Indirect tax – Fiscal Policy and Corporate Tax

Submitted to- Swanand Dhonse

10/28/2010

Indirect tax

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 Indirect tax – Fiscal Policy and Corporate Tax

INTRODUCTION
Unlike Direct Taxes, Indirect Taxes are not levied on individuals, but on goods and
services. Customers indirectly pay this tax in the form of higher prices. For example, it can be
said that while purchasing goods from a retail shop, the retail sales tax is actually paid by the
customers. The retailer eventually passes this tax to the respective authority. The indirect tax,
actually raises the price of a good and the customers purchase by paying more for that product
Indirect taxes are the charges that are levied on goods and services. Some of the
significant indirect taxes include VAT (Value Added Tax), sales tax, excise tax, stamp duties and
expenditure tax.

BASIC DIFFERENCE BETWEEN DIRECT AND INDIRECT TAXES

The primary difference between a direct and indirect tax is that direct tax is levied
directly by the government from the taxpayer, but indirect taxes are collected by the
intermediary.
Some of the examples of indirect taxes are Customs duties levied on imports, excise
duties on production, sales tax or value added tax (VAT) at some stage in production-distribution
process, and they are called indirect taxes because they are not levied directly on the income of
the consumer or earner.

MEANING OF INDIRECT TAXES

An indirect tax is the charge that is collected by
intermediary (like retail store) from the individual who holds Krunal patel(43)
the actual economic burden of the tax (like customer). The Amit narkar(41)
intermediary files a tax return and eventually passes to the
Paresh patil(44)
government. The indirect tax can be alternatively defined as
Rupesh devaliya(14)
the charge that is paid by one individual at the beginning, but
Nishank
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gonsalves(16)
 Indirect tax – Fiscal Policy and Corporate Tax

the burden of which will be passed over to some other individual, who eventually holds the
burden.

INDIRECT TAX IN INDIA

The indirect taxes in India are enforced upon different activities including manufacturing,
trading and imports. Indirect taxes influence all the business lines in India.
In general, the Indirect Tax in India is a complex system of interconnecting laws and
regulations, which includes specific laws of different states. The Indirect Taxation regime
encompasses various types of taxes like Sales Tax, Service Tax, Custom and Excise Duties,
VAT and Anti-Dumping Duties, and the organizations provide services in all these related fields.
At present the Indirect Taxes in India are under a transformation due to the changing
fiscal reforms of the Indian government. Many new acts and laws are being introduced replacing
the old laws and all related issues, which have become redundant. The reforms includes the
initiation of a region-based and state-level VAT on goods.

TYPES OF INDIRECT TAX

• Sales tax
• Value added tax
• Customs duty
• Excise duty
• State Level Taxes like octroi, property tax, stamp duty etc.
• GST
• Securities transaction tax
• Service tax

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Let us see each indirect tax in details

SALES TAX
A sales tax is a consumption tax charged at the point of purchase for certain goods and
services. The tax is usually set as a percentage by the government charging the tax. There is
usually a list of exemptions. The tax can be included in the price (tax-inclusive) or added at the
point of sale (tax-exclusive). Most sales taxes are collected by the seller, who pays the tax over
to the government which charges the tax. The economic burden of the tax usually falls on the
purchaser, but in some circumstances may fall on the seller. Sales Tax is a tax, levied on the sale
or purchase of goods. There are two kinds of Sales Tax i.e.

1. Central Sales Tax, imposed by the Centre

2. Sales Tax, imposed by each state

TO WHOM IS THESE TAX PAYABLE PAYABLE

• Central Sales tax is generally payable on the sale of all goods by a dealer in the course of
inter-state Trade or commerce or, outside a State or, in the course of import into or,
export from India.

• Sales tax is payable to the sales tax authority in the state from which the movement of
goods commences. It is to be paid by every dealer on the sale of any goods affected by
him in the course of inter-state trade or commerce.

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RECENT CHANGES
The Following are recent change in CST Law.

1-3-2006 – Appeal to CST Appellate Authority will lie only against highest Appellate Authority
of the State

18-4-2006 – LPG (liquid petroleum gas) for domestic use is added to list of ‘declared goods’ u/s
14 of CST Act to maintain tax rates at reasonable level.

1-4-2007 - CST rate reduced to 3%. 'D' form abolished. Tobacco products removed from list of
declared goods.

1-6-2008 - CST rate reduced to 2%. CST has been reduced to 3% (from 4%) with effect from 1-
4-2007. It is announced that it will be reduced by 1% every year and made Nil by 1-4-2010.

BASIC SCHEME OF THE CST ACT

The basic scheme of the CST Act is as follows.
1. Sales tax revenue to states – The CST Act provides for levy on Inter-State sales and also
defines what ‘Inter-State Sale’ is. However, the concept that revenue from sales tax should
be collected by States has been retained. Thus, though it is called Central Sales Tax Act, the
tax collected under the Act in each State is kept by that State only. CST in each State is
administered by local sales tax authorities of each State.

