES:

   Introduction to Indirect taxes: Customs, Excise, Sales tax and Service Tax: Authority
to levy; Concept of 'Goods', 'Manufacture', 'Sale', 'Import', 'Export', 'Service'; Taxable

   Concept of Indirect taxes - overview - Authority to levy taxes - Article 265 of the
Constitution of India - Power to levy - 7th Schedule List, I, II & III of the Constitution -
Entries 83, 84, 92A & B and 92C of List I (Union List) - Entry 54 of List II (State List) -
Concept of Goods - Sale of Goods Act & General Clauses Act - Movables -
Immovables - Concept of Excisable Goods - Marketability an essential condition -
Concept of Manufacture - Emergence of goods with distinct name, character and use -
Concept of Import - Entry into the territory of India - Concept of goods and imported
goods under Customs Law - Home Consumption - Concept of Sale - Inter-State Sale -
Inter State trade and Commerce, Concept of Service - Service provider; - Taxable
event in each type of indirect tax - What is "in India" - Concept of relevant date -
Distinction between taxable event, time to pay and relevant date.

SOURCE REFERENCE / CITATIONS                                         NOTES/REMARKS
*Constitution of India *Sale of Goods Act *General Clauses Act
*Territorial Waters, Continental Shelf, Exclusive Economic Zones &
Other Maritime Zones Act *Central Sales Tax Act *Customs Act
*Central Excises Act *Finance Act 1994 & subsequent Finance

ECR C.640(SC)             : re. Manufacture

1986 (25)ELT 580 (TR)     : re. Excisable goods

1987 (32)ELT 343 (AP)     : re. Taxable event - Excise

1989 (40)ELT 280 (SC)     : re. Marketability - Excise

1989 (42)ELT 513 (SC)     : re. Taxable event - Sales Tax

1999(112)ELT    3 (SC)    : re. Taxable event - Imports

1998 (97)ELT    3 (SC)         : re. Dutiability of manufacture at site

1998 (98)ELT 14 (GUJ)          : re. Service tax validity

2000(116)ELT 401 (SC)          : Unjust enrichment - Refunds

1998 (98)ELT 199 (SC)          :Ministers Speech is not a promise & is not

2000(120)ELT 273 (SC)          :Dutiability of manufacture at site

                        NARRATIVE                                              TIT BITS                        0806
1.CONCEPT                                                            The Arthasastra of Kautilya contains detailed and elaborate
In India major indirect taxes are - Customs, Excise, Sales provisions of various direct & indirect taxes. In the Chapter
tax(VAT)and Service Tax.                                             "TREASURY,         SOURCES     OF    REVENUE,     BUDGET,
(i)Customs is on goods imported or exported into or out of ACCOUNTS AND AUDIT" the Sources of revenue are
India.                                                               listed.
(ii)Excise is on goods manufactured in India.                        They are from:
(iii)Sales tax (VAT) is on goods bought/sold in India.               Crown agricultural lands
(iv)Service Tax is on value of specified services provided Mining & Metallurgy
EXPENSE IN INDIA                                                     Irrigation Works
2. AUTHORITY TO LEVY TAX                                             Manufacture of textiles; Salt, Alcoholic liquor
a.   Article 265 of the Constitution of India states "NO TAX Leisure activities - Courtesans, Prostitutes & entertainers
AUTHORITY OF LAW"                                                    Customs duties
b.   The Seventh Schedule to the Constitution, contains 3 Octroi & gate tolls
"LISTS" known as:                                                    Transaction tax
UNION LIST (LIST I)              (97 subjects)                       Tax on butchers
STATE LIST (LIST II)           (66 subjects)                         Countervailing duties
CONCURRENT LIST(LIST III) (47 subjects)                              Road cess
List I contains subjects (known as "entries") over which Monopoly tax
only the Union Parliament can legislate upon.               List II Royalties
contains subjects over which only the States can legislate Army Maintenance tax
upon. Entries in List III are those subjects over which both Tax in kind by villages
the Union Parliament and also the States can legislate Surcharges
upon.                                                                Passport fees
     The entries relevant to Customs, Excise, Sales tax Stamping fees
and Service tax are:-                                                Port dues

(List I)                                                          Land survey charges
83 - Duties of Customs.....                                       Testing fee
84 - Duties of Excise.........                                    Excort charges
92A-Tax on Inter-State Sales                                      Ferry tax
92C-Services tax                                                  Weights & Measures tax etc.
97 - Any other matter not enumer-ated in List II or III In fact, in Sub-Chapter "ACCOUNTS" a complicated form
including any tax not mentioned in either of those lists.         of accounts containing 10 columns for Income, 13 columns
(List II)                                                         for Expenditure and 9 columns for Balances have been
8 - Intoxicating liquors.....                                     prescribed. 7 types of punishments are also prescribed if
46- Tax on Agricultural income                                    accounts are not maintained in the said format. (See
54- Tax on Intra-State Sales                                      Annexure).(Penguin Classics - English - Kautilya- The
60- Taxes on Professions, Callings..                              Arthasastra by L.N.Rangarajan - 1987 Rs.150 pp 868)
By virtue of the above entries, the Union                          From the various provisions as to violations & penalties
Parliament & State Legislatures derive their power to levy etc, we may derive perverse satisfaction that our fore-
the said taxes respectively                                       fathers also faced similar problems we face today.

                       NARRATIVE                                          TIT BITS                        0806
3. CHARGING STATUTES                                              GROUCHO MARX was once arrested for non-
-    Levy and Collection of the taxes are exercised payment of income tax. When the Judge observed
     through the Statutes called 'Acts'. Statutes also why a rich man like Groucho should not pay tax with
     specify the maximum rates called "tariff rates". a smile, Groucho replied, "I did try to pay the tax with
     They also confer the required powers to the tax- a smile but they insist on cash payment".
     collecting authorities (the executive) to prescribe
     the procedures of collection, refund, exemption, Two things are certain in this world:
     penalty, appeal etc.                                         Death and taxes.
-    Such       authorities      (normally     called       the
     'Department') frame the necessary rules &                                                  -BENJAMIN FRANKLIN

       regulations of procedures. They also issue
       directions,     clarifications     and     amendments When goods at the time of "taxable event" were
       through 'Notifications', 'Circulars' etc.               wholly exempt from duty, are they chargeable to duty
-      Down the line, the implementing field-authorities if any, at the "relevant time" for payment ? This was a
       (known as Commissionerate, Range, Circle etc) controversial issue. But it is now a well settled law
       issue "Trade Notices", "Public Notices" etc, through Supreme Court Judgements.
       giving     specific     procedures    or   clarifications In the case of Customs duty on imports, duty shall be
       appropriate to their jurisdiction.                      at the rates prevailing as on the date of Bill of Entry
-      The principal enactments regarding the indirect or "entry inwards" whichever is later, when the Bill of
       taxes are the                                           Entry is for "home consumption", even if they were
       * Customs Act;                                          wholly exempt at the time of entry into Indian
       * Customs Tariff Act;                                   territory.
       * Central Excises Act;                                  In the case of Excise, the duty shall be as on the
       * Central Excise Tariff Act;                            date of clearance or removal of the goods from the
       * Central Sales Tax Act;                                place of manufacture, even if the goods at the time of
       * General Sales Tax /VAT Acts of each State;            manufacture (ie. Taxable event) were wholly exempt.
       * Finance Acts since 1994 regarding Service Tax In the case of "Sale on approval or return", the Sales
-      In addition to the above there are several other tax chargeable will be as on the date of change of
       enactments levying similar types of taxes.              ownership (ie. Title) and not as on the date of
-      The same goods can attract different types of despatch or delivery.
       Customs duty / Excise duty / Sales tax etc. For In the case of "deemed sale" contracts such as
       example -                                               Works Contract, the relevant date is the date of
          (i)        Imported goods can attract "Basic appropriation of goods towards the contract.
Customs Duty", "Additional duty of Customs" & In                    India   there   is   a   practical    difficulty   in
"Special Additional Customs Duties", "Surcharge" implementation of a full fledged Value Added Tax
etc.      (besides           these,     'Anti-dumping    duty', (VAT) system. This is so, due to Sales tax being a
'Counterveiling duty' & 'Safeguard duty' can also be State subject while Central Excise is a Union
there as per WTO norms).                                       Subject.     From    1.4.2003    many     States    have
                (ii) Goods manufactured may attract "Basic implemented           VAT for sales tax.       Already, the
Excise Duty", "Special Excise duty", "Additional Central Govt. has implemented VAT for Central
Excise duties" etc.                                            Excise purposes called "CENVAT"           (and also for
(iii) Similarly there can be Sales tax, Purchase tax, Service Tax)
Surcharge on Sales tax, Turnover Tax, Additional
Sales tax etc.

