duties and taxes for govt purchase proposals

8/7/2019 Duties and taxes for Govt purchase proposals

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Duties and taxes in Govt. Purchases proposals

For

National Academy for Defence Financial

Management

By Milind Date

29th May 2009


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` With a lot ofprivate sectorparticipation in govt sector

organisations, therere larger implications ofsuch taxes

` Its important forpeople responsible for Purchases as the purchase ofgoods / services have incidence

oftaxes

Sales organisations must collect taxes when they sale or

remove goods from factory

Accounts they must ensure compliance

Potentially taxes are costs which must be controlled,

neutralizedorminimized within the legal framework


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a) Levies by the State of a nation

b) Payable under laws as may be applicable

c) Could be classified as direct tax and

indirect taxd) Main purposes revenue, redistribution,

and repricing


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Direct Taxes: payable directly by

people or organisations on

whom they are ostensibly

imposed. E.g. Income tax


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Indirect Taxes: payable by

ultimate consumer of

product or service. Collected

through the series of entities

who are part of value chain.

E.g. customs, excise,service, Octroi etc


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Direct Tax

Paid after the income reaches

hands oftax payerIndirect Tax

Paid before goods/services reach

hands ofultimate consumer


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Revenue

Toraise fundsforroads,schools,hospitals,security &regulation

Redistribution

Transferwealthfrom rich topoor

Repricing

To address anissue e.g. highlevies ontobaccoproducts

Purposes ofTaxation


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What shouldone lookforwhen

finalizing purchase contracts?

a) Are the inputs or input services going to be used inmanufacture of final product?

b) Are any taxes payable on purchase of the input or input

service?c) Can the effect of taxes be neutralized?d) How to take sourcing decision to minimize the incidence of

tax?e) What are different duties and taxes applicable? What are

the concerned rules & regulations?


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Coverage ofTodays discussion

a)Central Excise Duty

b)Service taxc)Customs Dutyd)VAT CST and State


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` Basics ofExcise Law Nature ofExcise duty

Types ofExcise duty

Acts andRules applicable underCentral Excisex Central Excise Act, 1944

x Central Excise TariffAct, 1985

x Central Excise Rules, 2002

x Central Excise ValuationRules, 2000

xCenvat Credit Rules, 2004

x Notifications

x Circulars, Trade Notices etc.

Central Excise


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` It is a central levy collectedon all excisable goodsproducedormanufactured in India. This excludes liquor

which is under the state list.

` Fourbasic conditions:

Its the duty on Goods Goods must be excisable

Goods must be manufacturedorproduced

Such manufacture orproduction must be in India

Unless all four conditions are met, no excise duty can be

charged


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Concept ofGoods not defined in the central excise Act

1944

As per judicial interpretation must satisfy two conditions

forbeing called goods

An article must be Movable and Marketable

Hence immovable property is not goods Goods must be capable ofbeing bought orsold in the

market

Goods could be tangible or intangible

Excisable Goods are goods specified in the schedule to

the CETA 1985 as being subject toduty ofexcise


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x Definition as persec 2(f) is inclusive: Manufacture

includes any process

x (i) incidental and Ancillary to the manufactured

product; ( new & identifiable product having

distinctive name, characteroruse must emerge)

x (ii) which is specified in relation to goods in the 1st

schedule of CETA, 1985 as amounting to

manufacture or

x (iii) which, in relation to goods specified in 3rd

schedule of CEA, involves packing or repacking orlabeling or relabeling to render the product

marketable to the customer

(ii) And (iii) above are deemed manufacture


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` Duty is payable by manufactureron manufacturingthe goods; its not important whetherthe goods

are soldornot

` Raw material supplier is not manufacturer e.g.

Bajaj supplying material and gets the componentsmade by a job workerat his place. Here, Bajaj is

not manufacturer

` Brandowner is not manufacturer e.g. a Pharma

company gets tablets made by an SSI under itsown brandname. The Pharma company is not

manufacturer!