2. Tax collected in the state where movement of goods commences: The scheme of cst act is
that central sales tax is payable in the state from which movement of goods commences (i.e.
From which goods are sold). The tax collected is retained by the state in which it is collected.
CST act is administered by sales tax authorities of each state. Thus, the state government
sales tax officer who collects and assesses local (state) sales tax also collects and assesses
central sales tax.

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3. Tax on inter-state sale of goods: CST is tax on interstate sale of goods. Sale is inter-state
when (a) sale occasions movement of goods from one state to another or (b) is effected by
transfer of documents during their movement from one state to another.

4. State sales tax law applicable in many aspects: CST act makes provisions for very few
procedures and rules. In respect of provisions like return, assessment, appeals etc., provisions
of general sales tax law of the state applies.

VALUE ADDED TAX

A Value Added Tax is a type of indirect tax that is imposed on goods and services which
is being produced or rendered to the consumer. The increase in tax rate is borne directly by these
firms and institutions that operate within the country by reducing the profit of these
organizations. Therefore, these firms levy the tax indirectly on the goods/services they
produce/render at a percentage rate so as to reduce the tax burden imposed on them by the
government and this burden is borne by the final consumer that purchases these goods produced
by these firms. This type of tax is known as value added tax. It is also collected at each stage of
production and distribution i.e. if a supplier sells goods to the manufacturer, the manufacturer
pays VAT on the goods bought and sells to the wholesaler also with the same VAT rate. Value
Added Tax is also fiscal policy tool used by the government to control certain economic
variables (problems) that persist or have effect on the activities in the economy.

Value added tax (VAT) is a consumption tax (CT) levied on any value that is added to a
product. In contrast to sales tax, VAT is neutral with respect to the number of passages that there
are between the producer and the final consumer; where sales tax is levied on total value at each
stage. A VAT is an indirect tax, in that the tax is collected from someone who does not bear the
entire cost of the tax. In India, VAT replaced sales tax on 1 April 2005.

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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.
1. It eliminates cascading impact of double taxation and promotes economic efficiency.
2. It is primarily a self-policing, self-assessment system with more trust put on dealers.
3. It provides the potential for a stronger manufacturing base and more competitive export
pricing.
4. It is invoice based, and as a result it offers a better financial system with less scope for error.
5. It has an improved control, mechanism resulting in better compliance.
6. It widens the, tax base and promotes equity.
VALUE ADDED TAX IN MAHARASHTRA
The Bombay Sales Tax Act, 1959 introduced in 1959 underwent many changes thereafter
and in July 1981, first point tax was introduced wherein goods were classified into three main
schedules, broadly covering tax free goods, intermediate products and finished goods. The BST
Act was repealed and Maharashtra Value Added Tax Act, 2002 came into force w.e.f. 1st April,
2005 to usher in the progressive value added tax system in place of the old sales tax system.
The design of Maharashtra State VAT is generally guided by the best international
practices with regard to legal framework, as well as operating procedures. VAT in Maharashtra
is levied under a legislation known as the Maharashtra Value Added Tax Act (MVAT Act),
supported by Maharashtra Value Added Tax Rules (MVAT Rules). VAT is levied on sale of
goods including intangible goods.

HOW VAT WORKS

When a dealer 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 Government. The tax payable on
sales is to be calculated on the selling price. The tax paid on purchases supported by a, valid tax

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invoice is generally available as set-off (input, tax credit) while discharging the tax liability on
sales.

RATES OF VALUE ADDED TAX

There are two main rates of VAT 4% and 12.5%. The goods are grouped into five
schedules as under:

ADVANTAGES OF VAT
1. Coverage: Under other forms of sales tax, both seller and customer gain by evading tax. One
particular advantage is that of the widening of the tax base by bringing all transactions into
the tax net. Specifically, VAT gives the new government the opportunity to bring back into
the tax system all those persons and entities who were given tax exemptions in one form or
another by the previous regime.

2. Revenue-security: VAT represents an important instrument against tax evasion and is

superior to a business tax or a sales tax from the point of view of revenue security for three
reasons. In the first place, under VAT it is only buyers at the final stage who have an interest
in undervaluing their purchases, since the deduction system ensures that buyers at earlier
stages will be refunded the taxes on their purchases. Therefore, tax losses due to
undervaluation should be limited to the value added at the last stage. Secondly, under VAT,
if payment of tax is successfully avoided at one stage nothing will be lost if it is picked up at

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a later stage If evasion takes place under a sales tax, on the other hand, all the taxes due on
the product are lost to the government.