                        NARRATIVE                                       TIT BITS                    0806
4. GOODS                                                         here are several interesting aspects regarding "territory",
(i)Only "goods" attract Customs or Excise or Sales tax "territorial Waters", "Exclusive Economic Zone" etc. To
depending on the nature of event ie. 'Imports' or 'Exports', understand these correctly one has to refer to provisions of
'Manufacture', 'Sale' etc.                                       several conventions, codes, agreements etc.
                                                                 Eg: UN Convention on the Law of the Sea.
(ii)The word 'goods' has to be understood with reference to             International Sea bed Treaty.
each type of tax, as per the provisions of that Act.                    Conventions on Territorial Sea and Contiguous Zone,
       For example:-                                             the High Seas, the Continental Shelf, Exclusive Economic
        According to the Customs Act, Sec. 2(22), "Goods" Zones, Sovereignty over the Air etc.
includes -                                                       Some of the interesting but not much known facts:-
i.          Vessels, Air crafts and Vehicles;                    i.         India has been accorded 'pioneer status' in sea-
Stores;                                                                     bed mining.
ii.         Baggage;                                             ii.        India   has     been   allocated   1,50,000        square
iii.        Currency & negotiable instruments; &                            kilometers in the Sea-bed of Central Indian Ocean
iv.         Any other kind of moveable property.                            and Indian Claim has been registered in 1987.
        This definition is applicable only for Customs duty iii.            Each pioneer is required to pay $2,50,000 fee to
purposes on imports & exports.                                              the Preparatory Commission for registration.
                                                                 iv.        Each pioneer should pay $2,50,000 to the
(iii)Since 'goods' are not defined in the Central Excise                    International    Sea-Bed     authority   for       mining
enactment, the definition given in the Sale of Goods Act is                 contract + $ 1 million a year from the year of
applicable for excise purposes. According to Sale of                        approval.
Goods Act, Sec. 2(7) -                                           v.         The Sea-bed allotted to India contains 3,000
"Goods" means every kind of moveable property other                         billion tonnes of 'potato' nodules containing
than actionable claims & money; and includes stocks &                       copper, nickel, cobalt, zinc, lead, vanadium etc.
shares, growing crops, grass & things attached to or vi.                    India can become an exporter of these metals by
forming part of the land which are agreed to be severed                     mining our allocated area.
before sale or under the contract of Sale.                       vii.       Some of the areas of the sea allocated to India
        (iv)The General Clauses Act, 1897 Sec. 2(36) states-                contain 21 kg of nodules per square metre.
        "moveable property" shall mean property of every viii.              These nodules are at an average depth of 3000 -
description except immoveable property.                                     6000 metres.
           The same Act Sec. 2(26) defines immoveable            ix.        (Source: International Law by Dr. S.K. Kapoor -
           property:-                                                       Central Law Agency 8th Edition. 1990 Rs.110/- pp
        "immoveable property" shall include land, benefit to                832; The International Law of the Sea - Progress
arise out of land, and things attached to earth, or                         Publishers, Moscow, 1988 ISBN 5-01-000454-2
permanently fastened to any thing attached to earth.                        pp 255; Public International Law by M.P. Tandon -
       Thus it may be seen that while 'currency and negotiable              Allahabad Law Agency, 11th Edition. 1991,
instruments' are 'goods' for Customs duty purposes, they                    Rs.90/- pp 474).
are not goods for the purposes of Excise levy or Sales Tax

                                                                 According to our Territorial Waters, Continental Shelf,
                                                                 Exclusive Economic Zone & Other Maritime Zones Act,
                                                                 1976, the territorial waters extend to 12 nautical miles in
                                                                 the sea. Our Exclusive Economic Zone extends to 200
                                                                 nautical miles. Hence any exploration activity, eg. Oil
                                                                 drilling, outside 12 nautical miles is technically not in Indian
                                                                 Territory. However, once we have erected an installation in

                                                           this Exclusive Economic Zone, Ministry of External Affairs
                                                           (MEA) can issue a gazette notification declaring such
                                                           installation & 500 metres around it as part of our territory.
                                                           This is permitted under Article 5.3 of the Territorial Sea &
                                                           The Contiguous Zones of U.N. Convention dt. 10.9.1964
                                                           (Source: Basic Documents in International Law: OXFORD-
                                                           4th Edn. By Ian Brownlie ISBN 0-19-876381 - 6)

                     NARRATIVE                                       TIT BITS                          0806
5. TAXABLE GOODS & TAXABLE EVENT                           Section    2     (f)   of   Central   Excise   Act   defines
(i)Not all "goods" are taxable. They have to be "manufacture" as follows:
'specified' goods ie., specified to levy of tax under -"manufacture" includes any process-incidental or
each statute. Further they are charge-able to tax only ancillary to the completion of a manufactured
on the happening of an 'event' specified in the product, and
relevant statute.                                          -which is specified in relation to any goods in the
(ii)The 'taxable events' are as follows:                   Section or Chapter notes of the Schedule to the
-"Import" or "Export" for Customs                          Central Excise Tariff Act, 1985 (5 of 1985) as
-"Manufacture" or "Production" for Excise                  amounting to manufacture,
-"Sale" or "Deemed Sale" for Sales tax                     and the word "manufacture" shall be construed
-rendering of service for service tax                      accordingly and shall include not only a person who
(iii)To attract tax, the goods should be 'Specified employs               hired    labour   in   the   production     or
goods' in the respective tariff. For example "Electrical manufacture of excisable goods, but also any person
Energy" are "goods" but not "excisable goods" as -who engages in their production or manufacture on
they are not specified in the Central Excise Tariff.       his own account;
(iv)To know whether a particular item is specified            It would be useful to know the exact text of the
goods or not, one should be thorough with the 'entries' regarding the indirect taxes in the Seventh
appropriate tariff classification.                         Schedule to the Constitution of India.
 (v)Customs duties can be charged only on goods LIST I - UNION LIST
imported or exported. The taxable event is "Import" ENTRY
or "Export". Import or Export is said to happen when 83 Duties of Customs including export duties.
the goods enter into or exit out of India. For Eg. 84 Duties of Excise on tobacco & other goods
Customs Act, Sec. 2(25) states -                           manufactured or produced in India except-alcoholic
“Imported goods” means any goods brought into liquors for human consumption; opium, Indian hemp
India from a place outside India but does include & other narcotic drugs and narcotics, but including
goods    which      have   been      cleared   for   home medicinal and toilet preparations containing alcohol
consumption.                                               or any substance included in sub-paragraph (b) of
(vi)Excise duty can be charged on “excisable goods” this entry.
“manufactured” in India. Thus the taxable event is ENTRY
'manufacture'. The word 'manufacture' has been ill 92A Taxes on the sale or purchase of goods other
defined in the Central Excise Act. Courts have held than newspapers, where such sale or purchase takes
that 'manufacture' does not mean mere processing place in the course of Inter-Sale trade or Commerce.
but emergence of 'excisable goods' with distinct 92B Taxes on the consignment of goods (whether

name, character and use different from that of the the consignment is to the person making it or to any
goods used as inputs; also they should be capable of other person), whether such consignment takes
being bought and sold.                                   place in the course of Inter-Sale trade or Commerce.
                                                         97 Any other matter not enumerated in List II or List
                                                         III including any tax not mentioned in either of those

                    NARRATIVE                                       TIT BITS                          0806
-In certain instances "upgradation" does not amount LIST II - STATE LIST
to "manufacture" though what goes in is distinctly ENTRY
different from what comes out. For example, 51 Duties                    of   Excise      on    the   following       goods
upgradation of Computer does not amount to manufactured                       or     produced    in   the   State       and
manufacture of a new Computer vide CBEC circular countervailing duties at the same or lower rates on
454/20/99 - CX dt. 12.4.1999.                            similar goods manufactured or produced elsewhere
-Under Central Excise "manufacture" includes any in India :-
process specified in any Section or Chapter Note of a) alcoholic liquors for human consumption;
Excise Tariff as "amounting to manufacture". For b)               opium, Indian hemp & other narcotic drugs and
example under Note 5 of Chapter 30 of the Central narcotics,            but        including   medicinal    and        toilet
Excise Tariff, for goods falling under 30.03, even preparations containing alcohol or any substance
labeling   or   re-labeling   container   intended   for included in sub-paragraph (b) of this entry.
consumer and re-packing bulk to retail packs shall
amount to manufacture.                                   RATE OF TAX
-"Marketability" is yet another criteria to determine a. The rate of tax in each type of tax depends upon
excisable goods. For example molten sulphur, the 'relevant date' for determination of the rate of tax.
reformer-gas are not excisable goods. They have b. Under the respective enactments 'relevant dates'
only transient life and are not capable of being             are specified for each type of transaction. For
bought and sold as such.                                     example:
-Similarly emergence of an item as a part & parcel of
immovable property cannot be subject to excise. For        Relevant date for imports for home consumption
example, component parts of a lift are excisable is the date of filing the Bill of Entry or "entry inwards"
goods when manufactured. But 'lift' itself is not whichever is later. For warehoused imports, the
excisable since it comes into existence as a part of relevant date is the date of physical removal of the
immovable property, namely a building.                   goods from the warehouse.
-There has been a controversial decision in regard to
Plant & Machinery at site arising out of a Supreme Relevant date for excise duty is the date on which
Court decision in Sirpur Paper Mills case [1998 (97) goods are removed or cleared from the factory).
ELT 3 (SC)] & Triveni Engineering & Industries case
[2000 (120) ELT 273 (SC)]                                  Relevant date for Sales Tax is "sale" ie., the time
(vii)Sales tax/VAT is chargeable on goods only when of passing of the title or ownership from the buyer to
a 'sale' takes place. Transfer of title ie., change in the seller. In the case of goods forming part of a
ownership, is the essential aspect of a sale. Thus 'Works Contract', the relevant date is the date of
transfer of goods from one branch to another does "deemed sale" ie., when the goods are appropriated
not attract Sales tax. Similarly there cannot be sales into the works contract.
tax on goods given to a job-worker for processing
and return. State Sales tax is chargeable on sales
within a State while Central Sales tax is chargeable
for Inter-State sale. However it should be noted that
by 46th Amendment to the Constitution of India, the
concept of "deemed sale" has been incorporated.
This brings into the ambit of sales tax, transactions
which are not strictly "sale". (Eg. Lease, hire, stock
transfer, works contract etc.)But in all these cases,
the tax can be only on the value of goods.

