TAXATION. Tax Planning Direct Tax – “Deployment of funds in a manner to reduce the effective incidence of tax on the profits” Indirect Tax – “Restructuring

TAXATION

Tax Planning Direct Tax – “Deployment of funds in a manner to reduce

the effective incidence of tax on the profits”

Indirect Tax – “Restructuring of the business operations to minimize the tax costs of products / project procurements with consequential impact on goods & services sold / rendered”

SC observation in IInd Mc Dowells case –

“Tax Planning may be legitimate provided it is within the frame work of law. Colourable devices cannot be part of tax planning and it is wrong to encourage/ entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges”

Indirect Tax Structure in India

• On removal of Manufactured goods- Excise Duty

• Import of goods –Customs duty (Basic Duty + CVD + Addl. Duty)

• Sale of goods – VAT/ Sales Tax/ Central Sales Tax- (VAT-Input tax credit)

• Entry of goods in the State / Municipal Limit - Entry Tax / Octroi/Cess

• Rendering of taxable services - Service Tax on service provider except reverse charge

REVENUE TAX PLANING

• Minimization of procurement cost– By availing full Cenvat Credit on Excise

Duties paid on inputs.– By availing full input tax Credit – Trade off between local purchase / CST

purchase – Trade off between composition scheme

under works contract vs. normal valuation rules for works contract.

– Negotiation with non resident so as to make them bear the Income tax TDS liabilities for cost effectiveness and win-win solution in line with provision of Double Taxation Avoidance Agreement .

• Optimization of hidden cost on sale of petroleum product– System to be in place for collection of

concessional forms like ‘C’ form , ‘F’ form and furnishing E-I or E-II form etc. as seller.

– 6(2)(b) sale i.e. transit CST sale – Trade off between stock transfer / CST sale

INDIRECT TAX- LEVY INCIDENCE

TaxTax Liability to whomLiability to whom IncidenceIncidence

Excise dutyExcise duty

Peak rate 8% Peak rate 8% ManufacturerManufacturer Clearance from Clearance from

factory of factory of production i.E. Place production i.E. Place of removalof removal

Vat Vat

0%, 4% & 12.5%0%, 4% & 12.5%

1% on gold / silver1% on gold / silver

20% on liquor 20% on liquor

Separate rate on Separate rate on petroleum product petroleum product as per schedulesas per schedules

On sellerOn seller On sales within On sales within same state i.E. On same state i.E. On raising the invoice raising the invoice on the buyeron the buyer

EXCISE DUTY RATES ON FEW PETROLEUM PRODUCTS DS (SBU) (i.e. without 3% cess)

• MS (unbranded) : Rs. 5.35/Ltr.(basic duty)• HSD (unbranded) : Rs. 1.60/Ltr. basic duty)• LDO : 14% + 2.50/Ltr• FO/LSHS/MTO : 14% • Lubes/greases : 14%• Specialty Oils( with more than 70% of Mineral oil by

weight packed in 20 Ltr/ Kg or less : 14 % on (MRP less 30%)

• Specialty Oils( with less than 70% of Mineral oil by weight packed in 20 Ltr /Kg or more : 8 % on (MRP less 30%)

• Hexane/JBO/Solvent : 14% : • Naphtha/Bitumen : 14% *Note:- Specific Excise duty rate effective from

07.07.2009

Central Excise Issues

• Discounts to Customers• Delivery Assistance• Cenvat credit /Dealer Registration

/Invoice / RG23D

• MRP and abatement - Weights and Measures Act

• Supplementary Invoice

CENVAT CREDIT RULES

• Cenvat Credit Rules prescribe the methodology to avail Cenvat credit for various duties of excise and service tax paid on inputs(except MS,HSD,LDO)/capital goods/input services, which are used in the manufacturing & producing of final products and output services.

VAT is a multistage tax levied at different stages of production till distribution, on value added. In VAT regime tax is levied at each point of sale and set off or input credit is granted for tax paid on purchases. A following simple example can be considered for understanding the concept of VAT.

VAT

VAT ILLUSTRATED DEALER Purchase

priceValue Addition

Sale Tax Rate @10%

Setoff or ITC

Net tax payable

Raw material supplier 0 100 100 10 0 10

Manufacturer-1 100 50 150 15 10 5

Manufacturer-2 150 100 250 25 15 10

Distributor 250 200 450 45 25 20

Wholesaler 450 100 550 55 45 10

Retailer to consumer 550 150 700 70 55 15

Total 700 70

• By giving a set off of input tax paid, against output tax payable, it was effectively ensured that the tax is paid by the 1st seller or the dealer making value addition thereof, and the incidence borne by the ultimate consumer.

