1

CHAPTER 1

Introduction and Background of the subject

1.1. Taxation in India – Constitutional Background1

Taxation is the main source of income of Government. Government needs

funds for its basic functions like internal and external security, law and order

and various other purposes like creating infrastructure for overall growth of

the country, social and health services, maintenance of law and order, defense

etc.

Long ago, Justice Holmes of US Supreme Court defined tax as “tax is the

price which we pay for a civilized society”.

In Duke University, a programme on “Tax Analysis and Revenue

Forecasting” (TARF) 2 was conducted in 1993, wherein the taxation has been

defined as “Taxation is the transfer of real economic resources from the

private sector to the public sector to finance public sector activities.”

Taxes are broadly classified as Direct Taxes and Indirect Taxes. The direct

taxes are paid directly by the person concerned. Indirect taxes are paid by one

person but he recovers it from another person. Thus the person who actually

bears the tax burden pays it indirectly through some other person, who

practically acts as collecting agent. In other words in the case of direct taxes,

the liability to pay taxes and burden of tax is on the same person whereas in

the case of indirect taxes the liability and responsibility to pay taxes is one

person but the burden of tax gets shifted to another person i.e. ultimate

consumer.

2

Direct taxes are the taxes which the taxpayer pays directly from his income /

wealth, while indirect taxes are those which the taxpayer pays indirectly i.e.

while purchasing goods and commodities, paying for services etc. Direct taxes

are paid after the income reaches hands of taxpayer while indirect taxes are

paid before goods / services reach the taxpayer.

Constitution of India is foundation and source of powers to all laws in India.

The Constitution of India generally follows British Pattern, though concepts

of federal structures are borrowed from American and other constitutions.

India is a Union of States. The Structure of India is federal in nature. As per

Article 1(1) of Constitution of India “India, that is Bharat, shall be a Union of

States”.1 Government of India i.e Central Government has certain powers in

respect of whole country. India is divided into various states and Union

Territories and each state and union territory has certain powers in respect of

that particular state or union territory.

Seventh Schedule to Article 246 of Constitution on India1 has three lists with

respect to distribution of powers between Union Government and State

Governments. Article 246(1) states that Parliament has exclusive powers to

make laws with respect to any matters enumerated in List I in the seventh

schedule, which is known as Union List. List II, known as State List contains

list of matters where State Governments have powers to make rules. List III,

called as concurrent list contains matters where both Union Governments as

well as State Governments can exercise powers. In case of Union Territories,

Union Government can make laws in respect of all the entries in all three lists.

3

Entries relevant to taxation provisions in the Union List, State List and

Concurrent List are given below.

List I – Union List: - Union List specifies the list of matters where Parliament

has exclusive powers to make laws. It contains matters like Defense on India,

Foreign Affairs, and Banking etc.

Following are the relevant entries relating to taxation matters in List I.

Entry No. Matter / Tax

82 Tax on income other than agricultural income.

83 Duties on customs including export duties.

84 Duties of excise on tobacco and other goods manufactured or

produced in India except alcoholic liquors for human

consumption, opium, narcotic drugs, but including medicinal

and toilet preparations containing alcoholic liquor, opium or

narcotics.

85 Corporation Tax.

92A Taxes on Sale or purchase of goods other than newspapers,

where such sale or purchase takes place in the course of

interstate trade or commerce.

92B Taxes on consignment of goods where such consignment takes

place during interstate trade or commerce.

92C Tax on services.

97 Any other matter not included in List I, List II and any tax not

mentioned in List II or List III.

4

List II – State List:- This list contains matters where State Government has

exclusive powers to make laws. This includes Agriculture, Public Health,

Land, Water Supply etc. Following are the list of matters related to taxes.

Entry No. Matter / Tax

46 Taxes on agricultural income.

51 Excise duty on alcoholic liquor, opium or narcotics.

52 Tax on entry of goods into a local area for consumption, use or

sale therein.

54 Tax on sale or purchase of goods other than newspapers except

tax on interstate sale or purchase.

List III, i.e Concurrent List includes matters where both Central Government

and State Government can make laws. This list includes entries like Criminal

Law and Procedures, Civil Procedures, Education, Social Security, electricity,

forests, etc. This list contains only one entry pertaining to taxation, which is a

stamp duties other than duties or fees collected by means of judicial stamps,

but not including rates of stamp duty.

1.2. Bill, Act, Ordinance and Rules, Delegation of Powers.

Taxation law is enforced through Act, Rules, Notifications and Regulations.

First the Finance Bill is presented to the Parliament. The bill is a draft of the

proposed law to be passed. The bill is discussed and then it is passed in the

parliament with or without amendments. After it is passed by Loksabha and

Rajyasabha, it is sent to The President of India for assent. The bill becomes

Act (Statute) on the date on which The President of India gives his assent. The

Act generally provides the date on which it comes into effect. Similar

procedure is followed to amend or modify the existing Act.

5

Under delegation of powers Government can issue Rules, Regulations,

Notifications, Trade notices. All will have the same effect.

Under delegated powers, Government has collected various taxes. The trend

analysis shows that the share of Indirect taxes in the total tax collection is

reduced and stabilized in the range of 40-50% of the total tax collection.