3. Selectivity
VAT may be selectively applied to specific goods or business entities. We have already
addressed essential goods and small business. In addition the VAT does not burden capital goods
because the consumption-type VAT provides a full credit for the tax included in purchases of
capital goods. The credit does not subsidize the purchase of capital goods; it simply eliminates
the tax that has been imposed on them.

4. Co-ordination of VAT with other direct taxes

Most taxpayers cheat on their sales not to evade VAT but to evade personal and
corporate income taxes. The operation of a VAT resembles that of the income tax more than that
of other taxes, and an effective VAT greatly aids income tax administration and revenue
collection. It must be stressed once again that if properly implemented VAT can ultimately lead
to a reduction in overall rates of tax. Revenues will not be sacrificed but would in fact be
enhanced as a consequence of the broadened tax base. This does not seem to be a bad idea at all.
DISADVANTAGES OF VAT
VAT is reasonably straightforward. But there are some areas where it is easy to make mistakes.
These can lead to stringent penalties, and ignorance is no defense. In this briefing, we assume
you understand the basics and concentrate on some of the more unexpected pitfalls. It covers:

1. VAT favors the capital intensive firm

It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm
compared to the capital- intensive competitor, since the ratio of value added to selling price is
greater for the former. This is a real problem for labour-intensive economies and industries.

2. VAT is inflationary

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Some businessmen seize almost any opportunity to raise prices, and the introduction of VAT
certainly offers such an opportunity. However, temporary price controls, a careful setting of the
rate of VAT and the significance of the taxes they replace should generally ensure that there is
no increase if any in the cost of living. To the extent that they lead to a reduction in income tax,
any price increases may be offset by increases in take-home pay. In any case, any price
consequence is one time only and prices should stabilize thereafter.

3. VAT is regressive
It is claimed that the tax is regressive, i.e. its burden falls disproportionately on the poor since
the poor are likely to spend more of their income than the relatively rich person. There is merit in
this argument, particularly if it attempts to replace direct or indirect taxes with steep, progressive
rates. However, observation from around the world has shown that steep tax rates lead to
evasion, and in the case of income tax act as a disincentive to effort. Further, there is now a
tendency in most countries to reduce this progressivity of taxes as has been done where a flat rate
of income tax has been introduced.

CUSTOMS DUTY

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.
Duties of customs are levied on goods imported or exported from India at the rate specified
under the customs Tariff Act, 1975 as amended from time to time or any other law for the time
being in force. For the purpose of exercising proper surveillance over imports and exports, the
Central Government has the power to notify the ports and airports for the unloading of the
imported goods and loading of the exported goods, the places for clearance of goods imported or

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to be exported, the routes by which above goods may pass by land or inland water into or out of
Indian and the ports which alone shall be coastal ports.
In order to give a broad guide as to classification of goods for the purpose of duty
liability, the central Board of Excise & Customs (CBEC) brings out periodically a book called
the "Indian Customs Tariff Guide" which contains various tariff rulings issued by the CBEC.
The Act also contains detailed provisions for warehousing of the imported goods and
manufacture of goods is also possible in the warehouses.
For a person who do not actually import or export goods customs has relevance in so far
as they bring any baggage from abroad. Rates of customs duty for goods imported from
countries with whom India has entered into free trade agreements such as Thailand, Sri Lanka,
BIMSTEC, south Asian countries and MERCOSUR countries are provided on the website of
CBEC. Customs duties in India are administrated by Central Board of Excise and Customs under
Ministry of Finance.

OBJECTIVES OF CUSTOM DUTIES:

➢ Restricting Imports for conserving foreign exchange
➢ Protecting Indian Industry from undue competition
➢ Prohibiting imports and exports of goods for achieving the policy objectives of the
Government.
➢ Regulating exports
➢ Coordinating legal provisions with other laws dealing with foreign exchange such as Foreign
Trade Act, Foreign Exchange Management Act, Conservation of Foreign Exchange and
Prevention of Smuggling Act, etc.
TYPES OF DUTIES
Under the custom laws, the following are the various types of duties which are leviable.

1. Additional Duty (Countervailing Duty) (CVD):

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This additional duty is levied under section 3 (1) of the Custom Tariff Act and is equal to
excise duty levied on a like product manufactured or produced in India. If a like product is not
manufactured or produced in India, the excise duty that would be leviable on that product had it
been manufactured or produced in India is the duty payable. If the product is leviable at different
rates, the highest rate among those rates is the rate applicable. Such duty is leviable on the value
of goods plus basic custom duty payable. eg. If the customs value of goods is Rs. 5000 and rate
of basic customs duty is 10% and excise duty on similar goods produced in India is 20%, CVD
will be Rs.1100/-.

