Relevant Indirect Tax

provisions
Vikas Gupta

Indirect Tax system in India

By
The Central Govt.

By
The State Govt.

*Custom Duties
*Central Excise Duty
*Service Tax etc.

*Sales Tax / VAT

*State Excise Duty
*Entry Tax etc.

Applicable Indirect Tax

Avana being a Project organization, the following Indirect Taxes are
applicable to it:

Customs Duty on Import

Excise Duty on local Manufactured Products

Central Sales Tax

State VAT (Value Added Tax)

Works Contract Tax VAT as well as Service Tax

Service Tax

Customs Duty

Customs Duty applicability

Customs duty is on imports into India and export out of India.
In case of imports, taxable event occurs when goods mix with landmass of
India.
In case of exports, taxable event occurs when goods cross territorial waters of
India, Territorial waters of India extend up to 12 nautical miles inside sea from
baseline on coast of India and include any bay, gulf, harbor, creek or tidal river.
(1 nautical mile = 1.1515 miles = 1.853 Kms).
It is Made up of various duties and Cess
Effective Maximum rate approximately 26.85% of Assessable value

Various Duties and Cess

involved in Customs Duty
Basic Custom Duty
Basic Custom Duty levied under the Custom Act for import of goods into India .
Basic customs duty levied u/s 12 of Customs Act is generally 10% on nonagricultural goods, w.e.f. 1-3-2007
Countervailing Duty
CVD equal to excise duty is payable on imported goods u/s 3(1) of Customs
Tariff Act to counterbalance impact of excise duty on indigenous
manufactures, to ensure level paying field Equal to excise duty levied on like
product manufactured or produced in India .
CVD is payable equal to excise duty payable on like articles if produced in India.
It is payable at effective rate of excise duty. General excise duty rate is 10.30%
w.e.f. 27-2-2010 (10% basic plus 2% education cess and SAH Education cess of 1%).
CVD is payable on assessable value plus basic customs duty.
CVD can be levied only if there is manufacture

Various Duties and Cess

involved in Customs Duty
Special CVD
Special CVD is payable @ 4% on imported goods u/s 3(5) of Customs Tariff Act.
This is in lieu of Vat/sales tax to provide level playing field to Indian goods.
Traders importing goods can get refund. CVD is not payable if goods are
covered under MRP valuation provisions
Education Cess
Education cess of customs @ 2% and SAH Education cess of 1% is payable
Total duty
Total import duty considering all duties plus education cess on non-agricultural
goods is generally 26.85% of Assessable value

Methodology of Custom Duty

Calculation
S. No.

Particulars

CIF

Landing cost @ 1% of CIF

Assessable Value

Amount (Rs)

Percentage

10,00,000

100%

10,000

1%

10,10,000

101%

Basic Customs Duty @ 10% of Assessable value

1,01,000

10%

Sub Total for Calculating CVD (C+D)

11,11,000

111%

CVD @ 10.3% on E (10% plus education Cess @3%)

1,14,434

10.3%

Total of Duties (D+F)

2,15,433

Education Cess (@3% on G)

I
J

6,463

3%

Special CVD (@4% on (C+D+F+H)

49,276

4%

Total Duties Payable

2,71,172

27.12%

CENVAT Credit available out of

various components of Customs Duty
Buyer who is Manufacturer
Such importer is eligible to avail CENVAT Credit of:
Countervailing duty (CVD) including education cess on the same
Special CVD
Buyer who is Service Provider
Such importer is eligible to avail CENVAT Credit of:
Countervailing duty (CVD) including education cess on the same
Buyer who is Trader of imported goods
Such importer is eligible to get Refund of:
Special CVD

Excise Duty

Excise Duty applicability

Central excise duty is an indirect tax which is charged on such goods that are
manufactured in India and are meant for domestic consumption.
The term 'excisable goods' means the goods which are specified in the first
schedule and the second schedule to the Central Excise Tariff Act, 1985, as
being subject to a duty of excise and includes salt
The taxable fact is "manufacture" and the liability of central excise duty arises
as soon as the goods are manufactured.
The tax is on manufacturing, it is paid by a manufacturer, which is then passed
on to the customer
This tax is now known as the Central Value Added Tax (CENVAT)

Types of Excise Duty

There are three different types of central excise duties which exist in India:
Basic - Excise Duty, imposed under section 3 of the 'Central Excises and Salt
Act' of 1944 on all excisable goods other than salt produced or manufactured in
India, at the rates set forth in the schedule to the Central Excise tariff Act, 1985,
falls under the category of basic excise duty in India.
Additional - Section 3 of the 'Additional Duties of Excise Act' of 1957 permits
the charge and collection of excise duty in respect of the goods as listed in the
schedule of this act. This tax is shared between the central and state
governments and charged instead of sales tax.
Special - According to Section 37 of the Finance Act, 1978, Special Excise Duty is
levied on all excisable goods that come under taxation, in line with the Basic
Excise Duty under the Central Excises and Salt Act of 1944. Therefore, each year
the Finance Act spells out that whether the Special Excise Duty shall or shall
not be charged, and eventually collected during the relevant financial year.

