Lecture notes on Indirect Taxes

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11 INTERMEDIATE : PAPER - INDIRECT TAXATION INTERMEDIATE STUDY NOTES The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 SYLLABUS - 2016First Edition : August 2016 Published by : Directorate of Studies The Institute of Cost Accountants of India (ICAI) CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof.Syllabus - 2016 PAPER 11: INDIRECT TAXATION Syllabus Structure 1. Canons of Taxation - Indirect Tax 35% 2. Central Excise 3. Customs Law 15% 4. Servce Tax 30% 5. Central Sales Tax and VAT 20% 20% 35% 30% 15% ASSESSMENT STRATEGY There will be written examination paper of three hours OBJECTIVES To provide an in depth dtudy of the various provisions of indirect taxation laws and their impact on business decision-making. Learning Aims The syllabus aims to test the student’s ability to:  Understand the principles underlying the Indirect Taxation Statutes (with reference to Central Excise Act, Customs Act, Service Tax, Value Added Tax, Central Sales Tax)  Compute the assessable value of transactions related to goods and services for levy and determination of duty liability  Identify and analyze the procedural aspects under different applicable statutes related to indirect taxation Skill set required Level B: Requiring the skill levels of knowledge, comprehension, application, analysis. Note: Subjects related to applicable statutes shall be read with amendments made from time to time. 1. Canons of Taxation - Indirect Tax 35% 2. Central Excise 3. Customs Law 15% 4. Service Tax 30% 5. Central Sales Tax and VAT 20%1. Canons of Taxation - Indirect Tax: Features of Indirect Tax and Constitutional Validity 2. Central Excise: (a) Central Excise Law - Goods - Manufacturer - Valuation Rules - Related Party - Captive Consumption - Registration - Payment of Duty - Monthly Returns - Job Work. (b) CENVAT - Input Services capital goods and procedures under Cenvat Credit Rules. (c) Export Procedures (d) SSI provisions 3. Customs Laws: (a) Concepts of Customs Law - Types of Duties, Anti - dumping duties (b) Valuation rules - Import Procedures - Export Procedures - Baggage - Stores - Warehousing - Demurrage 4. Service Tax: (a) Introduction, Nature of Service Tax, Service Provider and Service Receiver (b) Registration Procedure, Records to be maintained (c) Negative List of Services, Exemptions and Abatements (d) Valuation of Taxable Services (applicable services will be notified for each term of exam) (e) Payment of Service Tax, Returns of Service Tax (f) Point of Taxation Rules, 2011 (g) Place of Provision of Service Rules, 2012 (h) Other aspects of Service Tax 5. Central Sales Tax and VAT: (a) Central Sales Tax (i) Introduction, Definitions, Salient Features of CST Act (ii) Stock Transfer, Branch Transfer, Inter State Sale (iii) Various forms for filing of returns under CST (iv) Procedures under Central Sales Tax (CST) (b) Value Added Tax (VAT) (i) Introduction, definitions, salient features of State VAT Act (ii) Treatment of stock & branch transfer under State VAT Act (iii) Filing of return under State VAT Act (iv) Accounting & Auditing VATContents Study Note 1 : Canons of Taxation - Indirect Tax 1.1 Basis for Taxation 1 1.2 Direct Taxes and Indirect Taxes 1 1.3 Features of Indirect Taxes 2 1.4 Coinstitutional Validity 4 1.5 Administration and Relevant Procedures 4 Study Note 2 : Central Excise 2.1 Introduction 6 2.2 Laws relating to Central Excise 7 2.3 Central Excise Act, 1944 7 2.4 Duties Leviable 7 2.5 Levy, Collection & Exemptions from Excise Duty 8 2.6 Goods 10 2.7 Excisability of Plant & Machinery, Waste and Scrap 14 2.8 Manufacture 15 2.9 Manufacturer 17 2.10 Classification of Goods 19 2.11 Valuation of Goods 23 2.12 Valuation in Case of Job Work-Rule 10A 34 2.13 Some Critical Issues in Central Excise 35 2.14 Assessable Value under Section 4 41 2.15 Value Based onb Retail Sale Price 42 2.16 MRP Based Valuation 43 2.17 Assessment under Central Excise Law 53 2.18 Procedural Aspects under Central Excise Duty 55 2.19 Refund & Other Important Provisions 58 2.20 Other Procedures in Central Excise 61 2.21 Excise Audit 66 2.22 Warehousing 70 2.23 Export Benefits and Procedures 71 2.24 Excise on Small Scale Industries 73 2.25 Demands and Penalties 82 2.26 Appeals 83 2.27 Important Provisions of Central Excise Act, 1944 84 2.28 Important Provisions of Central Excise Rules, 2002 90 2.29 Important Rules of Central Excise Valuation Rules, 2000 92 2.30 Rules of Classification 93Study Note 3 : Cenvat Credit 3.1 Background of Cenvat Credit 115 3.2 Highlights of Cenvat Credit Scheme 116 3.3 Utilization of Cenvat Credit 128 3.4 Reversal of Cenvat Credit 130 3.5 Refund of Cenvat Credit 134 3.6 Obligation of a Manufacturer or Producer of Final Products and a Provider of Taxable Services 138 3.7 Input Service Distributor 141 3.8 Documents and Accounts 143 3.9 Other Provisions 145 Study Note 4 : Customs Law SECTION - A 4.1 Introduction 158 4.2 Types of Custom Duty 169 4.3 Methods of Valuation 177 4.4 Methods of Valuation 181 4.5 Export Goods - Valuation for Assessment 196 4.6 Self Assessment on Basis of ‘Risk Management System’ (RMS) 197 4.7 Procedures for Import 197 4.8 Procedures for Export 201 4.9 Transit and Transhipment of Goods 202 4.10 Exemptions and Remission 203 4.11 Refund of Customs Duty 205 4.12 Appointment of Officers of Customs 208 4.13 Appointment of Customs Station, Warehousing Stations