• In the big chain of different stages involving input tax credit and payment of output tax net of input tax, there is however, scope of revenue leakage in the weak links of the chain.

INPUT TAX CRETIT

• This has necessitated certain restrictions on availing input tax credit and no tax credit is normally allowed in the following cases:

1.For goods purchased from a person who is not a registered dealer.

2.For the purchase of goods to be incorporated into the structure of a building owned or occupied by the person (this however does not prevent a tax credit on purchase of building materials for re-sale or the performance of works contract on a building owned and occupied by another).

RESTRICTIONS ON INPUT TAX CRETIT

3. For goods purchased from a dealer who has elected to pay tax under composition scheme.

4. For goods purchased from a casual trader.5. For purchases made in the course of inter-state

trade or commerce.6. For purchases made in the course of import

from outside the country.7. For sales made to dealers in the list of

exempted category.8. For sales to the class of goods in the exempted

category.


• Purchases which ends in circulation in the hands of the dealer, and not in the nature of plant and machinery for production, were intended to be kept in the negative list for input tax credit as below.

1.Air conditioning units, air coolers, fans and air circulators.

2.All automobiles including commercial vehicles, two and three wheelers, spare parts for repairs and maintenance thereof.


3. Food, beverage and tobacco products.

4. Building materials and materials used for repair and maintenance thereof.

5. Office Equipments.

6. Furniture, fixtures including electrical fixtures and fittings.

7. Goods purchased and accounted for in the business, but utilised for the purpose of providing facility to the employees including any residential accomodation.


8. Goods used for personal consumption or received as gift.

9. Jewellery.

10. Motor Spirit products if not resold, exported or stock tranferred.

11. Purchase of consumables or Capital Assets by Wroks Contractor not engaged in manufacturer.

12. Purchase by way of works contract when the contract results in immovable property other than plant and machinery.


–

• The restrictions in many cases are subject to exceptions and depends on the individual law of the state.

• Negative list also include items which deserves input tax credit by definition, but is kept in the list for revenue generation from those products intact, e.g., Crude Oil.


• In certain states, the input tax credit in specific cases are subject to percentage limit. In the state of Maharashtra, for example, office equipment purchased and capitalised enjoys tax credit equal to input tax as reduced by 3%.

• Similarly, the purchases used in fuel is subjected to the tax credit equal to input tax as reduced by 2% in the state of Maharashtra.


• Input tax credit on goods purchased and transhipped out of the state otherwise than by way of sale, is restricted to the input tax as reduced by prevalent CST rate, in almost all the states.

• Proportionate reduction in input tax credit is prescribed when the purchased goods are used in output of both vatable and non-vatable use.


• Input tax credit on purchases used in manufacture of exempted goods, in the state of Maharashtra, however, is the input tax as reduced by 2%. In the case of purchase of Capital items, full set off is available.


• Input tax credit on Capital Asset is allowed in lumpsum in some states whereas in some other states, in instalments. For example, in the state of Maharashtra the credit on Capital input can be taken in the year of purchase whereas under Section 9(9)(a) of Delhi VAT Act, the credit on Capital input is available as

• 1/3 in the year of purchase and

• Balance 2/3 in two immediately successive financial years.


The sub-section also appends a proviso restricting the credit on input tax if depreciation under Section 32 if Income tax Act has been availed on such input tax. This requirement under Delhi VAT Law resembles Rule 4(4) of Cenvat Credit Rules.


On an overall analysis of the above restrictions and negations, input tax credit can be said to be available against output tax on following items.

1.Sale or resale by the dealer inside the state.

2.Sale in the course if inter-state trade or commerce.

AVAILABILITY OF INPUT TAX CRETIT

3. Use of containers or materials for packing of taxable goods intended for sale, in the state or in the course of inter-state trade and commerce.

4. Use as raw materials and consumable stores required for the purpose of manufacture of taxable goods intended for sale in the state or in the course of inter-state trade and commerce.

5. Use as containers or packing materials for use in the packing of goods so manufactured.

6. Use in the execution of works contract.


7. Use as capital goods required, for the purpose of manufacture or resale of taxable goods or for execution of works contract, as the case maybe, and purchases of such goods are capitalised in the books of account of such manufacturer, works contractor or reseller, as the case may be.