2. Anti-dumping Duty:
Sometimes, foreign sellers abroad may export into India goods at prices below the amounts
charged by them in their domestic markets in order to capture Indian markets to the detriment of
Indian industry. This is known as dumping. In order to prevent dumping, the Central
Government may levy additional duty equal to the margin of dumping on such articles, if the
goods have been sold at less than normal value. Pending determination of margin of dumping,
such duty may be provisionally imposed. After the exact rate of dumping duty is finally
determined, the Central government may vary the provisional rate of dumping duty.
Dumping duty can be imposed even when goods are imported indirectly or after changing the
condition of goods. There are however certain restrictions on imposing dumping duties in case of
countries which are signatories to the WTO or on countries given "Most Favoured Nation
Status" under agreement. Dumping duty can be levied on imports on such countries only if the
Central Government proves that import of such goods in India at such low prices causes material
injury to Indian industry.

3. Duty on Bounty Fed Articles:

In case a foreign country subsidises its exporters for exporting goods to India, the Central
Government may import additional import duty equal to the amount of such subsidy or bounty.
If the amount of subsidy or bounty cannot be clearly determined immediately, additional duty

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may be collected on a provisional basis and after final determination; difference may be
collected or refunded.

4. Export Duty:
Such duty is levied on export of goods. At present very few articles such as skins and leather
are subject to export duty. The main purpose of this duty is to restrict exports of certain goods.
The Central Government has been granted emergency powers to increase import or export duties
if the need so arises. Such increase in duty must be by way of notification which is to be placed
in the Parliament within the session and if it is not in session, it should be placed within seven
days when the next session starts. Notification should be approved within 15 days.

5. Basic Duty:
This is the basic duty levied under the Customs Act on all the imported items. Other duties
are added on this duty to complete the customs duty liable on a particular commodity. The rate
varies for different items from 5% to 40%. A 5% customs duty is imposed on Set Top Box for
television broadcasting.

6. Protective Duty:
If the Tariff Commission set up by law recommends that in order to protect the interests of
Indian industry, the Central Government may levy protective anti-dumping duties at the rate
recommended on specified goods. The notification for levy of such duties must be introduced in
the Parliament in the next session by way of a bill or in the same session if Parliament is in
session. If the bill is not passed within six months of introduction in Parliament, the notification
ceases to have force but the action already undertaken under the notification remains valid. Such
duty will be payable up to the date specified in the notification. Protective duty may be cancelled
or varied by notification. Such notification must also be placed before Parliament for approval as
above.

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SERVICE TAX
Service tax is charged on the gross value of services and is generally payable on receipt
basis. It is an indirect tax - it is payable by the service provider but it is ordinarily recovered from
the recipient of services. Service tax is levied at the rate of 10% (plus 2% education cess) on
certain identified taxable services provided in India by specified service providers.
Ordinarily, every person liable to pay service tax is required to register it with service tax
authorities and comply with procedural requirements like paying taxes, filing returns, etc.
However, in case of non-residents, who do not have any office in India and who are liable to pay
service tax in India, this burden is shifted to the recipient of service with effect from 16 August,
2002. Service tax is a comparatively new levy in India and very few judicial precedents are
available on the subject.

TAXABLE SERVICES

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Chartere Cleaning Clearing Constru Storage
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Account Services Forward Wareho
ant ing using

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 Indirect tax – Fiscal Policy and Corporate Tax

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Comple g Account Explorat
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Services Mineral
Survey
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Technic
Erection,
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Dry Commissi Event
Facsimil Inspecti
Cleanin oning and Manage
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Certifica
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Technic
Fashion General al
Forward Franchis
Designi Insuranc Testing
Contract e
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Analysis
Health Insuranc
Goods Goods Club e
Telegrap
Transpo Transport and Auxiliar
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Centre Services
Intellect Telepho
Interior Internet Leased
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Decorator Café Circuit
Property Pager
Mainten
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Life ance or
Mailing List
Insuranc Repair Telex
List Compila
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 Indirect tax – Fiscal Policy and Corporate Tax

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FUTURE GROWTH PATH FOR SERVICE TAX IN INDIA

Service tax is envisaged as the tax of the future. Well synchronized taxation on
manufacturing, trade (domestic & international) and service without giving rise to cascading
effect of taxation would be an ideal worth pursuing in the immediate future. This would bring in
VAT in its truest sense.

Continued growth in GDP accompanied by higher rate of growth in service sector

promises new & wider avenues of taxation to the Government. If the tax on services reduces the
degree of intensity of taxation on manufacturing and trade without forcing the Government to
compromise on the revenue needs, then one of the basic objectives of taxing the service sector
would be achieved.

