DIRECT TAX

Direct tax is the tax which is charged directly on the tax payer. For e.g. property tax and income tax. In other words direct tax is that tax that is deducted from one's salary.

Direct Taxation in India

Direct taxation in India is taken care by the Central Board of Direct Taxes (CBDT); it is a division of Department of revenue under Ministry of Finance. CBDT is governed by the revenue act 1963.CBDT is given the authority to create and control direct taxes in India. The most important function of CBDT is to manage direct tax law followed by Income Tax department. In India the tax structure is divided amongst the central government and state government. The central government levies taxes on income, custom duties, central excise and service tax. While the state government levies tax like state excise, stamp duty, VAT (Value Added Tax), land revenue and professional tax. Local civic bodies levy tax on properties, octroi etc. Capital gains tax, personal income tax, tax on corporate income and tax incentives all come under the purview of direct tax. Direct taxes are charged on the basis of residential status and not on the basis of citizenship. The assessee are charged based upon the following factors
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Resident Resident but not ordinary resident. Nonresident.

Direct Taxes Before Reform They had a major impact on economic policies, creation of savings and the trend of investment. There was no proportion in terms of the impact of direct taxes on the economy and there relative share in total tax revenues. The system of direct taxes was very much complex and inefficient because of the combination of high marginal rates of personal income and wealth taxation and high rates of corporate profits. The corporate tax was pretty high. It leads to large scale evasion. Members Of Parliament and Central Government Ministers get comparatively low salaries, but they are given a sitting allowance which is not taxable. Ministers, MP's and other high ranking government officials get government allocated accommodation, where the charges are pretty less in comparison to the prevailing market rate. Growth in Direct Tax collection during the Financial Year 2008-09 Net direct tax collection during the fiscal 2008-09 stands at Rs.338, 212 crore, up from Rs.312, 202 crore during 2007-08, registering a growth of 8.33 percent. Growth in Corporate Taxes was 10.84 per cent, while Personal Income Tax (including FBT, STT and BCTT) grew at 9.09%. Despite economic slow-down and substantial relief to non-corporate taxpayers, direct tax

collections exceeded the previous year's collection by about Rs.26, 000 crore. Growth In Direct Tax Collection During The Financial Year 2009-2010 The net direct tax collections grew by 5.77 per cent during the first two months of the current fiscal (2009-2010).It was Rs 24,158 crore compared to Rs 22,840 crore at the same time last year. Corporate tax grew at5.56 per cent (Rs 8578 crore against Rs 8126 crore), while personal income tax (including FBT, STT and BCTT) grew at 5.92 per cent (Rs 15,559 crore as against Rs 14,690 crore0.Overall refund outgo during the period increased by 26.19 per cent (Rs 11,375 crore as against Rs 9014 crore)while refunds to non corporate taxpayers grew by 61.7 per cent (Rs 2,149 crore against Rs 1,329 crore).

Income Tax In India

Income tax in India is levied by the Central government and is monitored and controlled by Central Board OF Direct Taxes under Ministry of Finance in allay with the provisions of the Income Tax Act. Income earned in a given financial year is subject to tax as per the rates prescribed for that year. A financial calendar is from April 1 to March 31 of the following year. India has adopted the residential form of tax system. It means tax payers will be divided into residents or non residents. A tax payer can also be classified as ordinary residents. Residential Status An individual is resident in India if he is in India in the tax year for:
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182 days or more; or 60 days or more (the period of 60 days stands changed to 182 days or more for Indian citizens or persons of Indian origins on a visit to India; and also for citizens of India who leave India for employment abroad as member of a crew of an Indian ship) during the tax year, and an aggregate of 365 days or more during the four years preceding the tax year. An individual who does not satisfy the above conditions is a non-resident.

A resident is "not ordinarily resident" in India in any tax year if he:

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Has been "non-resident" in India in nine out of the 10 previous years preceding that year: or Has during the previous seven years, preceding that year, been in India for a total period of 729 days or less. Taxability based on status

Taxability Based On Status Residential Status Resident Resident but not ordinarily resident Indian Sourced Income Taxable In India Taxable In India Foreign Sourced Income Taxable In India Not Taxable In India