Following are the details of total tax collection during last ten years

1.3 Revenue collection of major taxes.3

Table 1.1-Revenue collection of major taxes (Rs in Crores)

Year Direct

Taxes

(Income

Tax, FBT

And

Corporate

Tax)

Customs

Duty

Central

Excise

Service

Tax

Indirect

Taxes

Total

Taxes

Indirect

Taxes as

a % of

total

Income

1980-81 2817 3409 6500 N.A 9909 12726 77.86%

1990-91 10712 20644 24514 N.A. 45158 55870 80.83%

2001-02 68613 49268 74255 3305 126828 195441 64.89%

2002-03 82000 45500 87383 4125 137008 219008 62.56%

2003-04 103255 49350 92379 7890 149619 252874 59.17%

2004-05 139365 54250 109199 14196 177645 317010 56.04%

2005-06 165208 64506 111226 23053 198785 363993 54.61%

2007-08 304760 100766 127947 51133 279846 584606 47.87%

2008-09 345000 108000 108359 60702 277061 622061 44.54%

2009-10 387008 84477 102000 58319 244796 631804 38.75%

2010-11 446000 131800 137778 71175 340753 786753 43.31%

2011-12 532651 151700 164116 97509 413325 945976 43.69%

2012-13 570257 186694 194350 132498 513542 1083799 47.38%

6

Chart No.1.1 Revenue from Direct Taxes

7

Chart No.1.2 Revenue from Indirect Taxes

8

Chart No.1.3 Revenue from Taxes

Direct Taxes (Income Tax, FBT And Corporate Tax)

Indirect Taxes(Customs, Central Excise and Service Tax)

9

It was observed that the revenue collection from service tax, though it is a new

levy, has shown continuous rising trend. The tax provisions have undergone

frequent changes and the scope of the service tax is also continuously

widened.

From the data presented hereinabove, it can be seen that the major source of

income of the Government is Indirect Taxes. Though the Central Excise and

Customs duty is an age-old source of taxes, the service tax is the latest

addition in the list of indirect taxes. Looking at the development of the service

sector in India, the collection from service tax will always show an increasing

trend. It is also known as the tax of 21st Century.

Proper understanding of various provisions, exemptions and procedures in

taxation and application of the same in the business operations is one of the

nontraditional areas for cost reduction. The Industry and business, to a great

extent try to reduce burden of Income Tax using various means and methods.

However, in Indirect Taxes, particularly Central Excise Duty, Service Tax,

Customs Duty and Vat, which play a very crucial role in cost of production,

stress is given on the compliance of tax provisions to avoid stringent penalties

and interest.

The scope of Indirect Taxes is very wide. While law for Central Excise,

Customs and Service Tax is one for the whole nation, VAT, Octroi, LBT have

state-wise separate provisions. The researcher has made concentrated efforts

to understand various provisions related to Central Excise Duty and Service

Tax, application of the same to various sectors, various exemptions

thereunder, Cenvat credit provisions which are common to Central Excise and

Service Tax, and effect of the same in cost reduction.

10

For the ready reference, the salient features of various Acts and Rules in

Indirect Taxes are given below.

1.4 Central Excise Duty.

The origin of Excise Duty can be found in Maryuan [Ref] Period in the form

of commodity taxation. It was levied on two commodities i.e salt and liquor.

The scope was expanded during Mughal period to levy tax on cotton, edible

oil, and soap, tobacco, salt and indigo. Subsequently in British rule duty was

extended on dairy products, handlooms, leather products, iron and steel. In the

year 1894, the excise duty was introduced on Cotton Yarn. Subsequently the

scope was widened in 1917 to include motor spirit, in 1922 to include

Kerosene, in 1930 Silver, in 1934 Sugar and matches and 1943 to cover many

items.

Till 1944, there were separate Acts for each commodity. However in the year

1944 all these Acts were consolidated and a new Act known as Central

Excises and Salt Act 1944 was introduced. Each item on which excise duty

was levied was assigned with separate code number called as Tariff Item (TI),

such as Sugar-TI-1, Coffee-TI-2, and Tea-TI-3. This was continued till TI-67.

In the year TI-68 was introduced by nomenclature “Not Elsewhere Specified”,

which brought practically all items under excise net.

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Excise is a duty on excisable goods manufactured or produced in India. The

liability to pay excise duty is on the manufacturer. Following can be said to be

main pillars of the excise law.

Manufacture and Manufacturer.

Classification of goods.

Valuation of Goods

Cenvat Credit.

Apart from the abovementioned four pillars, procedures laid down in various

Acts and Rules are also very important since the excise law is procedure

oriented. All the above factors are taken into consideration for the purpose of

study.

1.4.1 Major Changes (Milestones) in Central Excise.

1944 Enactment of Central Excises and Salt Act 1944.

1986 Central Excise Tariff Act, 1985 was brought into effect from

01.03.1986.

1986 Introduction of MODVAT, to avoid cascading effect of taxation.

Scheme was made applicable to inputs and packing material only.

1994 MODVAT scheme was expanded to cover Capital Goods.

1996 The Act was renamed as Central Excise Act, 1944 by dropping the

word ‘Salt’.

2000 MODVAT was renamed as CENVAT.

2004 CENVAT scheme was extended to Service Tax credit.

2004 Interchangeability of Cenvat Credit to Manufacturing and Service

sector.

12

With the introduction of MODVAT scheme in the year 1986, the cascading

effect of the excise duty is reduced to a great extent and the process of cost

reduction got a boost in a big way. The highlights on the CENVAT scheme in

vogue (formerly known as MODVAT) are enumerated in the subsequent

paras.

1.4.2 Laws relating to Central Excise.

Central Excise Law is not a one Act but consists of various Acts, Rules and

Notifications. Some provisions of Customs Act, Criminal Procedure Code,

Indian Penal Code, Legal Metrology Act 2011, have been made applicable to

Central Excise. Following is the gist of important Acts and Rules applicable to

Central Excise.

1.4.2.1 Central Excise Act 19444.

Central Excise Act, 1944 is the basic Act providing for charging of duty,

manufacture, valuation of the goods for the purpose of payment of excise

duty, powers of officers, provisions for penalty, adjudication and appeal,

settlement commission etc. presently the Act consists of 40 sections.

The Central Excise Act 1944 and Central Excise Tariff Act 1985 are linked

together in the following way.

a) Section 3(1) of the Central Excise Act 1944 specifies that duty shall be

levied and collected on all excisable goods which are produced or

manufactured in India as, and at the rates, set forth in the schedule to

the Central Excise Tariff Act.

b) Section 2 of the Central Excise Tariff Act specifies that rates at which

duties of excise shall be levied under Central Excise Act are as

specified in schedule to Central Excise Tariff Act.