                NARRATIVE                                    TIT BITS                       0806

Tax on Services rendered in India was introduced by Finance Act, 1994 and each year
the types of taxable services have been expanding. An uniform rate of 5% was in vogue
on all types of taxable services to start with. The service provider is the assessee for this

tax except in a few specified cases. It is permitted to be recovered from the service user
by the service provider. The rates are revised UPWARDS EACH YEAR with facility of
CENVAT credit from Sept 2004.

-Customs, Central Excise & Service tax is collected by the officials of Central Excise &
Customs of the Department of Revenue, Ministry of Finance of the Union Government.
Central Board of Excise & Customs (CBEC) is the administrative authority.
-Intra-State Sales tax /VAT are collected by the Sales tax authorities of the States.
-Inter-State Sales tax (CST) are also collected by the same State Sales tax authorities
(through delegated legislation) from where the goods are sold.

Whatever be the 'taxable event', the time to pay the tax is different in each type of tax.
The respective enactments specify the time of payment of tax.
Customs duty on imports is payable at the time of taking delivery after the completion of
"Assessment" for home consumption.            "Assessment" is defined in the Customs Act,
Sec.2(2): "assessment" includes provisional assessment, re-assessment and any order of
assessment in which the duty assessed is nil; In other words 'assessment' means
determination of duty including 'nil' duty.
Excise duty is payable on 5th of each month on removal or 'clearance' in the earlier
month, of the manufactured goods from the place of manufacture. This includes captive
consumption or use also.
Sales tax is payable on or before a 'specified date' in a month for the sales effected in the
preceding month. The 'specified date' is determined by the State Governments. (Normally
20th of each month)
Service Tax is payable monthly or quarterly as specified only on cash collection basis


Type of Tax Central         Sales           Service        Imports          Exports
               Excise       Tax / vat       Tax            (Customs)        Customs)

Tax is on      Goods        Goods           Services       Goods            Goods

Taxable        Manufactu Sale           (Or Rendering      Import           Export
Event          re           Deemed          Service

Time        Of 5th of each Specified        Quarterly/m Clearance For "Let Export"
Payment        month        Time By The onthly          as "Home
               except       States          Specified      Consumption"

Rate of Tax As at the As on date of As                 per As on date of As on date of export
               time     of sale          or Finance Act Bill of Entry or
               clearance    deemed sale                    "Entry Inward"
               from place                                  whichever   is
               of                                          later


   Each type of indirect tax should be understood with reference to the specific
enactments. The essential feature of dealing with indirect taxes be any one should be
that of strict compliance with the statutory requirements. The tendency to look for
loopholes for avoidance or circumventing the tax should be avoided. The motto should
be 'Not a paise more, not a paise less'.

                                   VALUE ADDED TAX (VAT)

1. Almost all the countries in the world charge tax on sale or purchase of goods and
services. Only the terminologies differ eg. Transaction Tax, Consumption Tax, Sales
Tax, Purchase Tax, Services Tax etc. The principle behind this taxation is that the
burden is ultimately on the consumer. Since the tax is not collected by the Government
directly from the consumer, it is termed "indirect tax". ie., Government gets the tax
through an "intermediary" (typically a manufacturer or trader) who charges the tax to
the ultimate consumer.
2. The same product may be sold several times, commencing from the manufacturer /
importer to the ultimate consumer through wholesalers, distributors, retailers etc. who
are intermediaries in the chain. Obviously each of the intermediary will add his margin
(called "value addition").
3. If tax is charged on each sale of the same product at each stage, then this will lead
to "cascadence" of tax (tax on tax again). The following is the example:

   Particulars          Manufacturer   Distributor   Wholesaler   Retailer   Consumer
                        (A)            (B)           (C)          (D)        (E)
   Cost of product      1000           1650          2200         2750       3300
   Margin               500            350           300          250
   Price                1500           2000          2500         3000
   Tax @ 10%            150            200           250          300
   Price to buyer       1650           2200          2750         3300

4. In the above example the total tax ultimately borne by the consumer is Rs.900 (150
+ 200 + 250 + 300) on a total product value (including margins of Rs.2400. Much
worse is that the consumer really does not know that the product has suffered a total
tax of Rs.900.
5. It will also be noticed in the given example that out of Rs.900 tax, only Rs.240 (10%
of Rs.2400) belongs to the value of goods + value addition. Out of the balance Rs.660,
the tax on tax already paid Rs.110 as follows:
       10 % of Rs.150 in B 15
       10 % of Rs.350 in C 35
       10 % of Rs.600 in D 60

   Another Rs.550 is tax on the value of goods already charged to tax.

6. From the economist's point of view this cascadence is not desirable. In all fairness
value of an item taxed once should not be charged to tax again excepting the value
added portion which has not suffered tax yet.

7. This is the background of introduction of a system called "Value Added Tax" known
as VAT. Under this system at each stage of transaction, only the value addition in the
transaction is taxed in effect.          However, to protect the confidentiality of the value
addition (margin), the method adopted is that of "Input Tax Reimbursement System".
Under this methodology, the consumer will know what is the exact 'tax' element of his
purchase but will not know the value additions (margins) built in the earlier stages by
the 'intermediaries'.

8. Illustration of VAT:

   Particulars            Manufacturer     Distributor     Wholesaler   Retailer   Consumer
                          (A)              (B)             (C)          (D)        (E)
   Input Cost             1000             1650            2035         2365       2640
   Profit Margin          500              350             300          250
   Total Cost             1500             2000            2335         2615
   Input Tax Credit      NA                150             185         215
   Net Price             1500              1850            2150        2400
   Tax @ 10%             150               185             215         240
   Gross Price           1650              2035            2365        2640
   Under the above      example it will    be found that   at each stage, the seller "reimburses"
himself to the extent of "input tax" suffered by him and only the balance is given to the
government. Thus the government gets a total tax of Rs.240 as follows:

       From A              Rs. 150
       From B (185 – 150)           Rs. 35
       From C (215 – 185)           Rs. 30
       From D (240 – 215)           Rs. 25
              Total        Rs. 240

   In the above method, the ultimate consumer "E" knows that the total product value
is Rs.2400 and tax on the same is Rs.240/-. He does not know the margins built by
each earlier seller.
   9. This VAT system is prevalent in more than 150 countries. In India, as per our
constitution, sales tax is a "State" subject and not a "Union" subject. Each "State" has
to legislate VAT law and implement the same. Further, as per our constitution, tax on
'inter-state' sales belongs to the State from which the goods originate. This means that
the State to which the goods are sent cannot extend VAT credit to the buyer as the tax
has been collected by the originating State.

10. Consequently the problem of implementation of VAT in India has become a legal
night-mare. However, many States have already implemented VAT. There are also
steps afoot to eliminate (bring zero tax) tax on inter-state sales. As this means loss of
revenue to the States from which the goods originate, Central Government is grappling
with this as to the means of compensating the same. .

                                          SECTION 2
                         BRIEF INTRODUCTION ABOUT TAXES

    Money collected by the body/person governing the Republic / Country /State / Local
Body etc
Why Tax
To meet the expenditure involved in administration of governing the Republic / Country
/ State / Local Body etc. as per the statute. Governing automatically includes, inter-alia,
creation/provision of infrastructure/facilities etc. required for social living

Tax vis-a-vis Duty
    In a republic, getting necessary infrastructure, facilities etc. is human right. But
remember, right can be exercised only if the man also performs duties.
Therefore word Duty is commonly used as a synonym of Tax.

Types of_Taxes
Direct Tax - Directly paid by the person who bears its burden.

Indirect Tax - Paid by the person, who passes on the burden of tax.
             Thus indirectly paid by the person bearing its burden.

Relevant Indirect Taxes
Customs Duty (Import Duty)
    Tax on importation of goods into India from a foreign territory
    Consists of mainly Basic Customs Duty, Additional Duty popularly known as
Counter-veiling duty, Special Additional Duty of Customs and sometimes Anti-Dumping
Excise Duty (Duty on Manufacture)
    Tax on manufacture of goods
Taxes go to a general fund for expenditure.
Cesses are collected under specific account heads and can be used for specific
purpose for which they are collected.

Meaning of some important terms
Something that can be sold, but not real estate or anything that is permanently situated
at a fixed place. To be excisable goods, the goods also have to be marketable.

The process or set of processes, which bring about a change in the raw materials or
inputs, to lend them independent identity, principal character, function, utility etc.