Non resident

Taxable In India

Not Taxable In India

Heads Of Income Income can be divided into five categories. The income that falls within the tax component is disclosed in line with rules for a particular head and then cumulated to determine the aggregate income to be taxed. But losses under certain categories cannot be cumulated with income gained under other categories. Salaries: It covers those monetary gains that are obtained for services performed and would include wages, pension, fees and commission .Standard deduction is taken from the salary and the amount of deduction depends upon the income received. Income From House property: It involves income earned by renting residential and commercial property. Only two authorized deductions are allowed while calculating income. Profits And Gains From Business Or Profession: It covers monetary benefits gained from business or profession minus the permissible deductions, against the revenue earned. Capital Gains: It deals with gains due to transfer of assets. The duration of holding determines the classification of the asset, which then decides the method of taxation. Capital assets held for 36 months (12 months in case of shares/securities) are taken as short term assets, while all other capital assets are taken as long term capital assets. Long term assets have the advantage of lower rate of tax. Income From Other Sources: It is the remaining category of income and takes care of all income not covered by any category. Foreign Nationals The tax law in India allows for exemption of income earned by foreign nationals for services provided in India, under certain condition:
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Remuneration from a foreign enterprise not conducting any business in India, provided the individual's stay in India does not exceed 90 days and the payment made is not deducted in computing the income of the employer; Remuneration received by a person employed on a foreign ship provided his stay in India does not exceed 90 days; Remuneration of foreign diplomats, consular staff, trade officials and their staff and family; and Income of an employee or consultant of a government approved foreign charitable institutions. Payment from an International unit not having any business in India on condition that the individual does not reside in India for more than 90 days and the remuneration made is not subtracted in calculating the income of the employer. Payment obtained by a person working on an International ship under condition he does not reside in India for more than 9 days.

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Payment for foreign diplomats, consular staff, trade officials and their staff and family and Earnings of an employee or consultant of a government approved foreign charitable institutions. Basic Tax Rates

Income (INR) Up to 150,0000 150,001-300,000 300,001-500,000 Above

Tax Rate Nil 10% 20% 30%

*Basic exemption for women and senior citizens will be INR 180,000 and INR 225,000 respectively.

Income Tax - Taxable Heads of Income

Remuneration includes:
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Tax upon salaries and wages Tax upon pension Tax upon bonus, fees & commissions Tax upon Gratuity Tax upon Annuity Tax upon profits in lieu of or in addition to salary Tax upon advance salary and perquisites

Others:
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Tax upon Allowances Tax upon Deferred compensation Tax equalisation

Besides remuneration for work, individuals may be taxed on the following income: Tax upon Income from house property The annual value of property, consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income tax, shall be chargeable to income tax under the head "Income from House Property".Is

income from any property covered under this section? No. Only the income from buildings or part of a building, held by the assessee as the owner and the income from land appurtenant to the buildings is covered under this section. Income from other property such as open land is out of the purview of this section. Income from such land will be taxed under the head, 'income from other sources.' When the property is used by the owner for his business or profession, the income of which business or profession is chargeable to income tax, the income of that property is not charged in the hands of the owner. Similarly, when a firm carries on business or profession in a building owned by a partner, no income from such property is added to the income of the partner, unless the firm pays the partner any rent for the same. If the assessee is not the owner of the building but is a lessee and he sublets the property, he would be taxed under the head 'Income from other sources'. What is included in the term 'buildings' for the purpose of this section? The term 'buildings' includes any building (whether occupied or intended for self-occupation), office building, godown, storehouse, warehouse, factory, halls, shops, stalls, platforms, cinema halls, auditorium etc. Income arising out of the building or a part of the building is covered under this section. What is meant by the term "land appurtenant"? Land appurtenant includes land adjoining to or forming a part of the building. It would depend on the nature of the land, whether it is appurtenant to the residential building, factory building, hotel building, club house, theatre etc. and will include courtyards, compound, garages, car parking spaces, cattle shed, stable, drying grounds, playgrounds and gymkhana. Is the income arising from vacant land covered under this section? Any income, arising out of vacant land, is not covered under this section even though it may be received as rent, ground rent or lease rent. Such income would be assessable as income from other sources. Even rent, arising out of open spaces, or quarry rent, is taxed as income from other sources. If a company is formed with the sole object of acquiring and letting out immovable properties, what head would the rental income be taxable under? Even if a company is formed for the sole object of acquiring and letting out immovable

