LEGAL ASPECT OF BUSINESS

UNIT - 5

1
 TAXES
• Taxes are of two types:
– Direct Tax: Income tax, wealth tax, corporate tax,
gift tax

– Indirect Tax: Excise tax, Sales tax , service tax &

customs duty

2
 Direct Tax
• Personal Tax:
– Personal income tax is levied on the incomes of
individuals, Hindu undivided families, unregistered
firms & other associations of people.
• Corporation Tax:
– It is levied on the incomes of registered
companies & corporations
– This tax is levied on the company & not on the
person who owns it.

3
 Direct Tax
• Wealth Tax:
– It is levied on the excess of net wealth over
exemption of individuals, joint Hindu families &
companies.
– For assessing the net value of wealth, net
obligations are deducted from their market value.

4
 Indirect Tax
• Customs Duty
– The Central Govt. levies duties on both export &
imports.
– Import duties are collected as a percentage of the
price of the commodity. This method of calculating
the duty payable is called the ad valorem basis.
• Excise Duty
– It is levied on production of commodities.
– Excise duty on commodities other than alcoholic
liquors & narcotics are levied by Central Govt. &
revenue is shared by both Central & State Govt.

5
 Indirect Tax
• Value Added Tax
– Value Added Tax (VAT) has replaced sales tax.
– It applies on sale of tangible goods within the
State.
– On every transaction, the tax becomes due.
– However, the taxes already paid in the prior
transactions on the same goods can be claimed as
credit.

6
 Central Govt.
• Income Tax (Except on Agriculture)
• Customs Duty
• Excise duty (Except on Liquor)

7
 State Govt.
• Income Tax on Agriculture
• Excise duty on Liquor
• Sales tax (Central Sales Tax is levied by Central
Govt. but collected by State Govt.)
• Entertainment tax

8
CENTRAL EXCISE TAX

9
 CENTRAL EXCISE TAX
• The excise tax is a tax on manufacturing.
• It applies on manufacture or production of
certain specified goods, in India.
• Conditions for excise tax:
– The articles must be goods, that is, they must be
movable & marketable.
– The article must be produced or manufactured in
India.
– It applies to only those goods which are mention in
the Central Excise Tariff Act, 1985.

10
 What are Goods?
• Goods must be movable. Immovable property or
things attached to the ground are not taxable.
• Goods must be marketable. The goods must be
known in the market.
• Following items have been held eligible for excise
duty:
– Gas & steam are goods as these are tangible.
– Electricity is a goods.
– Branded software like oracle & lotus are goods.
– Where parts are manufactured & then assembled in a
different location, duty would be payable on parts.

11
 Mention in the CETA a Must
• Goods are excisable only if these have been
included in the Central Excise Tariff Act (CETA).
• Goods like wheat & rice are not mentioned in
the CETA & hence are not excisable.
• Similarly, waste & scrap will be excisable only
if specifically mentioned.

12
 What Constitutes Manufactured
Goods?
• Manufacturing & producing describes the
coming into being of all new goods.
• They cover all by-products, intermediate
products & residual products.
• But most of the goods which are ‘produced’
are not excisable as they are not marketable.
• Thus, excise mainly applies to manufactured
goods.

13
 What Constitutes Manufactured
Goods?
• Manufacture is a process which results in the
production of a commercially different article
from the raw material. For e.g., making of
table from wood.
• The end product should be fit for commercial
use.
• The identity of the original article should be
lost & a new product should emerge.

14
 What Constitutes Manufactured
Goods?
• Following processes come under
‘manufacturing’:
– Processing of ply wood to make it slip proof.
– Mixing different ingredients to make pan masala.
– Processing grey fabric by bleaching, dyeing &
printing of fabric.