Levy of Excise Duty
Excise being the tax on manufacture of Goods - the excise duty is chargeable upon
manufacture of goods
For the sake of convenience it is levied at the time of clearance/removal of goods from
the place of manufacture.
The levy is on consignment basis. The discharging of liability arising out of levy of
excise duty can now be done on monthly basis.
Remember "clearance/removal" of goods and not "sale" of goods is the criteria for levy
of excise duty.
Manner of levying excise/customs duty
Specific rate of duty
By prescribing specific amount of duty to be paid per unit of goods cleared. This is
adopted when there is scope of gross undervaluation of goods being cleared or when it
is likely that within the territory of India the value of goods may vary to a great extent.
Compounded levy
Based on machinery per shift of production. Levied in cases where there are local
parameters which may involve high variation in production within a factory.
Production Capacity Based levy
Based on Annual Production Capacity of the manufacturing unit divided into twelve or
more periodical installments. Levied in case of goods prone to evasion.
Advalorem levy
Most popular form of levy

Based on intrinsic value of the goods and not the value at which the goods are sold. A
certain percentage of levy is charged. As per Kautilya, the greatest economist India has
ever produced, the tax share should be one part of six. Very close to normal rate of
16% charged now.
Concept of Transaction Value
Nearest equivalent of intrinsic value of the goods
But the transaction should be with independent buyer,
At arms length
No additional consideration should be received from buyer
No free of cost supply of material, machinery, technological know how etc. should be
received from the buyer.
The transaction value should not be doctored.
By following the provisions of Valuation Rules.
Exemption notifications
Exemption notifications discussed here are exemptions from Excise Duty. There are
similar exemptions available for Customs duty
There are certain exemptions allowed by issue of Exemption Notifications.
Important facts about exemption notifications
i.      Granted in “the public interest”
ii.     To fine tune the Govt. Policies
iii.    Can only grant exemption and not increase the burden prescribed by statute.
iv.     May be aimed at a class of manufacturers, buyers or variety of goods .
v.      May prescribe certain conditions for enjoying exemption.

Exemptions available for Defence Sector and suppliers of Defence Sector
Notification: 64/95-CE dated 16.3.95
 All goods                 Donated for welfare of Defence Personnel
 All goods                 Supplied as stores for consumption on board a vessel of Indian
                           Navy or Coast Guard
 All goods                 Supplied to projects and programmes SKYLARK, SAMYUKTA,
                           SANGRAHA, ATV, DIVYADRISHTI
 Motor Vehicle Parts Supplied to Ordnance Factories for manufacture of vehicles
 or Vehicles in CKD
 For equipment and Supplied to system and sub-system of Integrated Guided
 stores                  Missiles Development programme in IGM or Ministry of Defence
 I C Engines             Designed for use as prime movers as OE parts for vehicles
                         manufactured at Central Govt. Ordnance Factories
 Underwater batteries For use in Indian Navy
 and cells
 Bulletproof jackets     Supplied to Armed Forces
 All goods               Supplied for construction of warships of Indian Navy and Coast
Notification: 63/95-CE dated 16.3.95

 All goods                                 Manufactured by
                                           Hindustan Aeronautics Ltd
                                           Bharat Electronics Ltd
                                           Bharat Dynamics Ltd
                                           National Instruments Ltd
                                           National Aerospace Laboratories
                                           Mishra Dhatu Nigam
                                           Bharat Earth Movers Ltd
                                           Bharat Heavy Electricals Ltd, and
                                           Supplied to
                                           Ministry of Defence for official purpose
Notification: 62/95-CE dated 16.3.95
 All goods                                 Produced in Ordnance Factories
                                           and intended for use by Armed
                                           Forces of such factories

Other Important Concepts in Excise
Cenvat credit

   Set off of central excise duty paid by the suppliers of inputs on the inputs used by
the manufacturer

   Used for payment of duty on final product

   Available if the final product is chargeable to central excise duty

     In cases, where a manufacturer manufactures, using same inputs, dutiable as well
as exempted final product, then:-

a)   He shall avail cenvat credit of inputs used in manufacture of dutiable final product
only, by maintaining separate inventory for consumption of cenvatted inputs in the
manufacture of dutiable and exempted final product.
[In Cenvat Rules, 2004; a specific provision has been made to reverse cenvat credit on
inputs actually used in manufacture of final products cleared by availing exemption
under Notifications mentioned above.]

b) If no separate inventory is maintained and cenvat credit is availed on all such
common inputs, the manufacturer is required to reverse an amount equal to ten percent
of the value of exempted goods cleared.

     However, the amount of cenvat credit so reversed (either equal to ten percent of the
value or at actuals), is not Central Excise Duty, and this amount can not be recovered
from the customer. i.e. burden of such reversal cannot be passed on to the customer.

                                       SECTION 3


(1) The employer or a person responsible for payment of salary is liable to deduct the
tax at source, pay it into Government account and submit various returns.
(2) Any salary Disbursing Authority shall, at the time of payment, deduct income tax on
the amount payable at the average rate of income tax computed on the basis of the
rates of tax in force for the financial year in which the payment is made, on the
estimated income of the assessee under this head for the financial year. The aggregate
tax calculated on the estimated income divided by 12 and rounded off to the nearest
rupee is required to be deducted from the monthly salary.           [Section 192]
(3) An employee of Government or Public Sector Undertaking may furnish the
particulars of arrears/advances of salary received by him and for which he claims relief
under Section 89 (1) of the IT Act, duly verified, to his salary Disbursing Authority and
the salary Disbursing Authority is required to take into account those particulars also in
making the deduction of the tax. [Section 192 (2-A)]
(4) An employee may furnish the particulars of his income from other sources not being
a loss under any such head other than the loss under the head "Income from House
Property" for the same financial year and of any tax deducted thereon in Form 12C duly
verified, to the salary Disbursing Authority and the salary Disbursing Authority shall take
those particulars into account for the purpose of making deduction of tax. This is
subject to the condition that such other income when taken into account shall not have
the effect of reducing the tax deductible, except where the loss under the head "Income
from House Property" is taken into account, from 'salary income' below the amount that
would be so deductible if the other income and the tax deducted thereon had not been
taken into account. [Section 192 (2-B)]
A person responsible for paying any tax on income chargeable under the head
"Salaries" shall furnish to the person to whom such payment is made a statement giving
correct and complete particulars of perquisites or profits in lieu of salary provided to him
and the value thereof in such form and manner as may be prescribed.         [Section    192
(5) Any person responsible for paying salaries who does not deduct tax or after
deducting fails to pay the tax as required, will, without prejudice to any other
consequences which he may incur be deemed to be at default personally in respect of
the tax.        [Section 201]
(6) The tax shall be deducted from the salary bills of the employees and credited to the
appropriate Head of Account which will ultimately be adjusted to the Government
account by book transfers. [Section 200]
(7) Under Section 206 of IT Act read with Rules 36-A and 37 of Income Tax Rules,
every salary Disbursing Officer shall prepare the Annual return of salaries paid and tax
deducted there from in the prescribed form (Form No. 24) and deliver the same to the
concerned Income Tax Officer by 31st May.
(8) Under Section 203 of IT Act read with Rule 31 (1) of Income Tax Rules; salary
Disbursing Officer is required to furnish to the employee from whose salary the tax is
deducted a certificate (Form 16) indicating total salary income, deductions allowed and
the amount of tax deducted.

Employers/DDOs-Please Note, to :-
i.          Obtain    Tax      deduction    Account    Number      (TAN)     from    ITO    (TDS)
            (Section 203-A).
ii.         Deduct tax correctly from the salary of employees (Section 192).
 3          Deposit     tax      deducted      into    Government          account    in     time
(Section 200; Rule 30).
      a)      Issue   certificates    to   employees   for   tax   deducted     by   30th   April.
            (Section 203; Rule 31).
      b)       File monthly certificate of TDS and statement in respect of employees
            leaving service (These are not required in case of Government Drawing and
            Disbursing Officers). File annual returns of salaries by 31st May in Form No. 24
            (Section 206).
      The basic TDS provisions are catered by following sections under I T Act, 1961 for
collection and recovery of tax at source.
-     (A)        General : Section 190 & 191
-     (B)        Deduction at source: Section 192 to 206 B
-     (BB)       Collection at source: Section 206 C , 206 CA
-     [C]        Advance payment of tax: : Section 207 to 219
-     [D]        Collection & Recovery: Section 220 to 232
-     [E] Tax payable under provisional assessment:Omitted sec.233&234
       - [F] Interest Chargeable in certain cases: Section 234 A to 234 D
(A) General : Section 190 & 191

Section 190 : Deduction at source and advance payment :_ Provisions of this section
shall not be prejudicial to Sec. 4 (1)
Section 4 : BASIS OF CHARGE - Chapter II - Section 4 (1) : Read that section:
Enactment of income tax rates for that year will prevail for that year Section 4 (2) : TDS
or TCS will be effected as the case may be under various provisions of law and further
that, advance tax will be also be paid / liabilities be met under the provisions of the Act

Section 191: Direct payment

      This is applicable in cases of incomes which are not under the ambit of TDS
provisions. Income tax law intends that direct payment is to be made by the assessee.

      Section also talks about importance of deduction and payment of taxes and
consequences of non-observance of provisions within the meaning of Section 201 (1).