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x Central Excise TariffAct,1985 classifies goods inappropriate heading (there are 98 chapters, over

1000 tariffheads andover2000 sub-heads

x Harmonized System ofNomenclature (HSN) is used

forcodingx The codes are tabulated in 4 columns

x Tariff item

x Descriptionofgoods

x Unit

x Rate ofduty


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` Basic Excise duty (termed as CENVAT)- @ rates specified in 1st

Schedule to CETA. The general rate currently is 8%

` Special Excise Duty @ rates specified in 2ndschedule to CETA

` Additional Duty (on goods ofspecial importance andon textile &

textile articles)` Education Cess / Secondary & Higher Education cess which are

@ 2% and 1 % respectively to be calculatedonBasic duty

` National Calamity Contingency Duty (NCCD) e.g. 10% - 45% on

pan masala, tobacco & cigarettes, 1% onPolyesterFilament Yarn

(PFY), cars, MUV & 2-wheelers and mobile phones


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` Excise duty is payable on the assessable value

` The concept ofvalue is defined in section 4 of

CEA which has undergone a radical change w. e.

f. 1st

July 2000.` As persec 4(1)(a)Duty is payable on the

transaction value if the goods are sold at factory

gate to an unrelated buyer where price is the sole

consideration` In all othercases, valuation is done basedon

valuationrules undersection 4(1)(b)ofCEA


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` Value nearest to time & place ofremoval ifgoods not sold at thetime ofremoval e.g. free sample, warranty replacements

` Goods sold at different place than place ofremoval i.e. factory gate

e.g. FORdelivery contracts where the transportation charges are

allowed as a deduction

` Where price is not the sole consideration the AV will be the pricecharged + monetary value ofotherconsiderationreceived where

buyermay supply tools etc. free orat reduced price

` Valuation in case ofcaptive consumption - @ cost ofproduction +

10%

`

Sale atD

epot price ruling atD

epot but at the time ofremoval fromfactory


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Specific duty chargedon the basis ofcertain unitofmeasure like kg, liters, noofpieces, length etc.

Duty as a % of Tariff value this is a notional value

fixed by the govt which is used as a base insteadof

assessable value e.g. pan masala

Duty on MRP as a % on MRPless abatement e.g.

chocolates, biscuits, aerated waters

Ad valorem duty fixed as a % on assessable value

fixed undersection 4 i.e. transaction value


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x Forsupplies todefence undervarious

circumstances vide notification 64/95 dated 16-03-

1995

x Exports underbond without payment ofduty

x Export underclaim ofrebate

x Supplies to SEZ/EOU from DTA

x Exemption to SSI units

x Exemption in backward areas e.g. Uttarakhand


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Central Value Added Tax scheme was introducedon 1st

April 2000 toreplace MODVAT in vogue since 1986

CENVAT rules were made in 2002 and amended in 2004

Purpose was to avoid cascading effect as the duty was

charged at each stage till final product reaches ultimatecustomer

Underthis scheme, tax credit is given at each stage for

taxes paid till earlierstages

So effectively, duty is chargedonly on the value added

at each stage


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` Credit available to manufacturerorproducerof the final

product orproviderofa taxable service

` Credit can be takenof taxes paidon inputs or input

services

` These include excise duty as perschedules toCETA,

additional duty ofexcise, NCCD, education cess,additional customs duty, service tax

` Credit can be utilisedforpayment ofduties onremoval

offinal product

` C

redit can be taken immediately for inputs and its 50%forcapital goods infirst year& the rest in subsequent

years


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` Credit can be taken if the inputs are used in the manufacture

or inrelation to the manufacture offinal product orservice` Credit not available if inputs or input services are usedfor

manufacture ofexempted goods orprovisionofexempted

output services.