8. Use as raw material, capital goods and consumable stores required for the purpose of manufacture of any goods to be sold in the course of export, and containers or packing materials for use in the packing of goods so manufactured.


• For availing input tax credit a tax invoice indicating tax invoice separately is essential.

• Tax invoice should contain:1.The words “Tax Invoice” in bold letters at the

top or at any prominent place.2.The name, address and registration certificate

number of the selling dealer.3.The name and address of the purchasing

dealer.4.Invoice no and date.

TAX INVOICE

5. The description of the goods, the quantity or as the case maybe, number and price of the goods sold and the amount of tax charged thereon indicated separately.

6. Signature of the selling dealer, or his servant, or his manager or duly authorised agent.

7. The Tax Invoice shall contain Certificate as prescribed.

TAX INVOICE

PRINCIPLES OF INTER STATE SALES

Distinction Between Sec 3(a) and sec 3(b)

• u/s 3(a) - Movement is under the contract

• u/s 3(b) - Contract comes into existence only after the commencement and before termination of the inter state movement of the goods.

Definition : Section 3: This section defines the inter-State Sale in the following

words: "A sale or purchase of goods shall be deemed to take place in the

course of inter-State trade or commerce if the sale or purchase - . (a) occasions the movement of goods from one State to another; or (b) is effected by a transfer of documents of title to the goods during

their movement from one State to another. Explanation 1.- Where goods are delivered to a carrier or other

baileee for transmission, the movement of the goods shall,for the purposes of clause (b) be deemed to commencement at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.

Explanation 2.- Where the movement of goods commences and terminates in the same State it shall not be deemed to be a movement of goods from one State to another by reason merely of the fact that in the course of such movement the goods pass through the territory of any other State".


INTER STATE SALE

Sec 3 of CST Act A sale or purchase of goods shall be

deemed to take place in the course of inter-State trade or commerce if the sale or purchase,—

(a) occasions the movement of goods from one State to another; or

(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.


Essential Conditions of Inter-State Sale under sub-Section(a)

(i) There must be a completed sale of goods, i.e. any transfer of property in goods' by one person to another for cash or for deferred payment or for any other valuable consideration.

(ii) Such sale should occasion the movement of goods from one State to another State, meaning that the relevant contract of sale provides that goods will be moved and that by reason of the sale.

• Sale includes 'agreement to sell', If the following conditions are satisfied:

• there is an agreement to sell which contains a stipulation express or implied regarding the movement -of the goods from one State to another;

• in pursuance of such an agreement, the goods have actually moved from one State to another;

• a concluded sale ultimately takes place in the State where the goods are sent which is different from the State from which the goods move.


Salient features of Inter-State sale• (i) There should be a completed sale. • (ii) There should be agreement or contract with a stipulation

regarding movement of goods from one State to another State.• (iii) The goods should move due to the stipulation in the

agreement or contract.• (iv) Concluded sale should take place in a State which is

different from the State from where the movement started.• (v) The movement might be incidental to the contract of

sale.• (vi) Where the property in the goods passes on to the buyer

is not important.• (vii) The sale can precede the movemert of the goods or

movement of the goods can precede the sale.– If the movements of the goods commence and

terminates in the same State. even though it passed through other State, it will not be treated as inter-State sale.

INTER STATE SALEC Form ……… Goods for use in manufacture/ purchasing for

saleGoods for resale For goods used in power generation or

distribution. For goods used in mining For goods being used in telecommunication

network For containers and packing material

C Form - 2%Without C Form - VAT in dispatching State

GST - destination state

requirements of C forms:

Valid Registration number in C formDate of registration prior to invoice

dateInvoice no., invoice date, invoice

value recorded either in front side or reverse side of C form and signed and

stamped with designation . If details in attachment , it should

also be signed by same person signing the declaration form.

One C form can cover transactions covering one calendar quarter

(w.e.f.1.10,05)

INTER STATE SALE

CONCESSIONAL FORMS cont…

Decision to sale on CST basis, in-transit or stock transfer will depend upon the logistics of both the seller and the buyer, hence to be reviewed on case to case basis.

If C form is not collected or documents showing movement in transit are not proper or stock movement is also not properly documented, there would be tax liability at local VAT rate apart from prolonged litigation.

CONCESSIONAL FORMS

Hence need to establish proper control and monitoring system to collect and submit the concessional form /complying with legal requirement within two month from the end of the quarter to minimize OMC’s Tax burden.