etc. 209 4.14 Central Government Power of Prohibition, Detection of Illegally Imported and Export Goods 210 4.15 Warehousing in Customs 211 4.16 Provisional Assessment of Duty (Section 18) 222 4.17 Baggage and Postal Articles 223 4.18 Drawback 238 4.19 Other Provisions in Customs 242 4.20 Project Imports 243 4.21 Offences, Power and Penalties under Customs 246 SECTION - B 4.22 Anti - Dumping Duty - An Overview 249Study Note 5 : Service Tax 5.1 Introduction 273 5.2 Registration under Service Tax 284 5.3 Reverse Charge 288 5.4 Brand Name of Another Person 292 5.5 Payment of Service Tax Rule 6 292 5.6 Rate of Service Tax 293 5.7 Invoices under Service Tax 294 5.8 Records to be Maintained 295 5.9 Automation of Central Excise and Service Tax (ACES) 295 5.10 Electronic Accounting System in Excise and Service Tax (EASIEST) 296 5.11 Negative List & Exempted Services 298 5.12 Point of Taxation 324 5.13 Taxable Event in Service Tax 330 5.14 Place of Provision of Service Rules 332 5.15 Valuation of Taxable Services (Section 67) 349 5.16 Important issues under Service Tax Provisions 356 5.17 E-payment of Service Tax 359 5.18 Self Adjustment of Excess Tax Paid 359 5.19 Special Audit 360 5.20 Return 360 5.21 Penalties 362 5.22 Adjudication & Appeals 363 Study Note 6 : Central Sales Tax Act, 1956 6.1 Introduction 376 6.2 Constitutional Provisions & Nexus Theory 377 6.3 Principles & Objects of CST Act, 1956 377 6.4 Definition (Section 2) 378 6.5 Sale or Purchase in the course of Interstate Sale (Section 3) 383 6.6 Sale or Purchase outside a State (Section 4) 384 6.7 Sale in the course of Export / Import (Section 5) 385 6.8 Person liable to pay CST Section 6(1) & 6(1A) 386 6.9 Exemption in respect of Subsequent Sale Sec 6(2) 386 6.10 Taxability of Transfer of Goods made otherwise than by way of Sale (Sec. 6A) 387 6.11 Registration of Dealer 388 6.12 Rates of Tax in the couse of Inter-State Trade or Commerce Section 8(1) & 8(2) 390 6.13 Purchase of Goods by a Registered Dealer Section 8(3) 3916.14 Furnishing of Declaration Section 8(4) 391 6.15 Power to Exempt or Impose Tax at Concessional Rates Section 8(5) 392 6.16 Sale for Units Located in Special Economic Zone Section 8(6) 392 6.17 Determination of Taxable Turnover Section 8A 392 6.18 Levy & Collection of Tax Section 9 393 6.19 Penal Provisions under CST Act Section 10 393 6.20 Imposition of Penalty in Lieu of Prosecution Section 10A 394 6.21 Cognizance of Offences Section 11 & 12 394 6.22 Goods of Special Importance Section 14 394 6.23 Liability of Liquidator of Company in Liquidation Section 17 395 6.24 Liability of Directors of Private Company in Liquidation Section 18 396 6.25 Central Sales Tax Appellate Authority Section 19 396 6.26 Appeals Section 20 397 6.27 Procedure on Receipt of Appeal Section 21 397 6.28 Powers of the CST Appellate Authority Section 22 & 23 397 6.29 Authority for Advance Rulings Section 24 398 6.30 Transfer of Pending Proceedings Section 25 398 6.31 Applicability of Order Passed Section 26 398 6.32 Forms under CST 398 Study Note 7 : State Level VAT 7.1 Background of State VAT 418 7.2 Basic Principle of VAT 420 7.3 Registration Under VAT 422 7.4 Overview of State VAT 426 7.5 Purchase Tax in VAT or ‘Reverse Charge’ 427 7.6 Tax Rates Under VAT 428 7.7 Valuation of Taxable Turnover 430 7.8 Procedural Provisions under VAT 431 7.9 Assessment of Tax 432 7.10 Impact of VAT on CST 433 7.11 Role of Cost Accountant Under VAT 435 7.12 Agricultural Products or Commodities 435 7.13 High Seas 435 7.14 Phased out Inter-state Sales-Tax (i.e., Central Sales Tax) 436Study Note - 1 CANONS OF TAXATION – INDIRECT TAX This Study Note includes 1.1 Basis for Taxation 1.2 Direct Taxes and Indirect Taxes 1.3 Features of Indirect Tax 1.4 Constitutional Validity 1.5 Administration and Relevant Procedures 1.1 BASIS FOR TAXATION India is a socialist, democratic and republic country. Constitution of India is supreme law of land. All other laws, includ- ing the Income Tax Act, are subordinate to the Constitution of India. The Constitution provides that ‘no tax shall be levied or collected except by Authority of Law’. The Constitution includes three lists in the Seventh Schedule providing authority to the Central Government and the State Governments to levy and collect taxes on subjects stated in the lists. 1.2 DIRECT TAXES AND INDIRECT TAXES A) Direct Taxes: They are imposed on a person’s income, wealth, expenditure, etc. Direct Taxes charge is on per- son concern and burden is borne by person on whom it is imposed. Example-Income Tax. B) Indirect Taxes: They are imposed on goods / services. The Immediate liability to pay is of the manufacturer / ser- vice provider / seller but its burden is transferred to the ultimate consumers of such goods / services. The burden is transferred not in form of taxes, but, as a part of the price of goods / services. Example-Excise Duty, Customs Duty, Service Tax, Value-Added Tax (VAT), Central Sales Tax (CST). Adam Smith’s Canons of Taxation Adam Smith’s contribution to this part of economic theory is still regarded as classic. His enunciation of canons of taxa- tion has hardly been surpassed in clarity and simplicity. His four celebrated canons are as follows:- 1. Canon of Equality: Equality here does not mean that all tax-payers should pay an equal amount. Equality here means equality or justice. Its means that the broadest shoulder must bear the heaviest burden. The canon has given rise