(B)      Deduction at source: Section 192 to Section 206 B

1. Section: 192 : Average rate of salary .
2.    Section 193 : Interest on securities I Section : 194 H (Commission or brokerage):
Rs. 2,500/-
3. Section 194 A - Other interest
4. Section 194 B - Winning from lotteries
5. Section 194 D - Insurance Commission Rs. 5000/-
6.      Section 194 C & 194 J (Payments to Contractors, Transporters, Advertising
Contractors, Sub-Contractors and Fees for Professional and Technical Services /
Royalty) : Rs.20,000/-
7.    Section 194 I (Rent of Land / Building / Furniture and Rent of Plant / Machinery /
Equipment): Rs. 1,20,000/-

General principles for effecting TDS:
x.          For all sections except Section 192 : on payment or credit whichever is
         earlier. For section 192 TDS on payment of emoluments.

xi.            If there is any kind of confusion it is better to deduct TDS after having a word
           with the party.
xii.           It is essential to get address of the 'party' which is registered with income tax
           authorities and 'PAN' and 'Name' as registered with income tax authorities
xiii.          It is essential to correctly note 'TAN' of the party
xiv.           It is better to start deducting TDS if it is most likely that, consolidated limit will
           exceed 'basic minimum amount' qualifying for TDS, without waiting for limit to get

Due Date of payment :

        Within 7 days from the end of month
        For liabilities booked from 01.03 to 30.03 : due date is 7th April
           For liabilities provided for on 31st March: due date is 31st May

Test to be applied for each payment:

           Payment: VAT, Service Tax, FBT, TDS - all tests to be satisfied. TDS deduction
and payment also applies to fixed assets acquisition. TDS compliance to be checked on
receipt of income as well. TDS compliance to be checked when payment of interest is
made to organizations I institutions other than nationalized banks etc.

           It is the responsibility of the person paying to deduct TDS and pay the same
within prescribed time:
           TDS rate can be lowered if certificate u/s 197 is obtained from IT Department.
          TDS need not be deducted if certificate u/s 197 A is obtained from IT Department
for non-deduction of tax at source.

Section 192
Section 192 (1)
Any person shall at the time of payment deduct income tax on the amount payable at
the average rate of tax
Simultaneous employment during any AY : section talks about clubbing of income
Person responsible to deduct and pay considering entire salary income :salary +
perquisites + salary from previous employer
Person responsible for payment of tax: PF Trustee, Superannuation Trustee
TDS in respect of salary payable in foreign currency: Value in rupees of such salary
shall be calculated at the prescribed rate of exchange

Section 193

   The person responsible for paying to a RESIDENT

   Security has not been defined separately however reference of this word is
appearing in Section 2 (42A) giving covering definition Securities Contracts Regulation
Act, 1956

Section 194

   Nowadays limited applicability.
( Sec. 115 'O' wherein corporates usually pays corporate dividend tax)

   Important point to be noted 'banks / institutions' which do not deduct and pay
corporate dividend tax, income is taxable in the hands of recipient. One should not be
under the impression that, merely because it is dividend it is exempt from tax.

Section 194 B - Winning from lotteries
              Limited applicability and hence ignored

Section 194 C - Payments to contractors and sub-contractors

1. Pre-printed stationery
2. Repairs and maintenance
3. Courier
4. Transporter - including freight
5. Clearing and forwarding agents
6. Works contract-material + labour involvement - furniture work, electrification work,
building contract etc
7. Travel agent's commission
8. Canteen
9. Renovation Work.
10.Painting work
11.Car Hire Charges: travel agency providing driver, petrol and car
12.Laundry charges
13.Gardening / maintenance
14.All contractual payments irrespective whether agreement is entered or not
15. Security
16.Annual maintenance contracts ( if it does not fall within the definition of a
'professional' )
17.Carrying out medical/other tests
18.Hotel booking & charges including food, lodging etc.
19.Advertisement Contracts / Publication Payments
20.Wordings 'work' u/s 194 C(2) include 'advertising', 'broadcasting and telecasting
including production of programmes for such broadcasting or telecasting


Sl. Particulars            If the recipient is a Domestic Company or
No                         Firm                                            Criteria for deduction

     Nature of Sec         Up to 30.9.2009       During 1.10.2009 to
     Payment                                     31.3.2010

                           IT SC     EC Tot      IT   SC EC Tot

1    Salary          192   As per slab rates prescribed for women, SC            not   applicable.
                           senior citizens and other individuals           Only levy EC.

2    Interest        194A 10 -       -   10.00 10     -      -     10.00   Payment in excess of
     other than                                                            Rs. 5,000 p.a

3a Payments 194C 2             -     -   2.00    2    -      -     2.00
     rs    (other
     than 3b to

3b Payments 194C 2             -     -   2.00    2    -      -     2.00
     to                                                                    Payment in excess of

     transporte                                                            Rs.    20,000/-      per

     rs    where                                                           contract        or   Rs.

     PAN        is                                                         50,000/- p.a.


3c Payments 194C 2            -   -   2.00   0   -   -   0.00
    rs    where
    PAN         is

3d Payment           194C 1   -   -   1.00   2   -   -   2.00

3e Payment           194C 1   -   -   1.00   2   -   -   2.00
    to      Sub-

4   Commissi 194H 10 -            -   10.00 10   -   -   10.00   Payment in excess of
    on        or                                                 Rs. 2,500 p.a

5a Rent       of 194I     20 -    -   20.00 10   -   -   10.00   Payment in excess of
    Land/                                                        Rs. 1,20,000 p.a

5b Rent       of 194I     10 -    -   10.00 2    -   -   2.00    Payment in excess of
    Plant,                                                       Rs. 1,20,000 p.a

6   Fees     for 194J 10 -        -   10.00 10   -   -   10.00   Payment in excess of
    Professio                                                    Rs. 20,000 p.a
    nal      and


1. Higher TDS rate of 20% for not furnishing correct PAN: Requirement to furnish PAN
is compulsory to deductor. Otherwise TDS shall be deducted @20%. W.E.F.
2. Above rates are not applicable in case of payments made to foreign companies and
non-residents. In case of payments to foreign companies, SC should be levied at 2.5
percent (where total income of the foreign company exceeds INR 10 million) and EC
should be levied at 3 percent. However, in case of payments to other non-residents,
only EC of 3 percent should be levied.
3. For Advance Tax computation: Advance tax is not required in case amount of tax
payable for the entire year is less than INR 10,000/-. Further. EC should be applied in
respect of advance tax payments by all taxpayers. However, SC should be levied only
in case of advance tax payments by domestic and foreign companies.
4. No TDS on contract for manufacturing/supply of product according to
requirement of customer by using material purchased from a person other than
such customer.

                                  CHAPTER 2

                                   SECTION 1

                             PROVISIONS OF VAT
                          INTRODUCTION AND FAQs

1. Background

      Maharashtra is one of the 21 States which have introduced the Value

Added Tax (VAT) system of taxation from 1st April 2005. With the introduction of

VAT, we have moved to a globally recognized sales taxation system that has

been adopted by more than 130 countries.

      The design of Maharashtra State VAT is generally guided by the best

international practices with regard to legal framework as well as operating

procedures. Another key factor in preparation of the design of State level VAT is

the national consensus on certain issues. The consensus has been arrived a t

through the discussions in the Empowered Committee of State Finance Ministers

on implementation of State level VAT.

      On 1st April 2005, VAT replaced the single point sales tax. Single point

sales tax had a number of disadvantages, primarily that of double taxation. VAT

is a modern and progressive taxation system that avoids double taxation. In

addition to offering the possibility of a set-off of tax paid on purchases, VAT has

other advantages for both business and government.

         It eliminates cascading impact of double taxation and promotes

         economic efficiency:

         It is primarily a self-policing, self-assessment system with more trust put
         on dealers.

         It provides the potential for a stronger manufacturing base and more
         competitive export pricing.
         It is invoice based, and as a result it offers a better financial system with
         less scope for error.

         It has an improved control mechanism resulting in better compliance.
         It widens the tax base and promotes equity.

         VAT in Maharashtra is levied under a legislation known as the

         Maharashtra Value Added Tax Act (MV AT Act), supported by

         Maharashtra Value Added Tax Rules (MVAT Rules). VAT is levied on

         sale of goods including intangible goods.

2. The meaning of 'goods' for VAT purposes

'Goods' means every kind of moveable property including goods of incorporeal

and intangible nature but there are some exclusions, such as newspapers,

actionable claims, money, shares and securities and lottery tickets.

Businesses engaged in the buying and selling of goods within the scope of the

VAT law are referred to as dealers.

3. The meaning of 'sale' for VAT purposes

A transaction of sale can be a:

   i. normal sale of goods;

   ii. sale of goods under hire-purchase system;
   iii. deemed sale of goods used / supplied in the course of execution of works


   iv. deemed sale of goods given on lease.

         The rate of tax applicable to the goods sold under various classes of

         sales is uniform. However, in respect of normal sales of goods and

         deemed sales of goods under works contract and specified deemed

         sale of goods given on lease, the Act provides for an optional method

         for discharging tax liability by way of composition. Being so, the tax

         liability has to be determined with reference to the option exercised by

         the dealer for discharging tax liability.

4. Businesses covered by VAT

        The VAT system embraces all businesses in the production and supply

chain, from manufacture through to retail. VAT is collected at each stage in the

chain when value is added to goods. It applies to all businesses, including

importers, exporters, manufacturers, distributors, wholesalers, retailers, works

contractors and lessors.

5. Expectations from those liable to collect and pay VAT

         1. notify Commissioner of Sales Tax, when there is any change in the

            information communicated earlier

         2. complete and submit returns and pay the tax by the due date

         3. ensure that returns are complete, correct and self consistent

         4. provide promptly all the necessary information that are asked
6. What is VAT?