Liability to pay Excise Duty

The liability to pay tax excise duty is always on the manufacturer or
producer of goods. Three types of parties who can be considered as
manufacturers:
Those who personally manufacture the goods in question
Those who get the goods manufactured by employing hired labour
Those who get the goods manufactured by other parties
it is mandatory to pay duty on all goods manufactured, unless
exempted. For example, duty is not payable on the goods exported out
of India. Similarly exemption from payment of duty is available, based
on conditions such as kind of raw materials used, value of turnover
(clearances) in a financial year, type of process employed etc.
Under the different sections of the central excise act, the fines for
evading tax can range from twenty-five to fifty per cent of the amount
of duty evaded.

Manufacture under Excise Duty

The term "manufacture" refers to any process:
Related or supplementary to the combination of a manufactured
product.
Which is specified in relation to any goods in the Section or Chapter
Notes of the First Schedule to the Central Excise Tariff Act 1985 as
amounting to manufacture or
Which in relation to the goods specified in the Third Schedule
involves packing or repacking of such goods in a unit container or
labelling or re-labelling of containers including the declaration or
alteration of retail sale price on it or adoption of any other treatment
on the goods to render the product marketable to the consumer.

Excise Duty applicability

Presently Excise Duty Rates vary from 0% to 10.3% depending upon the
commodity
There are four basic conditions for levy of Central Excise Duty:
The duty is on Goods
The goods must be excisable
The goods must be manufactured or produced
Such manufacture or production must be India

Chart showing Excise Duty

Liability

Central Sales Tax

Sales Tax Basic Concepts

Sales can be broadly classified in three categories:
Inter-State Sale
Sale during import/export
Intra-State (i.e. within the State) sale
Sale tax on Inter State sale is levied by Union Government under Entry 92A of
List I (Union List), while sales tax on intra-State sale (sale within State) (now
termed as Vat) is levied by State Government under Entry 54 of List II (State
List) of Seventh Schedule to constitution of India
Even if CST is levied by Union Government, the revenue goes to State
Government. State from which movement of goods commences gets revenue.
CST Act is administered by State Government

Goods under Central Sales Tax

(CST)
CST is on Goods Goods include all kinds of Movable property but not:
News Paper
Actionable Claims e.g. Lottery Tickets
Stocks, Shares and Securities
Electricity is goods. Newspapers are goods but sales tax cannot be imposed in view of
specific exclusion from definition of goods
Intangible or incorporal articles are goods e.g. patent, copyright
DEPB and Advance Authorisation are goods and are taxable
Plant and machinery erected at site is not goods
Software (branded as well as unbranded) is goods - TCS v. State of Andhra Pradesh (SC 5
member Constitution bench)
Simple sale of SIM card can be taxed, but not when supplied as incidental to service

Dealer under Central Sales Tax

(CST)
Dealer means any person who carries on (whether regularly or otherwise) the
business of buying, selling, supplying or distribution of goods, directly or indirectly, for
cash, or for deferred payment, or for valuable consideration
Definition of dealer is wide, but only those who effect sale are liable to register and
pay CST
Government is dealer if it carries on business. Railways are dealers. Insurance
company is also dealer
Bank can be dealer in respect of sale of pledged goods
A club can also be dealer
An auctioneer is not a dealer, if he does not transfer the property in the goods to the
successful bidder

Central Sales Tax (CST)

applicability
This Act Applicable to Sales/Purchases taking place in Course of
Inter-state Trade & Commerce
There is no threshold Limit for registration-Even a Single
Transaction will make Liable for registration.
Interest/Penalty/Return/assessment provision applicable under
Local Act are also applicable to CST Act.
Two basic conditions for deciding whether C Form can be
issued or not:
Item being purchased is used in the process of manufacture or
used for Trade & Commerce
Item is stated in the Registration certificate as an item for used
in the process of manufacture or used for Trade & Commerce

Present Interstate System

S2
State
Haryana

2% CST
C Form

Local Sale
VAT

MANUFACTURER (HARYANA)

S1
State
UP

Stock Transfer

State

Inter State Sales

Delhi
Depot

Local Sale
VAT

State
Delhi
Dealer

Local Sale
VAT

State
Delhi
Customer

0% CST F Form

Inter State Sales

2% CST C Form

Inter State Sales

0% CSTH Form

State
Delhi
Dealer

State
Delhi
Dealer

Local Sale
VAT

State
Delhi
Customer

Export

UK
0% Tax

Central Sales Tax (CST)

Rate of Tax
From 1st June 2008 onwards
S. No.

Local VAT rate

Supported by Form C

Without Form C

Declared Goods

2%

4%

Exempted Goods

Exempt

Exempt

1%

1% (No C form required)

1%

4%

2%

4%

12.5%

2%

12.5%

No CENVAT credit is available against CST irrespective of whether

with or without C Form or tax payable at whatever rate

Central Sales Tax (CST)

Various Forms
S. No.

Forms

Purpose / Reason to Submit

When Inter-State Transaction takes place by

transfer of document of title of goodsobtain C
FORM from BUYER

E-I & E-II

Dealer to Claim Exemption on above Clause must

obtain FORM E-I from Vendor if Such vendor is 1st
Seller else FORM E-II

Sale to notified foreign Diplomat authorities

Sale to a dealer for export by the dealer

Inter State sale to units situated in SEZ

Sample of C Form under CST

Value Added Tax (VAT)

Status of VAT in India

J&K
Punjab
Chandigarh
Haryana
Delhi
Uttaranchal
UP
Assam

Rajasthan

Bihar
Jharkhand
WB
Chattisgarh

MP

Gujarat

Orissa

Maharashtra
AP
Goa
Karnataka

Pondicherry
Kerala

20 States VAT live April 1, 2005

Tamil Nadu

2 State/ UT implementing VAT

between the period April 1, 2005 to
March 31, 2006
5 States implementing VAT wef
April 1, 2006
2 State/UT implementing VAT on or
after January1 ,2007

Applicability of VAT / CST

State
Haryana

State
Delhi

State
Sales Tax Act

State
Sales Tax Act

CST ACT
State
VAT Act
Sales tax is a tax on sales of movable goods

State
VAT Act

Concept of VAT
No way different from Local Sales Tax (LST) with respect to the
fundamentals, however, method of levy differs in the two system
The traditional system of levying taxFirst Point Tax - Avoid cascading effect but Govt. loses its control on
last point sales with added value - leakage of revenue due to various
tax management in the subsequent sales after First Point.
Next Point Tax (especially for banded goods) - Burden of tax is shifted
to the next point
Last Point Tax- Govt. gets revenue on value addition up to last point
but loses its control on origin of manufacture - possibility for leakage
of revenue / escaped taxation Not popular with Govt.
Multipoint Tax- The Govt. keeps control on overall sales but cost
increases due to cascading nature of taxation

Concept of VAT
VAT is a solution to overcome all the above problems and acceptable
both to the Assessor (Govt.) and the Assessee (Dealer)
VAT in common man's language is a tax levied on the value added to
any product or service AT EVERY STAGE
Destination based tax system
Sales to Registered Dealer by a Registered Dealer
Provision for input tax credit paid at the previous point of purchase.
The tax paid by a registered dealer is netted.
Tax is ultimately borne by the consumer

VAT Chain
Manufacturer
Purchase

Full Tax credit VAT

Wholesaler
Full Tax credit

Retailer to Consumer
No Tax credit
Consumer

V
A
T

Wholesaler
to Retailer

Full Tax credit

Retailer

VAT Chain
Stage

Sale
price

Value
addition

VAT
@10
%

1st

100

10

2nd

140

40

3rd

150

10

4th

155

0.5

VAT in India Pre VAT Scenario

State 1
Imports
(No sales tax)

State 2
Stock transfer
(No sales tax)

Manufacturer

Inter State purchase

(CST)
Local purchase
(Local sales tax)

Distributor

(Local sales tax)

Interstate sale
(CST)

Retailer

Depot/CSA

(No sales tax)

Stock transfer
(No tax)

Retail sales
(Local sales tax
after limited credit of
LST)

Customer

(Local sales tax)

Stockist

(No sales tax)

Customer
(No sales tax)

Retail sales

(No sales tax)

Customer

VAT in India Post VAT Scenario

State 1
Imports
(No sales tax)
Possible Entry Tax

State 2
Stock transfer
Distributor
(No sales tax) (Possible entry tax
& Possible denial of credit in
(VAT after credit of
exporting State
entry tax)
(Possible tax on entry in State 2)

Manufacturer

Inter State purchase

(CST) + Possible Entry
Tax

Stock transfer
(No tax) (Possible
entry tax in State 2.
Possible denial of
credit in State 1

Retail sales
(Local sales tax
Local purchase
(Local sales tax) after limited credit of
LST) VAT after full Credit
VAT
Customer
(No sales tax)
VAT after Credit

(Local sales tax)

Interstate sale
(CST)

Retailer

Depot/CSA

Stockist

(VAT after credit)

(No sales tax)
Customer

(Local sales tax)

(VAT after credit of
entry tax)
(No sales tax)
(VAT after credit)

Retail sales

(No sales tax)

(VAT after credit)

Customer

VAT Credit
Full VAT credit paid within state
Tax paid on inputs both for intra-state & inter-state sale
Total Input tax for a period and not based on input/ output ratio (variation
among States)
Credit for unsold stocks allowed
Exclusions from VAT Credit

Petrol

Diesel

Aviation Turbine Fuel

Non VAT Taxes (SAT ? & Entry Tax)

VAT Credit Utilization

Within the same month / quarter
Excess C/F up to next financial year end
Refund of unutilized credit at next year end
Capital goods credit in 36 monthly installments
In respect of Export tax payment within the state will be refundable at the
Month / quarter end.

VAT Rates

Few exempted goods

4% for Agriculture / industrial inputs & some essentials

12.5% general VAT rate

Liquor - 20%

Gold, Silver, precious & semi-precious stones - 1%

VAT in UP
Value Added Tax (VAT) was adopted by UP on 1st April 2006
Registration
1. Threshold limit Rs 5 Lacs
2. Auto Registration for Registered Dealer Form VII & VIII within 60 days.
3. Compulsory for Transporters, Carriers, Forwarding Agents, Railway Agents
etc. transporting / storing goods.
Tax Payers Identification No (TIN):- Allotted on Form number 15 Mandatory to
quote on all Correspondences / Return / Challan / Tax invoice etc.
Composition Scheme :- Specified for Small Traders - 5 to 50 Lakhs @ VAT 1%.

VAT Rates in UP
Four rates have been prescribed
Schedule: I - 0% for exempted goods.
Schedule: II - 4%: for manufacturing inputs & IT Products & GSM.
Schedule: III -1%: for gold and precious stone.
Schedule: IV 20% to 32.5% for Petrol, Diesel oil, Furnace Oil.
Schedule: V RNR - 12.5%: for goods not specified under any schedule
RNR Revenue Neutral Rate

Input Tax Credit (ITC)

Allowed For intra-State purchase of goods for resale or use in manufacture.

Not allowed in respect of Non-VAT goods, captive power plant and other
specified capital goods like office equipment, furniture, air conditioners etc.

Input tax credits are not available for inter State (CST) procurement of goods.

Stock transfers outside the State attract a reversal of input tax credit (ITC) to
the extent of 3%.

Developers, co-developers and units in SEZ eligible for ITC on taxable goods for
specified operations.

Input Tax Credit (ITC)

Specified goods to be notified under Schedule IV to be taxable at first point.

Provisional refund of ITC to exporters.

Refund of excess ITC to other dealers at the end of the assessment year next
to the assessment year in which it falls due.

ITC on capital goods (other than non creditable capital goods): Capital Goods
means plant, machine, machinery, equipment, apparatus, tools appliances,
electrical installation used for manufacture or processing of any goods for sale by
the dealer and includes components, spare parts, accessories, mould dies etc.

ITC on capital goods - in 3 annual installments.

No ITC on capital goods held in stock on the date of commencement of Act.

VAT Chart
REVIEW OF VAT / CST AS ON 01-APRIL-2010
State

Existing VAT Rates

VAT is
Payable on
PTS / MRP

Andhra Pradesh
Assam
Bihar
Chandigarh
Chatisgarh
Goa
Gujarat
Haryana
Jharkhand
Karnataka
Kerala
Madhya Pradesh
Maharashtra
New Delhi
Orissa
Punjab

4% / 14.5%
5% / 13.5%
4% / 12.5%
4% / 12.5%
4% / 12.5%
4% / 12.5%
(4%+1%) / (12.5% + 2.5%)
5% / 12.5%
4% / 12.5%
5% / 13.5%
(4%+1%) / (12.5%+1%)
5% / 12.5%
5% / 12.5%
5% / 12.5%
4% / 12.5%
5% / 12.5% (10% Addl Tax/Surcharge)

PTS
PTS
MRP
PTS
PTS
PTS
PTS
PTS
MRP
PTS
MRP
PTS
PTS
PTS
MRP
PTS

Rajasthan

5% / 14%

Tamil Nadu
Uttar Pradesh
Uttarakhand
West Bengal
Pondicherry
Himachal Pradesh

4% / 12.5%
(4%+0.5%+0.5%) / (12.5%+1%)
4%+0.5% / 12.5%+1%
4% / 12.5%
4% / 12.5%
5% / 12.5%

Entry Tax, if
applicable

NA
NA

Return
Filing

NA

Monthly
Monthly
Quarterly
Quarterly
Quarterly
Quarterly
Monthly
Quarterly
Monthly
Monthly
Monthly
Quarterly
Monthly
Monthly
Monthly
Quarterly