to two theories. INDIRECT TAXATION l 1Canons of Taxation - Indirect Taxes i. Equality of sacrifice theory. It means that the burden of taxation should involve an equal sacrifice for every individual. This equality, however, though good in theory, is difficult to attain in practice. Sacrifice is subjective, something in the mind and feelings of a person. It is difficult to measure. Besides, it has to take into consideration the number of dependants on the earning member in the family and their standard of living. ii. The second principle indicating justice is the Ability or Faculty Theory, which holds that the rich should be made to pay something more than proportionate to their income. A man with an income of ` 12000 per month will not, other things being equal, feel the same pinch in parting with Rs. 120 as a man with income of only ` 2400 feels in paying ` 24 because the former’s faculty to pay is greater. On this principle is based progression in taxation i.e., increasingly higher rates of taxation as incomes increase. Proportional taxa- tion will not do justice. 2. Canon of Certainty: The individual should know exactly what, when and how he is to pay a tax. Otherwise, it causes unnecessary suffering. Similarly, the State should also know how much it will receive from a tax. 3. Canon of Convenience: Obviously, there is no sense in fixing a time and method of payment which are not suitable. Land revenue in India is realised after the harvest has been collected. This is the time when cultivators can conveniently pay. 4. Canon of Economy: This means that the cost of collection should be as small as possible. If the bulk of the tax is spent on its collection, it will take much out of the people’s pockets but bring little into the State’s pocket. It is not a wise tax. 1.3 FEATURES OF INDIRECT TAXES Government need funds for various purposes like maintenance of law and order, defence, social / health services, etc. Government obtains funds from various sources, out of which one main source is taxation. Justice Holmes of US- Supreme Court, has, long ago, rightly said that tax is the price which we pay for a civilized Society. Difference between Direct Taxes & Indirect Taxes Particulars Direct Taxes Indirect Taxes Meaning Direct Taxes are those taxes where Indirect Tax is a tax where incidence and impact the incidence and impact falls on fall on two different person. the same person. Nature of tax Direct Tax progressive in nature. Indirect Taxes is regressive in nature. Taxable Event Taxable Income of the Assessees. Purchase / Sale / Manufacture of goods and provisio of services. Levy & Collection Levied and collected from the Levied & collected from the consumer but paid/ Assessee. deposited to the Exchequer by the Assessee / Dealer. Shifting of Burden Directly borne by the Assessee. Tax burden is shifted or the subsequent / ultimate user. Hence, cannot be shifted. Collected After the income for a year is At the time of sale or purchases or rendering of earned or valuation of assets is services. determined on the valuation date. Advantages of Direct taxes Limitations of Direct taxes Direct taxes are ‘progressive’, as they depend on It Is psychologically very difficult for a person to pay paying capacity. Rich person is taxed more compared some amount after it is received in his hands. Hence, to poor person there is psychological resistance This is the reason why even Income Tax Act is widening the scope of “Tax Deduction at Source’’ (TDS) and TCS. Thus, a direct tax is converted to an indirect tax. 2 l INDIRECT TAXATIONDirect taxes do not affect prices of goods and service. Direct taxes are mainly on income of individuals, firms or corporate bodies, where millions of transactions are carried out in lakhs Of places and keeping an eye over all such transactions is virtually impossible Low income tax rates decrease tax revenues and tax Tax evasion is comparatively more in direct taxes evasion and hawala transactions. where it is on unorganized sector, since control is difficult Direct taxes do not increase the cost of modern Collection cost of direct taxes as percentage of tax machinery and technology. collected are higher in direct taxes compared to indirect taxes Direct taxes are not inflationary. Direct taxes can control wasteful expenditure only indirectly by taxing higher income group people. Government can judiciously use the direct taxes to support development in desirable areas, while discouraging in backward areas, infrastructure development etc Advantages of Indirect Taxes Limitations of Indirect taxes Since the price of commodity or service is already Indirect taxes do not depend on paying capacity. inclusive of indirect taxes, the customer Since the indirect tax is uniform, the tax payable on i.e. the ultimate tax payer does not feel a direct pinch commodity is same, whether it is purchased by a poor while paying indirect taxes and hence, resistance to man or a rich person. Hence, the indirect taxes are indirect taxes is much less compared to resistance to termed as ‘regressive’.