15
 What Constitutes Manufactured
Goods?
• Following processes didn’t come under
‘manufacturing’:
– Cutting of big cotton, paper into smaller pieces.
– Printing on plastic film as film remains film.
– Conversion of marble blocks into slabs.
– Affixing brand name.
– Repairing

16
 How much duty to be Charged?
• The types of excise duties can be grouped as
follows:
– Specific duty: Duties fixed as a specific amt. per unit
of weight or any other measure. For eg. $ per kg.
– Ad Valorem duty: Duties levied on the bases of value.
These duties are levied as a fixed percentage of the
value of the product.
– Fixed Assessed Value: For some commodities, the
govt. has fixed the assessed value. Presently, this
principle is applicable only to pan masala sold in less
than 10 gm packs.

17
 How much duty to be Charged?
• The types of excise duties can be grouped as
follows:
– Maximum Retail Price as the Value: Maximum Retail
Sale Price is an all inclusive price. It includes taxes,
freight, advertisement expenses, transport &
commission charges. The goods that are included in
this category are: cosmetics, paints, varnish, footwear,
aerated water, detergents &, soaps etc.
– Production Capacity: in this case, Govt. Fixes the
excise tax on the production capacity. In these cases,
the officials will estimate the annual production
capacity & fix a rate.

18
 Who Collects Excise Duty?
• The excise duty is levied & collected by the Central
Excise Dept., under the authority of the Central Excise
Act, 1944.
• Sec. 3 is the charging section derives its power to
impose this tax from Entry 84 of the Union list under
the 7th Schedule, read with Article 246 of the
Constitution of India.
• Entry 84 empowers the Central Govt. to levy duty on all
articles produced or manufactured in India (including
tobacco), but excludes alcohol & opium.
• Excise duty on alcohol & opium has been assigned to
the states & is known as excise duty.

19
VALUE ADDED TAX

20
 Meaning
• Value Added Tax is a multi point sales tax with set off
for tax paid on purchases. It is basically a tax on the
value addition on the product.
• The burden of tax is ultimately borne by the consumer
of goods. In many aspects it is equivalent to last point
sales tax. It can also be called as a multi point sales tax
levied as a proportion of Valued Added.
• It is a general tax that applies, in principle, to all
commercial activities involving the production and
distribution of goods and the provision of services.
• It is not a charge on companies. It is charged as a
percentage of price.

21
 Characteristics of VAT
• The difference between retail sales tax and VAT is that while
retail sales tax is collected at one stage, VAT is collected in
installments at successive stages of production and
distribution. It is a multi - state tax rather than a single stage
one like the retail sales tax, and in its deal form, is to be levied
on all the states of production & distribution.

• It is principle, comprehensive unlike selective excises.

• It is collected in bits at each stage of production and

distribution which, when added, equal a tax on the retail sale
of the final product at the same rate as the VAT.

• It falls on each input entering into the final products once and
only once. 22
 VAT in India
• Haryana was the first state to introduce it
successfully in 2003.
• After that, 20 more Indian states introduced
VAT into the Indian taxation system from 1
April 2005.
• 5 other states ;namely Rajasthan, Gujarat, MP,
Chattisgarh & Jharkhand introduced it in 2006.
• UP & Tamil Nadu has still not decided about
VAT.
23
 VAT Terminology
• Output VAT : Amount received by a seller as a
percentage of the gross sale price of
goods or services

• Input VAT : Amount paid by a buyer as a percentage of

the gross purchase price for goods or
services used in production.

• Zero Rated : Transactions in which the seller collects no

output tax and the corresponding input
tax is fully refundable. Exports are zero
rated

• Exempt : Transactions in which the seller collects no

output tax but the corresponding input tax
is non-refundable and absorbed by the
seller. Financial services are commonly
exempt.
24
 How VAT (Value Added Tax) Works
• A trader registered for VAT effectively pays VAT only at
one stage when he sells his goods.
• This tax is the only amount, which has an effect on his
selling price which includes VAT.
• The VAT that he has paid as a part of his purchase price
is charged on him by his suppliers.
• This is not a cost to him because he gets it back by
deducting it from tax on his sales (Output Tax).
• Therefore, VAT should have a minimum impact on his
selling prices.

25
Example
• Manufacturer
– The Manufacturing company Perfect Shoemaker Pvt.
Ltd has purchased raw material worth Rs. 50,000/-
after paying state tax of Rs. 2,000/- @ 4%. The
Labour contents are Rs. 40,000/- and the margin
towards administrative and selling expenses and
profit are Rs.10000 hence the total sale price
100000/- .Suppose the tax is rate 12.5% he will
charge Rs 12500 as tax from the Wholesaler. Since he
has already paid Rs 2000/- on the raw materials
hence his net tax liability Rs 10500/- after getting a
credit of Rs 2000/- tax paid by him on raw Material.
This is VAT for manufacturer

26
Example
• Wholesaler
– The wholesaler „tough shoe seller‟ has purchased
goods worth Rs 1,00,000/- after paying tax of Rs.
12,500/- as mentioned above. Let us assume his
margin for profit and expenses is Rs. 7,000/- then he
will sell the goods for Rs. 1,07,000/- to the retailer
and also charge tax of Rs. 13,375/- from the retailer.

– Since he has already paid the tax of Rs. 12,500/- on

his purchases hence his net tax liability will be Rs.
13,375/- (-) 12,500/- = Rs. 875/- We can Verify it as
12.5% of 7000 Since the value added by the
Wholesaler is 7000.
27
Example
• Retailer
– The retailer “M/s. Bright shoe point” has
purchased goods for Rs. 1,07,000/- after paying
tax of Rs. 13,375/-. Suppose his margin for profit
and expenses is Rs. 10,000/- thus he will sell the
goods to the customer at Rs. 1,17,000/- and will
charge tax of Rs. 14,625/-. His net tax liability
will be Rs. 14,625/- (-) Rs. 13,375 = Rs. 1,250/-
we can verify it as 12.5% of 10,000/- since the
value added by the retailer is Rs. 10,000/-

28
 MERITS OF VAT
• It ensures that input is taxed only once.
• It combines the advantage of being of general tax, without
the disadvantages of extended input taxation.
• It is free of other economic demerits of cascade type turnover
or sales tax.
• It does not change the relative prices of inputs and give wrong
signals to producers regarding factor combinations.
• It does not raise costs through input taxation.
• In developing countries, a mild bias could be built into the
system against capital intensive methods.
• Economy in the use of scarce inputs could be promoted
through an additional non – refundable duty.
29
 DEMERITS OF VAT
• VAT was to be applied in all states but it failed to do so.

• Inflation rate has been increased due to VAT.

• VAT has complicated both tariff in customs and excise and

Overburdened with more exemptions

• VAT is regressive :- It’s burden falls disproportionately on Poor

people since the poor are likely to spend more of their incomes

• VAT is too difficult to operate from the position of both the

Administration and business
30
 List of goods for which the rate of tax is
nil%

• Agricultural implements, aids, cattle feed, etc

• Cereal, pulses and basic Bread
• Charcoal and firewood
• Fishnet and fishnet fabrics
• Fresh vegetables
• Meat, flesh and poultry
• Human blood and human blood plasma
1% rate is charged for precious metals and
stones

31
 Goods paying 4% as VAT
• Agricultural machinery, fertilizers and hand
pumps
• All kinds of Bricks
• Aviation turbine fuel
• Iron and steel
• Bulk drugs
• Crude oil or crude petroleum oil
• Edible oils, domestic utensils, books and paper

32
Goods for which rate of Tax is 20%
• Foreign and Country liquor - 20%
• Molasses - 20%
• High speed diesel oil - 31-34%
• Any kind of motor spirit - 28-30%

All goods not covered under any schedule have

to pay 12.50% as VAT

33
SERVICE TAX

34
 Introduction
• Service Tax was introduced in 1994 under
Finance Act, 1994 with 3 SERVICES namely,
Brokerage charged by stockbroker, Telephone
services & premium on General Insurance
Services.
• Applicable to whole of India except Jammu &
Kashmir.

35
 Introduction
What is Service Tax?
• It is a tax levied on the transaction of certain
Specified Services, by the Central Government
under the Finance Act, 1994.
• It is an Indirect Tax, which means that
normally the service provider pays the tax and
recovers the amount from the recipient of
taxable service.

36
 Who is liable to pay Service Tax?
•Generally, the ‘Person’ who provides the taxable
service (on receipt of service charges) is responsible for
paying the Service Tax to the Government (Sec.68 (1) of
the Act), except the following:
•The recipient of services in India is liable to pay Service
Tax, where taxable services are provided by Foreign
Service providers with no establishment in India;
•The Service Tax is to be paid by the Insurance
Company for the services in relation to Insurance
Auxiliary Service by an Insurance Agent.

37
 Assessee
Who is an ‘Assessee’ in relation to Service Tax?

‘Assessee’ means a person liable to pay Service

Tax and includes his agent.

38
 REGISTRATION REQUIREMENTS
• As per Section 69, every person liable to pay service
tax has to get themselves registered with service tax
department.
• An Input Service Distributor and any provider of
taxable services whose aggregate value of taxable
service in a financial year exceeds Rs. 9 lacs, has to
get themselves registered.

39
 Contd…
• Application for registration in Form ST-1 to be made
to concerned Superintendent of Central Excise.
• The application for registration shall be made within
30 days, from the date on which the levy of service
tax is brought into force in respect of the relevant
services or of the commencement of business where
services has already been levied.

40
 Contd…
• Registration Certificate is granted in Form ST-2 within 7 days
from the date of receipt of intimation, if not, then deemed
to be granted. In case the registration certificate is not
issued within seven days, the registration applied for is
deemed to have been granted. (Rule 4(5) of the STR, 1994)
• CBEC vide Circular no. 35/3/2003 has made it compulsory
for every assessee to obtain the Service which is a 15 digit
alphanumeric no. based on the PAN
• Assessee providing more than one taxable service should
mention in single application, all the taxable services provided by
him. Rule 4(4), Service Tax Rule,1994

41
 Exemption Scheme for
Small Service Providers
• Central Government, provides the basic exemption to the
service providers whose aggregate value of taxable
services provided in last financial year is less than Rs. 10
Lacs.
• Assessee should not charge the Service Tax if he/she is
claiming the benefit of exemption. If charged by mistake
the same should be refunded to the service receiver.

42
 Other Exemptions
• Services provided to United Nations &
International Organizations.
• Services provided to developer of SEZs or units
of SEZs
• Services provided to Diplomatic Missions.
• Services exported in terms of Export Service
Rule 2005
• Services provided by RBI

43
 Contd…
• Services provided by Incubators (used to maintain
a constant temperature) are exempt from service
tax.
• Services provided by digital cinema service
provider to producer/ distributor in relation to
delivery of content of Cinema in Digital Form are
exempt from service tax.
• Value of goods and materials sold by service
provider are exempt.

44
 Service Tax Rate
Period Rate
From 1.7.1994 to 13.05.2003 5%
From 14.5.2003 to 09.09.2004 8%
From 10.9.2004 to 17.04.2006 10%
From 18.4.2006 to 10.05.2007 12.24%*
From 11.05.2007 to 24.02.2009 12.36%*
From 25.02.2009 10.3%*

*Inclusive of cess

45
 A MAN FOUND A FOREIGN PARTICLE IN A
BOTTLE OF A SOFT DRINK. HE COMPLAINED IN
THE COURT AND THE COMPANY WAS FINED Rs
1,00,000/-.

 A MAN USED A COIN-BOX PHONE AND THE

CALL BECAME ONE-WAY i.e. HIS VOICE DID
NOT REACH THE OTHER PERSON. HE TRIED
CALLING THRICE AND EVERYTIME, THE SAME
HAPPENED. ON COMPLAINING, HE GOT A
COMPENSATION OF Rs 1250 AND HIS 3 RUPEE
BACK.

46
• Adopting methods of deception to promote sale, use or
supply of goods or services e.g.

 Misleading public about price (e.g. bargain price when it

is not so).
 Charging above MRP printed.
 Misleading public about another’s goods or services.
 Falsely claiming a sponsorship, approval or affiliation.
 Offering misleading warranty or guarantee.
 Sale of spurious or sub-standard goods/services.
 Offering used or renovated goods as new.
 Using banned food colours.
 Misleading advertising. Manipulating price or delivery or
flow of supplies to impose unjustified costs or restrictions
on consumers. 47
• US President John Kennedy introduced the
Rights for Consumers:
1. Safety
2. Information
3. Choice among a variety of products and
services at competitive prices
4. A fair hearing by governments in the
formulation of consumer policy

48
On 24 December 1986 Govt. of India
Enacted the Consumer Protection
Act 1986 to:

• Ensure Rights of Consumers

• Provide Remedies for deceived
Consumers
49
• Exclusive for consumer disputes in all
districts, state and national capitals.
• 6 consumer rights specified.
• Consumer Protection Councils from
national to state and district levels.
• Covers private, public, cooperative
sectors.
50
• Right to SAFETY against hazardous goods and
services.
• Right to be INFORMED about quality, quantity,
purity, standard, price.
• Right to CHOOSE from a variety at competitive
prices.
• Right to BE HEARD.
• Right to seek REDRESSAL.
• Right to CONSUMER EDUCATION.
51
 Definitions.
"consumer" means any person who—
• buys any goods for a consideration,
• hires or avails of any services for a consideration,
• “uses such goods” with the approval of person who
has bought such goods for consideration.
• “is beneficiary of services” with the approval of
person who has hired the services for
consideration.

52
 Continued…
"person" includes,—
• a firm whether registered or not;
• a Hindu undivided family;
• a co-operative society;
• every other association of persons whether
registered under the Societies Registration
Act, 1860 (21 of 1860) or not;

53
 Continued…

"service" means service of any description which

is made available to potential users and includes,
the provision of facilities in connection with
banking, financing insurance, transport,
processing, supply of electrical or other energy…

54
 Continued…

board or lodging or both, housing

construction, entertainment, amusement or
the purveying of news or other information,
but does not include the rendering of any
service free of charge or under a contract of
personal service;

55
 Continued…

Manufacturer is a person who-

• Makes or manufactures any goods or parts
thereof.or
• Assembles parts of the goods made or
manufactured by others and claims the end
product to be goods manufactured by
himself,or

56
 CONSUMER DISPUTE REDRESSAL
AGENCIES

1) A Consumer Dispute Redressal Forum at the District level.

2) A Consumer Dispute Redressal Commission at the State
level.
3) A National Consumer Dispute Redressal Commission at
national level.

57
 JURISDICTION
Forum / Commission Where the value of the goods or
services and the compensation, if
any claimed,
District Forum Does not exceed Rs. 20 lakhs
State Commission Rs. 20 lakhs and above but not
exceeding One Crore
National Commission Above One Crore

Besides, State and National Commission have appellate

jurisdiction also.

58
 FILING OF COMPLAINTS

A complaint may be filed by

a) The consumer to whom the goods are sold or services
are provided
b) Any recognised consumer association
c) One or more consumers with same interest
d) The central government or state government

59
 FILING OF COMPLAINTS
The Fee for filing the Complaint for the district forum is as under
Sr. Value of Goods / Service and Compensation Amount
No. of Fees
1) Upto Rs. 1 lakh rupees Rs. 100
2) Rs. 1 Lakh and above but less than Rs.5 lakhs Rs. 200
3) Rs. 5 Lakhs and above but less than Rs. 10 lakhs Rs. 400

4) Rs. 10 lakhs and above but less than Rs. 20 lakhs

The fees shall be paid by Cross demand Draft drawn on a nationalized bank or through
crossed Indian postal order drawn in favour of the Registrar of the Sate Commission and
payable at the place of the State Commission (w.e.f. 5.3.2004.)

60
 RELIEF TO THE COMPLAINANT ?
IF THE COMPLAINT IS PROVED THE FORUM SHALL ORDER
a) to remove defect pointed out by the appropriate laboratory from the
goods in question;
b) to replace the goods with new goods of similar description which shall be
free from any defect;
c) to return to the complainant the price, or , as the case may be, the charges
paid by the complainant;
d) to pay such amount as may be awarded by it as compensation to the
consumer for any loss or injury suffered by the consumer due to negligence
of the opposite party;
e) To remove the defect in goods or deficiency in the services in question.

61
 RELIEF TO THE COMPLAINANT ?
f) to discontinue the unfair trade practice or the restrictive trade practice or
not to repeat them;
g) not to offer hazardous goods for sale;
h) to withdraw the hazardous goods from being offered for sale;
ha) to cease manufacture of hazardous goods and to desist from offering services
which are hazardous in nature;
hb) to pay such sum as may be determined by it, if it is of the opinion that loss or
injury has been suffered by a large number of consumers who are not
identifiable conveniently.
hc) to issue corrective advertisements to neutralize the effect of misleading
advertisement at the cost of the opposite party responsible for issuing such
misleading advertisement;
i) To provide for adequate cost to parties.

62
 FERA, 1973
• The principle objective of the Foreign
Exchange Regulation Act (FERA) is to prevent
the outflow of Indian currency. The objective
of the act is as follows.
• To regulate dealings in foreign exchange and securities
• To regulate the transaction indirectly affecting foreign
exchange
• To regulate import and export of currency and bullion
• To regulate employment of foreign nationals
• To regulate foreign companies
• To regulate acquisition, holding etc of immovable
property in India by non-residents

63
• Given India’s progress towards a more open economy, it
was only inevitable that the Foreign Exchange Regulation
Act. (FERA).
• Be reborn in a liberal, modern avatar.
• The process received a push , with the cabinet approving the
draft Foreign Exchange Management Act (FEMA).
• The draft reportedly relaxes to a degree the restrictions on
all current and some capital account transactions and
provides for the expected move towards full account
convertibility.
• FERA was the product of a time when oil crisis, among
other things, had depleted India’s foreign currency reserves.

64
 FEMA Overview
STRUCTURE OF THE FEMA (ACT)

• FEMA has in all 49 sections of which 9

(section 1 to 9) are substantive and the rest
are procedural/administrative.
• Section 46 of the Act grants power to Central Government
to makes rules and section 47 of the Act grants power to
RBI to make regulations to implements its provisions and
the rules made there under.

• Thus RBI is entrusted with the administration and

implementation of FEMA
65
 FEMA, 1999
• It came into force on 1st June, 2000.
• It is applicable:
– To whole of the India.
– Any branch, office & agency, which is situated
outside India but owned by resident in India
• It covers 2 categories:
– Person resident in India
– Person resident outside India

66
 Provision from FEMA, 1999
• Refund of Inward Payment: If a request is made
from overseas for cancellation of Inward
Payment, Authorized Dealers may do so without
referring to RBI, if refunds is not compensate for
loss.
• Application for payment in foreign currency:
– A person, firm or bank may apply to an Authorised
dealer for payment in any foreign currency
– Application should be made in Form- A1, if the
purpose of payment is import of goods in India.
– For any other purpose in Form-A2.

67
 Provision from FEMA, 1999
• Mode of payment of rupees against sale of
foreign exchange: In case of sale of foreign
exchange amounting to Rs. 20,000 or more
the payment received by authorised dealer
from applicant should be through a crossed
cheque drawn on bank acc. of co.
• Traveller cheque negotiable only in India:
Rupee traveller cheque can’t be encashed
outside India, if issued for the use in India.

68
 Provision from FEMA, 1999
• Rate of exchange: Authorised Dealer may buy
from & sell public foreign currency notes &
coins at rate of exchange determined at
market conditions.

69
THANK YOU

BY:
FARAH CHOUDHARY

70