` If input or input services are partly usedforexemptedfinal

products and partly fortaxable final product, the manufacturer

can-

Maintain separate inventory & accounts forreceipt and use of

inputs or

Pay an amount equal to 10% ofthe value ofexempted goods or

8% of the value ofexempted service or

Pay an amount equal to proportionate credit attributable to

exempted product orservice


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` Exports are generally relievedofdomestic taxes to make

Indian industry competitive.` Central excise rules 2002, provide for2 mainrules related to

exports- Rule 18 Rebate ofduty on export goods and material used in

manufacture ofsuch goods. It grants rebate ofduty paidon such goods

oronduty paidon inputs used in manufacture ofsuch goods.Notifications 19, 20 and 21 of2004.

Rule 19 Export ofgoods underbond without payment ofduty onfinal

product ortheir inputs. The rule approves removal ofgoods from factory

underbond without payment ofduty or it allows the removal of inputs (to

be used in manufacture ofexport goods) without payment ofduty.


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x Job work means processing or working upon RM or semi-finished items supplied to the job workerso as to complete a part

orwhole of the process resulting into manufacture

x Ifgoods are sent to job workerunderCenvat, he is not required to

pay excise duty onremoval afterprocessing

x Exemption is also available to job workerunderNotificationNo.214/86

x Valuation in case of job work the Assessable value is material

cost (sent to him by manufacturer) + job work charges including

profit


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Brief background of Customs Law Nature ofCustoms duty

Types ofduty

Acts andRules applicable underCustoms

x Customs Act, 1962x Customs TariffAct, 1975

x Customs rules valuation, duty drawback, baggage,imports at concessional rates etc.

x Notifications

x

Circulars, Trade Notices etc.

Customs Duty


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` Its an indirect tax leviedon import ofgoods and export ofgoods. Itscharged when theres movement ofgoods orservices across the

territorial borders ofIndia.

` In todays parlance, its mainly duties on import as export duties are

almost abolished

` Also called as Tariff, its collectedfrom the importerorexporter.` The incidence is borne by the consumer.

` Purpose, apart from raising revenue, is

to protect domestic industry from international competition

torestrict imports ofcertain items

To conserve foreign exchange


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`

Basic Customs Duty (BCD) charged undersection 2 ofC

TA 1975.The peakrate ofcustoms duty is 10%

` Additional Customs Duty u/s 3(1)(Countervailing duty - CVD) equal to excise duty chargedon similararticles manufactured inIndia

` Education cess on customs duty 2%

` Higher education cess on customs duty 1%

` Additional Duty u/s 3 (3) charged in case final product is excise

exempt & hence no chance ofC

VD

` Special Additional Duty (CVD-SAD) u/s 3(5) charged to counterbalance sales tax orVAT 4%


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`

Anti-Dumping Duty ondumped articles u/s 9A ofC

TA chargedonnormal value minus export price charged` Safe guard duty if imports are in very large quantities, exists for

a limited period` Product specific safeguardduty on imports from China` NCCDofCustoms on pan masala, chewing tobacco and cigarettes`

Export duty chargedonly on a few items like luggage leather,hides, skins.` Cess


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Specific duty chargedon the basis ofcertain unitofmeasure like kg, liters, noofpieces, length etc.

here, value ofgoods imported has norelevance.

Ad valorem duty fixed as a % on assessable value

i.e. normally CIF + 1% landing charges

Compound Duty a combinationofboth the above

methods


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x Value could be assessment/Customs value as persection

14(1)ofCA 1962 ortariff value fixedforcertain products likecrude palm oil, palm oil, soyabeanoil, brass scrap (notification 36

of2001)

x Customs Value is transaction value i.e. price (being only

consideration) at which goods are exchanged by non-related

partiesx It will also include charges forcosts & services like commission,

engineering, design work, royalties, license fees, freight, loading

etc.

x It has 1% (ofCIF) charge as landing charge

x

Rate ofExchange forCustoms Valuation is as perCBE&C


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Customs duty computation.xls

Importerwho is a manufacturerwill get CENVAT credit

on CVD + Edu cess on CVD + SHE cess on CVD +

Special CVD


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x Exemptionfrom customs duty through notifications

x Project Imports to avoid high incidence ofduties on initial project cost.