(This argument is only partially direct taxes. correct; as it is possible to levy lower taxes on goods of Manufacturer’s/Dealer’s Psychology favours indirect daily consumption while levying higher taxes on luxury taxes- The manufacturer/ trader who collects the taxes goods and the regressive effect can be reduced in in his Invoice and pays it to Government, has a many circumstances.) psychological feeling that he is only collecting the taxes and is not paying out of his own pocket (though this feeling may not be always correct). Indirect taxes are easier to collect as indirect taxes are Tax on goods and services increases its prices, which mainly on goods/commodities/services, for which may reduce demand as per law of demand of goods record keeping, verification and control is relatively and services. Lesser demand means lower growth of easy(atleast in organized sector).Manufacturing industrialization. activities are carried out mainly in organized sector, where records and controls are better. Tax evasion is comparatively less in indirect taxes in High customs/excise duty increases smuggling, hawala organized sector due to convenience of control trade and mafia gangs, which is harmful in many ways. Similarly, high excise duty leads to evasion. On the other hand, low tax rate will affect the government exchequer. Collection costs of indirect taxes as percentage of tax Higher customs duty and excise duty increases cost of collected are lower in indirect taxes compared to modern machinery and technology direct taxes. Government can levy higher taxes on luxury goods, Indirect taxes increase the prices of products which reduces the wasteful expenditure And hence are often perceived as inflationary. Government can judiciously use the indirect taxes to support development in desirable areas, while encouraging it in backward areas also ,e.g. reducing taxes on goods manufactured in tiny or small scale units; lowering taxes in backward areas etc. INDIRECT TAXATION l 3Canons of Taxation - Indirect Taxes Recovery from buyer is not essentialc ondition for levy of indirect taxes- In general ,indirect taxes are recovered from buyer, it is not an essential feature of indirect taxes. Tax on goods or services will be valid even if it is not recovered or recoverable from buyer. It is valid liability of manufacturer / seller / service provider. 1.4 CONSTITUTIONAL VALIDITY Power of Taxation under Constitution of India is as follows: (a) The Central Government gets tax revenue from Income Tax (exception Agricultural Income), Excise (exception alcoholic drinks), Customs and Central Sales Tax. (b) The State Governments get tax revenue from sales tax, state excise duty on certain commodities viz. from liquor and alcoholic drinks. Also tax on agricultural income. (c) The Local Self Governments e.g. municipalities, etc. get tax revenue from entry tax and house property tax. Article 265 provides that no tax shall be levied or collected except by Authority of Law. The authority for levy of various taxes, as discussed above, has been provided for under Article 246 and the subject matters enumerated under the three lists set out in the Schedule-VII to the Constitution. 1.5 ADMINISTRATION AND RELEVANT PROCEDURES In India, Constitution which came into effect on 26thJanuary, 1950 is supreme and all laws and Government actions are subordinate to our Constitution. Clear understanding of concepts is vital for any discussion on taxation matters as power to levy and collect tax is derived from Constitution. If it is found that any Act, Rule, Notification or Govern- ment order is not according to the provisions of the Constitution, it is illegal, null and void and it is called ultra vires the Constitution. India is Union of States–The structure of Government is federal in nature. Article1(1) of Constitution of India reads, ‘In- dia, that is Bharat, shall be a Union of States’. Government of India (Central Government) has certain powers in respect of whole country. India is divided into vari- ous States and Union Territories and each State and Union Territory has certain powers in respect of that particular State. Thus, there are States like Gujarat, Maharashtra, Tamilnadu, Kerala, Uttar Pradesh, Punjab etc. and Union Ter- ritories like Pondicherry, Chandigarh etc. Sources and Authority of Taxes in India Powers of Central or State Government to levy tax Article Empowers For 246(1) Central Government Levy taxes in List I of the Seventh Schedule of the Constitution. 246(2) Central or State Government Levy taxes in List III of the Seventh Schedule 246(3) State Government Levy taxes in List II of the Seventh Schedule of the Constitution. Bifurcation of powers between Union and States – Article 246(1) of Constitution of India states that Parliament has ex- clusive powers to make laws with respect to any of matters enumerated in List I in the Seventh Schedule to Constitution (called ‘Union List’). As per Article 246(3), State Government has exclusive powers to make laws for State with respect to any matter enumerated in List II of Seventh Schedule to Constitution. Seventh Schedule to Constitution consists of following three lists: • List I (Union List) contains entries under exclusive jurisdiction of Union Government. • List II (State List) contains entries under exclusive jurisdiction of States. • List III (Concurrent List) contains entries where both Union and State Governments can exercise power.In case of Union Territories, Union Government can make laws in respect of all the entries in all three lists. 