Basics of Indirect Tax

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 1. What is Tax?
Taxes are considered to be the “cost of living in a society”. Taxes are levied by the Governments to meet
the common welfare expenditure of the society. There are two types of taxes
(A) Direct taxes
(B) Indirect taxes

2. What is Direct Tax

Direct tax is levied directly on the income or wealth of a person. The person who pays the tax to the
Government cannot recover it from somebody else i.e. the burden of a direct tax cannot be shifted.
e.g. Income tax.

3. What is Indirect Tax

Indirect tax is levied on the price of a good or services, e.g. Goods and Services Tax (GST) or Custom
Duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another
person.

4. Why are taxes levied

The reason for levy of taxes is that they constitute the basic source of revenue to the Government.
Revenue so raised is utilized for meeting the expenses of Government like defence, provision of
education, health-care, infrastructure facilities like roads, dams etc.

5. Power to levy taxes

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 three tiers of
Governments, in accordance with provisions of the Indian Constitution.
The significant provisions of the Constitution relating to taxation are:
Article 265: No tax shall be levied/collected except by authority of law. This provision prohibits
arbitrary collection of tax
Article 245: The power for enacting laws is conferred on
(i) the Parliament for whole or any part of India; and
(ii) the Legislature of a State for whole or any part of State
Article 246: It gives the respective authority to Union and State Governments for levying tax
Seventh Schedule to Article 246: It contains three lists under which Union and State Governments
has authority to make laws.
Union List: Parliament has the exclusive power to make laws on the matters contained in Union List.
State List: The Legislatures of any State has the exclusive power to make laws on the matters contained
in the State List.
Concurrent List: Both Parliament and State Legislatures have the power to make laws on the matters
contained in the Concurrent list.

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6. Features of Indirect Tax

(1) An important source of revenue: Indirect taxes are a major source of tax revenues for
Governments worldwide and continue to grow as more countries move to consumption-
oriented tax regimes. In India, indirect taxes contribute more than 50% of the total tax revenues
of Central and State Governments.
(2) Tax on commodities and services: It is levied on commodities at the time of manufacture or
purchase or sale or import/export thereof. Hence, it is also known as commodity taxation. It is
also levied on provision of services.
(3) Shifting of burden: There is a clear shifting of tax burden in respect of indirect taxes. For
example, GST paid by the supplier of the goods is recovered from the buyer by including the
tax in the cost of the commodity.
(4) No perception of direct pinch: Since, value of indirect taxes is generally inbuilt in price of
commodity, most of the time the tax payer pays the same without actually knowing that he is
paying tax to the Government. Thus, tax payer does not perceive a direct pinch while paying
indirect taxes.
(5) Inflationary: Tax imposed on commodities and services causes an all-round price spiral. In
other words, indirect taxation directly affects the prices of commodities and services and leads
to inflationary trend.
(6) Wider tax base: Unlike direct taxes, the indirect taxes have a wide tax base. Majority of the
products or services are subject to indirect taxes with low thresholds.
(7) Promotes social welfare: High taxes are imposed on the consumption of harmful products
(also known as ‘sin goods’) such as alcoholic products, tobacco products etc. This not only
checks their consumption but also enables the State to collect substantial revenue.
(8) Regressive in nature: Generally, the indirect taxes are regressive in nature. The rich and the
poor have to pay the same rate of indirect taxes on certain commodities of mass consumption.
This may further increase the income disparities between the rich and the poor.

7. Genesis and History of GST in India

The idea of national Goods and Services Tax (GST) was mooted by Kelkar Task Force in 2004. The Task
Force strongly recommended fully integrated ‘GST’ on national basis.
France was the first country to implement GST in 1954. Within 62 years of its advent, about 160
countries across the world have adopted GST because this tax has the capacity to raise revenue in
the most transparent and neutral manner. GST has subsumed multiple indirect taxes like excise duty,
service tax, VAT, CST, luxury tax, entertainment tax, entry tax, etc

8. Laws of GST in India

(i) Central Goods and Services Tax (CGST) Act, 2017
(ii) Integrated Goods and Services Tax (IGST) Act, 2017
(iii) Union Territory Goods and Services Tax (UTGST) Act, 2017
(iv) Goods and Services Tax (Compensation to States) Act, 2017
(v) State Goods and Services Tax (SGST) Acts, 2017

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9. Broad principles of GST

(i) GST is a value added tax levied on manufacture, sale and consumption of goods and services
(ii) Broad-based tax & destination based tax
(iii) Technically paid by suppliers but it is actually funded by consumers
(iv) Collected through a staged process i.e. a tax on the value added to goods or services at every
point in the supply chain
(v) A tax on consumption of products from business sources, and not on personal or hobby
activities
(vi) Input tax credit is provided throughout the value chain
(vii) Manufacturers, wholesalers, retailers and service providers charge GST at the specified rate on
price of the goods and services from consumers and claim input credits for GST paid by them
on procurement of goods and services (raw material).
(viii) Since, only the value added at each stage is taxed under GST, there is no tax on tax or cascading
of taxes under GST system. GST does not differentiate between goods and services and thus,
the two are taxed at a single rate

10. Taxes subsumed in GST

CENTRAL TAXES STATE TAXES
Central Excise Duty State VAT
Duties of Excise (Medicinal and Toilet Purchase Tax
Preparations)
Additional Duties of Excise (Goods of Special Luxury Tax
Importance)
Additional Duties of Excise (Textiles and Entry Tax (All forms)
Textile Products)
Additional Duties of Customs (commonly Entertainment Tax (except those levied by the
known as CVD) local bodies)
Special Additional Duty of Customs (SAD) Taxes on advertisements
Service Tax Taxes on lotteries, betting and gambling
Central Sales Tax

11. Taxes not subsumed in GST

1. Petroleum Products viz, petroleum crude, high spirit diesel, motor spirit (commonly known as
petrol), natural gas and aviation turbine fuel
2. Alcoholic Liquor for human consumption
3. Electricity

12. GST in India

(i) GST is a consumption or destination-based tax levied on the basis of the “Destination principle.”
(ii) Comprehensive tax regime covering both goods and services and collected on value-added at
each stage of the supply chain.

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(iii) GST is levied on goods and services imposed at each point of SUPPLY
(iv) The power to levy taxes would be subjectively distributed between Centre and States and there
will be separate levies in the form of
(a) Central Goods and Services Tax (CGST),
(b) State Goods and Services Tax (SGST) / Union Territory Goods and Service Tax (UTGST) and
(c) Integrated Goods and Services Tax (IGST)
(v) Currently, Brazil and Canada also follow dual GST model.

13. Types of Supply

Nature of supply Levy of Tax
Intra State Supply CGST levied by CG and
SGST levied by SG and UT with state legislature and
UTGST levied by UT without state legislatures
Inter State Supply IGST levied by CG [CGST+SGST]

14. Meaning of Intra-state supply

Where the location of the supplier and the place of supply of goods or services are in the same
State/Union territory, it is treated as Intra-State Supply of goods or services respectively.

15. Meaning of Inter-state supply

Where the location of the supplier and place of supply of goods or services are in (i) two different
States or (ii) two different Union Territories or (iii) a State and a Union territory, it is treated as Inter-
State Supply of goods or services respectively.
All Imports of goods in India shall be deemed to be inter-State supplies and accordingly IGST shall be
levied on the imported goods in addition to the applicable custom duties.
Supply of goods or services or both TO / BY a SEZ developer/ unit is deemed to be inter state supply
Supply of goods made to an international tourist is deemed to be inter-state supply

16. List of Union Territories without State Legislatures

Without State Legislature With State Legislature
Andaman & Nicobar Islands Delhi
Lakshadweep Puducherry
Chandigarh Jammu & Kashmir
Dadra and Nagar Haveli and Daman and Diu
Ladakh

17. Charge of GST

CGST is levied on intra-state supply of goods or services or both except alocholic liquor for human
consumption on transaction value chargeable at prescribed rates, collected in prescribed manner
(time of supply) and shall be paid by a taxable person.

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18. Basic definitions

Goods means every kind of movable property other than money and securities but includes actionable
claim, growing crops, grass and things attached to or forming part of the land which are agreed to be
severed before supply or under a contract of supply.
Services means anything other than goods, money and securities but includes activities relating
to the use of money or its conversion by cash or by any other mode, from one form, currency or
denomination, to another form, currency or denomination for which a separate consideration is
charged. Explanation clarifies that “services” includes facilitating or arranging transactions in securities.
Taxable person means a person who is registered or liable to be registered u/s 22 or section 24.
Reverse charge means liability to pay tax by the recipient of supply of goods or services or both
instead of the supplier of such goods or services or both under section 9(3)/9(4), or under section
5(3)/5(4) of the IGST Act.
Outward supply means
 supply of goods or services or both, whether by sale, transfer, barter, exchange, licence, rental,
lease or disposal or any other mode,
 made or agreed to be made by such person in the course or furtherance of business
Inward supply shall mean receipt of goods or services or both whether by purchase, acquisition or
any other means with or without consideration

19. Meaning of Aggregate Turnover

Inclusions Exclusions
Value of outward supplies CGST/ SGST/ UTGST/ IGST/ CESS
Taxable Supplies Value of exempt supply of services provided by
Exempt supplies way of extending deposits, loans or advances in
so far as the consideration is represented by way
Exports of interest or discount
Inter-state supplies
of persons having the same PAN be computed Value of inward supplies on which tax is payable
on all India basis under reverse charge
Taxable supply means a supply of goods or services or both which is leviable to tax under CGST Act
Non-taxable supply means a supply of goods or services or both which is not leviable to tax under
CGST Act or under IGST Act
Exempt supply means supply of any goods or services or both which
(a) attracts nil rate of tax or
(b) may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods
and Services Tax Act, and
(c) includes non-taxable supply

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20. Registration in GST

Every supplier of goods and/ or services is required to obtain registration in the State/UT from where
he makes the taxable supply if his “aggregate turnover” exceeds ₹ 40 lakhs/20 lakhs/10 lakhs
during a FY. The limit is ₹ 10 lakhs if the person is carrying out business in the Special Category States.
Special Category States are Manipur, Mizoram, Nagaland & Tripura.
Registration in GST is PAN based and every supplier shall obtain registration in every state where he
makes a taxable supply. GSTIN is a 15 digit identification number granted to every registered person.

A person who is not liable to be registered may get himself registered voluntarily.

21. Composition Scheme in GST

A registered person, whose “aggregate turnover” in the preceding FY does not exceed ₹ 1.5 crores.
may opt to pay an amount at fixed rates (1%/5%) during the current FY.
The turnover limit for composition levy shall be ₹ 75 lakhs for 8 Special Category States mentioned
below:
Arunachal Pradesh, Sikkim, Manipur, Tripura, Meghalaya, Uttarakhand, Mizoram, Nagaland
*In case of Assam, Himachal Pradesh and Jammu and Kashmir, the turnover limit will be ₹ 1.5 crores.

22. Rates of Tax under Composition Scheme

Sl No. Category of registered persons CGST Rate Levy on
1 Manufacturers, other than manufacturers of ice 0.5 % Turnover in State/UT
cream, pan masala, tobacco and aerated water
2 Restaurant / outdoor catering services 2.5 %
3 Any other suppliers (example traders) 0.5% Turnover of taxable
supplies of goods &
services in State/UT

23. Flowchart to understand the process of utilization of ITC

ITC on account of Output IGST Output CGST Output SGST
IGST (I) (II) – In any order and in
any proportion
(III) ITC on account of IGST to be completely exhausted mandatorily
CGST (V) (IV) Not permitted
SGST (VII) Not permitted (VI)

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