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1.4.2.2 Central Excise Tariff Act, 19855.

Central Excise Tariff Act, 1985 provides classification of all excisable goods

into 96 chapters. A ‘section’ is a grouping of number of chapters which codify

a particular class of goods. Each of the sections is related to broader class of

goods and ‘chapter’ contains goods of one class. Specific code is assigned to

each excisable item. The structure and coding system is based on the

Harmonious Nomenclature System (HSN) which is worldwide accepted. The

classification forms basis for prescribing duty on the various products.

Criteria for classification are given in Central Excise Tariff Act. However the

basic principle of classification is based on the trade parlance.

1.4.2.3 Central Excise Rules, 20024.

Under the powers granted under Sec 37 of the Central Excise Act 1944, the

Government has framed Central Excise Rules to carry into effect of the

Central Excise Act. These Rules provide for various procedures to be

followed for clearance of goods, accounting of goods, registration, procedural

aspects, payment of excise duty, export, refund, etc…….

1.4.2.4 Cenvat Credit Rules, 20044.

Sec 37 of the Central Excise Act, 1944 gives powers to Central Government

to make rules to (i) provide for the credit of duty paid for the credit of duty

paid or deemed to have been paid on goods used in or in relation to

manufacture of excisable goods (ii) provide for giving of credit of sums of

money with respect to raw materials used in manufacture of excisable goods

(iii) provide for credit of service tax leviable under Chapter V of the Finance

14

Act, 1994, paid or payable on taxable services used in , or in relation to, the

manufacture of excisable goods.

Under these powers, Modvat Scheme was introduced in 1986. Cenvat was

introduced in 2000 in place of Modvat. However, in 2001, separate Cenvat

credit rules were introduced. These were replaced by Cenvat Credit Rules,

2002 and later by Cenvat Credit Rules 2004, w.e.f. 10.09.2004 wherein

Cenvat Credit and Service tax has been integrated.

Highlights of Cenvat Credit Scheme

Intents to avoid cascading effect of Excise Duty and Service Tax.

Credit of duty paid on inputs, input services and capital goods available to

manufacturer of excisable goods and provider of taxable output services.

No credit of service in Jammu and Kashmir.

Inputs, moulds, dies, jigs and fixtures can be sent to Job Worker.

Removal of used capital goods as scrap or second hand capital goods on

payment of appropriate amount.

Credit on motor vehicles available to specified output service

Credit on basis of specified documents.

Credit available instantly incase of input goods and input services.

Cenvat credit of capital goods in two stages, upto 50% in the year of

receipt and balance in any subsequent financial year.

Cenvat to manufacturer available only if there is a ‘manufacture’.

Cenvat Credit is available in respect of specified duties only such as basic

excise duty, service tax, education cess and higher education cess,

countervailing duty, special additional duty.

Cenvat Credit of special additional duty is not available to service

provider.

15

Utilization of Cenvat credit for payment of duty on final product as well as

service tax on output services. Cenvat Credit interchangeable.

Cenvat Credit is indefeasible.

One-to-one correlation not required.

No input credit if final product / output service exempt from excise duty/

service tax.

No cash refund, except in case of export or supply to SEZ .

Unutilized Cenvat Credit is transferable in case of transfer of location,

sale, and merger of the manufacturing unit.

Accounting entries not relevant for eligibility of Cenvat Credit.

1.4.2.5 Central Excise Valuation Rules, 20004.

The provisions related to valuation of excisable goods for the purpose of

determination of excise duty are specified in Sec.4 and Sec 4A of the Central

Excise Act, 1944. As per Sec 4(1)(b) of the Central Excise Act 1944, if

assessable value cannot be determined u/s 4(1)(a) of the Act, it shall be

determined in such manner as may be prescribed by rules. Under these powers

Central Excise Valuation (Determination of Price of Excisable Goods) Rules-

2000 have been issued effective from 01.07.2000. These Rules apply only

when valuation of the goods for the purpose of payment of excise duty

(assessable value) under sec 4(1)(a) of the Act, i.e. transaction value cannot be

considered as assessable value . The Valuation Rules are not applicable where

value of the goods is determined u/s 4A of the Act.

These Rules are applicable in following conditions.

a) Rule 4:- When goods are not sold at the time of removal from factory

and the price of the goods is not available at the time of removal,

Valuation of free samples etc.

16

b) Rule 5:- When goods are sold at place other than place of removal .e.g.

FOR DESTINATION contracts. In such case, actual cost (or equalized

cost, as the case may be) of transportation from the place of removal

upto the place of delivery of excisable goods will be allowed as

deduction.

c) Rule 6:- When the price is not the sole consideration for sale.

d) Rule 7:- When goods are sold at depot or consignment agent.

e) Rule 8:- Where goods are not sold by the assessee but are used for

consumption by him or on his behalf in the production or manufacture

of other articles.

f) Rule 9:- Sale to related person.

g) Rule 10:- When sale is through interconnected undertakings.

h) Rule 10A:- Valuation in case of Job worker.

i) Rule 11:- Best Judgment Assessment, when the aforesaid rules cannot

apply.

1.4.2.6 Central Excise (Removal of Goods at concessional rate of duty for

manufacture of excisable goods) Rules 20014.

Under the powers conferred under Sec 37 of the Central Excise Act, 1944,

Central Excise (Removal of Goods at concessional rate of duty for

manufacture of excisable goods) Rules 2001 have been issued. These Rules

are made applicable to a manufacturer who intends to avail exemption of duty

on excisable goods when used for the purpose specified in the notification.

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1.4.2.7 Appeals.

Following set of rules have been issued for procedural aspects of the appeals

under Central Excise, Customs and Service Tax.