4 l INDIRECT TAXATION Seventh Schedule to Article 246 of the Indian Constitution List I List II List III UnionList State List Concurrent List Taxation under Constitution Union List (List I) State List (List II) Only Union Government can make laws. Only State Government can make laws. Given in Schedule Seven of Constitution Given in Schedule Seven of Constitution. Important taxes in Union List Important taxes in State List Entry No. 82 – Tax on income other than Entry No. 46 – Taxes on agricultural income. agricultural income. Entry No. 51 – Excise duty on alcoholic liquors, opium Entry No. 83 – Duties of customs including export duties. and narcotics. Entry No. 84 – Duties of excise on tobacco and other Entry No. 52 – Tax on entry of goods into a local area goods manufactured or produced in India except for consumption, use or sale there in (usually called alcoholic liquors for human consumption, opium, Entry Tax or Octroi). narcotic drugs, but including medicinal and toilet Entry No. 54 – Tax on sale or purchase of goods preparations containing alcoholic liquor, opium other than newspapers except tax on interstate sale or narcotics. or purchase. Entry No. 85 – Corporation Tax. Entry No. 55 – Tax on advertisements other than Entry No. 86 – Taxes on the capital value of assets, advertisements in newspapers. exclusive of agricultural land, of individuals and Entry No. 56 – Tax on goods and passengers carried companies; taxes on capital of companies by road or inland waterways. Entry No. 92A – Taxes on the sale or purchase of goods Entry No. 59 – Tax on professions, trades, callings and other than newspapers, where such sale or purchase employment. takes place in the course of interstate trade or commerce. Entry No. 92B – Taxes on consignment of goods where such consignment takes place during interstate trade or commerce. Entry No. 92C – Tax on services Amendment passed by Parliament on15-1-2004, but not yet made effective. Entry No. 97 – Any other matter not included in List II, List III and any tax not mentioned in list II or list III. (These are called ‘Residua Powers’.) List III : Concurrent List Both union and State Government can exercise power Given in Schedule Seven of constitution Entry No. 17A – Forest Income Entry No. 25 – Education Income INDIRECT TAXATION l 5Central Excise Study Note - 2 CENTRAL EXCISE This Study Note includes 2.1 Introduction 2.2 Laws relating to Central Excise 2.3 Central Excise Act, 1944 2.4 Duties Leviable 2.5 Levy, Collection & Exemptions from Excise Duty 2.6 Goods 2.7 Excisability of Plant & Machinery, Waste and Scrap 2.8 Manufacture 2.9 Manufacturer 2.10 Classification of Goods 2.11 Valuation of Goods 2.12 Valuation in Case of Job Work–Rule 10A 2.13 Some Critical Issues in Central Excise 2.14 Assessable Value under Section 4 2.15 Value Based on Retail Sale Price 2.16 MRP Based Valuation 2.17 Assessment under Central Excise Law 2.18 Procedural Aspects under Central Excise Duty 2.19 Refund & Other Important Provisions 2.20 Other Procedures in Central Excise 2.21 Excise Audit 2.22 Warehousing 2.23 Export Benefits and Procedures 2.24 Excise on Small Scale Industries 2.25 Demands and Penalties 2.26 Appeals 2.27 Important Provisions of Central Excise Act, 1944 2.28 Important Provisions of Central Excise Rules, 2002 2.29 Important Rules of Central Excise Valuation Rules, 2000 2.30 Rules of Classification 2.1 INTRODUCTION The Central Excise Law is the law which empowers Central Government to collect excise duty on the goods manu- factured or produced in India. Excise Duty is a duty on goods manufactured in India. Chapter II of the Central Excise Act, 1944 deals with levy and collection of Excise Duty with the help of section 3 which is the charging section. This duty is based on the value of the goods manufactured. Hence, it is necessary to determine the VALUE of the excisable goods in order to levy and collect the excise duty on these goods by applying the RATES specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985. The First Schedule gives the Basic Excise Duty (BED) rate and the Second Schedule gives the Special Excise Duty (SED) rate. 6 l INDIRECT TAXATIONIn majority of cases, the general rate of excise duty has been increased from 12.36% (including education cess and secondary and higher education cess) to 12.50% (excluding education cess and secondary and higher education cess) notification no. 01/2015-M&TP dated 01.03.2015. The education cess which was levied on all excisable goods as a duty of excise has been fully exempted vide notification no. 14/2015 CE dated 01.03.2015 and secondary and higher education cess which was levied on all excisable goods as a duty of excise has also been fully exempted vide notification no. 15/2015 CE dated 01.03.2015. To solve the practical problems regarding the calculation of excise duty, the general rate of 12.50% is considered here irrespective of the name and nature of the product. However, the product specific rates of excise duty are mentioned in CETA. 2.2 LAWS RELATING TO CENTRAL EXCISE Central Excise Tariff Act, 1985(CETA): This classifies the goods under 96 chapters with specific codes assigned. Central Excise Act, 1944(CEA): The basic act which provides the constitutional power for charging of duty, valuation, powers of officers, provisions of arrests, penalty, etc. Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000: The provisions regarding the valua- tion of excisable goods are laid down in this rule. Central Excise Rules, 2002 : The procedural aspects are laid herein. The rules are implemented after issue of notifica- tion. Cenvat Credit Rules, 2004: The provisions relating to Cenvat Credit available and its utilization are mentioned. Central Excise law extended to ‘’designated areas’’ in continental shelf and exclusive Economic Zone of India i.e., upto 200 nautical miles inside sea from the baseline of India and represents the limit till which India can be engaged in economic exploitation. 