       Value Added Tax (VAT) is a modern and progressive form of sales tax. It

is charged and collected by dealers on the price paid by the customer. VAT paid

by dealers on their purchases is usually available for set-off against the VAT

collected on sales.

7. Is VAT yet another tax?

No, it will replace these four existing taxes.

1) The Bombay Sales Tax Act, 1959.

2) The Maharashtra Sales Tax on the Transfer of Right to Use Any Goods For

Any Purpose Act, 1985.

3) The Maharashtra Sales Tax on the Transfer of Property in Goods Involved in

   the Execution of Works Contract (re-enacted) Act, 1989.

4) The Bombay Sales of Motor Spirit Taxation Act, 1958.

8. Why change to VAT?

       VAT is a modern and progressive tax system now used in over 130 other

countries. Most of the States in India have agreed to change over to a VAT

system providing uniformity. A few remaining states have agreed to VAT in

principle and are likely to join it a while later.

9. What are the benefits of VAT?

The following are the benefits:

1) It is simple, transparent and progressive

2) Business friendly system of taxation

3) Reduction in the number of tax rates to only two main rates - 4% and 12.5%

4) Reduction in the effective tax rate for many goods

5) Elimination of "tax on tax" existing in the sales tax system

6) Full set-off available for VAT paid on most business purchases

7) Simplification of forms and procedures

8) Greater reliance on self assessment and voluntary compliance by dealers

10. What types of businesses are liable for VAT?

VAT applies to all types of businesses including

1) Importers

2) Manufacturers

3) Distributors

4) Wholesalers

5) Retailers

6) Works Contractors

7) Lessors

11. How is VAT charged?

      All registered dealers, regardless of where they are in the chain of

manufacture and production, must charge VAT on their sales of taxable goods

and collect it from their customers.

       Registered dealers must issue a tax invoice to other registered dealers

showing the VAT amount being charged as a separate amount. Registered

dealers who pay VAT on their purchases can normally claim a "set-off" for the

VAT paid to their suppliers. As a result, VAT is not a cost to the dealers.

      Dealers must ensure that tax is charged separately in their purchase

invoice in order to be eligible to claim set-off.

      Certain dealers who sell mainly to consumers at retail level can opt for a

simplified system of VAT calculation and payment under a Composition Scheme.

Under the Composition Scheme, dealers will not issue a tax invoice or show VAT

as a separate amount on a bill or cash memorandum.

12. What are the obligations of dealers registered for VAT?

Dealers who are required to be registered for VAT must

1) Charge and collect VAT on their sales of taxable goods

2) Issue proper tax invoices

3) Keep proper records and books of account

4) Calculate the VAT due to Government based on VAT charged on sales LESS

any VAT available as a set-off on business purchases

5) File VAT returns on a regular basis declaring their VAT liability

6) Pay any amount of VAT due to the Government with the VAT return

13. What is the rate of VAT?

Under the VAT, the tax rates have been simplified. There are only two main

rates of VAT:

1) 4 % for items consisting mainly of raw materials used in the manufacturing

process, IT products and some goods of common consumption

2) 12.5% for all goods unless they are listed under the other rates

"Foodgrains including pulses, milk, vegetables and books are not subject to


In addition, there are other rates for specific items:

1) 1 % for gold, silver, other precious metals, precious and semi precious stones

and their jewellery

2) 20% for liquor

        The only exception to these rates is for the sale of motor spirits, which

        have special tax rates based on the existing Bombay Sales of Motor Spirit

        Taxation Act, 1958.

                                       SECTION 2


1      Agriculture (Sub-Section 1)

       It includes floriculture, horticulture, the raising of crops, grass or garden

produce and also grazing, but does not include diary farming, poultry farming,

stock breeding, the mere cutting of wood or grass, gathering of fruit, raising of

man-made forests or reading of seedlings or plants.

2      Agriculturist (Sub-Section 2)

       Means a person who cultivates land personally for the purpose of


3      Business (Sub-Section 4)

4       Introduction

        A person carrying on a business would be liable to tax under this Act

whether he carries on such business with or without motive.

       This definition includes transactions in connection with or incidental or

ancillary to trade, commerce, business, etc.

       The terms trade, commerce, manufacture, etc are not defined in the act.

These words will have their natural meaning. Thousands of decided cases will

throw light on the meaning of these words

5      Capital Assets (Sub-section 5)

       Capital asset shall have the same meaning as assigned to it in the

       Income Tax Act, 1961. This expression shall not include jewelry held for

       personal use or property not connected with the business.

       Capital asset is defined under Sub-section 14 of Section 2 of the Income

       Tax Act as given below:

        "Capital asset means property of any kind held by an assessee, whether

        or not connected with his business or profession, but does not include:

         (i) any stock-In-trade, consumable stores or raw materials held for the

        purpose of his business or profession;

            (ii) personal effects, that is to say, moveable property (including

            wearing     apparel and furniture, but excluding jewelry), held for

            personal use by the assessee or any member of his family

            dependent on him.

            Explanation.- For the purpose of this sub-clause ,'jewelry" includes-

(a) ornaments made of gold, silver, platinum or any other precious metal or any

alloy containing one or more of such precious metals, whether or not containing

any precious or semi-precious stone, and whether or not worked or sewn into

'any wearing apparel;

(b) precious or semi-precious stones, whether 'or not set in any furniture, utensil

   or other article or worked or sewn into any wearing apparel:

            (iii) agricultural land in India, not being land situate;

   (a) in any area which is comprised within the jurisdiction of a municipality

   (whether known as a municipality, municipal corporation, notified area

   committee, town committee, or by any other name)or a cantonment board

   and which has a population of not less than ten thousand according to the

   last preceding census of which the relevant figures have been published

   before the first day of the previous year: or

  (b) in any area within such distance, not being more than eight kilometres,

   from the local limits of any municipality or cantonment referred to in item (a),

   as the Central Government may, having regard to the extent of, and scope

   for, urbanisation of that area and other relevant considerations, specify" in

   this behalf by notification in the Official Gazette;

          (iv)   60 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980,

           or National Defence Gold Bond, 1980, issued by the Central


           (v)   Special Bearer Bonds, 1991 issued by the Central Government;

          (vi)   Gold Deposit Bonds issued under the Gold Deposit Scheme,

            1999 notified by the Central Government".

     As per the definition in the Act any asset to be qualified as capital asset the

asset should be connected with the business and the definition specifically

excludes jewelry held for person use. From the combined reading of the

definition in the Act and Income Tax Act it may be observed that the capital asset

excluding the above six (may include property of every description, movable or

 immovable, fixed or circulating, tangible or intangible corporeal or non-corporeal

 provided they are connected with the business. Corporeal means physical things

 like land, building, jewelry, shares, cars etc. Non-corporeal means assets like

 leasehold rights, copyrights manufacturing licence, rout permits for buses,

 tenancy rights etc.

 Definition of Capital Asset is very important as there is separate provision for

 availing Credit on tax paid on Capital Goods.

 6. Dealer (Sub-section 8)

  'Dealer' means any person who buys or sells goods in the State in connection

 with his business.

 It includes:

 (i) A factor, broker, commission agent, del credere agent or any mercantile
 agent, who buys or sells in connection with business on behalf of any principal or
 principals whether disclosed or not.
(ii) An auctioneer who sells or auctions goods whether acting as an agent or
 otherwise or who organises the sale of goods or conducts the auction of goods
 whether or not he has the authority to sell the goods. In this definition even a
 person who organises any auction is treated as dealer. However we have to see
 how far the Courts will accept this definition.
 (iii) A non resident dealer or his agent residing in the State who buys or sells
 goods in the State.
 (iv)           Any society, club or other association of persons which buys goods
 from or sells goods to its members.

        The following persons who sell any goods whether by auction or otherwise
 shall be deemed to be dealer:

 (i)    Customs Department of the Government of India administering the Customs
 Act, 1962.
 (ii)    Department of Union Government and any Department of           any      State
 (iii) Incorporated or unincorporated societies, clubs or other associations         of
 (iv)     Insurance and Financial Corporations, institutions or companies and Banks
 included in the Second Schedule to the Reserve Bank of India Act..
 (v)      Local Authorities.
 (vi)     Port Trusts.
 (vii) Trusts, both private and public.
 (viii) Railway Administration.
 (ix)     Shipping and Construction companies, air transport companies, airlines
       and advertising agencies.
 (x) Any other corporation, company, body or authority owned or constituted by,
 or subject to administrative control, of the Central Government, any State
 Government, or any local authority.

 This sub-section has provided three exceptions to the general definition of
 (i) An agriculturist who sells exclusively agricultural produce grown on land

 cultivated by him personally.

(ii) An education institution carrying on the activity of manufacturing, buying or

 selling goods in the performance of its functions for achieving its objectives. .

 (iii) A transporter holding permit for transport vehicles granted under the Motor

 Vehicles Act, 1988.

 7 Goods (Sub-section 12)

             It means every kind of moveable property not being new, papers,

 actionable claims, money, stocks, shares, securities or lottery tickets. It includes
live stocks, growing crop, grass and trees and plants including the produce

thereof and including property in such goods attached to or forming part of the

land which are agreed to be severed before sale or under the contract of sale.

