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  1. 1. Dr. S. R. Kulkarni, Professor - MSU
  2. 2. TAXES Economist De Marw has stated “A tax is a price which each citizen pays to the Government to cover his share of the cost ofgeneral public services which he consumes”.
  4. 4. Introduction toIndirect Taxes
  5. 5. TYPES OF TAXES DIRECT TAXES Income Tax, Professional Tax, Wealth Tax INDIRECT TAXES Central Excise, Service Tax, Custom Duty
  6. 6. TYPES OF TAXESDirect TaxesProgressive TaxIncrease as proportion of incomePerson liable to pay when income exceedsspecified limit.Payment only on specified dates.Indirect TaxesRegressive TaxDecreases as proportion of incomeEvery one liable to pay (poor or rich)Payment 24 x 365
  7. 7. Classification ofIndirect TaxesCentral Indirect Taxes:Central Excise Duty, Custom Duty,Central Sales Tax and Service TaxState Indirect Taxes:State Excise Duty, Sales Tax or VAT,Consignment Tax, Property Tax, EntryTax or Octroi.
  8. 8. One line meaning ofIndirect TaxesCentral Excise Duty:Tax on manufacture or production of excisable goods in India.Custom Duty:Tax on import or export of goods.Service Tax:Tax on services provided or to be provided.Sales Tax:Tax on sale or purchase of goods.VAT:Tax on value added by the dealer of the goodsCentral Sales Tax:Tax on inter state sale of goods
  9. 9. Constitutional supportto Direct and Indirect Taxes
  10. 10. Indirect Taxes in India Central Govt. State Govt. •VAT replaced State Sales Tax* Excise Duty – CENVAT Credit from 1st April, 2005• Service Tax -- CENVAT Credit (Gujarat 2006)• Custom Duty (Sales Tax, WCT, TOT, S.Charge) Proposed Goods & Services Tax Act Proposed Goods & Services (State – GST) Tax Act. (Central) - Merger of all state taxes including Octroi - Service Tax Levy to the States. ( Proposed from 1st April 2010 ( Proposed from 1st April 2010 ) On the same goods and services, Central Govt. and State Govt. would
  12. 12. VAT adopted by the Countries Standard Standard Country Year VAT Country Year VAT Rate RateFrance 1948 20% Russia 1992 18%Brazil 1967 18% Spain 1986 16%Australia 2000 10% Sweden 1969 25%Banglades 1991 15% U.K. 1973 20%hCanada 1991 NA Korea (S) 1977 10%China 1994 17% Israel 1976 17%Nepal 1997 10% Denmark 1967 25% 12Pakistan 1990 15% India 1986
  13. 13. VAT Revenue Ratios : 2001 Percentage PercentageCountry to Tax to GDP RevenueBelgium 15 7Denmark 20 10France 18 8Germany 18 7Spain 17 6Sweden 18 7UK 18 7 13
  14. 14. Tax Revenue Growth in IndiaIn 10 yearsIncome Tax Corp. Tax 450%Custom Duty 131%Central Excise Duty 145%Service Tax 2474%State Indirect Taxes 231%Aggregate 259%Direct & Indirect tax to GDP 6% & 15%
  16. 16. Pre-VAT Situation (prior to 2005 in India)
  17. 17. Post-VAT/GST Situation
  18. 18. What is VAT/GST ?1. VAT is multipoint Sales Tax,s with facility of set- off for tax paid on purchases.2. Collected in installments at each stage of transaction from production to consumption.3. Does not have cascading effect due to ITC.4. VAT is tax on consumption. Final burden of tax is fully & exclusively borne by ultimate consumer.5. VAT is equivalent to last point retail sales price tax.6. VAT is not charged on exports.
  19. 19. What is VAT/GST ?VAT = Out put tax – Input tax = Tax on sale – tax on purchase = Tax payable – input tax credit = Output tax on sale of taxable goods minus input tax paid on purchases = Tax at each stage of sale starting from production or import to ultimate consumer
  20. 20. Goods and Services Tax (GST)• Further significant improvement in Indirect Taxation (awaited)• Next logical step – towards a comprehensive indirect tax reforms.• GST likely to be introduced from April 1, 2011……???