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EXCISE DUTY

Central Excise levy was existing for years. But in 1944, 11 different Acts were combined
into one Act and this was then named as "The Central Excise and Salt Act, 1944". It was then
renamed as "The Central Excise Act, 1944". This Act is the original Act for excise, which
contains the Tariff Items 1 to 67. In 1975 the Tariff Item 68 was introduced with the description
"all other goods not elsewhere specified

Excise is one of the important indirect taxes which is based on this principle. To simply
state Excise is a tax levied on goods manufactured or produced in India. Central Excise duties
are the single largest source of Revenue for the Central Government of India. On an average, out
of every one Rupee Government earns, 19 paisa is contributed by Excise. Apart from the Basic
Excise duty, the following types of duties are also levied:
1. Special duty of excise specified in the Second Schedule to the Central Excise Tariff Act,
1985 leviable under the Central Excise Act, 1944.
2. Additional duty of excise under the Additional Duties of Excise (Textiles & Textile Articles)
Act, 1978.
3. Additional duty of excise under section 3 of the Additional Duties of Excise (Goods of
Special Importance) Act, 1957.

COLLECTION OF CENTRAL EXCISE DUTY

They are levied and collected by Central Excise Department under the authority of the
Central Excise Act, 1944 and Central Excise Rules, 1944. The Entry empowers the Central
Government to levy Duty on all articles produced or manufactured in India (including tobacco)
except Alcohol and Opium. The power to collect Excise duty on Alcohol and Opium has been
assigned to States and it is known as State Excise duty.

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EXCISABLE GOODS
Excisable goods refer to those Goods which are mentioned in the Central Excise Tariff Act,
1944. Goods as per this Act must possess the following characteristics called as the 4 Ms
1. The goods should be MOVABLE. (No duty on immovable goods).
2. The goods should be MARKETABLE (capable of being bought and sold).
3. The goods should arise out of MANUFACTURING process.
4. The goods should be MENTIONED in the Central Excise Tariff Act. (If one of the criteria
mentioned above is absent, the item cannot be described as goods to attract Excise levy, even
if there is entry in the tariff).

EXCISABLE GOODS ARE OF TWO KINDS:

1. Unmanufactured Goods (Coffee, Tobacco).
2. Manufactured Goods. Rates of duty are of three kinds:
3. Specific; i.e., per kg.
4. Ad valorem; i.e., on the value of goods expressed in terms of % of the value.
5. Duty on production capacity: On certain Notified Goods under section 3A.

IMPORTANCE OF CENTRAL EXCISE DUTY

Central excise revenue is the biggest single source of revenue for the Government of
India. The Union Government tries to achieve different socio-economic objectives by making
suitable adjustments in the scope and quantum of levy of Central Excise duty. The scheme of
Central Excise levy is suitably adapted and modified to serve different purposes of price control,
sufficient supply of essential commodities, industrial growth, and promotion of small scale
industries and like Authority for collecting the Central Excise duty.

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TYPES OF EXCISE CONTROL

1. Physical Control: Applicable to manufactured tobacco and mainly to cigarettes. Assessment
is done by Excise Officer and thereafter the goods are removed under his supervision.
2. Self Assessment Procedure: This self removal procedure requires the assessee to file a
classification declaration for his goods in quadruplicate under rule 173B to inform the
department of the claimed rate of duty applicable to his Goods.
3. Compounded Levy Scheme: It is meant for small-scale decentralised sector like
embroidery, marble slabs etc.
4. Collection of Central Excise Duty at the point of consumption: It is confined to
Khandsari Molasses going for manufacture of alcohol.
5. Levy of Excise Duty on the basis of capacity of production: This is a New Weapon in the
Government's armoury. A new section 3A has been introduced to fight evasion.

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SECURITIES TRANSACTION TAX

When the ministry of finance announced it’s Annual Budget for the year 2004-2005, it
also announced a new tax which would be levied on capital gains on financial securities --
Securities Transaction Tax.
It is a tax being levied on all transactions done on the stock exchanges. Securities
Transaction Tax is applicable on purchase or sale of equity shares, derivatives, equity-oriented
funds and equity-oriented mutual funds in a recognized stock exchange.
The Securities Transaction Tax was introduced by Chapter VII of the Finance Act (No.2)
Act, 2004. STT has been an efficient instrument to collect the taxes, as many market players
falsify transactions to evade capital gains taxes but it would be erroneous to consider STT
(indirect tax) as a substitute to capital gains tax (direct tax). If there are problems in collecting
capital gains taxes, these should be sorted out rather than reducing and abolishing it altogether.
Further, to justify the introduction of STT only in terms of smooth collection of taxes would be a
serious mistake. There are several other benefits of STT in the Indian financial markets.

SECURITIES
'Securities' are defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956
(SCRA) to include:
➢ Shares, scrip’s, stocks, bonds, debentures, debenture stock or other marketable securities of a
like nature in or of any incorporated company or other body corporate
➢ Derivatives

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 Indirect tax – Fiscal Policy and Corporate Tax

➢ Units or any other instrument issued by any collective investment scheme to the investors in
such schemes
➢ Security receipt as defined in Section 2(zg) of the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002
➢ Such other instruments as declared by the central government; and
➢ Rights or interest in securities
➢ Equity-oriented mutual funds (not debt-oriented mutual funds)
➢ STT is not applicable in case of government securities, bonds, debentures and units of mutual
fund other than equity oriented mutual fund.