MRP

NA

Quarterly

PTS
PTS
PTS
MRP
PTS
PTS

NA
NA
NA
NA
NA

Monthly
Monthly
Monthly
Quarterly
Monthly
Monthly

Applicable

NA
Applicable
Applicable

NA
NA
NA
NA
NA
Applicable

NA
NA
Applicable

Applicable

Rate Revision

Increase in VAT wef 15-01-2010

Increase in VAT wef 31-10-09

Additional Cess wef 01-04-08

Increase in VAT wef 15-02-2010
Increase
SSC wef
Increase
Increase
Increase

in VAT wef
01-04-08
in VAT wef
in VAT wef
in VAT wef

01-04-2010
01-08-09
01-04-2010 to 5%
14-01-2010

Increase in VAT wef 29-01-2010 & Addl Tax wef 05-02-2010

Increase in VAT wef 08-07-09 for 12.5% and Increase of 4% to 5% wef 09-032010
Additional Cess wef 01-06-09/Additional Cess of (4+0.5%)+0.5% wef 20-02-10
Surcharge of (4+0.5%) & 12.5%+1% wef 01-03-2010 postponed 01-04-2010

Increase in VAT wef 29-03-2010 to 5%

Works Contract Tax

What is a Indivisible Works

Contract ?

It is a Works Contract (WC) & Not a Normal Sale.

The Indivisible Works Contract is:

A Composite (Turnkey Jobs) work where both Labour & Material is involved,
breaking of Price for Supply (Material) & Labour may not be separate Sale of
Materials & Labour Contract.

Contract where the Contractor / Seller gets the order from the customer for
definite goods or for WC.

The Clauses in the Agreement between the Contractor & the Contractee are the key
factors for determining whether the Contact is of sale of goods or WC.

If the Contract is divisible then, the supply of material is a Sale Contract and the
labour portion is WC. If in the Labour portion, material is also used then VAT (WC)
is applicable.

Local WC are covered under the Local VAT Act & Inter-state WC are covered under
the Central Sales Tax Act.

Sale Vs. Works Contract

Concept)

If the thing to be delivered has any individual existence before the delivery as the
property of the party who is to deliver it, then it is a Sale. If the main object of the
work undertaken is not the transfer of a chattel qua chattel, the contract is one for
work & labor (Hindustan Shipyard 119 STC 533 SC).

In a Contract of Sale, the main object is the transfer of property and delivery of the
possession of Chattel as a Chattel to the buyer, where it is not so, it is a contract of
Works & Labour (Hindustan Aeronautics Ltd. 55-STC 314 -SC)

It is made clear that contract of building buses, ships are that of the Sale even if
they are manufactured as per the specifications and under strict supervision of the
buyer. (Hindustan Shipyard 119 STC 533 SC).

The test therefore is as to whether in a particular case, it is a Contract of Sale

(Chattel as a Chattel) or WC, neither the ownership of the material nor the value of
skill or labour as compared with the value of the material is conclusive, although
such matter may be taken into consideration depending upon the facts and
circumstances of the particular case.

Works Contract is a
Deemed Sale

The Scenario before the 46th Constitutional Amendment (Before 2nd Feb, 1982)

The Sales of goods covered under the sale of goods Act were only liable for
Sales tax (only normal sales were covered)

The Supreme Court Judgment of Gannon Dunkerely (9 STC 353)

The Indivisible WCs were not covered under the State Sales tax Laws. The
states were not empowered to levy Sales tax on Indivisible WCs.

The 46th Amendment to the Constitution of India Sub-article (29-4) reads as under:
(b) a tax on the transfer of property in goods (whether a goods or in some other
form) involved in the execution of a Works Contract
The concept of Deemed Sale under the State VAT / CST Acts:

The Sales tax/VAT/CST is applicable only on the value of the goods and
not on labour portion of the Contract.

Alternatives are prescribed for arriving at the material value of the

Contract.
The States are empowered to levy Sales tax/VAT/CST on such deemed sales only
after the 46th Amendment to the Constitution of India

Divisible & Indivisible

Works Contracts
(A) Divisible Contract :

State A
Contractor
X

Supply Normal Sale

VAT 4% / 12.5%

Two separate contracts,

one for supply portion and
other for labour work, two
separate
companies,
preferable.

No artificial break of sale

price to avoid VAT (WC) on
labour portion.

The
clauses
in
the
Agreement and intentions
of the two parties is an
important factor.

State A
Contractee
Y

Erection & Commissioning

State A
Contractor
X or X1

Labour Job (WC) (if material

used, the WC provisions are
attracted, otherwise pure
Labour Job

State A
Contractee
Y

Divisible contracts are more litigation prone

Divisible & Indivisible

Works Contracts
(B) Indivisible Contract :

Deemed Sale (WC)

State A
CONTRACTOR VAT (WC) is applicable
on contract value as per
X
the three options
available.

Only one Indivisible WC.

(Single
P.O.
by
the
Contractee)

The
clauses
in
the
Agreement and intentions
of the two parties is an
important factor.

VAT (WC) applicable only

on the material value of the
Contract determined by
the three methods (options)
under State VAT Act.

State A
Contractee
Y

More options of levy of VAT/Composition tax available in Indivisible Works

Contracts)

Activities covered under

Works Contract
1.

Construction Jobs

2.

Civil Work

3.

Erection of Plant and Machinery

4.

Processing conversion jobs.

5.

Repair Jobs

6.

Annual Maintenance Contracts (AMCs)

7.

Customized Printing Jobs.

8.

Building of bodies on chassis.

9.

Electrical fittings.

10.

Installation of lift / elevator in the building.

11.

Air-conditioning installations.

12.

Painting jobs.

13.

Repairs of vehicles.

14.

Re-treading of old Tyre.

15.

Electro-plating, electro-galvanizing, anodizing and the like.

Applicability of VAT on
various Works Contracts
Indivisible /
Composite Works
Contracts

Job Works

Construction
Contract
Erection of Plant
& Machinery
EPC Contracts
Installation &
Commissioning of
Lifts / Elevators
Civil Works

Processing
Conversion Jobs
Repair of
Vehicles
Repair Jobs
Electro Plating,
Electro
galvanizing,
anodizing and
like
Customized
Printing Jobs

VAT Applicable

VAT Applicable

Pure Labour Jobs

Pure Labour Jobs

where no own
material is used by
the Contractors
(Consumables,
Chemicals which
evaporate during
the process are
allowed).

No VAT Applicable

Art Works

Work of Art &

Labour (Art
Work)
Photography
Paintings by
the Artist

No VAT Applicable

Basic Concepts of Levy of VAT /

CST On Works Contracts
1.

No VAT/CST is applicable on pure labour jobs where no material of his own is used
/ added by the job worker (vendor).

2.

VAT / CST is applicable on Material Value of the Work Contract.

3.

To arrive at the Material Value in the Contract, three methods are adopted under
the State VAT Acts namely :
i.

Actual Non-material Deduction Method

ii.

Standard Deduction Method

iii.

Composition Tax Method (Non-legal Method.)

4.

VAT Setoff / Credit is available under the State VAT Acts to both the Contractor &
Contractee except for the Negative List items purchased

5.

For Divisible Contract, supply of material is a Normal Sale Contract and the
Labour Contract is subject to VAT (WC) provisions, only if the own material is used
by the Contractor.

6.

If the Contractor dispatches his own materials from one state to another, directly
to the customer under the Indivisible WC, then it is a deemed inter-state sale of
material subject to levy of CST by the state of dispatch.

Works Contract Taxation

under State VAT Act
OPTION A (LEGAL)
A1 [VAT paid on Inputs Rs.2.00]

A2 [VAT paid on Inputs Rs.2.00]

Contract Price

Rs.100.00

(-) Actual Non-material

Value

Rs. 80.00

Material Value

Rs. 20.00

Material Value

@ 12.5% VAT on
Rs.20.00

Rs.

@ 12.5% VAT on Rs.7.00

TAX INVOICE

Rs.100.00

TAX INVOICE

VAT @ 12.5% on
Rs.20.00

Rs.

VAT @ 12.5% on Rs.75.00

Rs.100.00

Contract Price

Rs.100.00

Standard Deduction (Non-

Rs. 25.00

@ 8% Composition Tax on
Rs.100

Rs.

Material)

2.50

2.50

Rs.

0.50

2% TDS Deduction by Contractee

VAT paid on inputs Rs.2.00 (Credit 64%)

Rs.1.28

Contract Price

Rs.102.50
VAT PAYABLE (2.50
2.00)

OPTION B (COMPOSITION)

VAT PAYABLE (Rs.9.38

Rs.2)

Rs. 75.00

8.00

Rs.108.00

Rs. 9.38

INVOICE
Contract Price

Rs.100.00

@ 8% Composition Tax

Rs.

Rs.109.38

@ 5% Composition Tax ( 206-06)

Rs.108.00

Rs.

VAT PAYABLE (Rs.8.00

1.28)

Rs.

Rs.100.00
Rs. 9.38

7.38

A2 [VAT paid on Inputs Rs.2.00]

8.00

6.72

2% TDS Deduction by Contractee

Service Tax

What is Service Tax

Service tax comes under powers of Entry 97 of List I of Seventh Schedule to
Constitution of India. Service tax was introduced w.e.f. 1-7-1994 and its
scope is being expanded every year. Service tax is not payable if service is
provided in J&K or if provided outside India
Service tax is imposed under section 66 of Finance Act, 1994, which is the
charging section [There is no separate Service Tax Act as such]. Service
provided or to be provided is taxable event. Thus, service tax is payable
when advance is received
Service requires two parties. One cannot give service to himself
Service tax cannot be levied on value of goods. Service tax and Vat are
mutually exclusive

Rate & Liability of Service

provider
General rate of service tax is 10.30% (including education cess and SAH
education cess) w.e.f. 24-2-2009 [During period 11-5-2007 to 23-2-2009, it was
12.36%]. In some cases, abatement is available
Education cess and SAHE cess should be shown separately in invoice and
should be paid under separate accounting head
Service tax is payable by service provider. In few cases, tax is payable by
service receiver, under reverse charge method [Section 68(2)]
In case of Goods Transport Agency (GTA), Import of Service, Sponsorship
service and Agent of mutual fund and insurance, service tax is payable by
service receiver

Value for purpose of Service

Tax
Service tax is payable on gross amount charged for taxable service provided
or to be provided [section 67] (excluding material cost)
Tax is payable on reimbursement of expenses which are part of service, but
not on payments made by service provider as pure agent of service receiver
Service tax is not payable on amounts collected by service provider from
service receiver which are not part of service but are paid by service provider
to third parties for administrative convenience and then recovered from
service receiver, even if all requirements of definition of pure agent are not
satisfied
If value is not ascertainable, valuation can be on basis of similar service or on
basis of value which shall not be less than cost

Exemption from Service Tax

Small service providers whose total value of services provided (including
exempt and non-taxable services) is less than Rs 10 lakhs in previous year
are not required to pay service tax in current financial year till they reach
turnover of Rs 10 lakhs. Clubbing provisions can apply. Registration is
required if turnover exceeds Rs 9 lakhs per annum
The exemption is not available if service is provided under brand name of
other person
This exemption is not available when service tax is payable by service
receiver under reverse charge method
Services provided to SEZ unit or developer are exempt if wholly consumed
within SEZ. In case of services consumed by SEZ outside SEZ, refund claim
has to be filed

Classification of Services
If prima facie, a taxable service is classifiable under two or more sub-clauses
of section 65(105), classification shall be effected as per following rules
Specific description to be preferred over a general description [section
65(2)(a)]
Classification should be as per essential character in case of composite
services [section 65(2)(b)]
Service which appears earlier in list of section 65(105), if service cannot be
classified on above basis [section 65(2)(c)]
Service should be predominantly a taxable service. A composite contract
consisting various services cannot be vivisected. An indivisible/composite
contract of goods and services can be vivisected and service part of it is
subject to service tax

CENVAT Credit
Service provider can avail CENVAT credit of service tax paid on input services
and excise duty paid on inputs and capital goods. The credit can be utilised
for payment of service tax on output services
Definition of input service is wide. Any service in relation to business is input
service
Credit can be availed on basis of proper and complete specified original duty
paying documents
If assessee is providing both taxable and exempt services and if input
services are common, CENVAT credit can either be taken on proportionate
basis or 6% amount is required to be paid on value of exempted services

Registration
Service provider should register within 30 days from date of commencement of
providing taxable service. Application should be in form ST-1 [Rule 4(1)]. Income
Tax PAN, address proof, evidence of constitution of firm/company, list of
directors/partners are the most important document required.
Application for registration is to be filed electronically. The PAN based registration
number is generated by system immediately. However, registration certificate is
issued by Superintendent in form ST-2 after the documents are submitted.
Registration will be deemed to have been granted if not received within seven days
[Rule 4(5)]
Person providing services from more than one premises or offices can apply for
centralised registration, if he has centralised billing system or centralised
accounting system [Rule 4(2)]

Procedure to be followed
Assessee should prepare invoice in respect of his services. The Invoice should be
prepared within 14 days from date of completion of taxable service or receipt of
payment towards the value of taxable service, whichever is earlier. Invoice should
contain prescribed details [Rule 4A]
If the assessee is an individual or proprietary firm or partnership firm, the tax is
payable on quarterly basis within 5 days at the end of quarter (within 6 days in
case of e-payment) except in March. Service tax is payable by other assessee by
5th of the month following the month in which payments are received toward value
of taxable services (by 6th in case of e-payment) except in March [rule 6(1) of
Service Tax Rules]
Service tax on value of taxable services received during month of March or quarter
of March is required to be paid by 31st March in case of all the assessee

Import of Services
In case of import of service, tax is payable by recipient of services under
method of reverse charge. Tax should be paid by cash i.e. GAR-7 Challan and
then Cenvat credit can be availed of the tax so paid, as it is his input service
Tax is payable only when service is received in India. Services provided and
used outside India cannot be taxed in India
To determine the issue whether a provision of service is import of service,
services have been classified in three categories. Criteria for each category
has been specified e.g. immovable property India, service performed in India,
recipient is located in India

Some Illustrations of Tax

computation

Case 1: Avana is Importer and

Sells within State of Delhi
S.
No.

Particulars

Amount

A.

CIF

10,00,000.00

B.