  21. 21. Justification of GST• Shortcomings of VAT (Break ITC chain)• GST include comprehensively more indirect Central and State taxes and integrate goods and service taxes for set-off• Revenue gain for the Centre and State• Increase compliance, reduce evasion• Dealers’ psychology favors VAT/GST
  22. 22. Why GST• Several State Indirect taxes• CENVAT load on the goods, cascading effect• No integration of VAT on goods and services at the State level• Goods produced on the basis of physical inputs as well as services• GST is VAT plus service tax & an improvement over VAT• Central Sales Tax (CST) will also be removed
  23. 23. GST model accepted• GST have three components:o Levied by the Centre i. Central GST(CGST) ii. Integrated (IGST),o Levied by the States State GST. (SGST)• GST model to be implemented through multiple statutes. Each state will have separate its’ own Act
  24. 24. GST model Uniform• Definition of taxable event,• Taxable person,• Measure of levy,• Valuation provisions,• Basis of classification etc.
  25. 25. Central Taxes to be subsumed under GST• Central Excise Duty• Additional Excise Duties• The Excise Duty levied under the Medicinal and Toiletries Preparation Act• Service Tax• Additional Customs Duty, commonly known as Countervailing Duty (CVD)• Special Additional Duty of Customs – 4% (SAD)• Surcharges• Cesses
  26. 26. State Taxes to be subsumed under GST• VAT/Sales tax• Entertainment tax• Luxury tax• Taxes on lottery, betting and gambling.• State Cesses and Surcharges• Entry tax or octroi
  27. 27. Dual GST• CGST and SGST both will be levied on all transactions of goods and services.• CGST and SGST are to be paid to the accounts of the Centre and the States separately• Input tax credit (ITC) of CGST & SGST to be taken separately and used separately, cross utilisation barred.
  28. 28. Salient features of the GST model• GST have two components: levied by the Centre Central GST, levied by the States State GST.• Dual GST model implemented through multiple statutes• Basic features of law chargeability, definition of taxable event and taxable person, measure of levy valuation provisions, basis of classification etc. uniform
  29. 29. Salient features of the GST model• CGST and SGST applicable to all transactions of goods and services made for a consideration except the exempted goods and services• CGST and SGST are to be paid to the accounts of the Centre and the States separately• Allowed to be taken as input tax credit (ITC)• Credit of CGST to be used against payment of CGST only and Credit of SGST to be used against payment of SGST
  30. 30. Salient features of the GST model• Cross utilization of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services under the IGST model• Refund of GST should be avoided by both the Centre and the States except in the cases such as exports,
  31. 31. Salient features of the GST model• Uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST• Separate administration of the Central GST to the Centre and for State GST to the States• Threshold limit of gross annual turnover of RS.10 lakh both for goods & services for all States for small trader or SSI to keep him out of purview of SGST
  32. 32. Salient features of the GST model• Threshold limit for Central GST for goods RS. 1.5 crore• Threshold limit for Central GST for services may also be appropriately high• Separate threshold of services (Rs. 10 lakh)• Composition/Compounding Scheme for the purpose of GST cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5% across the States.
  33. 33. Salient features of the GST model• Taxpayer need to submit periodical returns, in common format to both the CGST authority and to the concerned SGST authorities• Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits• Assessment, enforcement, scrutiny and audit by the authority collecting the tax, with information sharing between the Centre and the States.
  34. 34. Purchase tax• Food grains producing States and certain other States earn substantial revenue from Purchase Tax• Purchase Tax has to be subsumed, but such state are not prepared for it.• Such states wants to keep purchase tax out of GST net
  35. 35. Tax on items containing Alcohol• Alcoholic beverages to be out of GST net.• Existing practice to levy Sales Tax/VAT to be continued on alcoholic beverages.• State Excise Duty, presently being levied by the States to be continued.