Goods include all movable property. It includes the following: .


Animals and Birds in captivity.


Standing Trees agreed to be severed

                                       SECTION 3

                                      VAT EXPLAINED

How VAT works

When you sell goods, the sale price is made up of two elements; the selling price

of the goods and the tax on the sale. The tax is payable to the State


The tax payable on sales is to be calculated on the selling price. The tax paid on

purchases supported by a valid tax invoice is generally available as set-off (input

tax credit) while discharging the. tax liability on sales.


The following example shows how the VAT works through the chain from

manufacturer to retailer.

Company A buys iron ore and other consumables and manufactures stainless

steel utensils.

Partnership firm B buys the utensils in bulk from Company A and polishes them

Shopkeeper C buys some of the utensils and purchases packing material from

vendor D, packages them and sells the packed utensils to the public.

(The sale and purchase figures shown in the example are excluding tax)

Particulars                                          Amount           VAT @ 4%

Company A

Cost of iron ore and consumables                              50000       2000

Sales of unpolished stainless steel utensils             150000

Value added                                              100000

Company A is liable to pay VAT on Rs.l,50,000 @ 4%          6000

less set off                                                2000

Net VAT amount to pay with the Return                                    4000

(Note: Tax invoice issued by Company A will show sale price as Rs.l,50,000, tax

as Rs.6,000.Therefore, the total invoice value will be Rs.l,56,000)

Particulars                                          Amount       VAT @ 4%

Partnership B

Purchases unpolished stainless steel                    150000


Sales polished stainless steel utensils                 180000

Value added                                              30000

Partnership B is liable to pay V AT on

Rs. 1,80,000 at 4%                                        7200

But can claim set off of tax paid on purchases            6000

Net VATamountto pay with the Return                                   1200

 Shopkeeper C

Purchases polished stainless steel utensils             180000

Packing material                                           5000

Total purchases                                          185000

Sales                                                    225000

Value added                                               40000

Shopkeeper C is liable to pay VAT                           9000

on Rs.2,25,000 @ 4%

Set off of tax paid on purchases                            7400

(Rs.7,200 + Rs.200 of packing material)

Net VAT amount to pay with the Return                                    1600

Vendor D

Tax paid costs                                                     nil

Sales                                                         5000

Value added                                                  5000

Vendor D is liable to pay VAT on

Rs. 5,000 @ 4%                                                             200

The V AT due on the value added

through the chain, i.e., 4 % on Rs.2,25,000 is                            9000

The State Government received the tax in stages. The payments of tax were as follows.

Suppliers of Company A                           2,000

Company A                                    4,000

Partnership B                                1,200

Shopkeeper C                                 1,600

Vendor D                                         200

Total                                       9,000

        Thus, through a chain of tax on sale price and set off on purchase price,

the cascading impact of tax is totally eliminated.

        Since set-off of tax on purchases is given only on purchases from

registered dealers where tax is collected separately, your purchases from
unregistered dealers, imports, inter-state. purchases and purchases from

registered dealers without separate tax collection are not entitled to set-off.

      In practice, the tax is finally borne by the ultimate consumer, who is not a

registered dealer, in this case, people who buy utensils from the shopkeeper C.

                                 SECTION 4


          1. Introduction

      Dealers have to pay tax as per this Act when they sell goods. Goods are

classified into Schedules.

          2. Charging Section

        Section 4 is the charging Section of this Act. No tax can be levied or

collected in India except under the authority of law. This section gives such

authority for charging of Value Added Tax in accordance with this Act and Rules.

Section 6 deals with Rates of Tax under this Act. The goods are grouped into

five schedules as under:-

Schedule        Rate of Tax                                     Illustrative items

   A       0%                 1.Fresh Vegetables and Fruits, milk, eggs, bread.

                              2. Lac, shellac and products thereof

                              3. Unmanufactured tobacco (i. e. tobacco covered under heading 2401 of the

                              Central Excise Tariff ) and bidis (i. e. bidis covered by tariff items 2405, 1031,

                              2403, 1039, 2403 and 1090 will also be exempted from tax)

                              4. Agricultural implements manually operated or animal driven. 5. Aids and

                              implements used b handicapped persons.

                              6.Betel Leaves.

                              7.Books, Periodicals and Journals.


                              9. Condoms and contraceptives

                              10.Glass Bangles

                              11.Meat, Fish, Prawns and other aquatic products when not cured or frozen,

                              Eggs and Live stock and Animal hair. 12.Unprocessed and unbranded salt.

                              13.Water other than

                              (i) aerated, mineral, distilled, medicinal, ionic, de-mineralized water, and

                              (ii) water sold in sealed container.

      B       1%                 Gold, Silver and precious metals, Articles of Gold, Silver etc.           (jewellery),

                                 Precious Stones, Semi Precious Stones and Pearls of all types

      C       4%                 i). Raw materials, notified industrial inputs, IT products and a few essential items

                                 ii)    Paddy and rice, wheat and pulses in whole grain, split or broken form

                                 iii) The flour of wheat and rice including atta, maida, rawa and suji, whether sold

                                 singly or in mixed form

                                 iv) The flour of pulses including besan, whether sold singly or in mixed form

                                 v)     Gur, jaggery and edible varieties of rub gur

                                 vi) Chillies, turmeric, tamarind, coriander seeds, fenugreek and parsley (suva),

                                 whether whole or powdered.

                                 vi)    Coconut in shell and separated kernel of coconut (excluding Kopra)

                                 vii)    Papad except when served for consumption

                                 viii) Solapuri chaddar and towels

      D       20% and above      Liquor, petrol, diesel

      E       12.5%              Items other than specified in the above schedules

                                 Few examples
                                 i.          Wet dates
                                 ii.         Dry fruits including raisins and currants
                                 iii.        Tea in leaf or powdered form including instant tea
                                 iv.         All other tobacco products covered by       Chapter 24 of the Central
                                             Excise Tariff (e.g. Cigarettes, Cigar, Cheroots, Snuff, Jarda, Scented
                                             Tobacco, Gutkha, Tobacco Extracts and essences including Quimaam)

(The list is illustrative and not exhaustive. Please refer to the schedules as well as
additional details of items given hereunder).

Commissioner of Sales Tax, Maharashtra State Circular No. 29 T of 2007
(Notification No. Sr. DC(A&R)/Adm-3/Notification /2006 dated 30th March 2007
also refers to in respect of certain items enlisted in the Table ibid.

3.1 Part B includes items which are in the nature of valuable items and Tax Rate

is 1 %. The tax rate has been kept low so that the trade of these items will not be

shifted to other states.

3.2 Schedule C includes 108 items and the Tax Rate is 4%. All the declared

goods under Section 14 of the CST Act have been included under Schedule C.

This part also includes raw materials, capital goods for industry, necessities not

covered under Part A and some other goods like Readymade Garments are also

included. Some of the items included under Schedule C are intangible goods as

may be notified by the State Government, from time to time, All types of yarn

other than cotton and silk yarn in hank and sewing thread, Aluminium utensils,

Bearings, Bicycles, Tricycles, Cycle rickshaws and parts, Bulk drugs, Capital

Goods as may be notified by the State Government from time to time, Coffee

beans and seeds, Cocoa pod, Green tea leaf and Chicory, Edible oils, Oil cake

and de-oiled cake, Exercise book, Graph book and Laboratory note book, Flour,

Atta, Maida, suji, besan, Rice, wheat and pulses, Readymade garments, Safety

matches, Ship and other water vessels, Sports goods excluding apparels and

footwear, Sugar and khandasari as may be notified by the State Government

from time to time, Transmission towers, Umbrella except garden umbrella,

Vanaspati (Hydrogenated vegetable oil), Writing instruments. It includes

Industrial inputs and packing materials as may be notified from time to time by

the State Government in the Official Gazette and IT products as may be notified

by the State Government from time to time.

3.3 Schedule D includes 10 items and Tax Rate is 20% in the case of Foreign

Liquor, Country Liquor and Imported Liquor. It also includes Petroleum products

and divided into 7 categories and the Tax Rate is 10 to 34% and in some cases

such as High Speed Diesel Oil one Rupee per litre also is leviable.

3.4     Schedule E includes all goods not covered in other Schedules and rate of

tax is 12.5%.

4.     Difference between tax free goods and exempt sales

        It is sometimes confusing to have goods that are tax free and sales that

are exempt. Both result in no VAT being charged, so what is the difference? . .

        Tax free goods do not attract tax at any stage of sales or in any type of

transaction, whereas, exempt sales are certain type of transactions, viz., export

sales, which are exempt from tax.

5.1    Composition schemes

        Certain dealers may find it difficult to keep detailed records for claiming

set-off. For such dealers, a simpler and optional method of accounting for VAT

has been introduced. This method is the composition scheme. It may be noted

that composition scheme is not' meant to be a tax concession scheme but only

a simplification of tax calculation and payment system.

5.2 Tax payable by dealers opting for composition in lieu of VAT

     The following classes of dealers are eligible for option to pay tax under


     a) Resellers selling at retail, i.e., to consumers,

     b) Restaurants, eating houses, hotel (excluding hotels having gradation of

        'Four Star' and above), refreshment rooms, boarding establishments,

        clubs and caterers,

     c) Bakers,

     d) Dealers in second-hand passenger motor vehicles and

     e) Works contractors

     f) Dealers engaged in the business of providing mandap, pandal, shamiana.