Landing Cost @ 1% of CIF

C.

Assessable Value

10,10,000.00

D.
E.
F.

Basic Custom Duty @ 10%

Sub Total for Calculating CVD (C+D)
CVD @ 10.30% on E (10% plus education Cess @3% )

1,01,000.00
11,11,000.00
1,14,433.00

G.

Total of Duties (D +F)

2,15,433.00

H.
I.
J.

Education Cess (@ 3% on G)
Special CVD @ 4% (C+D+F+H)
Total Duties Payable (D+F+H+I)

6,463.00
49,276.00
2,71,172.00

K.

Transportation Cost

1,00,000.00

L.
M.
N.
O.
P.

Total Cost to Avana (A+K+J)

Avana Margin (Say)
Sale Price (L+M)
Delhi VAT @ 12.5%
Invoice Amount

10,000.00

13,71,172.00
2,00,000.00
15,71,172.00
1,96,397.00
17,67,569.00

Note:
Buyer will
get the
Cenvat
Credit of
CVD &
Special
CVD as well
as VAT
Credit
Net Cost to
Buyer ( P-OI-F )
1,407,463

Case 2: Avana is Importer and

Sells to Buyer of UP
S.
No.
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.

Particulars
CIF
Landing Cost @ 1% of CIF
Assessable Value
Basic Custom Duty @ 10%
Sub Total for Calculating CVD (C+D)
CVD @ 10.30% on E (10% plus education Cess @3% )
Total of Duties (D +F)
Education Cess (@ 3% on G)
Special CVD @ 4% (C+D+F+H)
Total Duties Payable (D+F+H+I)
Transportation Cost
Total Cost to Avana (A+K+J)
Avana Margin (Say)
Sale Price (L+M)
CST Against C Form @ 2%
Invoice Amount

Amount
10,00,000.00
10,000.00
10,10,000.00
1,01,000.00
11,11,000.00
1,14,433.00
2,15,433.00
6,463.00
49,276.00
2,71,172.00
1,00,000.00
13,71,172.00
2,00,000.00
15,71,172.00
31,423.00
16,02,595.00

Note:
Buyer will
get the
Cenvat
Credit of
CVD &
Special
CVD as VAT
Credit
Net Cost to
Buyer ( P-IF)
14,38,886

Case 3: Avana Maharashtra Branch (Assumed) is

Importer, Buyer is located in Delhi, Avana gives the
delivery to Transporter of Buyer in Mumbai
S.
No.
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.

Particulars
CIF
Landing Cost @ 1% of CIF
Assessable Value
Basic Custom Duty @ 10%
Sub Total for Calculating CVD (C+D)
CVD @ 10.30% on E (10% plus education Cess @3% )
Total of Duties (D +F)
Education Cess (@ 3% on G)
Special CVD @ 4% (C+D+F+H)
Total Duties Payable (D+F+H+I)
Transportation Cost
Total Cost to Avana (A+K+J)
Avana Margin (Say)
Sale Price (L+M)
Maharashtra VAT @ 12.5%
Invoice Amount

Amount
10,00,000.00
10,000.00
10,10,000.00
1,01,000.00
11,11,000.00
1,14,433.00
2,15,433.00
6,463.00
49,276.00
2,71,172.00
1,00,000.00
13,71,172.00
2,00,000.00
15,71,172.00
1,96,397.00
17,67,569.00

Note:
Buyer will
get the
Cenvat
Credit of
CVD &
Special CVD
but not of
Maharashtra
VAT, as
buyer is not
registered
with
Maharashtra
VAT
Net Cost to
Buyer (P-I-F)
16,03,860

Case 4: Avana Maharashtra Branch (Assumed)

is Importer, Buyer is located in Delhi, Avana
gives the delivery to Buyer in Delhi
S.
No.
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.

Particulars
CIF
Landing Cost @ 1% of CIF
Assessable Value
Basic Custom Duty @ 10%
Sub Total for Calculating CVD (C+D)
CVD @ 10.30% on E (10% plus education Cess @3% )
Total of Duties (D +F)
Education Cess (@ 3% on G)
Special CVD @ 4% (C+D+F+H)
Total Duties Payable (D+F+H+I)
Transportation Cost
Total Cost to Avana (A+K+J)
Avana Margin (Say)
Sale Price (L+M)
CST Against C Form @ 2%
Invoice Amount

Amount
10,00,000.00
10,000.00
10,10,000.00
1,01,000.00
11,11,000.00
1,14,433.00
2,15,433.00
6,463.00
49,276.00
2,71,172.00
1,00,000.00
13,71,172.00
2,00,000.00
15,71,172.00
31,423.00
16,02,595.00

Note:
Buyer will
get the
Cenvat
Credit of
CVD &
Special
CVD as VAT
Credit
Net Cost to
Buyer ( P-IF)
14,38,886