  36. 36. Tax on Tobacco products• Centre may be allowed to levy excise duty on tobacco products over and above GST and that to without ITC.
  37. 37. Tax on Petroleum Products• Crude, motor spirit (including ATF) and HSD would be kept outside GST net• Sales Tax could continue to be levied by the States on these products with prevailing floor rate• Centre wants to continue its levies like excise.
  38. 38. Taxation of Services• Centre and the States will have concurrent power to levy tax on all goods and services.• Constitution requires, amendment to levy tax on services by the states.• At present only Centre levies tax on services
  39. 39. GST Rate Structure• Two-rate structure proposed i. Lower rate for necessary items and goods of basic importance ii. Standard rate for goods in general.• Special rate for precious metals• Exempted list under VAT regime including Goods of Local Importance may be retained• Revenue neutral GST rate is expected
  40. 40. Authority to tax goods and services• Central Government can tax goods, only up to manufacturing or importing level• State Government can tax goods, after manufacturing or importing level• At present only Central Government can tax Services and inter state sales
  41. 41. GST at the State• Additional power of levy of taxation of services for the States,• System of comprehensive set-off for cascading burden of CENVAT and service taxes,• Subsuming of several taxes in the GST• Removal of burden of CST
  42. 42. Expectations from GST• Effective GST model in a federal system• Overall harmonious structure of rates• Upholding the powers of Central and State Governments in their taxation matters.• Model that would be easily implementable• Acceptable to stakeholders.
  43. 43. Inter-State Transactions of Goods and Services• IGST Model: Centre would levy IGST i.e. CGST plus SGST on all inter-State transactions of taxable goods and services• Inter-State seller will pay IGST• Exporting State will transfer to the Centre the credit of SGST used in payment of IGST• Importing dealer will claim credit of IGST
  44. 44. Inter-State Transactions of Goods and Services• Centre will transfer to the importing State the credit of IGST used in payment of SGST• Relevant information will also be submitted to the Central Agency• Central Agency will act as a clearing house mechanism• Central Agency will verify the claims and inform the respective governments to transfer the funds
  45. 45. Inter-State Transactions of Goods and Services• Uninterrupted ITC chain on inter-State transactions.• No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer.• No refund claim in exporting State, as ITC is used up while paying the tax.• Self monitoring model.
  46. 46. Inter-State Transactions of Goods and Services• Level of computerization is limited to inter-State dealers and Central and State Govt. to computerize their processes• Inter-State dealers be e-registered and correspondence with bye-mail, compliance level will improve• Model can take B2B as well as B2C transactions into account.
  47. 47. IT Infrastructure• IT infrastructural requirement will be shared by the Central Government through the use of its own IT infrastructure facility• Tying up the State Infrastructure facilities• Improvement of the States own IT infrastructure, including TINXSYS in a time bound manner
  48. 48. Manufacturing to consumption• Higher the number of intermediaries, between manufacturing and consumption, higher will be value addition and aggregate tax, resulting in to rise in prices, leading to inflation.• Every increase in tax component is ultimately born by consumer which, affects his budget.• Tax paid by consumer, adds revenue to exchequer.
  49. 49. Post-VAT/GST Situation
  50. 50. Receipts On Government of Gujarat : Sales Tax/VAT 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 GR (%) -2.00% 4.70% 16.60% 16.80% 21.80% 71.70%Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08VAT 3736.32 3661.74 38.34.14 4470.28 5222.87 6360.48 10918.78 12718.38(Crore)Source: Socio-Economic Review Gujarat State, 2008-09, P. S-122
  51. 51. GST/VAT: Tax on valuecoin Other side of the added• GST/VAT is tax on every value added by assessee/dealer.• Value addition is nothing but expenses incurred and profit charged by assessee.• Any increase in expense or profit of a dealer increase GST/VAT as it is part of value addition.• Which results in price rise.