2.3 CENTRAL EXCISE ACT,1944 The duty of Central Excise is levied if the following conditions are satisfied : (1) The duty is on goods. (2) The goods must be excisable. (3) The goods must be manufactured or produced. (4) Such manufacture or production must be in India. In other words, unless all of these conditions are satisfied, Central Excise Duty cannot be levied. Ownership of raw ma- terial is not relevant for duty liability - Hindustan General Industries v. CCE 2003 (155) ELT 65(CEGAT) 2.4 DUTIES LEVIABLE (1) Basic Excise Duty: This duty, also known as CENVAT, is levied under section 3(1)(a) of Central Excise Act. It is levied at the rates specified in First Schedule to the Central Excise Tariff Act, read with exemption notifications, if any. Currently, the general rate of excise duty on non-petroleum products is 12.5% (w.e.f. 1-3-2015). However, there is no education cess at all (w.e.f. 1-3-2015). This duty is applicable to majority of the excisable goods. (2) National Calamity Contingent Duty (NCCD): It is imposed vide section 136 of the Finance Act, 2001 on pan masala, branded chewing tobacco, cigarettes, domestic crude oil and mobile phones. This rate is 1% on Basic Excise Duty. Notification No. 12/2015 Cex. dt. 01-03-2015: w.e.f. 1-3-2016 Excise duty on mobile handsets including cellular phone is being changed from 1% without CEN- VAT credit or 6% with CENVAT credit to 1% without CENVAT credit or 12.5% with CENVAT credit. NCCD of 1% on mobile handsets including cellular phone, remains unchanged. w.e.f. 01.03.2016: INDIRECT TAXATION l 7Central Excise Excise duty of 1% (without CENVAT credit) or 12.5% (with CENVAT credit) has been levied on articles of jewellery excluding silver jewellery not studded with diamonds/ruby/emerald/sapphire. Example 2: Basic Excise Duty 12.50% Add: Education Cess — Add: S & H Education Cess — Total effective rate of duty 12.50% 2.5 LEVY, COLLECTION & EXEMPTIONS FROM EXCISE DUTY Taxable Event The taxable event (i.e. Manufacture or production of excisable goods in India is taxable event. Central excise duty is charge on manufactured goods & not on sale of goods that means even if goods are not sold, excise duty should be payable on it. Captive consumption, free sample, intermediary goods etc. are also liable to central excise duty even from these goods no revenue is generate. An ownership criterion is irrelevant in paying excise duty) of great signifi- cance in levy of any tax or duty. Excise duty is leviable on all excisable goods, which are produced or manufactured in India. Thus, ‘manufacture or production in India’ of an excisable goods is a ‘taxable event’ for Central Excise. It becomes immaterial that duty is collected at a later stage i.e. at the time of removal of goods. Example 3: Product X is produced on 1st February 2016 by X Ltd. On that date X is an excisable commodity with a tariff rate of 12.5%. Subsequently on 31st March, 2016 Product X was removed from the factory. Hence, the taxable event is on 1st February 2016 and not on 31st March 2016. Persons Liable to Pay Duty Rule 4(1) of the Central Excise Rules, 2002 provides that every person who produces or manufactures any excisable goods, or who stores such goods in a warehouse, shall pay the duty leviable on such goods in the manner provided in Rule 8 or under any other law, and no excisable goods, on which any duty is payable, shall be removed without payment of duty from any place, where they are produced or manufactured or from a warehouse, unless otherwise provided. Rule 4(1A) provides that not with standing anything contained in sub-rule (1), every person who gets the goods, fall- ing under Chapter 61 or 62 or 63 of the First Schedule to the Tariff Act, produced or manufactured on his account on jobwork, shall pay the duty leviable on such goods, at such time and in such manner as is provided under these rules, as a if such goods have been manufactured by such person. Provided that where any person had, instead of paying duty, quthorised job worker to pay the duty leviable on goods manufactured in his behalf under the provisions of sub-rule (1A) as it stood prior to the publication of this notification, he shall be allowed to obtain registration and comply with the provisions of these rules within a period of thirty days from the date of publication of this notificationin the Official Gazatte. Rule 4(2) provides that not with standing anything contained in sub-rule (1), where molasses are produced in a khand- sari sugar factory, the person who procures such molasses, whether directly from such factory or otherwise, for use in the manufacture of any commodity, whether or not excisable, shall pay the duty leviable on such molasses, in the same manner as if such molasses have been produced by the procurer. Rule 4(4) provides that not with standing anything contained in sub-rule (1), Commissioner may, in exceptional circum- stances having regard tothe nature of the goodsand shortage of storage space at the premises of the manufacturer where the goods are made, permit a manufacturer to store his goods in any other place outside such premises, with- out payment of duty subject to such conditions as he