     Accordingly, if the dealer has opted for payment of tax liability under

composition, the tax liability has to be determined in terms of the guidelines

given in the relevant Notification in this regard. Apart from the terms and

conditions governing each of the composition schemes, the Notification explains

the methodology for computation of turnover liable to tax and the rate of

composition payable.

     A dealer can opt for the composition option at the beginning of the financial

year and has to continue to be a composition dealer at least till the end of that

financial year. If he wishes to switch over to normal VAT, he can do so only at

the beginning of the next financial year. However, a new dealer can opt for

composition at the time of registration.

     In respect of works contract, the contractor can choose to discharge tax

liability tender composition option. Moreover, such an option can be exercised by

the contractor on contract to contract basis. For details please refer to our


6.    Points to note

a)    Charge correct rate of tax
b)    Consider the composition scheme option, if you find it suitable and
c)    Consult the local sales tax office if in doubt

7. Rate of Tax of Packing Materials

When the goods sold are packed in any materials, the tax shall be leviable on

the sales or purchases of such packing material at the same rate of tax at which

rate tax is leviable on the goods so packed. This rule is applicable whether such

packing materials are charged separately or included in the price of the goods

sold. If the goods are not taxable then there will be no tax on the packing

material used.

8. No Purchase Tax

Under this Act no purchase tax is payable. Only in the cash of stocks held on 31-

3-2005 which were purchase tax is to be paid if the conditions are not fulfilled.

9. Sales and Purchases not to be Liable to Tax

9.1 Inter-State Sale and Import and Export

Sub-section (1) excludes all sales which are Inter State Trade, Sale outside the

State, Sale in the course of Import and Exports from the purview of this Act. As

per the Constitutional provisions and provisions of Central Sales Tax Act, 1956

the State Government has no power to tax the above mentioned sales.

This section states that this Act will not be applicable where sale or purchase

takes place,

(a) (i) outside the State; or

  (ii) in the course of the import out of such territory of India or the export of the

  goods out of such territory; or

(b) in the course of inter-State trade or commerce.

Further it states that for the purpose of this section, whether a sale or purchase

takes place:

(a)      (i) outside the State; or

       (ii) in the course of the import out of such territory of India or the export of

the goods out of such territory; or

(b) in the course of inter-State trade or commerce, shall be determined in

accordance with the provisions of section 3, 4 and 5 of the Central Sales Tax


9.2 Sale of Fuel and Lubricant to a Foreign Aircraft

Sale of fuel and lubricant to foreign aircraft is exempt under sub-section (2) of

Section 8 provided the following conditions are satisfied:

(i) Exemption is in accordance with the notification issued by the Central

Government in exercise of its power under Section 3 of the Foreign Aircraft

(Exemption from Taxes and Duties on Fuel) Act, 2002.

(ii) The aircraft is not registered in India.

(iii) The fuel and lubricants are filled into receptacles forming part of aircraft.

(iv) The country in which the aircraft. is registered is a party to the Convention of

International and Civil Aviation, 1944 and it has entered into an Aircraft

Services agreement with India and the aircraft is operating on a scheduled .or

non-scheduled service to or from India.

9.3 Sale by Special Economic Zone Developer or Unit or Export Oriented Unit

Sub-section 3 provides exemption from tax on goods supplied by Special

Economic Zone Developer or Unit, 100% Export Oriented Unit, any unit in the

Software Technology Park, or any unit in the Electronic Hardware Technology

Park. It -provides that the Government may I exempt by order tax on the sales of

goods made by any of I these units exempt from tax. It is subject to terms and

conditions specified by the State Government. A developer of the Special

Economic Zone means a developer undertaking development, repairs,

maintenance and improvement of the Special Economic Zone and the developer

has been certified by the Commissioner.

The Special Economic Unit includes an establishment situated within the Special

Economic Zone.

9.4 Exemption from Tax for goods specified in the Import and Export Policy

Sub-section 3A empowers the State Government to exempt from payment of tax

any class or classes of sales of goods made by registered dear to any class of

dealers specified in the Import and Export Policy of the Government of India.

Now Export and Import Policy has been renamed as Foreign Trade Policy. This

exemption notification has to be notified in the Official Gazette. The State

Government may imposed conditions and restriction to allow exemption from


9.5 Exemption from Payment of Tax - Sale to/by Canteen Stores

Sub-section 3B empowers the State Government to exempt from payment of tax

sales of goods made by:              .

(i) Any registered dealer to the Canteen Stores Department of the Indian Naval

Canteen Services.

(ii) The Canteen Stores Department or the Indian Naval Canteen Services to the

unit run canteens or members of the armed forces.

(iii) The unit runs canteens to the members of the armed forces.

This exemption notification has to be notified in the Official Gazette. The State

Government may impose conditions and restriction to allow exemption from

payment of tax.

9.6 Exempted Units

Sub-section 4 provides that the State Government may by order published in the

Official Gazette provide exemption from payment of the whole of tax in respect of

sales affected by a unit holding a Certificate of Entitlement to whom incentives

are granted under Package Scheme of Incentives.

Exemption from Payment of Tax - Sale to State Government

 Sub-section 5 empowers the State Government to exempt from payment of tax

 any class or classes of sales of goods made by registered dealer to the


 (i) The State Government. .

 (ii) The Central Government.

 (iii) A Generating Company as defined in the Electricity Act, 2003 for use in

 generation of electricity.

 (iv) A Registered dealer holding a licence for transmission of electricity under the

 Electricity Act, 2003 for use in transmission of electricity.

 (v) A Registered dealer holding a licence for distribution of electricity under the

 Electricity Act, 2003 for use in distribution of electricity.

 (vi) The Mahanagar Telephone Nigam Ltd.

 (vii) The Bharat Sanchar Nigam Ltd.

(viii) Any telephone service provider holding a licence granted under the Indian

 Telegraph Act, 1885 arid the Indian Wireless Telegraphy Act, 1933, to establish,

 maintain and operate telephone service up to subscribe terminal connection.

 9.7 Penalty for Non-compliance

 Exemption is available from payment of tax under Sub-sections (3), (3A), (3B) or

 (5) of Section 8. If the purchaser fails to comply with the conditions or restrictions

 subject to which the exemption is given, the authority may impose penalty on the

purchasing dealer. The penalty may be equal to one and a half times the tax

which would have become payable on the purchase if the exemption was not

available on the purchase. The authority has to give the purchaser reasonable

opportunity of being heard before imposing the penalty.

                                     SECTION 5

                                 TAX INVOICES - FAQs

1. What is a tax invoice?

A tax invoice is the document you must obtain when you purchase goods for

your business and on which you have paid tax or give to your customers who are

registered dealers and to whom you charge VAT.

2. Is the tax invoice in a prescribed format?

No. A tax invoice can be in any form to suit your business. All tax invoices must


1) The words 'Tax Invoice' in bold letters either at the top or at a prominent


2) A serial number

3) The date of the transaction/sale/issue

4) Seller's name, address and Registration certificate member.

5) Purchase's and name & address

6) Description of the goods

7) The quantity or number of goods involved in the transaction

8) The price of the goods

9) The amount of VAT charged on the goods (this must be shown separately)

10) A declaration certificate.

3.   What does the declaration certificate have to state?

Certificate as below to be printed on invoice (Rubber stamp may be used for old


        "I/We hereby certify that my / our registration certificate under the

Maharashtra Value Added Tax Act, 2002 is in force on the date on which the

sale of goods specified in this "tax invoice" is made by me / us and that the

transaction of sale covered by this "tax invoice" has been effected by me / us

and it shall be accounted for in the turnover of sales while filing of return and the

due tax, if any, payable on the sale has been paid or shall be paid".

4. Who may sign the certificate?

You yourself or your manager or agent as authorised by you may sign the tax

invoice certificate.

5. When is a Bill or Cash Memorandum to be issued?

 Bill or Cash memorandum can be issued by a registered dealer wherein the

  tax amount is not shown separately.

 All dealers paying tax under Composition Scheme (other than works

  contractors) should also issue Bill or Cash Memorandum.

 Unregistered dealer cannot issue Tax invoices. They will have to issue Bill or

  Cash Memorandum.

6. What information should the bill or cash memorandum show?

A bill or cash memorandum may be in any form to suit your business, but it must

show all the following information:

   1) name of the business, address and Registration Certificate number,
   2) a serial number,
   3) particulars of the goods sold,
   4) sale price of the goods,
   5) date of issue,
   6) your signature - or that of your authorized representative
   7) a declaration certificate.

7. What does the declaration certificate have to state?

Certificate as below to be printed on invoice

(Rubber stamp may be used for old stationary).

     I/we hereby certify that my/our registration certificate under the Maharastra
Value Added Tax Act, 2002 is in force on the date on which the sale of goods
specified in this bill/cash memorandum is by we/us, and that the transaction of
sale covered by this bill/cash memorandum has been effected by me and it shall
be accounted for in the turnover of sales while filing my return.

8. Why are there two different types of sale documents?

     Under the VAT, a registered dealer can claim set-of for tax paid on most
business purchases. In order to claim a set-off, a registered dealer must get a
tax invoice from his supplier. Unregistered dealers and consumers cannot claim
set-off, so they do not need a tax invoice and a less detailed bill or cash
memorandum is appropriate.


Shared By: