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UNIT - 1Introduction to Indirect Taxation and GST Q1) What are direct and indirect taxes? Differentiate between the two.A1) Taxes are broadly classified into direct and indirect taxes.Direct Taxes: A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the Government by the persons (juristic or natural) who are liable. A direct tax is one that cannot be shifted by the taxpayer to someone else. A significant direct tax imposed in India is income tax. In simple words it is a tax directly paid by the Person to the Government. Indirect Taxes: If the taxpayer is just a channel or medium and at every stage the tax- incidence is passed on till it finally reaches the consumer, who really bears the burden, such tax is indirect tax. An indirect tax is one that can be shifted by the taxpayer to someone else. Its incidence is borne by the consumers who ultimately consume the product or the service, while the immediate liability to pay the tax may fall upon another person such as a manufacturer or provider of service or seller of goods.Also called consumption taxes, they are regressive in nature because they are not based on the principle of ability to pay. All the consumers, including the economically challenged bear the brunt of the indirect taxes equally. Indirect taxes are levied on consumption, expenditure, privilege, or right but not on income or property. Earlier, a number of indirect taxes were levied in India, namely, excise duty, customs duty, service tax, central sales tax (CST), value added tax (VAT), entry tax, purchase tax, entertainment tax, tax on lottery, betting and gambling, luxury tax, tax on advertisements, etc. However, indirect taxation in India witnessed major shift on July 01, 2017 with into a unified indirect tax regime wherein a large number of Central and State indirect taxes were combined into a single tax – Goods and Services Tax (GST). The introduction of GST has been a very significant step in the field of indirect tax reforms in India. Customs duty continues in post-GST regime. Differences between Direct Tax and Indirect Tax
Q2) What are the advantages and disadvantages of Direct Taxes?A2) ADVANTAGES OF DIRECT TAXESThere are some key benefits of direct taxes such as- • Curbs Inflation- In case if there is monetary inflation, the government can increase direct tax rates so that the goods and services demand can be reduced. As the demand falls, it helps in condensing inflation.• Equitable- Direct taxes are also known to be equitable as the progression principle is at its foundation. People with lower income pay lower taxes, and people with higher income pay higher taxes.• Reduces Inequalities- The higher taxes collected from the rich are used by the government to launch newer initiatives for the poor. The initiatives provide income sources to people with lower income, helping them improve their living standards. DISADVANTAGES OF DIRECT TAXESDirect taxes also have some drawbacks such as • Considered a Burden- As taxpayers are required to pay direct taxes like income tax in a single lump sum every year, they are considered a burden. Moreover, even the documentation process is generally complex and time-consuming.• Evasion is Possible- While the government has made tax evasion very difficult now, there are still many fraudulent practices through which individuals and businesses can avoid or pay lower taxes than they should.• Restrains Investments- Due to the imposition of direct taxes like securities transaction tax and capital gains tax, a lot of people avoid investing. So, in a way, direct taxes restrain investments. Q3) What are the advantages and disadvantages of Indirect Taxes?A3) ADVANTAGES OF INDIRECT TAXSome significant benefits of indirect taxes are listed below- • Poor Contributes Too- It is essential for the country that every individual contributes towards its development. As the poor are often exempt from paying direct taxes, the indirect taxes ensure that even poor contribute towards nation-building.• Convenience- Unlike direct taxes which are generally paid in a lump-sum, indirect taxes like GST are paid in small amounts. When you purchase a product or service, a small amount of GST is already included in the price, and this makes its payment more convenient for the taxpayers.• The collection is Easy- If you want to know what is the difference between direct and indirect tax, one of the biggest of them is how they are paid. Unlike direct taxes, there are no documents or complex procedures involved in paying indirect taxes. You are required to pay the tax right when you purchase a product or service. DISADVANTAGES OF INDIRECT TAXESA few cons of indirect taxes are as follows- • Regressive- Indirect taxes are widely known to be regressive in nature. While they make sure that everyone pays taxes irrespective of their income, they are not equitable. People from every income group are required to pay indirect taxes at the same rate.• Makes Products and Services More Expensive- As indirect tax is added to the price of goods and services, it makes them more expensive. For instance, products like cigarettes, high-end bikes, premium cars, etc. are included in the 28% tax slab of GST.• Lacks Civic-Consciousness- As indirect tax is added to the price of the product or service, the consumers are generally unaware of the tax they are paying. This is opposite to direct taxes where the taxpayer clearly knows the taxes he/she is paying. Q4) Write about the Genesis of GST in India.A4) GENESIS OF GST IN INDIAIn the year 2000, the then Prime Minister mooted the concept of GST and set up a committee to design a Goods and Services Tax (GST) model for the country. In 2003, the Central Government formed a task force under Vijay Kelkar, which in 2004 strongly recommended fully integrated ‘GST’ on national basis. Subsequently, the then Union Finance Minister, Shri P. Chidambaram, while presenting the Union Budget (2006-2007), announced that GST would be introduced from April 1, 2010. Since then, GST missed several deadlines and continued to be uncertain. However, GST regime gained momentum in the year 2014 when the NDA Government tabled the Constitution (122nd Amendment) Bill, 2014 on GST in the Parliament on 19thDecember, 2014. The Lok Sabha passed the Bill on 6thMay, 2015 and Rajya Sabha on 3rd August, 2016. Subsequent to ratification of the Bill by more than 50% of the States, Constitution (122ndAmendment) Bill, 2014 received the assent of the President on 8th September, 2016 and became Constitution (101stAmendment) Act, 2016, which paved the way for introduction of GST in India. In the following year, on 27thMarch, 2017, the Central GST legislations - Central Goods and Services Tax Bill, 2017, Integrated Goods and Services Tax Bill, 2017, Union Territory Goods and Services Tax Bill, 2017 and Goods and Services Tax (Compensation to States)Bill, 2017 were introduced in Lok Sabha. Lok Sabha passed these bills 29thMarch, 2017 and with the receipt of the President’s assent on 12thApril, 2017, the Bills were enacted. The enactment of the Central Acts was followed by the enactment of the State GST laws by various State Legislatures. Telangana, Rajasthan, Chhattisgarh, Punjab, Goa and Bihar were among the first ones to pass their respective State GST laws. By 30th June, 2017, all States and Union Territories had passed their respective SGST and UTGST Acts except Jammu and Kashmir. With effect from 1st July, 2017, the historic indirect tax reform - GST was introduced. GST law was extended to Jammu and Kashmir on 8th July,2017. GST has subsumed multiple indirect taxes like excise duty, service tax, VAT, CST, luxury tax, entertainment tax, entry tax, etc. Q5) Discuss the power to tax GST in India.A5) POWER TO TAX GST (CONSTITUTIONAL PROVISIONS)India has a three-tier federal structure, comprising the Union Government, the State Governments and the Local Government.The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution.The Constitution of India is the supreme law of India. It consists of a Preamble, 25 parts containing 448 Articles and 12 Schedules. Power to levy and collect taxes whether, direct or indirect emerges from the Constitution of India. In case any tax law, be it an act, rule, notification or order is not in conformity with the Constitution, it is called ultra vires the Constitution and is illegal and void.Thus, a study of the basic provisions of the Constitution is essential for understanding the genesis of the various taxes being imposed in India. The significant provisions of the Constitution relating to taxation are:Article 265: Article 265 of the Constitution of India prohibits arbitrary collection of tax. It states that “no tax shall be levied or collected except by authority of law”. The term “authority of law” means that tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. Article 245: Part XI of the Constitution deals with relationship between the Union and States. The power for enacting the laws is conferred on the Parliament and on the Legislature of a State by Article 245 of the Constitution. The said Article provides asunder: Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. No law made by the Parliament shall be deemed to be invalid on the ground that it would have extra-territorial operation.III. Article 246:It gives the respective authority to Union and State Governments for levying tax. Whereas Parliament may make laws for the whole of India or any part of the territory of India, the State Legislature may make laws for whole or part of the State.IV. Seventh Schedule to Article 246: It contains three lists which enumerate the matters under which the Union and the State Governments have the authority to make laws.V. Article 246A: Power to make laws with respect to Goods and Services TaxThis article grants power to Centre and State Governments to make laws with respect to GST imposed by Centre or such State. Centre has the exclusive power to make laws with respect to GST in case of inter-State supply of goods and/or services. However, in respect to the following goods, the aforesaid provisions shall apply from the date recommended by the GST Council: The provisions of Article 246A are notwithstanding anything contained in Articles 246 and 254. Article 254 deals with the supremacy of the laws made by Parliament. VI. Article269A: Levy and collection of GST on inter-State supplyArticle 269A stipulates that GST on supplies in the course of inter-State trade or commerce shall be levied and collected by the Government of India and such tax shall be apportioned between the Union and the States in the manner as may be provided by Parliament by law on the recommendations of the Goods and Services Tax Council. In addition to above, import of goods or services or both into India will also be deemed to be supply of goods and/ or services in the course of Inter-State trade or Commerce. This will give power to Central Government to levy IGST on the import transactions which were earlier subject to Counter availing duty under the Customs Tariff Act, 1975. Where an amount collected as IGST has been used for payment of SGST or vice versa, such amount shall not form part of the Consolidated Fund of India. This is to facilitate transfer of funds between the Centre and the States. Parliament is empowered to formulate the principles regarding place of supply and when supply of goods, or of services or both occurs in inter-State trade or commerce. Q6) Discuss the extent and commencement of GST in India.A6) Extent:Part I of the Constitution of India states: “India, that is Bharat, shall be a Union of States”. It provides that territory of India shall comprise the States and the Union Territories specified in the First Schedule of the Constitution of India. The First Schedule provides for twenty-nine (29) States and seven (7) Union Territories.Part VI of the Constitution of India provides that for every State, there shall be a Legislature, while Part VIII provides that every Union Territory shall be administered by the President through an ‘Administrator’ appointed by him. However, the Union Territories of Delhi and Puducherry have been provided with Legislatures with powers and functions as required for their administration.India is a summation of three categories of territories namely – (i) States (29); (ii) Union Territories with Legislature (2); and (iii) Union Territories without Legislature (5).The State of Jammu and Kashmir enjoys a special status in the Indian Constitution in terms of Article 370 of the Indian Constitution. The Parliament has power to make laws only on Defence, External Affairs and Communication related matters of Jammu and Kashmir. As regards the laws related on any other matter, subsequent ratification by the Government of Jammu and Kashmir is necessary to make it applicable to that State.Therefore, the State of Jammu & Kashmir were required to pass special laws to be able to implement the Goods and Services Tax Acts. Accordingly, the assembly of J&K passed the GST bill in the first week of July. Subsequently, Honourable President of India had promulgated two ordinances, namely, the CGST (Extension to Jammu and Kashmir) Ordinance, 2017 and the IGST (Extension to Jammu and Kashmir) Ordinance, 2017 making the CGST/ IGST applicable to the State of Jammu and Kashmir, w.e.f. 8th July, 2017. Once the laws are passed by the State of Jammu & Kashmir, the Union Government will have to amend the Central Goods and Services Act, 2017 to delete the phrase that such provisions do not apply to the State of Jammu & Kashmir. After the promulgation of ordinance, India has adopted GST in its form across the country.Commencement:The CGST Act came into operation on 01.07.2017, the date appointed by the Central Government. However, certain provisions i.e. Sections 1,2,3,4,5,10,22,23,24,25,26,27,28,29, 30,139, 146,164 were made effective form 22.6.2017. Q7) What is GST? What are the benefits of GST?A7) The goods and services tax (GST) is a value-added tax levied on most goods and services sold for domestic consumption. The GST is paid by consumers, but it is remitted to the government by the businesses selling the goods and services.GST, or Goods and Services Tax, is a tax that customers have to bear when they buy any goods or services, such as food, clothes, electronics, items of daily needs, transportation, travel, etc. The concept of GST is that it is an “Indirect Tax”, i.e., this tax is not directly paid by customers to the government, but is rather levied on the manufacturer or seller goods and the providers of services. The sellers usually add the tax expense into their costs, and the price the customers pay is inclusive of GST. Thus, in most cases, you end up paying a tax even if you are not an income taxpayer. BENEFITS OF GSTThe following are the benefits of the GST:• Elimination of the cascading tax effect With the introduction of GST i.e., Goods and Services Tax, all the taxes have been brought under a single sunshade. This means the cascading tax effect has been eliminated. The GST rate applicable to the service would be 18%. • Higher threshold In the VAT charging system, the business having the turnover above Rs.5 lakhs are accountable to pay VAT. Even the service providers who get a turnover of Rs.10 lakhs were free from service tax. Though, the beginning of the registration under GST is Rs.20 lakhs. • Manageable procedure The whole GST process, beginning from registration and ending with filing returns, is done online. It is a manageable procedure that can be matched even by individuals with minimum technical know-how. Registering under GST is especially easy because there is no requirement to run around for multiple registrations like Service Tax, Excise Duty, VAT, etc. • Composition scheme Small businesses that get turnovers between Rs.20 lakh and Rs.75 lakh can benefit under the new tax regime as the Composition Scheme can help in reducing their taxes. The compliance and tax burden on small businesses has significantly decreased thanks to the implementation of GST. • Simplified compliances The earlier tax regime had Service Tax and Value Added Tax, and each of these taxes had their compliances and returns. For instance, Excise Duty return filing had to be made every month, while Service Tax return filing had to be made every month for companies and LLPs, and all quarter for partnerships and proprietorships. Value Added Tax was different in different states, which appeared in inconsistencies over the country. The execution of GST has ensured all businesses pay a uniform tax for the supply of goods and services. • E-Commerce operators no longer undergo from differential processing Before the execution of the Goods and Services Tax, there was no proper definition for the supply of goods by an e-commerce portal. There were many VAT laws. GST has completely done away with such confusing compliances and differential treatments. The e-commerce sector now has simply set provisions that make it easier to engage in the supply of products over states. • Regulation of the unorganized sector Before the introduction of GST and its execution, many industries like constructions and textiles were considered unorganized. The execution of GST has added provisions for online compliance and payments. Even the availing of input credit has been clearly explained to avoid confusion, thus bringing in regulation and accountability to these sectors. Q8) Explain the conceptual framework of GST.A8) CONCEPTUAL FRAMEWORK OF GSTThese are basically the taxes applicable now in the current regime under the GST system:• Central Goods and Services Tax (CGST)CGST is imposed on the intra-state supply of products and services. The Central Government levies CGST and it is supervised by the Central Goods and Services Tax Act. CGST has completely replaced all the past Central taxes such as Central Excise Duty, Customs Duty, Service Tax, SAD, CST, etc. It is charged to taxpayers with SGST. The rate at which CGST is charged is usually the same as the SGST rate, and the revenue collected under CGST is sent to the Central Government. • State Goods and Services Tax (SGST)SGST the same CGST discussed above. It is charged on the sale of products or services within a state. The State Government is liable for the levy of SGST. This tax replaces all the earlier taxes such as Entry Tax, Value Added Tax, Entertainment Tax, State Sales Tax, cesses, and surcharges. The revenue collected under SGST is sent to the State Government. • Integrated Goods and Services Tax (IGST)IGST is imposed on inter-state transactions of products and services. It is also levied on imports. The shifted from one state to another. The tax was executed so that states would only have to deal with the Union Government rather than dealing with all states. • Union Territory Goods and Services Tax (UTGST)UTGST is levied on the supply of products and services in any of the Union Territories in the country, like Andaman and Nicobar Islands, Daman and Diu, Dadra and Nagar Haveli, Lakshadweep, and Chandigarh. UTGST is levied along with CGST. Q9) Discuss the provisions of import of goods and services under GST.A9) The IGST (Integrated Goods and Services) Act, 2017, defines the import of goods as bringing commodities from overseas into India. As such, all imports are considered as inter-state supplies. IGST will be applicable to all imported goods along with custom duties as applicable.As for the import of services, the IGST Act, 2017, defines it as the supply of a service by a supplier who is based outside the company, but the recipient of the services is based in India, and the place at which the service is supplied is also within the geographical boundaries of the country. In this article, we will discuss in depth the import of goods and services under GST. Import of GoodsFollowing the implementation of GST, the import of commodities will not be impacted by charges such as safeguard duty, education cess, basic customs duty, anti-dumping duty, etc. All these additional custom duties will be subsumed by GST.Article 269A of the GST regime states that the supply of commodities or services or both, if imported into India, will be considered as supply under inter-state commerce or trade and will attract integrated tax. For instance, if the assessable value of a commodity imported into the country is Rs.500, basic customs duty is 10%, and the integrated tax rate levied is 18%, the taxes shall be computed in the following manner:Assessable Value = Rs.500Basic Customs Duty = Rs.50Value for the levy of integrated tax = Rs.500 + Rs.50 = Rs.550Integrated Tax = 18% of Rs.550 = Rs.99Overall Taxes = Rs.50 + Rs.99 = Rs.149Over and above these taxes, commodities may also attract an additional cess under the GST regime. This cess shall be collected on the value chosen for the levy of integrated tax. In the aforementioned example, the cess will be levied on Rs.550. Import of ServicesThe import of services is defined as the supply of a service by a supplier who is based outside the company, but the recipient of the services is based in India, and the place at which the service is supplied is also within the geographical boundaries of the country.The provisions present in Section 7(1)(b) of the Central Goods and Services Tax Act, 2017, mentions that when services are imported with consideration, it will be deemed as a supply, regardless of whether it is utilised in the continuance or course of business. When services are imported without consideration, they will not be deemed as supply. Businesses, however, are not mandated to undertake any tests for service imports to be deemed as a supply.Moreover, the provisions present in Schedule I of the Central Goods and Services Tax Act, 2017, services imported by registered taxable individuals from relatives or distinct individuals as stated in Section 25 of the Central Goods and Services Tax Act, 2017, in the continuance or course of a business will be considered as supply regardless of whether or not it has been made without consideration. Input Tax CreditUnder the GST regime, an importer who is registered can use the IGST levied to them when importing goods as input tax credit. During the outward supply of goods by the importer, the input tax credit could be used to pay taxes such as CGST / SGST / IGST. The importer can also avail GST Compensation Cess along with the input tax credit of IGST before transferring it to the ones in the supply chain. The importer, however, will not be able to avail the credit of basic customs duty. In any case, if the importer wishes to avail input tax credit of GST Compensation Cess and IGST, he/she will have to compulsorily declare GSTIN (GST Registration Number) in the Bill of Entry. GSTN provides provisional IDs which can be utilised over the course of the transition period, and importers are urged to ensure that their GSTIN registration process is complete. Since the GSTIN declared in the Bill of Entry is the basis for the availability of input tax credit, registered individuals can avail input tax credit only if they furnish Form GSTR 2 which contains all applicable details as mentioned in the Invoice Rules along with relevant information as required. GSTN will be interconnected with Customs EDI (Electronic Data Interchange) system for the validation of ITC. Moreover, information relating to the Bill of Entry in non-EDI locations will take a digital format and will be utilised for validating input tax credit provided by GSTN. Q10) Discuss the provisions of export of goods and services under GST.A10) Export of goods means taking goods out of India to a place outside of India. Export of Services means when the supplier of service is located in India and the place of supply of service is outside India. Read on to know moreExport of Goods and ServicesExport of goods means taking goods out of India to a place outside India.Export of Services means when the supplier of service is located in India and the place of supply of service is outside India. Treatment of Exports under GSTExport of goods or services are treated as Zero rated supply i.e., the goods or services exported shall be relieved upon them either at the input stage or at the final product stage.Export of goods or services are treated as inter state supply in course of business.Features of Export under GST schemeThe goods and services can be exported either on payment of IGST which can be claimed as refund after the goods have been exported or under Letter of Undertaking (LUT) without payment of IGST.In case of goods and services exported under LUT, the exporter can claim refund of accumulated ITC on account of exportThe shipping bill filed with the customs is treated as an application for refund of IGST and shall be deemed to have been filed after submission of export general manifest and furnishing of a valid return in Form GSTR-3 by the applicant. Place of Supply in case of Export of GoodsThe Place of supply in case of Export of goods is the place where the goods have been exported to. i.e., destination outside IndiaThe Place of supply of Services shall be the location of recipient of the services. Unless the location of the recipient of services is not available then the place of supply shall be the location of the supplier of services. Deemed ExportsDeemed Exports refers to those transactions in which goods supplied do not leave the country and the payment for such supplies is received whether in Indian Currency or in Free foreign exchange. Filing of Refund ApplicationAny person claiming refund on export of goods or services may make an application of refund before the expiry of 2 months from the relevant date Q11) What are the taxes to be subsumed and not be subsumed under GST?A11) CENTRAL TAXES TO BE SUBSUMED IN GSTOn application of the above principles and various papers which have been released in this regard, it is deduced that the following Central Taxes should be, to begin with, subsumed under the Goods and Services Tax:• Central Excise Duty (CENVAT)• Additional Excise Duties• The Excise Duty levied under the Medicinal and Toiletries Preparations (Excise Duties) Act 1955• Service Tax• Additional Customs Duty, commonly known as Countervailing Duty (CVD)• Special Additional Duty of Customs – 4% (SAD)• Surcharges and Cesses levied by Centre are also likely to be subsumed wherever they are in the nature of taxes on goods or services. This may include cess on rubber, tea, coffee, national calamity contingent duty etc.• Central Sales Tax to be phased out. STATE TAXES TO BE SUBSUMED IN GSTFollowing State taxes and levies would be, to begin with, subsumed under GST:• VAT / Sales tax• Entertainment tax (unless it is levied by the local bodies)• Luxury tax• Taxes on lottery, betting and gambling• State Cesses and Surcharges in so far as they relate to supply of goods and services• Octroi and Entry Tax• Purchase TaxTAXES WHICH ARE NOT TO BE SUBSUMEDGST may not subsume the following taxes within its ambit:• Basic Customs Duty: These are protective duties levied at the time of Import of goods into India.• Exports Duty: This duty is imposed at the time of export of certain goods which are not available in India in abundance.• Road & Passenger Tax: These are in the nature of fees and not in the nature of taxes on goods and services.• Toll Tax: These are in the nature of user fees and not in the nature of taxes on goods and services.• Property Tax• Stamp Duty• Electricity Duty
Context | Direct Tax | Indirect Tax |
| Income and Profits | All the goods and services |
2. Who pays | Individuals and businesses | End consumers |
3. How much | Depends on incomes and profits | Same for everyone |
4. Transferability | Not transferable | Transferable |
5. Tax Evasion | Possible | Not possible |
6. Nature | Progressive | Regressive |
7. Collections | Complex | Convenient |
8. Common examples | Income Tax, Wealth Tax | GST, VAT |
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