  52. 52. Consumer Price Index (Base Year: 1986-87=100) GUJARAT ALL INDIA Agricultural Rural Agricultural Rural Labourers Labourers Labourers LabourersYEAR General Food General Food General Food General Food1999-00 309 327 311 328 309 314 310 3132000-01 314 322 315 323 304 299 306 3002001-02 320 324 322 324 311 304 313 3052002-03 332 336 333 336 323 316 325 3172003-04 339 344 341 344 332 326 335 3272004-05 350 354 351 354 342 335 344 3352005-06 369 377 371 377 358 351 360 3522006-07 403 415 403 415 388 384 389 3842007-08 424 434 425 435 417 416 418 4162008-09 450 459 451 459 454 457 454 457Source: Socio-Economic Review Gujarat State, 2008-09, P. S-116
  53. 53. Growth Rate of Consumer Price Index GUJARAT ALL INDIA Agricultural Rural Agricultural Rural Labourers Labourers Labourers LabourersYEAR General Food General Food General Food General Food1999-00 - - - - - - - -2000-01 1.6% -1.5% 1.3% -1.5% -1.6% -4.8% -1.3% -4.2%2001-02 1.9% 0.6% 2.2% 0.3% 2.3% 1.7% 2.3% 1.7%2002-03 3.8% 3.7% 3.4% 3.7% 3.9% 3.9% 3.8% 3.9%2003-04 2.1% 2.4% 2.4% 2.4% 2.8% 3.2% 3.1% 3.2%2004-05 3.2% 2.9% 2.9% 2.9% 3.0% 2.8% 2.7% 2.4%2005-06 5.4% 6.5% 5.7% 6.5% 4.7% 4.8% 4.7% 5.1%2006-07 9.2% 10.1% 8.6% 10.1% 8.4% 9.4% 8.1% 9.1%2007-08 5.2% 4.6% 5.5% 4.8% 7.5% 8.3% 7.5% 8.3%2008-09 6.1% 5.8% 6.1% 5.5% 8.9% 9.9% 8.6% 9.9%
  54. 54. Consumer Price Index (Industrial Workers) Base year 86-87=100 YEAR Index Growth Rate 1998-99 414 - 1999-00 428 3.4% 2000-01 444 3.7% 2001-02 463 4.3% 2002-03 482 4.1% 2003-04 500 3.7% 2004-05 520 4.0% 2005-06 542 4.2% 2006-07 597 10.1%Source: Hand Book of Statistics on The Indian Economy, RBI, 2008-09, P. 86
  55. 55. Growth Rate of Consumer Price Index (Industrial Workers) Base year 86-87=10012.00%10.00%8.00%6.00%4.00%2.00%0.00% 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
  56. 56. Double Taxation• Under GST/VAT scheme, profit component of value addition is taxed once as indirect tax.• Same profit component is again taxed under head profit or gain from business or profession under Income Tax Act, 1961 as direct tax• It is a case of Double taxation.
  57. 57. All transactions to be taxed by Central and State governments• At present, Center taxes, only up to importing (custom duty) or manufacturing (Excise Duty).• On implementation of GST Center will tax sale or purchase along with manufacturing (CGST).• At present, State taxes, only after importing or manufacturing i.e. sale or purchase (VAT)• On implementation of GST state will tax importing or manufacturing along with sale or purchase (SGST)
  58. 58. Implementation of VAT• 21 States - 1st April 2005• BJP ruled States 1st April 2006• Tamilnadu 1st Jan. 2007• Uttarpradesh 1st Jan. 2008• Uttarakhand and Jammu-Kashmir have yet not implemented
  59. 59. Innovation• Central Government had agreed at the time of implementation of VAT that, any loss arising in abolishing CST will be compensated.• Government of Gujarat is demanding 220 crore on this account.• GOG made budget provision for the year 2010-11, that if Central Government fails to compensate till 1st July, 4% ITC will be reduced on every inter state sales.
  60. 60. Implementation of GST• Federal structure• Different state governments ruled by different political parties• Amendments to constitution required• No state would like to give up their authority to levy taxes• No state would like to share their power with Central Government to levy taxes.