Goods are classified underhead 98.01 and charged concessional or

nil rates ofduty

x General Exemptions undercustoms notifications there are 129 such

exemptions. GEx EOU / SEZ / STP schemes


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Brief background of Service tax Law Nature ofService tax - No separate Act governed by Chapter

5 ofthe Finance Act 1994

Important concepts

x Taxable servicesx Taxable event

x Rate ofservice tax including cess

x Liability to pay

x Value of taxable service

x

Classificationofservicex Exemptions

Service Tax


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` Over52% ofIndias GDP is contributed by service industry and thus Govt

raises sizable revenue` Its an indirect tax normally collected by service providerfrom the

recipient ofservice and paid to Govt.

` It is payable on taxable service as defined in various clauses ofSection

65 ofFinance Act 1994. Currently 115 services are defined.

` It is administered by the Excise and customs department through their

commissionerates.

` Cenvat credit is available on inputs, input services & capital goods used

in providing output services as perCENVAT Credit rules 2004.

` There is no service tax ifservices providedfree ofcost


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` These are types ofservices as defined by various

clauses ofsection 65 (105)of the Finance Act1994.

` It implies existence of2 parties

` The section 65 defines taxable service as any

service provided or to be provided

` Taxable events are: Entering into contract forservice it becomes service to

be provided

Provisionofservice even ifcontract was entered into

before service became taxable & actual service is given

after it becomes taxable


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` Currently the service tax is charged at 10% on the

taxable value of the service provided

` The educational cess of2% and secondary &

highereducation cess 1% are also applicable


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` Payable by the service provider (the person providing

taxable service) barring a few exceptions given below

where the recipient is liable: Service provided by personfrom any country otherthan India to a

person in India In insurance auxiliary service, tax not payable by insurance agent

but by insurance company

In Goods transport agency, tax is payable by consignoror

consignee who pays freight andnot by the transporting agent

Mutual fund agent is not liable, but MF company is.


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` Section 67 ofFinance act 1994 tax is payable on

Gross amount charged by service provider for the

service provided or to be provided

` Its payable on the value ofservice that is billed and

actually received by service providerfrom customer

` Reimbursement ofout ofpocket expenses charged by

service providerare included in the valuation

` Expenses incurred by service provideron behalfof

service receiverare not included e.g. customs duty paidby CHA, ticket charges paid by travel agent


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` Exemptions are granted through notifications u/s 93 ofFinance Act

1994` They can be partial ortotal; conditional orunconditional

` Exemptions cannot be granted with retrospective effect

` Small service providerwith turnover< Rs 10 lacs p.a.

` Theres no service tax on services exported

` Services to UN are exempt

` Services to SEZ units forconsumption within SEZ are exempt

` Services provided by RBI are exempt

` Some specific exemptions are allowed by granting partial abatement

on the gross amount charged e.g. tax is chargedon 33% ofgross

amount forconstruction service

` In case of exempted services, no Cenvat credits on inputs is

allowed


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VAT is a tax on sales within the state andCST is tax on

inter-state sale

CST will be abolished by 1stApril 2010

State-wise VAT is introduced in 2003 1, 2005 20, 2006

5, 2007 -1, 2008 -1 VAT system and law are same in all states. Differences

exist in provisions on Credit allowance

Credit oftax on capital goods

Credit when goods are sold inter-state Schedules of tax rates

VAT / CST


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x It is a tax onfinal consumptionofgoods and services

x At each stage in the chainofbusiness till the stage ofconsumption, tax is payable only on the value added

xThis means the dealergets credit for the taxes paidby him on purchases. This avoids cascading effectmuch like CENVAT credit. VAT example


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` Knowledge oftaxation is important foreveryone to

effectively carry out the functional duties

` Continuous updating ofknowledge is crucial as the

provisionof tax laws keep changing

` Case laws guide in many ways where the provisionsunder tax laws are eithersilent orambiguous

` Keep trackofpurchase procedures ormanuals issued

by yourorganization, as they provide a basis to take

decisions


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duties and taxes for govt purchase proposals

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