Syllabus UNIT - III Direct&IndirectTaxes
(MODVAT),(CENVAT),Competition Act 2002 & FEMA Acts,Business
Ethics, Corporate Governance, Philosophy and strategy of planning
in India
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Taxation The act of levying taxes is called taxation. A tax is
a compulsory charge or payment imposed by government on individuals
or corporations. The persons who are taxed have to pay the taxes
irrespective of any corresponding return from the goods or services
by the government. The taxes may be imposed on the income and
wealth of persons or corporations. The rate of taxes may vary.
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A tax "is not a voluntary payment or donation, but an enforced
contribution, exacted pursuant to legislative authority
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Canons of Taxation A good tax system should adhere to certain
principles which become its characteristics. A good tax system is
therefore based on some principles. Adam Smith has formulated four
important principles of taxation. A few more have been suggested by
various other economists. These principles which a good tax system
should follow are called canons of taxation.
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Adam Smiths four canons of taxation Canon of Equality Canon of
Certainty Canon of Convenience Canon of Economy
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Canon of Equality This states that persons should be taxed
according to their ability to pay taxes. That is why this principle
is also known as the canon of ability. Equality does not mean equal
amount of tax, but equality in tax burden. Canon of equality
implies a progressive tax system. Canon of Certainty According to
this canon, the tax which each individual is required to pay should
be certain and not arbitrary. The time of payment, the manner of
payment and the amount to be paid should be clear to every tax
payer. The application of this principle is beneficial both to the
government as well as to the tax payer.
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Canon of Convenience According to this canon, the mode and
timings of tax payment should be convenient to the tax payer. It
means that the taxes should be imposed in such a manner and at the
time which is most convenient for the tax payer. For example,
government of India collects the income tax at the time when they
receive their salaries. So this principle is also known as the pay
as you earn method. Canon of Economy Every tax has a cost of
collection. The canon of economy implies that the cost of tax
collection should be minimum.
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Taxes can be classified into various types on the basis of
form,nature,aim and method of taxation. the most common and
traditional classification is to classify into : Direct Tax
Indirect tax TYPES OF TAXES
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Direct taxes A direct tax is that tax whose burden is borne by
the same person on whom it is levied. The ultimate burden of
taxation falls on the person on whom the tax is levied. It is based
on the income and property of a person. Thus income tax,
corporation tax on companys profits, property tax, capital gains
tax, wealth tax etc are examples of direct taxes. Indirect taxes An
indirect tax is that tax which is initially paid by one individual,
but the burden of which is passed over to some other individual who
ultimately bears it. It is levied on the expenditure of a person.
Excise duty, sales tax, custom duties etc are examples of indirect
taxes.
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On the basis of degree of progression of tax, it may be
classified into: Proportional tax Progressive tax Regressive tax
Degressive tax
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Proportional tax A tax is called proportional when the rate of
taxation remains constant as the income of the tax payer increases.
In this system all incomes are taxed at a single uniform rate,
irrespective of whether tax payers income is high or low. The tax
liability increases in absolute terms, but the proportion of income
taxed remains the same. Progressive tax When the rate of taxation
increases as the tax payers income increases, it is called a
progressive tax. In this system, the rate of tax goes on increasing
with every increase in income.
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Regressive taxation A regressive tax is one in which the rate
of taxation decreases as the tax payers income increases. Lower
income is taxed at a higher rate, whereas higher income is taxed at
a lower rate. However absolute tax liability may increase.
Degressive taxation A tax is called degressive when the rate of
progression in taxation does not increase in the same proportion as
the increase in income. In this case, the rate of tax increases
upto a certain limit, after that a uniform rate is charged. Thus
degressive tax is a combination of progressive and proportional
taxation. This type of taxation is often used in case of income
tax. This is the case of income tax in India as well.
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DIRECT TAXES
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Income Tax: Income Tax Act, 1961 imposes tax on the income of
the individuals or Hindu undivided families or firms or
co-operative societies (other than companies) and trusts
(identified as bodies of individuals associations of persons) or
every artificial juridical person. The inclusion of a particular
income in the total incomes of a person for income-tax in India is
based on his residential status. There are three residential
status, viz., (i) Resident & Ordinarily Residents (Residents)
(ii) Resident but not Ordinarily Residents and (iii) Non Residents.
There are several steps involved in determining the residential
status of a person. All residents are taxable for all their income,
including income outside India. Non residents are taxable only for
the income received in India or Income accrued in India. Not
ordinarily residents are taxable in relation to income received in
India or income accrued in India and income from business or
profession controlled from India.
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Corporation Tax: The companies and business organizations in
India are taxed on the income from their worldwide transactions
under the provision of Income Tax Act, 1961. A corporation is
deemed to be resident in India if it is incorporated in India or if
its control and management is situated entirely in India. In case
of non resident corporations, tax is levied on the income which is
earned from their business transactions in India or any other
Indian sources depending on bilateral agreement of that
country
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Property Tax: Property tax or 'house tax' is a local tax on
buildings, along with appurtenant land, and imposed on owners. The
tax power is vested in the states and it is delegated by law to the
local bodies, specifying the valuation method, rate band, and
collection procedures. The tax base is the annual ratable value
(ARV) or area-based rating. Owner-occupied and other properties not
producing rent are assessed on cost and then converted into ARV by
applying a percentage of cost, usually six percent. Vacant land is
generally exempted from the assessment. The properties lying under
control of Central are exempted from the taxation. Instead a
'service charge' is permissible under executive order. Properties
of foreign missions also enjoy tax exemption without an insistence
for reciprocity.
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Inheritance (Estate) Tax: An inheritance tax (also known as an
estate tax or death duty) is a tax which arises on the death of an
individual. It is a tax on the estate, or total value of the money
and property, of a person who has died. India enforced estate duty
from 1953 to 1985. Estate Duty Act, 1953 came into existence w.e.f.
15th October, 1953. Estate Duty on agricultural land was
discontinued under the Estate Duty (Amendment) Act, 1984. The levy
of Estate Duty in respect of property (other than agricultural
land) passing on death occurring on or after 16th March, 1985, has
also been abolished under the Estate Duty (Amendment) Act,
1985.
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Gift Tax: Gift tax in India is regulated by the Gift Tax Act
which was constituted on 1 st April, 1958. It came into effect in
all parts of the country except Jammu and Kashmir. As per the Gift
Act 1958, all gifts in excess of Rs. 25,000, in the form of cash,
draft, check or others, received from one who doesn't have blood
relations with the recipient, were taxable. However, with effect
from 1 st October, 1998, gift tax got demolished and all the gifts
made on or after the date were free from tax. But in 2004, the act
was again revived partially. A new provision was introduced in the
Income Tax Act 1961 under section 56 (2). According to it, the
gifts received by any individual or Hindu Undivided Family (HUF) in
excess of Rs. 50,000 in a year would be taxable.
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SERVICE TAX Service tax is a part of Central Excise in India.
It is a tax levied on services provided in India, except the State
of Jammu and Kashmir. The responsibility of collecting the tax lies
with the Central Board of Excise and Customs(CBEC). Service Tax is
a form of indirect tax imposed on specified services called
"taxable services". Over the past few years, service tax been
expanded to cover new services and recently list of negative
services has been introduced. The objective behind levying service
tax is to reduce the degree of intensity of taxation on
manufacturing and trade without forcing the government to
compromise on the revenue needs. For the purpose of levying service
tax, the value of any taxable service should be the gross amount
charged by the service provider for the service rendered by
him.
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EXCISE Central Excise duty is an indirect tax which is levied
and collected on the goods/commodities manufactured in India. The
Central Excise Act, 1944 and other connected rules- which provide
for levy, collection and connected procedures. It is mandatory to
pay Central Excise duty payable on the goods manufactured, unless
exempted eg., duty is not payable on the goods exported out of
India.
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SALES TAX
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VAT Value Added Tax (VAT) is a tax on value addition and a
multi point tax, which is levied at every stage of sale. It is
collected at the stage of manufacture/resale and contemplates
rebating of tax paid on inputs and purchases. It is a tax levied on
a firm as a percentage of its value added, to avoid the multiplying
effect of taxes as the product passes through different stages of
production. The tax is based on the difference between the value of
the output and the value of the inputs used to produce it. The aim
is to tax a firm only for the value added by it to the inputs it is
using for manufacturing its output.
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MODVAT Modified value added tax is a concept in central excise
law introduced with effect from 1-3-1986. It has gained momentum
with more and more industries beginning to avail this facility.
Modified Value Added Tax, introduced in 1986, is a tax for allowing
relief to final manufacturers on the excise duty borne by their
suppliers for goods manufactured by them. It has now been replaced
by the CENVAT scheme. Even though the term MODVAT is not defined in
central exercise act 1944 or rules made there under.
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PRESENTATION ON CENVAT (CENTRAL VALUE ADDED TAX) CENTRAL VALUE
ADDED TAX
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DEFINITION The Modvat Scheme has been replaced by a new set of
rules called CENVAT Credit Rules 2002. The definition of Capital
Goods, Exempted Goods, Final products and the inputs has been
provided in Rule 2 of CENVAT Credit Rules, 2002. It also included
the list of items eligible for Capital Goods as well as for the
inputs. DUTIES ELIGIBLE FOR CENVAT A manufacturer or producer of
final product is allowed to take CENVAT credit of duties specified
in the Cenvat Credit Rules, 2002.
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CENVAT CREDIT RULES In order to remove the cascading effect of
excise duty and service tax, the Excise Duty paid on the inputs,
capital goods and input services, which are used in or in relation
to the manufacture of final product or for providing output
services is permissible to be set-off against the excise duty
liability on the final products or paying service tax under the
CENVAT Credit Rules, 2004. These rules have been notified to
regulate the availment and utilization of the CENVAT credit.
