Understanding Indirect & Direct Taxes in India: A Look at GST, Income Tax & Other Taxes, Lecture notes of Law

Download Understanding Indirect & Direct Taxes in India: A Look at GST, Income Tax & Other Taxes and more Lecture notes Law in PDF only on Docsity! CANONS OF TAXATION & GOODS & SERVICES TAX - MANDALIKA SRINIVAS IRS COMMISSIONER CENTRAL TAX & GST, HYDERABAD e-mail: gstqueries.medchal@gmail.com INDEX • INRODUCTION. • AUTHORITY TO LEVY TAX. • TYPES OF TAXES IN INDIA. • CANONS / PRINCIPLES OF TAXES. • TAX ON SERVICES– AN ADDL. SOURCE OF REVENUE. • SHORTCOMINGS IN INDIAN TAXATION. • GST – A REMEDY . Introduction… Why tax? • TAX – is a Major source of Revenue : - Levied under the authority of law; - collected from public in various forms like -- Taxes / Duty ; Cess ; Fee ; Surcharges;Toll etc. [ Non-tax Sources : Profits of PSUs/ Govt. enterprises; income from Railways; External & Internal Barrowings] - Govt. uses it for the welfare of the Public - Defence ; - Health; - Education;- -Infrastructure development; - Poverty alleviation ; - Maintenance of law and order, etc. • Taxes are the price that we pay for a civilized society. Introduction… Purpose? Objectives of taxation:-- 1. Revenue/Fiscal : to mobilise fund to Govt. - including foreign exchange 2. Non- Revenue/ Regulatory : - to protect domestic industry; - reduce regional imbalances; - to develop a specific sector - to generate employment - to discourage consumption of some goods (ex: SIN GOODS = Cigarettes ; Alcohol ) Etc. AUTHORITY TO LEVY TAX • The Constitution of India allocates the power to levy various taxes between the Centre and the State. • Article:265 : imposes an important restriction to this power “ No tax shall be levied or collected except by authority of law”. - every tax levied or collected has to be backed by a law, passed either by : - the Parliament or -- the State Legislature. DIRECT Vs INDIRECT TAX • DIRECT TAX : Incidence of Tax is borne by the person who paid it. - can not be passed on to any other person. Eg. Income Tax, Corporate Tax; Road Tax ; property tax; professional Tax. • INDIRECT TAX: Incidence of Tax is borne by the ultimate consumer who pay it as a part of the price. Eg. GST ; Customs duty; Excise Duty; Sales tax/ State VAT; State Excise etc. SHARE OF DIRECT & INDIRECT TAXES • Developing Countries-depend more on indirect taxes; - because too many poor people; less persons with ability to pay direct tax. [IT payers 1.9 Cr. = 1.5% of 130 Cr population; persons with > Rs. 1 Cr = 50,000 only] • Developed Countries - depend more on direct Taxes. Ratio of Direct : Indirect tax (INDIA) : 1988-89 : 20 : 80 1994-95 : 26 : 74 2000-01 : 36 : 64 2013-14 : 56 : 44 2017-18 : 57 : 43 -- the growth of direct tax revenue - sign of development. CENTRAL TAXES DIRECT TAX: Levied on a Person / property. • INCOME TAX : - on Individual / corporate body . INDIRECT TAXES: Levied on an activity: • CUSTOMS DUTY : A tax levied by on Imports/Exports. • EXCISE DUTY : A tax levied on act of manufacture or production. • SERVICE TAX : A tax levied on provision of Service. • GST – replaced Excise Service tax of C’ & Sales Tax of State. OTHER LEVIES • Surcharge: a surcharge is a tax on tax imposed for the purposes of the union [Art. 271] [ Individuals earning more than ₹1,00,00,000 annually are required to pay an extra sum amounting to 15% on their Income Tax AS SURCHARGE - under Section 3(a) of the Finance Act, 2017.] NOTE: Surcharge and Cess - levied by the union form part of the Consolidated Fund of India; need not be shared with the State governments and are thus at the exclusive disposal of the union government. • Toll : a form of user tax that usually pays for the cost of road / bridge built and under maintenance without raising taxes from non- users. (Entry: 59 of List - II) CANONS /PRINCIPLE OF TAXATION CARDINAL PRINCIPLES FOR TAXATION:- - for a good Taxation System. • FOUR canons of taxation----Initially propounded by ADAM SMITH in his famous book: (1776) “THE WEALTH OF NATIONS”. 