TAX EXEMPTIONS
STT so paid is allowable as deduction in computation of taxable income under the head
profits or gains from business or profession with effect from 1 April 2009.
1. LONG-TERM CAPITAL GAINS:
➢ For sale of equity shares, units of equity oriented mutual fund (delivery based), the gains
are exempt from tax under section 10(38)
➢ For sale of unit of an equity oriented fund to the mutual fund, the gains are exempt from
tax under section 10(38)
1. SHORT-TERM CAPITAL GAINS:
➢ For sale of equity shares, units of equity oriented mutual fund (delivery based), the gains
are taxable at the rate of 10% (+surcharge +education cess) under section 111A
➢ For sale of unit of an equity oriented fund to the mutual fund, the gains are taxable at the
rate of 10% (+surchage +education cess) under section 111A
➢ Sales of equity shares, units of equity oriented mutual fund (non-delivery based) and
sales of derivatives are both treated as business income. If income is shown as business
income, one can claim tax rebate under section 88E.

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STATE LEVEL TAXES

Apart from various indirect taxes collected by center the state also imposes certain taxes.
These taxes are as follows

OCTROI DUTY
Octroi is a tax levied on the entry of goods into a municipality or any other specified
jurisdiction for use, consumption or sale. Octroi is levied at the time when the goods enter the
municipal limits where the goods are to be ultimately sold, used or consumed.
Generally, octroi is borne by the purchaser. Goods in transit are exempted from octroi.
Octroi rates differ for different local areas. Goods are classified into groups for levying the octroi
at different rates. Currently, octroi is being levied only in certain states.
Octroi as a tax in the BMC was introduced in 1965. Prior to that only 'town duty' was
being levied on a very few items. At that time yield from property tax was the mainstay of
municipal tax revenue for Mumbai. For example, in 1964, total revenue of BMC was Rs.23.64
Crore, out of which Rs. 18.59 Crore were from property tax while Rs. 1.54 Crore only were from
'town duty'. Property taxes accounted for 78.61% of total municipal revenue while town duty
accounted for only 6.53%. The dictionary definition of Octroi terms it to be “a local tax collected
on various articles brought into a district for consumption.”

Octroi has clearly contributed to the tune of 33 per cent of MCGM's annual budget and it has
been enjoying a 4,500-strong assessment and collection department
The octroi department of Brihanmumbai Municipal Corporation (BMC) has registered a
record tax collection to the tune of Rs 4252 crore- in 2007-08 an increase of around 20 per cent
as compared to previous year. This is 10 per cent higher than the sales tax, thus indicating the
sharp increase of business in Mumbai.

OCTROI IN MAHARASTHRA

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Maharashtra has 21 municipal corporations spread across the State. Many Governments had
abolished octroi in Municipal Councils in the year 1999. The financial implications of abolishing
octroi in the Municipal Corporations are however, much more substantial since municipal
finances depend heavily on octroi income, and it will not be possible for them to discharge their
responsibilities unless they are given an equally potent alternative revenue source or, are
compensated in perpetuity from the State budget.
The latter is not possible due to State’s own developmental commitments and the heavy
debt burden. Almost a decade has passed since the ongoing tussle between the industries and the
municipal corporations of Maharashtra over the Octroi levy; On the one hand, the municipalities
seem to be opposing the abolition of their main source of income-Octroi, given that it contributes
nearly 60% to their revenue. On the other hand is the industry. The Industry seems to echo the
idea that Octroi must be abolished due to its various ill effects including the final distribution
price.

MIRA-BHAYANDAR CASE
All goods can now flow in and out of Mira-Bhayandar freely with octroi being
completely abolished by the Mira-Bhayandar Municipal Corporation (MBMC) from September
1. It has been replaced by an account-based cess. With the abolition of octroi, MBMC becomes
the second civic body after Navi Mumbai Corporation, to replace octroi.
Traders in Mira-Bhayandar had gone on a week-long strike from August 1 demanding the
abolition of octroi. They had alleged harassment at the hands of the private collection agency
Konark Infrastructure, which had been collecting octroi on behalf of the MBMC for the past one
year.
From September 1, the MBMC has set up 20 centers across the area to enable traders to
register themselves. Traders will pay cess depending on their business turnovers. Account-based
cess is currently levied in Navi Mumbai. A number of small scale industries had shifted out of
Bhayandar to escape octroi duty. Such industries will return to the area with the abolition of the
duty and number of industries in the Vasai-Virar belt may also shift to Bhayandar to take
advantage of the octroi abolition and to escape the frequent power cuts.