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WHEN AND HOW MUCH CREDIT CAN BE TAKEN The Cenvat Credit in
respect of inputs may be taken immediately on receipt of the
inputs. The Cenvat credit in respect of Capital Goods received in a
factory at any point of time in a given financial year shall be
taken only for an amount not exceeding fifty percent of the duty
paid on such capital goods in the same financial year and the
balance of Cenvat Credit may be taken in any subsequent financial
year. The Cenvat credit shall be allowed even if any inputs or
capital goods as such or after being partially processed are sent
to a job worker for further processing, testing, repair etc.
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The salient features are as follows: Capital goods Input Input
service Input service distributor Under the cenvat credit rules,
2004, the credit of following duties/tax is allowed The cenvat
credit may be utilised for payment of
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CAPITAL GOODS means The following goods, namely: All goods
falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90,
heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule
to the Excise Tariff Act; Pollution control equipment; Components,
spares and accessories of the goods specified ad (i) and (ii)
Moulds and dies, jigs and fixtures; Refractories and refractory
materials; Tubes and pipes and fittings thereof; and Storage
tank.
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Input means All goods, except light diesel oil, high speed
diesel oil and motor spirit, commonly known as petrol, used in or
in relation to the manufacture of final products whether directly
or indirectly. And whether contained in the final product or not
and includes lubricating, oils, greases, cutting oils, coolants,
accessories of the final products cleared along with the final
product, goods used as paint, or as packing material, or as fuel,
For generation of electricity or steam used in or in relation to
manufacture of final products or for any other purpose, within the
factory of production.
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Definition of Input Service Input service means any service,
Used by a provider of taxable service for providing an output
service; or Used by the manufacturer, whether directly or
indirectly, in or in relation to the manufacture of final products
and clearance of final products from the place of removal,
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INPUT SERVICE DISTRIBUTOR Meaning of Input Service Distributor
Input service distributor means an office of the manufacturer or
producer of final products or provider of output service, which
receives invoices issued under rule 4A of the Service Tax Rules,
1994 towards purchases of input services and issues invoice, bill
or, as the case may be, challan for the purposes of distributing
the credit of service tax paid on the said services to such
manufacturer or producer or provider.
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UNDER THE CENVAT CREDIT RULES, 2004, THE CREDIT OF FOLLOWING
DUTIES/TAX IS ALLOWED The duty of excise specified in the First
Schedule to the Tariff Act, leviable under the Act; The duty of
excise specified in the Second Schedule to the Tariff Act, leviable
under the Act; The additional duty of excise leviable under section
3 of the Additional Duties of Excise (Textile and Textile Articles)
Act, 1978 (40 of 1978); The additional duty of excise leviable
under section 3 of the Additional Duties of Excise (Goods of
Special Importance) Act, 1957 (58 of 1957);
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THE CENVAT CREDIT MAY BE UTILISED FOR PAYMENT OF Any duty of
excise on any final product; or An amount equal to CENVAT credit
taken on inputs if such inputs are removed as such or after being
partially processed; or An amount equal to the CENVAT credit taken
on capital goods if such capital goods are removed as such; or An
amount under sub-rule (2) of rule 16 of the Central Excise Rules;
2002 Service Tax on any output services: Provided that while paying
duty, the CENVAT credit shall be utilised only to the extent such
credit is available on the last day of the month for payment of
duty relating to the month.
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Duty Paying Documents against which CENVAT credit can be
availed are:- Invoice issued by A manufacture of inputs or capital
goods. An importer An importer from his depot or premises of
consignment agent, Provided the depot/ premises is registered with
central excise A first/second stage dealer. A supplementary invoice
A bill of entry. A certificate issued by appraiser of customs An
invoice/bill/challan issued by providers of input service. A
challan evidencing payment of service tax.
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Credit of duty is allowed only if all the conditions given
below are met:- The basic criteria for availment of credit of duty
paid on inputs or capital goods is that the goods shall be used in
manufacture of final products. The goods shall be accompanied with
proper prescribed documents.
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`MODVAT' (Modified Value Added Tax) The modvat scheme is
regulated by Rules 57A to 57U of the Central Excise Rules and the
notifications issued there under (The Central Excise Rules, 2002
(Section 143 of the Finance Act, 2002). Modvat Scheme ensures the
revenue of the same order and at same time the price of the final
product could be lower. Apart from reducing the costs through
elimination of cascade effect, and bringing in greater
rationalization in tax structure and also bringing in certainty in
the amount of tax leviable on the final product, this scheme will
help the consumer to understand precisely the impact of taxation on
the cost of any product.
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MODVAT and CENVAT Subsequently, MODVAT scheme was restructured
into CENVAT( Central Value Added Tax) scheme. A new set of rules
57AA to 57AK, under The Cenvat Credit Rules, 2004, Were framed and
whatever restrictions were there in MODVAT Scheme were put to an
end and comparatively, a free hand was given to the assesses. Under
the Cenvat Scheme, a manufacturer of final product or provider of
taxable service shall be allowed to take credit of duty of excise
as well as of service tax paid on any input received in the factory
or any input service received by manufacturer of final
product.