may specified. From the above discussion it can be concluded that the following persons shall be liable to pay excise duty : (I) Every person, who produces or manufactures any excisable goods, (II) Every person, who stores excisable goods in a warehouse, (III) In case of molasses, the person who procures such molasses, 8 l INDIRECT TAXATION(IV) In case goods are produced or manufactured on job work, (a) The person on whose account goods are produced or manufactured by the job worker, or (b) The job worker, where such person authorizes the job worker to pay the duty leviable on such goods. Liability to Excise Duty Section 3(1) of Central Excise Act provides that there shall be levied and collected in such manner, as may be pre- scribed: (a) a duty of excise to be called the Central Value Added Tax (CENVAT), on all excisable goods which are pro- duced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985; (b) a special duty of excise, in addition to the duty of excise specified in clause (a) above, on excisable goods specified in the Second Schedule to the Central Excise Tariff Act, 1985, which are produced or manufactured in India, as, and at the rates, set forth in the said Second Schedule : Provided that the duties of excise which shall belevied and collected on any excisable goods which are produced or manufactured by a hundred percent Export Oriented Undertaking 100%EOU and brought to any other place in India, shall be an amount equal to the aggregate of the duties of customs which would be leviable under the Cus- toms Act, 1962 or any other law for the time being in force on like goods produced or manufactured outside India if imported into India, and where the said duties of customs are chargeable by reference to their value. The value of such excisable goods shall, notwithstanding anything contained in any other provision of this Act, be determined in accordance with the provisions of the Customs Act, 1962 and the Customs Tariff Act, 1975. Explanation.-where in respect of any such like goods, any duty of customs leviable for the time being in force is levi- able at different rate, then, such duty shall, for the purposes of this proviso, be deemed to be leviable at the highest of these rates. Section 3(1A) provides that the provisions of sub-section (1) shall apply in respect of all excisable goods other than salt which are produced or manufactured in India, by or on behalf of Government as they apply in respect of goods which are not produced or manufactured by Government. Section 3(2) provides that Central Government may, by notification in the Official Gazette, fix for the purpose of levying the said duties, tariff values of any articles enumerated, either specifically or under general headings, in First Schedule and the Second Schedule to the Central Excise Tariff Act, 1985 as chargeable with duty ad valorem and may alter tariff values for the time being in force. Exemption on DTA (Domestic Tariff Area) Clearance by 100% EOU Notification no. 23/2003-C.E., Dated 31.3.2003 DTA clearances by 100% EOU are exempt from- (a) 50% of the basic duties leviable thereon; (b) Additional duty of customs u/s 3(5) of Customs Tariff Act, 1975. Exemption from additional duty is available only if the goods so removed are not exempt from payment of sales tax/VAT in India. Collection of Excise Duty For collection of Central Excise Duty, the following two procedures are followed by the Central Excise Department: (i) Physical Control Procedure: Applicable to cigarettes only. In this case, assessment is done by Central Excise Offices and thereafter goods are removed under his supervision under cover of an invoice counter signed by him. (ii) Self-Removal Procedure: Applicable to all other goods produced or manufactured within the country. Under this system, the assesee himself determines the duty liability on the goods and clears the goods. Exemptions from Levy of Excise Duty Section 5A of the Central Excise Act, 1944 empowers the Central Government to grant Exemption from levy of excise duty and lays down the provisions relating thereto: (1) Power to Notify Exemptions in Public Interest Section 5A(1) provides that the Central Government is empowered to exempt in the public interest, any excis- INDIRECT TAXATION l 9Central Excise able goods from the levy of whole or any part of excise duty. Such exemption may be granted either absolutely or subject to such conditions, as may be specified in the Notification. Exceptions — However, unless specifically provided in such notification, no exemption shall apply to excisable goods, which are produced or manufactured: (i) in a Free Trade Zone or a Special Economic Zone and brought to any other place in India; or (ii) by a hundred per cent Export Oriented Undertaking and brought to any place in India. (2) Exemption in public interest Section 5A(2) provides that if the Central Government is satisfied that it is necessary in the public interest so to do, it may, by special order in each case, exempt from payment of duty of excise, under circumstances of an exceptional nature to be stated in such order, any excisable goods on which duty of excise is leviable. (3) Notification may provide for different method of levy of duty as well Section 5A(3) provides that an exemption in respect of any excisable goods from any part of the duty of excise leviable thereon may be granted by providing for the levy of a duty on such goods at a rate