Central Excise (Appeals0) Rules, 2001.

CEGAT (Countervailing Duty and Anti Dumping Duty Procedure)

Rules, 1996.

Customs, Excise and Service Tax Appellate Tribunal (Procedure)

Rules, 1982.

1.4.2.8 Notifications issued under Central Excise Act and Central Excise

Rules.

Any Act needs to be passed in the parliament and it is a time consuming

process. Parliament is mainly concerned with policies of law. However, to

take care of routine activities and procedural aspects, powers are delegated to

Government of India or Central Board of Excise & Customs. Under these

delegated powers (known as delegated legislation), rules, regulations or

notifications are issued to take care of the changing situations. These

notifications are to be published in Official Gazette. The rules, regulations and

notifications issued under the delegated powers have the same force as the

main Act.

Following are the limitations of the delegated legislation.

It cannot be contrary to any Act.

It cannot override provisions of the main Act.

It cannot restrict or widen scope of the Act.

If Act lapses, notifications, regulations and rules also lapse.

It cannot be issued with retrospective effect.

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Under Central Excise (and also under Customs) law, two types of notifications

are issued. Tariff Notifications and Non-Tariff Notifications. Tariff

Notifications are generally issued for granting full or partial exemptions and

generally are related to rate of duty (or tax), whereas non tariff notifications

are issued to amend / modify the rules and regulations.

1.4.2.9 Allied Rules / Regulations.

Central Excise (Compounding of Offences) Rules, 2005.

Consumer Welfare Fund Rules, 1992.

Central Excise (Removal of Difficulties) Rules, 2005.

Customs, Central Excise Duties and Service Tax Drawback Rules, 1995.

Central Excise (Determination of Retail Sales Price of Excisable Goods)

Rules, 2008.

Pan Masala Packing Machines (Capacity Determination and Collection of

Duty) Rules, 2008.

Chewing Tobacco and Unmanufactured Tobacco Packing Machines

(Capacity Determination and Collection of Duty) Rules, 2010.

Clean Energy Cess Rules, 2010.

The Indirect Tax Ombudsman Guidelines, 2011.

CBE & C’s Manual for Excise Procedures: - CBE &C has issued ‘Manual’

which is a compilation of various instructions and guide to the assessees.

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1.4.3 Advance Rulings

A businessman would like to have clear idea about the tax provisions, various

aspects of taxation matters before he decides to venture in the new business.

The Advance Ruling brings certainty in determining duty liability and it helps

in avoiding time consuming and expensive litigations at a later date. Keeping

this in mind, first time, provisions of advance rulings were made in 1993, in

Income Tax Act, 1961, vide Sec 245N to 245R.

Similar provisions of advance ruling in respect of Indirect Taxes have been

made in 1999 with the intention to help manufacturer, producer, importer or

exporter in clearing his doubts about legal aspects.

These Provisions are contained in Sec 23A to 23 H of the Central Excise Act,

1944, Sec 28E to 28L of Customs Act, 1962 and Sec 96A to 96I of Finance

Act 1994 in respect of Service Tax.

Following Rules have been made to deal with the procedural aspects of

advance ruling.

Central Excise (Advance Rulings) Rules, 2002.

Customs (Advance Ruling) Rules, 2002.

Service Tax (Advance Rulings) Rules, 2003.

The authority under Advance Ruling gives decision on a question raised

before him. Such rulings are binding on the applicant and department. There is

no provision of appeal against decision of authority under Advance Ruling.

However, writ petition is maintainable.

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As per Sec 23A(c) of the Central Excise Act, 1944, Sec 28E(c) of Customs

Act, 1962 and Sec 96A (a) of Finance Act1994, following persons can apply

for advance ruling if they propose to undertake any business activity in India.

(i) (a) Non- resident setting up a joint venture in India in collaboration

with a non resident or a resident (b) A resident setting up a joint

venture in India in collaboration with a non resident or (c) A wholly

owned subsidiary Indian company, of which the holding company is a

foreign company, who or which proposes to undertake any business

activity in India.

(ii) A joint venture in India.

(iii) A resident falling in any class or category, as may be, is specified by

Central Government by issuing a notification. Under this provision,

Public Sector Company, Public Limited Company and a resident

importing goods under project import scheme are notified.

Advance Rulings provisions are very much useful in knowing the risks in the

taxation and planning the business structure. These provisions also help in tax

planning.

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1.4.4 Settlement of Cases under Central Excise, Customs and Service

Tax.

For settling complicated cases of chronic tax evaders as an extraordinary

measure and for giving them an opportunity to make true confession and to

settle the matter forever, Settlement Commission is constituted under Central

Excise, Customs and Service Tax. It is a forum of self surrender.

Settlement Commission is based on Wanchoo Committee Report. While

commenting on the deleterious effect of frequent disclosure schemes on the

level of compliance among the tax paying public and the morale of the

administration, the Report Said “This does not mean that the door for

compromise with an errant taxpayer should remain forever closed. In the

administration of fiscal laws, whose primary objective is to raise revenue,

there has to be some room for compromise and settlement. A rigid attitude

would not only inhibit a one time tax-evader or an unintending defaulter from

making a clean breast of his affairs, but would also unnecessarily strain the

investigation resources of the Department in cases of doubtful benefit to

revenue while needlessly proliferating litigation and holding up collections.

We would therefore, suggest that there should be a provision in law for a

settlement with a tax payer at any stage of the proceedings” (gist reported in

Rajshri Plastiwood Ltd in re 2001(130) ELT295(Settlement Commission)6

The provisions are incorporated in Sec 31, 32, and 32A to 32P of the Central

Excise Act 1944 and Sec.127A to 127N of Customs Act 1962. The provisions

are made applicable to Service Tax also.

22

Settlement Commission has been constituted vide Noti. No.40/99-CX(NT) dt.

9th June 1999, having principal bench at Delhi and additional benches at

Mumbai, Chennai and Kolkata.

The provisions of Settlement Commission are mainly useful in cases where

department has found evasion of duty and initiated action by issuing show

cause notice. In such cases the assessee may like to settle the issue by paying

dues and interest to avoid further liability. The Settlement Commission can

grant immunity from prosecution and can reduce or waive penalty and fine.

Following are the advantages of Settlement Commission.

Quick Settlement of disputes.

A one time tax evader or unintending defaulter can avoid prolonged

litigations.

Immunity from prosecution to assessee, its directors or partners.

Reduction or waiver of penalty and fine.

Helps in reducing cost of litigations.

Central Excise (Settlement of Cases) Rules, 2001 as amended from 1st June

200 have been issued under the powers conferred by Sec 37 of Central Excise

Act 1944 to deal with the procedural aspects.

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1.5 Service Tax.

1.5.1 Background of Service Tax.

The share of service sector in the GDP has shown increasing trend

continuously. In 1950-51, it was 30.5% of the GDP which reached to 41.2%

in 1990-91, thereafter after liberalization and globalization it increased to 49%

in 2000-01and 63.4% in 2011-12 including construction services.

Till 1994, service sector remained untaxed. In the year 1994, for the first time,

vide Finance act, 1994, Service Tax was introduced on three services –

Telecommunication, General Insurance and Share Broker. It is pertinent to

note that out of these three sectors, Telecommunication and General Insurance

services were predominantly provided by the Government entities. Till 2011-

12 more than 120 services were brought into the net of service tax. From 1st

July 2012, the service tax law has undergone a major change.

The tax on services is introduced under the powers of Entry 97 of the Union

List –I of seventh schedule to constitution of India i.e residual entry which

reads “Any other matter not included in List II or List III including any tax not

mentioned in List II or List III”. Therefore service tax cannot be imposed on

transaction exclusively covered in List II.

The researcher has collected details of service tax revenue for the period from

1994-95 till 2012-13. The following analysis shows that revenue from service

tax is increasing every year. This is mainly due to expansion of the scope of

the service tax.

24

1.5.2 Analysis of Service Tax Revenue.7

The following table shows that revenue from service tax is increasing every

year.

Table 1.2 Service Tax Revenue and Growth

Year S.T.Revenue Growth over

P.Y.(%)

No. of

Services

Under Tax

Net

No.of

Assessees

Growth

over

P.Y

1994-95 410 - 3 3943 -

1995-96 846 106.34 6 4866 23.4

1996-97 1022 20.8 6 13982 2.87

1997-98 1515 48.24 18 45991 228.93

1998-99 1787 17.95 26 107479 133.7

1999-00 2072 15.95 26 115495 7.45

2000-01 2612 26.06 26 122326 5.91

2001-02 3305 26.53 41 187577 53.34

2002-03 4125 24.81 52 232048 23.71

2003-04 7890 91.27 62 403856 74.04

2004-05 14196 79.92 75 774988 91.9

2005-06 23053 62.39 84 846155 9.18

2006-07 37482 62.59 99 940641 11.17

2007-08 51133 36.42 100 1073075 14.08

2008-09 60702 18.71 106 1204570 12.25

2009-10 58319 -3.93 117 1307286 8.53

2010-11 71175 22.04 119 $$$

2011-12 97509 37 119 $$$

2012-13 132498 35.88 ** $$$

Source: - Data collected from CBE&C.

** Services other than in negative list.

$$$ Information not available.

25

Service Tax is called as tax of 21st Century. However, till today there is no

separate Service Tax Act as such. The provisions of service tax are contained

in Chapter VA of Finance Act 1994. Till 2012, there was no definition of

“service”. The service has been defined under sec 65B (44) of the Finance Act

1994. All services including declared services, except those in negative list are

subject to service tax w.e.f.01.07.2012. Service Tax is payable if service is

provided in taxable territory. Broadly taxable territory means India plus 200

nautical miles inside the sea, excluding Jammu and Kashmir. Service Tax is a

destination based consumption tax on commercial activities. Service requires

two parties. One cannot give services to himself. Profit motive is not essential

for liability of service tax. Service tax is not leviable on a transaction treated

as sale of goods and subjected to levy of sales tax / VAT. Service Tax and

VAT are mutually exclusive.

Service Tax is payable on gross amount charged for taxable service provided

or to be provided. It is payable on net amount excluding service tax.

Notification No.25/2012-ST dt.20.06.2012 provides for exemption to some 39

services.

1.5.3. Concept of Service.

As per Sec 65B (44) of the Finance Act, 1994 5"service" means any activity

carried out by a person for another for consideration, and includes a declared

service, but shall not include—

(a) an activity which constitutes merely,––

(i) a transfer of title in goods or immovable property, by way of sale, gift or

in any other manner; or

(ii) a transaction in money or actionable claim;

26

(b) a provision of service by an employee to the employer in the course of or

in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time

being in force.

It has been clarified that nothing contained in this clause shall apply to,––

(A) the functions performed by the Members of Parliament, Members of State

Legislative, Members of Panchayats, Members of Municipalities and

Members of other local authorities who receive any consideration in

performing the functions of that office as such member; or

(B) the duties performed by any person who holds any post in pursuance of

the provisions of the Constitution in that capacity; or

(C) the duties performed by any person as a Chairperson or a Member or a

Director in a body established by the Central Government or State

Governments or local authority and who is not deemed as an employee

before the commencement of this section.

1.5.4. "Declared service"

Declared services include deemed services. These have specifically included

in the definition of “declared services” as many of these services are partly

covered either under sale of goods or deemed sale of goods which are subject

to State VAT / Central Sales Tax. Hence to avoid disputes, deeming provision

has been made to clarify that service portion of such transactions can be taxes.

Following are the declared services under section 66E of the Finance Act

1994.

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(a) Renting of immovable property,

(b) Construction of a complex, building, civil structure or a part thereof,

including a complex or building intended for sale to a buyer, wholly or

partly, except where the entire consideration is received after issuance of

completion-certificate by the competent authority,

c) Temporary transfer or permitting the use or enjoyment of any intellectual

property right,

d) Development, design, programming, customization, adaptation,

upgradation, enhancement, implementation of information technology

software,

e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a

situation, or to do an act,

f) Transfer of goods by way of hiring, leasing, licensing or in any such

manner without transfer of right to use such goods,

g) Activities in relation to delivery of goods on hire purchase or any system

of payment by installments,

h) Service portion in the execution of a works contract,

i) Service portion in an activity wherein goods, being food or any other

article of human consumption or any drink (whether or not intoxicating) is

supplied in any manner as a part of the activity.

1.5.5 Negative List of Services under Section 66D of Finance Act, 1994.

Negative list of service means the services are not taxable at all. These are the

services listed in section 66D of Finance Act 1994, introduced from

01.07.2012. Following are the details of negative Services.

1. Services by Government or a local authority excluding the following

services to the extent they are not covered elsewhere—

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• Services by the Department of Posts by way of speed post,

express parcel post, life insurance and agency services

provided to a person other than Government,

• services in relation to an aircraft or a vessel, inside or outside

the precincts of a port or an airport,

• transport of goods or passengers, or

• support services, other than services covered under clauses (i)

to (iii) above, provided to business entities,

2. services by the Reserve Bank of India,

3. services by a foreign diplomatic mission located in India,

4. services relating to agriculture by way of -

• agricultural operations directly related to production of any

agricultural produce including cultivation, harvesting, threshing, plant

protection or seed testing,

• supply of farm labour,

• processes carried out at an agricultural farm including tending,

pruning, cutting, harvesting, drying, cleaning, trimming, sun drying,

fumigating, curing, sorting, grading, cooling or bulk packaging and

such like operations which do not alter the essential characteristics of

agricultural produce but make it only marketable for the primary

market,

• renting or leasing of agro machinery or vacant land with or without a

structure incidental to its use,

• loading, unloading, packing, storage or warehousing of agricultural

produce,

• agricultural extension services,

• services by any Agricultural Produce Marketing Committee or Board

or services provided by a commission agent for sale or purchase of

agricultural produce,

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5. trading of goods,

6. any process amounting to manufacture or production of goods,

7. selling of space or time slots for advertisements other than

advertisements broadcast by radio or television,

8. service by way of access to a road or a bridge on payment of toll

charges,

9. betting, gambling or lottery,

10. admission to entertainment events or access to amusement facilities,

11. transmission or distribution of electricity by an electricity transmission

or distribution utility,

12. services by way of—

• pre-school education and education up to higher secondary school or

equivalent,

• education as a part of a curriculum for obtaining a qualification

recognised by any law for the time being in force,

• education as a part of an approved vocational education course,

13. services by way of renting of residential dwelling for use as residence,

14. services by way of—

• extending deposits, loans or advances in so far as the consideration is

represented by way of interest or discount,

• inter se sale or purchase of foreign currency amongst banks or

authorised dealers of foreign exchange or amongst banks and such

dealers,

15. service of transportation of passengers, with or without accompanied

belongings, by—

• a stage carriage,

• railways in a class other than—

(A) First class, or

(B) An air-conditioned coach,

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• metro, monorail or tramway,

• inland waterways,

• public transport, other than predominantly for tourism purpose, in a

vessel of less than fifteen tonne net, and

• metered cabs, radio taxis or auto rickshaws,

16. services by way of transportation of goods—

• by road except the services of—

(A) a goods transportation agency, or

(B) a courier agency,

• by an aircraft or a vessel from a place outside India to the first customs

station of landing in India, or

• by inland waterways,

17. funeral, burial, crematorium or mortuary services including

transportation of the deceased.

1.5.6 Exemptions from Service Tax8.

Exempted Service has not been defined in Finance Act. However, as per Rule

2(e) of Cenvat Credit Rules 2004 “Exempted Services” means a –

1) Taxable Service which is exempt from the whole of the service tax

leviable thereon or

2) Service, on which no service tax is leviable under section 66B of the

Finance Act (Negative Service) or

3) Taxable service whose part of value is exempted on the condition that

no credit of inputs and input services used for providing such taxable

service, shall be taken;

But shall not include a service which is exported in terms of Rule 6A

of the Service Tax Rules, 1994

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Central Government can grant partial or total exemption in public interest, by

issuing an ‘exemption notification’ under sec 93 of the Finance Act 1994.Such

exemption may be partial or total. It may be conditional or unconditional.

Distinction between negative list and exempt service is that services in

negative list are not taxable at all as they have been excluded from the

charging section 66B of Finance Act, 1994 while exempted services are

taxable but are exempted from service tax by Central Government by issuing a

notification under powers delegated vide Sec 93(1) of the Finance Act, 1994.

Change in negative list requires Parliamentary Approval, while change in list

of exempted services can be effected by Central Government by issuing a

notification in gazette.

Vide Notification No. 25/2012-ST dt.20.06.2012, w.e.f 01.07.2012; certain

services have been exempted from service tax. Details of Exempted Services

are enclosed herewith as Annexure B.

1.5.7 Bundled Services:-

Concept of Bundled Services under Service Tax has been introduced w.e.f

01.07.2012. As per Explanation to section 66F(3) of Finance Act, 1994

“Bundled service” means a bundle of provision of various services wherein an

element of provision of one service is combined with an element of provision

of any other service or services. Thus, ‘bundled service’ is a composite service

consisting of two or more services. For eg. An airline provides movie or

catering on board. A service provider of pandal and shamiana may also offer

to provide catering service. A job worker may also agree to provide delivery

of goods after job work.

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1.5.8 Person Liable to pay service tax.

Under Service Tax, normally liability to pay service tax is on service provider.

Section 68(1) of Finance Act, 1994 provides that every person providing

taxable service shall pay service tax at the prescribed rate specified in section

66B of the Act.

However, Section 68(2) of the Act provides that person other than service

provider can be made liable to pay service tax by issuing notification. Further,

proviso to Section 68(2) of the Act provides that the notification can prescribe

that part of the service tax to be paid by service provider and balance by the

other person.

Thus, the powers to decide who should pay service tax are delegated to

Central Government. Under the said powers, in certain cases service receiver

is made liable to pay service tax.

The provision that service receiver is liable to pay service tax is termed as

“Reverse Charge” or “Tax Shift”.

Notification No. 30/2012-ST Dt. 20.06.2012 has been issued effective from

01.07.2012, wherein certain cases the liability to pay service tax is shifted to

recipient of service. Parallel provisions have also been made in Rule 2(d) of

Service Tax Rules, 1994.

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1.5.9 Laws relating to Service Tax9.

1. Finance Act , 1994

There is no separate Service Tax as such. Provisions of service tax are

contained in Chapter VA of Finance Act, 1994.

2. Service Tax Rules, 1994

Service Tax Rules contain provisions related to procedural aspects

such as registration, invoice of services, payment of service tax,

periodic returns, penalties etc.

3. Place of Provision of Services Rules, 2012. :-

Section 66B of Finance Act, 1994 provides that service tax shall be

levied on all services except in negative list, provided or agreed to be

provided in taxable territory. Therefore it is essential to decide whether

service has been provided or agreed to be provided in taxable territory.

To determine place of provision of service, Rules have been issued

under the powers of Sec 66C of the Finance Act, 1994.

Provision of place of Service Rules is relevant for following

purpose.

Whether service has been provided in taxable territory.

Export of Service.

Import of Service for liability of service tax on reverse charge

basis.

Services provided to and from Special Economic Zone.

Services provided to and from Jammu and Kashmir.

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4. Point of Taxation Rules, 2011.

Point of Taxation Rules, 2011 are issued:-

a) To introduce provisions relating to payment of service tax on

accrual basis instead of receipt basis.

b) To specify date relevant for determining rate of service tax.

5. Service Tax (Determination of Value) Rules, 2006 :-

Section 67 of the Finance Act 1994 makes provisions for valuation of

service. IN exercise of powers u/s 67, Service Tax (Determination of

Value) Rules, 2006 have been issued w.e.f.19.04.2006. Generally

where the value of service is not ascertainable u/s 67, the provisions

relating to determination value of services are contained in the said

rules.

6. Cenvat Credit Rules, 2004

Cenvat credit Rules, 2004 are common for manufacturing as well as

service sector. There is interchangeability of service tax between

excise and service tax.

7. Notifications

Following are the major and important notifications issued under Sec

66B of the Finance Act, 1994

Notification No. Subject.

25/2012-ST as amended providing exemption from tax to certain

Services known as Mega Exemption.

26/2012-ST as amended Abatement Notification.

30/2012-ST as amended Person liable to pay service tax under

Reverse Charge.

33/2012-ST dt.20.06.2012 Exemption to small service providers.

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8. “Taxation of Services- An Education Guide.” Issued by CBE&C

CBE&C has issued above named booklet to explain various aspects of

the new provisions relating to negative list of service tax.

1.6. Excise Provisions made applicable to service tax

As per Sec 83 of Finance Act, 1994, Provisions of certain sections of

Central Excise Act, 1944 have been made applicable to service tax, as

they apply to a duty of Excise.

As per Sec 65B(55) of Finance Act,1994, Words and Expressions used

but not defined in Chapter V of Finance Act,1994 and defined in the

Central Excise Act,1944 or the Rules made thereunder shall apply , so

far as may be , in relation to service tax as they apply in relation to

duty of excise.

Details of central excise provisions made applicable to service tax are

given in Annexure C.

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1.7 Customs Duty

1.7.1 Background.

Customs duty is on import of goods into India and Export of goods out of

India. Like Central Excise and Service Tax, Customs Duty is monitored by

Central Board of Excise and Customs under Ministry of Finance, Government

of India. Customs duty has its origin in British Period. It was introduced in

1786. The present Customs Act 1962 was passed to consolidate Sea Customs

Act, Land Customs Act and provisions for Air Customs.

Customs duty started with 5%. To protect Indian Industry from foreign

competition, it was increased. It was more than 100%. In some cases it was

even 300%. Then it started becoming counter-productive and malpractices

like smuggling, havala trade was increased. After realizing these aspects,

Customs Duty has been gradually reduced to international level.

1.7.2 Important milestones in reduction in customs duty rates.

From the following Table, it can be seen that the customs duty rates are

reduced from 150% adv to 10% adv during the period from 1991 to 2010

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Table 1.3 – Reduction in Customs Duty Peak Rate.

Year Customs Peak Duty Rate10.

1991 150%

1992 110%

1993 85%

1994 65%

1995 50%

1997 42%

2000 38.5%

2001 35%

2002 30%

2003 25%

2004 20%

2005 15%

2007 10%

1.7.3 Laws relating to Customs Duty11.

1. Customs Act, 1962.

Customs Act 1962 is the main Act and contains provisions for levy

and collection of duty, import and export procedures, prohibitions on

importation and exportation of goods, penalties, offences.

2. Customs Tariff Act, 1975.

This Act contains two schedules. Schedule 1 for classification and

duties on imports and Schedule 2 for classification and rate of duties

for export. Customs Tariff Act contains provisions for Countervailing

Duty (CVD), anti-dumping duty, protective duties, preferential duties

etc.

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3. Major Rules under Customs Act

Under the powers provided in Sec 156 of the Customs Act 1962,

Central Government has framed various rules. Following are the major

rules framed under the delegated power.

4. Customs Valuation Rules, 1988:-

These rules are issued for valuation of imported goods and

determination of duty payable on it.

5. Customs and Central Excise Duties Drawback Rules, 1995.

These rules provide mode of calculating rates of duty draw on exports.

6. Baggage Rules, 1998.

These Rules provide for allowances for bringing in baggage from

abroad by Indians and Tourists.

7. Customs (Import of Goods at Concessional Rate of Duty for

manufacture of Excisable Goods) Rules, 1996.

These Rules provide procedure to be followed when goods are

imported for export purpose.

8. Regulations under Customs Act.

Under sec 157 of the Customs Act, 1962, Central Board of Excise and

Customs has been empowered to make regulations, consistent with

provisions of the Act, to carryout purposes of the Act. Various

regulations have been framed under these delegated powers.

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The major distinction between Rules and Regulations under Customs

Act is the authority issuing it. Rules are issued by the Central

Government u/s 156 whereas regulations are issued by Central Board

of Excises and Customs u/s 157 of the Act. Both have statutory force.

Both are subordinate regulations and are issued to carryout the purpose

of the Act.

9. Notifications.

Notifications are issued under the powers delegated under various

sections of the Customs Act, 1962.

10. Circulars issued by CBE&C.

CBE&C is empowered to issue circulars u/s 151A of the Act.

Generally circulars are issued for bringing uniformity in classification

of goods, or with respect to levy of duty thereon. Issue instructions to

Customs Officers, prescribing procedures etc.

1.7.4 Types of Customs Duties.

Basic Customs Duty. (Sec 12 of Customs Act,1962)

Countervailing Duty (Section 3(1) of Customs Tariff Act). Also

known as Additional Customs Duty

Education Cess on Customs Duty.

Higher and Secondary Education Cess.

Additional Duty (Sec 3 of Customs Tariff Act)

Additional Duty (Sec 3 (5) of Customs Tariff Act) known as

special CVD- SAD.

40

Protective Duties (Sec 6 of Customs Tariff Act).

Anti Dumping Duty (Sec 9A of Customs Tariff Act).

Safeguard Duty (Sec 8B of Customs Tariff Act).

National Calamity Contingent Duty (Sec 134 of Finance Act,

2003).

Export Duty (Second Schedule to Customs Tariff).

1.7.5 Common Aspects of Customs and Central Excise.

Both are Central Acts.

Both Acts derive power of levy from Union List (List I) of the

Seventh Schedule to Constitution of India.

Both are under administrative control of Central Board of Excise

and Customs (CBE&C).

Organizational hierarchy is same from top to Assistant

Commissioner level.

Transfers from Customs to Excise and vice versa are very

common.

Chief Commissioner in charge of zone is same for excise and

customs at many places.

In many places, excise officers also work as customs officers.

Classification Tariffs of both acts are based on Harmonized

System of Nomenclature and principles of classification are

identical.

Principles of deciding assessable value are based on transaction

value under both.

Concept of Related person in both.

Provisions of Refund, including principle of unjust enrichment are

similar.

41

Provisions for interest on delayed payment are identical in both.

Provisions for raising demands for short levy, non levy or

erroneous refunds are similar.

Provisions for mandatory penalty, recovery are similar in both.

Powers to search, confiscation, are similar under Customs are

made applicable to Central Excise with suitable modifications.

Settlement Commission provisions are identical under both.

Provisions related to Authority for Advance Ruling are identical.

Appeal Provisions are identical.

Appellate Authority (CESTAT) is same.

Provisions for granting exemptions from duty- partial, full,

conditional or unconditional are identical.

Both are procedure oriented.

Considering the complexity of the law and various exemptions and benefits to

assesses, proper tax planning certainly helps tax payer to reduce cost of

production since Indirect Taxes directly form part of cost of production /

overheads.

1.8 Exemptions from Duty / Service Tax.

Central Excise Tariff Act prescribes the classification of goods and rate of

duty for each product covered in the Schedules to CETA. This rate is called as

“Tariff Rate”. Many times due to change in the circumstances and situations,

changes in the duty structure are required to be made quickly. Therefore

powers are delegated to Government and CBE&C to issue notifications and

make changes in the rate of duty. The duty payable as per the notification is

called as “Effective rate of Duty”. Generally notifications are issued to grant

part or full, conditional or unconditional exemption from duty, in the public

42

interest. Exemption from duty is given as relief. In series of decisions, Hon.

Supreme Court has held that Exemption notification has to be strictly

construed. The conditions for taking benefit are to be strictly interpreted.

If the Tariff specifies rate of duty as “Nil”, the goods are chargeable to Nil

rate of duty. If the goods are exempt by way of a notification, they are called

as “Exempt from Duty”. Excisable goods do not become non excisable goods

only because exemption is granted under exemption notification.

Similarly under Service Tax, the exemptions are provided in specific cases.

Availing the correct benefit of the exemption notification is a major step in tax

planning.

The researcher observed that though the taxpayer is very much concerned in

tax planning in direct taxes, there is not much awareness in tax planning in the

indirect taxes. Indirect taxes are directly concerned with the cost of material,

utilities and services. With this objective, this research project has been

undertaken by the researcher. The researcher has structured the study

accordingly. The concept of Tax Planning is explained in the subsequent

chapter.

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References for Chapter One

1 Constitution of India

2 Study Material TARF, Duke University.

3 V.S. Datey - Central Excise - Taxmann Publication

4 R.K.Jain - Central Excise Manual - Centax Publication

5 R.K.Jain -Central Excise Tariff - Centax Publication

6 Decision in the case of Rajashri Plastiwood Ltd. published in

2001(130) ELT295 (Settlement Commission).

7 Data collected from CBE&C.

8 Notification No. 25/2012-ST dt.20.06.2012,

9 Finance Act,1994

10 www.cbec.gov.in

11 R.K.Jain - Customs Manual - Centax Publication.