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STAMP DUTY
Stamp Duty is payable at the prescribed rates on instruments recording certain
transactions, including transfers of immovable property, shares, etc. Generally, stamp duty is
levied by respective states as per the state Act. In the absence of such a state Act, the provisions
of the central Act (i.e. Indian Stamp Act) apply.
The basic purpose of Indian Stamp Act, 1899 is to raise revenue to Government.
However, over a period of time, the stamped document has obtained so much value that a
‘stamped document’ is considered much more authentic and reliable than an un-stamped
document. It is a tax and must be paid in full and on time. A delay attracts penalty at 2% per
month, subject to maximum penalty of 200% of the deficit amount of stamp duty.

WHO PAYS STAMP DUTY?

In the absence of an agreement to the contrary, the purchaser/transferee has to pay or in case of
property exchange, both parties have to bear it equally. Stamp papers are to be purchased in the
name of one of the parties to the document. Stamp paper is valid for six months from the date of
purchase.

INSTRUMENTS CHARGEABLE TO STAMP DUTY

Instruments include every document by which any right or liability is or purports to be
created, transferred, limited, extended, extinguished or recorded but does not include a bill of
exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of
shares, all transfer documents including agreements to sell, conveyance deed, gift deed,

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mortgage deed, exchange deed, deed of partition, power of attorneys, leave and licence
agreement, agreement of tenancy, lease deeds, power of attorney to sell for consideration etc.
have to be properly stamped.

STAMP DUTY ON PROPERTIES

Stamp duty on non-residential properties whether in a co- operative society or not is at a

flat rate of 5% of the market value. Stamp duty on residential flats in a housing society and
buildings

Upton Rs. 1, 00,000 nil

Rs. 1, 00,001 to Rs.2, 0.5% of the value
50,000,
Rs. 2, 50,001 to Rs.5, Rs. 1,250 + 3% of the
00,000 value
Above Rs.5, 00,000 Rs. 8,750 + 5% of the
value

PROPERTY TAX
A property tax is a tax imposed on property by reason of its ownership. Property tax can
be defined as "generally, tax imposed by municipalities upon owners of property within their

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jurisdiction based on the value of such property." Property tax is a tax that an owner of property
(usually real estate) is liable to pay. Property Tax India is levied on residents by local municipal
authorities to upkeep the basic civic services in the city.
Property taxes are usually charged on a recurrent basis (e.g., yearly). A common type of
property tax is an annual charge on the ownership of real estate, where the tax base is the
estimated value of the property.
Property again consists of three entities:
1. Land

2. Improvements to Land (immovable man made things)

3. Personalty (movable man made things)

HOMESTEAD EXEMPTIONS
In some states, laws provide for exemptions (typically called homestead exemptions)
and/or limits on the percentage increase in tax, which limit the yearly increase in property tax so
that owner-occupants are not "taxed out of their homes". Generally, these exemptions and
ceilings are available only to property owners who use their property as their principal residence.
Homestead exemptions generally cannot be claimed on investment properties and second homes.
When a homesteaded property changes ownership, the property tax often rises sharply and the
property's sale price may become the basis for new exemptions and limits available to the new
owner-occupant.
Homestead exemptions increase the complexity of property tax collection and sometimes
provide an easy opportunity for people who own several properties to benefit from tax credits to
which they are not entitled. Since there is no national database that links home ownership with
Social Security numbers, landlords sometimes gain homestead tax credits by claiming multiple
properties in different states, and even their own state, as their "principal residence", while only
one property is truly their residence.

LUXURY TAX

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A luxury tax is a tax on luxury goods -- products not considered essential. A luxury tax
may be modeled after a sales tax or VAT, charged as a percentage on all items of particular
classes, except that it mainly affects the wealthy because the wealthy are the most likely to buy
luxuries such as expensive cars, jewelry, etc.
A luxury good may be a Veblen good, which is a type of good for which demand
increases as price increases. Therefore the effect of a luxury tax may be to increase demand for
certain luxury goods. In general, however, since a luxury good has a high income elasticity of
demand by definition, both the income effect and substitution effect will decrease demand
sharply as the tax rises.

IMPACT OF LUXURY TAX

When a luxury tax is imposed, typically there is little to no outcry from the majority of
the population as most people are not in a position to be affected by the tax. Over time, what is
viewed as "luxury" might change, resulting in more and more people being affected by the tax.
The Luxury Tax was introduced w.e.f from 1.11.1996 on various hotels, lodging houses,
clubs etc. "Luxury Provided in hotel" means accommodation and other services provided in a
hotel, the rate or charges for which including the charges of air conditioning, telephone, radio,
music, extra beds but does not include the supply of food, drinks or other services which is
separately charged for.
The term "hotel" includes a residential accommodation, a lodging house, an inn, a club, a
resort, a farm house, a public house or a building or part of a building, where a residential
accommodation is provided by way of business
The hotelier who is liable to pay the tax may collect it from the customers a rate admissible
under the act of prevailing at that point of time.
The hotelier registered under the Act is required to pay tax on quarterly basis i.e the
period ending 31st March, 30th June, 30th September & 31st December by the end of succeeding
month respectively along with the returns, except in case of major hotels who are required to pay
the tax on monthly basis (the return shall be filed before the 15th of the next month). In order to