1. Equity 2. Certainty 3. Convenience 4. Economy ECCE CANNONS /PRINCIPLE OF TAXATION …contd • Modern economists gave following additional canons of taxation: 5. Productivity 6. Elasticity 7. Flexibility 8. Simplicity and 9. Diversity. & IT Rates - Eg. Pr. of Equity Se AX MARKET Individual tax payers Up to Rs 2,50,000 No tax Mo tax Rs 2,50,001 to Rs 5,00,000 5% 5% Rs 5,00,001 — 10,00,000 20% 20% More than Rs 10,00,000 30% 30% Senior citizens who are 60 years old and above but less than 80 years Up to Rs 3,00,000 No tax No tax Rs 3,00,001 to Rs 5,00,000 10% 10% Rs 5,000,001 to Rs 10,00,000 20% 20% More than Rs 10,00,000 30% 30% Senior Citizens who are 80 years old and above Up to Rs 5,00,000 No tax Mo tax Rs 5,00,001 to Rs 10,00,000 20% 20% More than Rs 10,00,000 30% 30% CANNONS/PRINCIPLE OF TAXATION …contd 2. Certainty: tax to be paid should be Certain – but not arbitrary; --tax payer should know in advance – how much to pay ; by what time to pay; --- Govt. should also be certain – - to know how much tax revenue would be generated in a year to decide the tax structure & tax policy ; - budget various expenditure. CANNONS /PRINCIPLE OF TAXATION …contd 3. Convenience : taxation should be convenient to both the tax payer & tax administration – in terms of means and timing of payment. Ex: (i) Land revenue – harvesting Time; (ii) Tax Deduction at Source (TDS) in IT & GST; (iii) RCM- Liability to pay Service Tax/ GST on Goods Transport Agency service is on recipient. RCM in GST – Sec 9(3) & 9(4) of CGSTA [ ST on Transportation of goods by Road was levied in 1997 –but withdrawn; later in 2004 – re-introduced, but as RCM w.e.f: 01.01.2005] CANNONS /PRINCIP TAXATION …contd CANNONS /PRINCIPLE OF TAXATION …contd 7. Flexibility: Tax structure should be flexible; but not rigid. - to revise the tax structure, easily - with respect to its coverage and rates- - to suit the changing requirements of the economy. 8. Simplicity: taxation should be simple ; - but not complicated. – to avoid litigation due to disputes in interpretation of tax-laws and easy administration. Eg. Settlement of litigation ; avoidance to issue SCN for delay in filing Returns - liability as fee for minor infractions; CA NONS /PRINCIPLE F TAXATION …contd CANNONS /PRINCIPLE OF TAXATION …contd 9. Diversity: Govt . should collect tax from different sources ; but not from limited sources. -so that adequate tax revenue can be generated with lower tax-rates - burden of tax is not felt. -- when tax is generated from more sources- failure of one or two sectors wouldn’t effect over all revenue collection. -- Prior to 1994 services were not taxed ---- all possible business activities are taxed now. CA NONS /PRINCIPLE F TAXATION …contd SERVICE TAX- A NEW SOURCE Service tax- an example of diversification of taxation: • SERVICE SECTOR – Contributes to 57% of GDP ; while Manufacturing Sector contributes just 15% of GDP. • So Central Govt. – found Service sector as a new source of Revenue. • Service Tax- introduced in 1994- on three services: 1. General Insurance; 2. Stock Broking; and ; 3. Telecommunications. -- Yielded just Rs. 410 Cr.- in 1994-95 (C.Ex. Rs. 37,467 Cr) -- Expanded to 119 services by 2012-13 [Rs.1,24,000 Cr.] (2016 -17:ED- 3.19 Lakh Cr. Vs ST – 2.31 Lakh Cr. ) SHORTCOMINGS IN INDIAN TAXATION 1. Multiplicity of taxes: Taxes by Union Government, State Governments and the local governments have resulted in difficulties and harassment to the tax payer - maintain separate records for each of them; --Interact with several authorities; --- file different returns etc. - Multiple markets – due to divergent Statutes across states 2. Cascading Effect = Tax on Tax : The assessable value for payment of VAT / ST was inclusive of ED and/or Customs duty; • Imported Goods – Tax on Tax at more than one stage; • Local taxes / Entry Tax on value inclusive of all previous taxes. SHORTCOMINGS IN INDIAN TAXATION 3. Non- availability of the Credit of all elements of Tax on Goods/ Services :- also leads to cascading effect & inflation. Eg. : 1. Sales Tax Paid on Capital Goods – not available as Credit; 2. Central Sales Tax paid on interstate sales was not available as Credit to traders. 4. Dominance of Indirect taxes: (State & Central indirect taxes) It is well known that indirect taxes are more burdensome to the poor than the wealthy. SHORTCOMINGS IN INDIAN TAXATION 5. Adhocism: Tax policies & Rates of Tax - changed frequently; several taxes are imposed on ‘adhoc’ basis to meet deficits and withdrawn later. Some taxes are introduced and withdrawn later for political reasons. ( eg.: Excise duty on all textiles introduced in 2003 was withdrawn in 2004). 6. Bias in incidence of taxes: --Urban population is taxed far higher than the rural rich. 7. Poor/ no use of Technology: Poor systems & Lack of transparency. SHORTCOMINGS IN INDIAN TAXATION 11. High degree of Discretion : - leads to divergence in decisions and possible corruption. - Particularly the quantum of penalty; 12. Loopholes in policies & provisions of law : Leads to evasion of tax. GST • GST was conceived as the Solution for several shortcomings of the earlier Indirect taxation system. • France was the first country to implement GST to reduce tax-evasion. • Since then, more than 140 countries have implemented GST (Malasia :2015 – but Rolled back w.e.f: 01.06.2018) • Some countries have Dual-GST-Eg:Brazil and Canada • Proposed GST in India is close to Brazilian system of GST, except that our is a Single system of GST. GST Council GST Council is the apex body to make recommendation on GST policy issues  Chairperson – Union FM;  Members - MOS (Finance) and all Ministers of Finance / Taxation of each State;  Chairman of the Central Board of Indirect Taxes and Customs (CBIC), is a permanent invitee;  Quorum is 50% of total members;  Decision by 75% majority;  States - 2/3 weightage and Centre - 1/3 weightage  So far all decisions were on consensus basis not by voting. Taxes Subsumed in GST I. Central Taxes: 1. Central Excise Duty 2. Service Tax 3. Duties of Excise (Medicinal and Toilet Preparations) 4. Additional Duties of Excise (Goods of Special Importance) 5. Additional Duties of Excise (Textiles and Textile Products) 6. Additional Duties of Customs (commonly known as CVD) 7. Special Additional Duty of Customs (SAD) 8. Central Surcharges and Cesses so far as they relate to supply of goods and services contd… Taxes Subsumed in GST II. State Taxes : 1. State VAT/ Sales Tax; 2. Central Sales Tax; 3. Luxury Tax; 4. Entry Tax (all forms); 5. Entertainment and Amusement Tax (except when levied by the local bodies); 6. Taxes on advertisements; 7. Purchase Tax; 8. Taxes on lotteries, betting and gambling; 9. State Surcharges and Cesses so far as they relate to supply of goods and services. • 13 Cesses have ceased to exist with the rollout of GST. ( 15 major taxes & 13 Cesses = 28 levies were subsumed) Salient features GST… • Dual GST with the Centre and States simultaneously levying - it on a every taxable event (supply); and - - on a common tax base. -- Central GST(CGST); and -- State/UT - GST (SGST/UTGST). • Inter- State supplies of Goods/ Services/ Both- attract IGST. (Rate of IGST a sum total of CGST & SGST/UTGST) Salient features GST… • GST would apply to all Goods other than alcoholic liquor for human consumption; - but GST on five petroleum products (Crude /MS /HSD /ATF /NG) , would be from a future date. • The GST would apply to all services barring a few to be specified. (Eg: Service of an employer to employee; S’ by MP/MLA & M’ of other local bodies; S’ by Court/ Tribunal; S’ by crematorium/Funaral/mortuary & Transportation of deceased ; Sale of Land ; Sale of Building etc.) Salient features GST… • CGST and SGST - levied at rates - notified on the recommendations of the GST Council. • GST-Council recommended a four-tier tax structure at : 5%, 12%, 18% and 28%. • Special rates on some like jewellery (3%); • Exports and supplies to SEZ are 0% ( Zero Rated) • Tobacco products and luxury goods would attract higher tax. • Exemption list - would be common for the Centre and the States. Salient features GST… • Tax payers with an aggregate turnover in a financial year up to Rs.20 lakhs would be exempt from tax. • For NE States , Himachal P; Jharkand and Sikkim, the threshold exemption shall be Rs. 10 lakhs. • Small taxpayers with an aggregate turnover in a financial year up to Rs. 150 lakhs shall be eligible for composition levy. • Under composition levy scheme, a taxpayer shall pay tax as a percentage of his turnover during the year without the benefit of input tax credit (ITC) & cann’t pass on the tax incidence to recipient; (Traders & Manufacturers: 1%; Restaurants: 5%) • Tax payers making inter-State supplies or paying tax on reverse charge basis shall not be eligible for composition scheme. Alcohol for human consumption Power to tax remained with the State Five petroleum products – crude oil , diesel, petrol, natural gas and ATF GST Council to decide a future date from which GST will be applicable Tobacco Part of GST but power to levy additional excise duty with Central Government Entertainment tax levied by local bodies Power to tax remains with local bodies GST ! Salient features GST… • Integrated GST (IGST) - levied and collected by the Centre on inter-State supply of goods and services. • Credit of taxes paid on inputs (Input Tax Credit/ ITC ) shall be allowed and taxpayers can utilize the same for payment of output tax. • CGST credit can be used for payment of CGST and SGST credit can be used for payment of SGST. • No ITC on account of CGST shall be utilized towards payment of SGST and vice versa. • Credit of IGST shall be utilized for payment of IGST, CGST and SGST, in that order. • SGST portion of IGST shall be transferred to the destination State where the goods or services are eventually consumed. Ease of doing business  Registration – On line:: No physical verification – Granted in 7 days – otherwise deemed to have been granted.  Common e-Return for CGST, SGST (UTGST) and IGST  Common periodicity of Returns for a class of dealers  Uniform cut-off date for filing of Returns  Mandatory reporting of supply & purchase invoice details prior to or along with filing of e-Return – to avoid submission of hard copies;  System based verification of returns on monthly basis;  System based validations of ITC availed, utilized & Tax payments  Single challan for all four type of tax payments;  Tax can be deposited by internet banking, NEFT / RTGS, Debit / credit card and over the counter;  Abolition of Check-posts – E-Way Bill ( Nation-wide E-way bill for inter-State supplies from 01.04.2018 and for intra-State supplies latest by 03.06.2018) Ease of doing business GST council has shown resilience in responding to the needs of the trade and industry. The decisions taken by the GST Council from time to time:  Exemption from registration  to suppliers of services making inter-State supply up to Rs. 20 lacs  to suppliers providing services through an e-commerce platform provided their aggregate turnover does not exceed Rs. 20 lacs  Exemption from Section 9(4) – Reverse Charge on purchase from unregistered persons till 30.09.2018  No requirement on payment of tax on advances received for supply of goods by all taxpayers  Suspension of TCS / TDS provisions till 30.09.2018. Ease of doing business  All taxpayers to file GSTR-3B & pay tax on monthly basis  Taxpayers with turnover up to Rs. 1.5 Cr to file quarterly GSTR-1 returns – Monthly for other taxpayers  Late fee already paid but subsequently waived off to be re- credited to their Electronic Cash Ledger under “Tax” head instead of “Fee” head  New simplified system of return filing would be worked out by a Committee of Officers  From October 2017 onwards, the amount of late fee payable by a taxpayer  whose tax liability for that month was ‘NIL’ will be Rs. 20/- per day instead of Rs. 200/- per day  whose tax liability for that month was not ‘NIL’ will be Rs. 50/- per day instead of Rs. 200/- per day 60 Anti-Profiteering under GST “Profit is fine, profiteering is not.” “Don’t let someone profiteer at the expense of the Govt. Policy ” Profiteering means: “the activity of taking unfair advantage of a situation to make a large profit, often by selling goods that are difficult to fetch a very high price” Anti-Profiteering in GST - First law in our constitutional history that allows the government to keep a tab on a businessman’s pricing decision irrespective of his intentions, the nature of the produce and market circumstances. 61 Anti-Profiteering under GST Under GST system - prices of goods and services were expected to substantially come down on a/c of removal of cascading effect & seamless ITC. AP provisions are warranted to check the undue benefit to Suppliers on account of reduced Rates and/or availability of ITC. Section 171 of the CGSTA/SGSTA/UTGSTA - envisages that the benefit on account of the reduction in rate of tax on any goods/services or due to the availability of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. Relevant Rules: Rule 122 to 137 of CGSTR/SGSTR Sie Administrative Structure EYL MGT Tay Standing Committee State Screening Committees é CoN AERC a Raye sg las CN NACE LAea sue » aN atl Neem eum ely Standing Committee on Anti-profiteering Second Floor, Bhai Vir Singh Sahitya Sadan, Bhai Vir Singh Marg, Gole Market, New Delhi 110001, Tel No. 011-23741537, National Anti-profiteering Authority Fax No,; 01123741542, Email: dgsafeguards@nik.in Oa ycenictla i Director General of Safeguards, CBEC OMT CIMT a NCCU Ac LR oe LA LL) 4 a aN a For determining profiteering and passing @ screening Committees on Anti-pronteering “ 7 Contact details of State Screening Committee on Anti-profiteering appropriate order to ensure consumers benefit from are available at URL: goo. gl/eYIXnk reduction in tax rate or benefit of Input Tax Credit SUCCESS STORY OF GST – IT’S INDICES Decline in Prices of Common consumer Goods (CCG): - Price of several FMCG – have fallen : due to :: - - reduction in the total incidence of Tax ( No Cascading) - -- adoption of lesser GST-rate as compared to total of - C.Ex+ VAT : Examples:: Description Pre- GST Post-GST Description Pre- GST Post-GST Purified Water 27% 18% Tooth powder 17% 12% Tooth Paste 27% 18% UPVC doors & Windows 28.81% 18% Hair Oil 27% 18% Shampoo 28% 18% Soap 27% 18% Hair dye 28% 18% Stapler 27% 18% Perfume & after/pre- shave etc 28% 18% X-ray film 23% 12% Fans, pumps Compressors 28% 18% Wrist watches clocks straps 28% 18% Razor/blades Detergents 28% 18% ADVANTAGES OF GST . GST has increased the tax base & increase tax revenue . It happened with VAT introduced in several states • GST has increased tax collections due to wide coverage of goods and services – from 92000Cr in Aug. 2017 to >1 lakh Cr. For 04/2018. [ 07/2018: 96483 Cr.] • It resulted in cost competitiveness of goods and services in Global market . GST VERIFY APP • It is an android APP - to verify – whether the person collecting tax from the consumer is eligible to collect tax or not; -- it also provides the details of the person collecting GST. • A Composition Tax Payer should not collect the tax from his consumer. --- The app also tells whether the taxpayer is in composition scheme or not. ESSENTIAL CONTENTS OF TAX INVOICE / BILL OF SUPPLY 1 Name, address and GSTIN of the supplier 2 A consecutive serial number, in one or multiple series, containing alphabets or numerals or special characters hyphen or dash symbolised as ‘-‘ and ‘/’ respectively and any combination thereof, unique for a financial year. 3 Date of issue of invoice 4 Name, address and GSTIN of the recipient * 5 HSN code of goods or accounting code of services ** 6 Description of goods or services 7 Quantity of goods or unit quantity code 8 Total value of goods/services 9 Taxable value of goods or services 10 Rate of tax separately (applicable rate for CGST, SGST/UTGST or IGST and Cess 11 Amount of tax charged separately for CGST, SGST/UTGST or IGST and Cess 12 Place of supply along with name of state, in case of inter-state supply 13 Address of delivery if same is different from place of supply 14 Applicability of reverse charge to be mentioned wherever applicable 15 Signature or digital signature of supplier or his authorized representative Defective Invoices ELITE. M LITE..AMEQRIV 5: GST CHARGED WITHOUT A VALID GST IDS JODEH AH "PTO, li NO. “B gidies bate: 26 IA IKg 83325 Ms: = Particulars ty | Rate | VAT 4% VAT 12.5% Copa chatty | 1 ]1&) aq w u (| ax] 92 wW u (] &] sg Bows § (| 36] 26 pdoteStard | | [260] 20 “es CVA] Leo} Bo w ce e xB Oye rn «&} Cfaruf 2 we} (Pye BIR CHI-TIKKA IP 284 bo 29, 0 oF 17.00, 102. 00 RON PRAWNS BLRVN Ful \ Total Sh 7 Grand Total zp ° St | TIN 28450171740 - PLO adh y  Correct Invoice ja ENTERPRISES 1 a 4) .WRoad, Opp Court | aacice No. | ~ Enoor 503224 j4e7 Sy Berne senovenssoznazn een < gana. & oe pment | YGontact : 08482 224535 ose 288 | ee { &-Mail : janata_sa@yahoo.co.in | Buyer a | ) ME ELECTRONICS j & FURNITURES is MAMID >IPALLY Terms of Delivery GSTIN/UIN —: 36AAXFM5318C1Z3 i i |StateName —: Telangana, Code : 36 | | | FP Description of Goods | HSN/SAG | GST | Quantity LE Rate | per] Amount x | Bae |__| }—| | gl2NQHNW/RD EDGE 185 E2H 2.2 astezio0 | 28%] 1Nos| 2,984.38 [Nos | 8,984.38 | | N.Or.Wine - 2NQHNW | \ { i jf 1,72,968.77 \ cast | | 1se1se2 i i || = | == | _ Roundo! | | \ 11 : | | | | | |_| ! —- Total 9Nos| |__]& 4,44,600.00 | FaRor Remnant Caranatin fn wend Ix Hundred Ont: | \ mos Lakh Forty Four Thousand SaaS aaa Tax ‘State Tax | Total \ HSN/SAG Value | Rate | Amount | Rate | Amount |Tax Amount | 7,12,968.77 |__14%| 15,815.62 | __14%| 15,815.62 | 31,631.24 84182100 45,815.62 15.815.62 | 31,631.24 | ‘Tax Amount (in words) = ind Six Hundred Thirty One and Twenty Four AUTHORITY to Levy TAX by UNION ... List-I 1. Taxes on Income other than agricultural income (Entry 82) 2. Duties of Customs including Export duties (Entry 83) 3. Duties of Excise on tobacco and other goods manufactured or produced except (i) alcoholic liquor for human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in (ii). (Entry 84) 4. Corporation Tax (Entry 85) 5. Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on capital of companies (Entry 86) 6. Estate duty in r/o property other than Agri.l land (Entry 87) 7. Duties in respect of succession to property other than agricultural land (Entry 88) AUTHORITY to Levy TAX by UNION .….. List-I 8. Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares/freight(Entry 89) 9. Taxes other than stamp duties on transactions in stock exchanges and futures markets 10. Tax on sales or purchase of newspaper and advertisement their in; 11. Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce 12. Taxes on the consignment of goods in the course of inter- State trade or commerce (CST) 13. All residuary types of taxes not listed in any of the three lists of Seventh Schedule of Indian Constitution AUTHORITY to Levy TAX by STATE .….. List-II 1 Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for revenue purposes and records of rights, and alienation of revenues (Entry 45) 2 Taxes on agricultural income (Entry 46) 3 Duties in respect of succession to agricultural land (Entry 47) 4 Estate Duty in respect of agricultural land (Entry 48) 5 Taxes on lands and buildings (Entry 49) 6 Taxes on mineral rights (Entry 50) 7 Duties of excise for following goods manufactured or produced within the State (i) alcoholic liquors for human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics (Entry 51) 8 Taxes on entry of goods into a local area for consumption, use or sale therein (see Value added tax) (Entry 52) 9 Taxes on the consumption or sale of electricity (Entry 53) 10 Taxes on the sale or purchase of goods other than newspapers(Entry 54)