Facility to update the status of ‘C’ forms on portal is available w.e.f. Jan. 08

PRINCIPLES OF IN-TRANSIT SALE

• Sec 6(1) – Charging Section for tax on Inter state Sales

• Section 6(2) – Provides for Exemption from tax on subsequent sales during the movement of goods from one state to another by transfer of documents to the title to such goods to a registered dealer and by complying with the conditions prescribed therein.

• However, if and where those conditions are not satisfied, even such subsequent sales would attract tax and only in such circumstances the proviso to section 9(1) which specifies the State, which is competent to levy the tax, would come in.


Illustration of sale in transit• Mr. Bombaywala purchased goods from Mr.

Ahmed of Ahamdabad. When the goods are moving from Gujarat to Maharastra, he sold it to Mr. Kurien of Kochin Mr. Kurien sold it during the movement of the goods to Mr.Maniail of Madurai. In these cases if the goods are covered by the subsequent buyers CST Registration Certificates and they are able to issue Form C. Form El or E2, then all these subsequent sales will be treated as sale in transit and they will be exempt from CST.


Inter State Selling Dealer

Buying person

E-I or E-II Forms’`C/D’

Is taxable under CST?

First A of Ahemadabad

B of Bombay

A will submit E-I to B.

A should obtain Form B

Yes

Second (During movement)

B of Bombay

K of Kochin

B will give Form E-II to K

B should obtain Form C from K

No

Third (During Movement)

K of Kochin M of Madurai

K will give Form E-II to M

K should obtain Form C from M

No

M sells after taking delivery

M of Madurai

H of Hyderabad

- M should obtain Form C from H.

Yes

HIGH SEAS SALE

Where transfer of documents of the title effects sale , such transfer should take place before the goods are moved out of the Custom Station.

If the above mentioned conditions are satisfied in any such sale transaction, there will be no custom duty to the Original Buyer.

Endorsement of B/L in the favour of the second buyer who ultimately pays for the duties.

Sales Tax

STOP CODES – Delivery order000 – exempt001 – against Form C declarations002 to 099 – CST Sales100 – Local VAT / Sales tax101-399 – Local VAT

Local Sale vs. interstate sale Seller (OMC) and buyer in same state –

Local; otherwise interstate sale

SERVICE TAX LEVIED VIDE FINANCE ACT 1994

Service Tax is levied under section 66 on specified (107 services) taxable services defined under section 65 (105).Classification of services and effective date are very crucial for levy of service tax.

In 1994 it started with four services and major addition of services has started post 2002. illustrative list is given below:-

Telephone services 01.07.1994 Courier service w.e.f 1.11.96 Consulting engineer w.e.f. 07.07.97 Man power recruitment agency w.e.f 07.07.1997


Port services 16.07.01Storage or warehousing w.e.f. 16.08.02Business Auxiliary services w.e.f. 01.07.03Goods transport agency w.e.f. 10.09.04Packaging services w.e.f 16.06.05Supply of man power temporary or

otherwise w.e.f 16.06.05Business Support service w.e.f 01.05.06 Renting of immovable property w.e.f.

01.06.07


Supply of tangible goods for use w.e.f 16.05.08 Service Tax is levied on the service provider

except in the case of reverse charge. In case of reverse charge, liability to pay service

Tax is on service receiver. E.g. import of service where the service provider has no PE in India.

There is no Service Tax on services provided free of cost.

Service tax become payable only after the actual receipt of fees or charges including advance received .

NEW SERVICES W.E.F. 01/09/09

The following three new service were introduced in the Finance (No. 2) Bill, 2009 and service tax is applicable w.e.f. 01/09/09.

Transport of coastal goods and goods transported through national waterways and inland water.

Legal consultancy service – service should be provided to a business entity by any

other business entity . any service provided by way of appearance before any

court, Tribunal or authority shall not amount to taxable service.

Cosmetic and plastic surgery service.

ENTRY TAX / OCTORI/CESS

Some municipal jurisdictions levy octori /entry tax on entry of goods. E.g. in MP entry tax on LPG (dom) is 6.47%.

Entry tax is levied and collected by the State Govt. "Entry of goods" means entry of goods into a local

area from any place outside that local area or any place outside the State for consumption, use or sale therein.

ENTRY TAX

No entry tax shall be levied on the entry of scheduled goods into a local area, if such goods have already been subjected to entry tax or that the entry tax has been paid by any other person or dealer under the Act.