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quantify the tax due from the hotelier in respect of the year during which he is liable to pay tax,
assessment is carried out by the assessing authority.
The Delhi government has proposed to reduce the luxury tax on hotels and restaurants in
the city from the current 12.5 to 10 per cent. The minister has proposed an additional value
added tax (VAT) of almost eight per cent on tobacco products to offset the loss in revenue due to
reduction in luxury tax. The luxury tax reduction was announced to provide stimulus to the travel
trade industry, which was badly affected due to a decline in the tourism sector
The industry expects uniformity in the kind of luxury taxes throughout the country. A uniform
rate structure would basically get in a lot of administrative efficiency and if this can be capped
somewhere at around between 8-10% that would be really great in boosting tourism within India
because in certain states the luxury tax is as high as 15-17.5%.

GOODS AND SERVICES TAX (GST) IN INDIA

The multi level taxes on goods and services in the present regime leads to distortion and
inefficiency in tax administration and raises compliance issue, therefore, a Goods and Services
Tax (GST) on all commodities and services is most suitable taxation system for a growth
oriented and developing economy of India.

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MEANING OF GST
The concept of Goods and Services Tax (GST), which is also called Value Added Tax
(VAT), is a tax on every economic supply in the distribution chain. The taxable event is ‘supply
of goods’ and ‘supply of services’. Any transfer of right to use goods will constitute supply of
goods, and, any supply not involving goods will be supply of service. However, the tax is
worked out on the value-added component of the supply. This is achieved by working tax on the
full intrinsic value of the goods or service and giving set off/credit of tax suffered at previous
stage, called input stage, to avoid cascading effect. Thus, the entire supply chain up to final
consumer gets taxed with in-built mechanism of input stage credit. In this system, the final
consumer ends up bearing the full burden of tax without any set off benefit. As supplies not
involving goods will be supply of service, the ambit for services will be very large. Generally for
services to be taxed global best practices are considered. The supply is sub-classified as
destination and consumption based from taxation perspective. Further, the supply to be taxed
could be Business-to-Business or Business-to-Consumer depending on the feasibility in
individual case. The GST will subsume present indirect taxes of Central Excise, Customs,
Central Sales tax, Service Tax under Union List and Sales Tax, Value Added Tax, Entry Tax,
Purchase Tax, State Excise duty, Luxury Tax, Entertainment tax, Octroi Tax on consumption or
sale of electricity, etc. under State List. Thus, it is aiming at a comprehensive GST as a substitute
for a multi-tax regime.

BENEFITS OF DUAL GST

The Dual GST is expected to be a simple and transparent tax with one or two CGST and
SGST rates. The dual GST is expected to result in:-

1. Reduction in the number of taxes at the central and state level.

2. Decrease in effective tax rate for many goods.

3. Removal of the current cascading effect of taxes.

4. Reduction of transaction costs of the taxpayers through simplified tax compliance.

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5. Increased tax collections due to wider tax base and better compliance.

IMPACT ON PRICES OF GOODS AND SERVICES

The GST is expected to foster increased efficiencies in the economic system thereby

lowering the cost of supply of goods and services. Further, in the Indian context,
there is an expectation that the aggregate incidence of the dual GST will be lower than the
present incidence of the multiple indirect taxes in force. Consequently, the implementation of
the GST is expected to bring about, if not in the near term but in the medium to long term, a
reduction in the prices of goods and services. The expectation is that the dealers would start
passing on the benefit of the reduced tax incidence to the customers by way of reduced
prices. As regards services, it could be that their short term prices would go up given the

expectation of an increase in the tax rate from the present 10% to approximately
14% to 16%.

WHO WOULD BE IMPACTED:

All businesses, whether engaged in sales / supply of goods or

supply of services, would be impacted by GST. The impact would be on

supply chains, ERP, product pricing, dealer margins etc.

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CONCLUSION

Bringing greater transparency in tax system and removing inequities amongst different
taxpayers and bleaching ‘gray economy’ is a challenging task. Under the present scenario, it has
become all the more necessary to have a Single tax on all goods and services. It would encourage
voluntary tax compliance, discourage tax evasion, reduce compliance and transaction cost and
improves the tax to GDP ratio. It will encourage expansion of tax base, rationalize tax structure
and will improve efficiency of tax administration. Truly unified domestic common market is the
ultimate object of tax reform process which can be achieved by simplifying the tax system and
for this abolition of too many levels of tax slabs and integration of services under one umbrella
of ‘GST’ is the only way.

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