expressed in a form or method different from the form or method in which the statutory duty is leviable and any exemption granted in relation to any excisable goods in the manner provided in this sub-section shall have effect subject to the condition that the duty of excise chargeable on such goods shall in no case exceed the duty statutorily payable. Section 5A(2A) provides that the Central Government may, if it considers it necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued or order issued, insert an Explana - tion in such notification or order, as the case may be, by notification in the Official Gazette at any time within one year of issue of the notification or order, and every such Explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be. 2.6 GOODS ‘’Goods’’ has not been defined in the central Excise Act,1944. As per Article 366(12) of the Constitution of India, ‘’Goods’’ means all articles, materials and commodities. Section 2(7) of Sale of Goods Act, 1930 defines ‘Goods’ to mean every kind of movable property other than action- able claims and money and includes stocks and shares, growing crops, grass and things attached to and forming part of the land, which are agreed to be served before sale or under the contract of sale. These articles, materials and commodities must be movable and marketable. Decision of the Supreme Court of India in the case of Union of India vs Delhi Cloth and General Mills Ltd (1977). Those movable and marketable goods must be excisable goods as per section 2(d) of the Central Excise Act, 1944. Those excisable goods must be manufactured in India as per section 2(f) of the Central Excise Act, 1944 which in- cludes any process incidental or ancillary to the completion of the manufactured product. Decision of the Supreme Court in the case of Wallace Flour Mills Ltd Vs Commissioner of Central Excise (1989). Basic conditions for levy of Duty under Section 3 It is obvious from section 3(1) that, to attract excise duty, the following conditions must be fulfilled: • There should be movable goods; • The goods must be excisable; • The goods must be manufactured or produced; and • The manufacture or production must be in India. Goods manufactured or produced in SEZ are “excluded excisable goods”. This means, that the goods manufactured or produced in SEZ are “excisable goods” but no duty is leviable, as charging section 3(1) excludes these goods. Thus, the goods manufactured in SEZ are not “exempted goods”. They can be termed as “excluded excisable goods”. As per explanation to section 2(d), ‘goods’ includes any article, material or substance which is capable of being 10 l INDIRECT TAXATIONbought and sold for a consideration and such goods shall be deemed to be marketable’. Basic Ingredients From the above definitions of ‘goods’, the two essential elements of goods are emanated: (i) They should be movable, and (ii) They should be marketable. Goods must be Movable In order to be movable, an article must fulfill two conditions: (i) It should come into existence (as a result of manufacture); and (ii) It should be capable of being moved to market to be bought and sold. Thus, goods must exist. Where goods have not come into existence, they cannot be moved as well. So long as the goods have not come into existence, no question of levy of excise duty would arise. It has been observed that the word ‘manufacture’ or ‘production’ are associated with movables. In Municipal Corporation of Greater Mumbaiv. Union of India, a petrol pump of huge storage capacity which was not embedded to earth but which could not be removed without dismantling was held to be immovable in nature. In Sirpur Papers Mills Ltd. V. CCE the machinery embedded to a concrete base to ensure its wobble free operation was held to be a movable property. CBEC has clarified that whatever is attached to earth, unless it is like a tree/building/similar thing, shall not necessarily be regarded as immovable property if the whole purpose behind such attaching to the concrete base is to secure maximum operational efficiency and safety. Thus, excise duty cannot be levied on immovable property. Example 4: A Ltd. was engaged in fabrication, assembly and erection of waste treatment plant. The plant could not function as such until it was wholly built in- cluding civil construction. A Ltd. purchased duty paid parts of water treatment plant in unassembled form and assembled to the ground with civil work. Hence, excise duty is not required to pay. Because, the product emerges as immovable in nature. Larsen & Toubro Limited v UOI 2009 (243) ELT 662 (Bom). Waste Water Treatment Plant is an Example 5: M/s X Ltd., engaged in the manufacture of drums mix/hot mix plant immovable property by assembling and installing its parts and components. The machine is fixed by nuts and bolts to a foundation not because the intention was to permanently attach it to the earth, but because a foundation was necessary to provide a wobble free operation to the machine. Hence, the Supreme Court held that the plantsin question were not immovable property. Consequently, duty would belevied on them CCE v Solid & Cor- rect Engineering Works and Ors 2010 (252) ELT 48 1 (SC). Drum Mix Plant Hot Mix Plant Goods must be Marketable Marketability denotes the capability of a product, of being put into the market for sale. Where goods are not mar- INDIRECT TAXATION l 11

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