Entry Tax shall be levied and collected on entry of the scheduled goods into a local area for consumption, use or sale therein on the purchase value of such goods.

TAX COMPLIANCE AND CORPORATE GOVERNENCE

Appropriate deduction of income tax TDS as per Income Tax Law.

Payment of Tax on due dates. Return / statutory forms to be filed in the

prescribed format on or before due date filling up 100% data qualitatively.

PAN of all suppliers/ customers/service provider. Registration number and proper legal

documentation /classification of services by the service provider and payment thereof by them to be satisfied before reimbursement.

The duties and Taxes to be paid only on actual payment against original documents.

GOODS AND SERVICE TAX (GST)

First discussion paper on goods and service tax (GST) in India was released on 10th November by The Empowered Committee of State Finance Ministers.

The broad principle of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST…..to facilitate the introduction of GST by 1st April, 2010….”

GST Discussion Paper– Salient Features

GST Discussion Paper– Salient Features - IGST

GST IGST Issues

DIRECT TAX CODE (DTC)

A New Direct Taxes code along with the discussion paper for structural changes has been released on 12th August 2009 to the public for debate and it was proposed to be effective from 01st of April 2011.

Representation has been made on Industry basis to Ministry for Changes in few stringent amendments proposed in DTC.

MAJOR CHANGES PROPOSED IN DTC

Minimum Alternative Tax – 0.25% of Value of Gross assets for Banking companies & 2% for Others, MAT paid not available for set off/ carry forward.

Value of Gross assets = Gross block of FA + Value of CWIP + Book value of all other assets – accumulated depreciation + Dr balance of P&L a/c if included in book value of assets.

In OMC’s case the MAT liability will increase from 127.81 crores to Rs. 827.59 crores, considering PBT of Rs. 1108.67 crores and total gross assets of Rs. 41379.64 crores – FY 2007-08.

MAJOR CHANGES PROPOSED IN DTC Contd….

Loss can be carried forward to indefinite period.

If return is not filed within due date, the whole of the loss i.e. current year as well as all previous year’s loss carried forward will expire.

TDS rate if PAN is not furnished by the payee: Higher of 20% or rate as mentioned in the tax code.

Investment linked deduction has been introduced & Profit linked deduction has been done away with.


Branch Profit Tax for Foreign Company @15% (effectively total tax of 36.25%).

EET based taxation for all permitted savings.

Deductions have been proposed to be increased to Rs. 3 Lakhs. (Permitted savings + Tuition fees of children)

Wealth tax rate - 0.25% if net wealth exceeds Rs. 50 crores for individuals, HUFs only.


SLAB for Individuals/HUF other than women

Individual assesses & Individual senior

citizensTax

RATE

< Rs. 1,60,000 NIL

> Rs. 1,60,000 < Rs. 10,00,000

10% (TI – 1,60,000)

> Rs. 10,00,000 < Rs. 25,00,000

Rs. 84,000 + 20% (TI – 10,00,000)

> Rs. 25,00,000 Rs. 3,84,000 + 30% (TI – 25,00,000)


SLAB for women assessees

RATE

< Rs. 1,90,000 NIL

> Rs. 1,90,000 < Rs. 10,00,000

10% (TI – 1,90,000)

> Rs. 10,00,000 < Rs. 25,00,000

Rs. 81,000 + 20% (TI – 10,00,000)

> Rs. 25,00,000 Rs. 3,81,000 + 30% (TI – 25,00,000)


SLAB for senior citizens

RATE

< Rs. 2,40,000 NIL

> Rs. 2,40,000 < Rs. 10,00,000

10% (TI – 2,40,000)

> Rs. 10,00,000 < Rs. 25,00,000

Rs. 76,000 + 20% (TI – 10,00,000)

> Rs. 25,00,000 Rs. 3,76,000 + 30% (TI – 25,00,000)


ASSESSEE RATE

Unincorporated bodies (like Firm/AOP/BOIetc), Local authority & other society

30%

Company assessee (Domestic company as wellas Foreign company)

25%

Non-profit organization & Tax on BranchProfits

15%

Capital Gains Tax to residents @ normal rates

Capital Gains Tax to nonresidents 30%

Thank You…….

All the Best…

Documents

TAXATION. Tax Planning Direct Tax – “Deployment of funds in a manner to reduce the effective incidence of tax on the profits” Indirect Tax – “Restructuring