properties, the rental income would be taxable as "Income from House property" and not as "business income." If a building is used as a market and the owner/landlord provides certain other services as required by the municipal license, what head would the income fall under? The income from letting out shops would be considered income from house property. When is the income from house property wholly exempt from tax? In the following cases, income from house property is completely exempt from any tax liability: i. ii. iii. iv. Income from any farmhouse forming part of agricultural income; Annual value of any one palace in the occupation of an ex-ruler; Property Income of a local authority; Property Income of an authority, constituted for the purpose of dealing with and satisfying the need for housing accommodation or for the purposes of planning development or improvement of cities, towns and villages or for both. (The Finance Act, 2002, w.e.f. 1.4.2003 shall delete this provision.); Property income of any registered trade union; Property income of a member of a Scheduled Tribe; Property income of a statutory corporation or an institution or association financed by the Government for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both; Property income of a corporation, established by the Central Govt. or any State Govt. for promoting the interests of members of a minority group; Property income of a cooperative society, formed for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both; Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commodities by an authority constituted under any law for the marketing of commodities; Property income of an institution for the development of Khadi and village Industries;' Self-occupied house property of an assessee, which has not been rented throughout the previous year; Income form house property held for any charitable purposes; Property Income of any political party.

v. vi. vii.

viii. ix. x.

xi. xii. xiii. xiv.

How is the annual value of the property determined? Under S 23 (1) of the Income tax Act, annual value of property shall be deemed to be the following: i. The sum for which the property might reasonably be expected to be let out from year to year;

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iii.

Where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; Where the property or part of the property is let and was vacant during the whole or any part of the previous year and, owing to such vacancy, the actual rent received or receivable by the owner in respect thereof is less than the sum referred to clause (a) the amount so received or receivable.

The taxes levied by any local authority in respect of the property shall be deducted while determining the annual value of the property of that previous year in which such taxes are actually paid by him. Further, the amount of actual rent received or receivable by the owner shall not include the amount of rent, which the owner cannot realize. Sub-section 2: The annual value of a house or part of a house shall be taken as nil if the property consists of such house or part of the house and is occupied by the owner himself for the purpose of his own residence or, if such house or part thereof cannot be occupied by him because his employment, business or profession is carried on at any other place and, he has to reside at that other place in a building that does not belong to him. Nevertheless, the above provision would not apply if the house or part thereof is actually let during the whole or any part of the previous year; or if any benefit therefrom is derived by the owner. If the property consists of more than one house, the provisions of the sub-section (2) shall apply in respect of only one of such houses, which the assessee may at his option specify. The annual value of the house(s), other than the house in which the assessee has exercised an option, shall be determined under sub-section (1) as if the house (s) had been let out What are the deductions permitted to be made from Income from house property"? S 24 lays down that 'income chargeable under the head 'Income from house property' shall be computed after making the following deductions: 1. A sum equal to 30% of the annual value; 2. If the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital. Where such property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, on or after 1st April 2003, the amount of deduction under this clause shall not exceed Rs 1, 50,000. The amount of deduction shall not exceed Rs 30,000 where the property consists of a house or part of a house, which the owner occupies for his own residence or which cannot be occupied by him because his employment, business or profession is carried on at any other place and he has to reside at that other place in a building which is not his own. Can rental income be treated as business income?

The main criteria for deciding whether the rent is assessable as income from property or as business income depends upon the assets are exploited commercially or whether the same are let out for enjoying the rent.

Income Tax - Tax upon Income from business or professions

What conditions must be satisfied for an income to fall under the head of income from profits and gains of business? For charging the income under the head "Profits and Gains of business," the following conditions should be satisfied:
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There should be a business or profession. The business or profession should be carried on by the assessee. The business or profession should have been carried on by the assessee at any time during the previous year.

What income will be chargeable to income tax under the head 'Profits and gains of business or profession'? The following income would be chargeable under the head "Profits and gains of business or profession":
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The profits and gains of any business or profession, which was carried on by the assessee at any time during the previous year; Any compensation or other payment, due or received by the following:o Any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; o Any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto; o Any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of any agency or the modification of the terms and conditions relating thereto;

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Any person, for or in connection with the vesting in the Government, or in any corporation owned or controlled by the Government, under any law for the time being in force, of the management of any property or business; Income, derived by a trade, professional or similar association from specific services performed for its members; Profits on sale of a license granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947; Cash assistance (by whatever name called), received or receivable by any person against exports under any scheme of the Government of India; Any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971; The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm.
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However, it is provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under Clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted. Would the interest income be assessed as ''business income'' or as ''income from other sources''? Interest Income is either assessed as ''Business Income'' or as ''Income from other sources'' depending upon the activities carried on by the assessee. If the investment yielding interest were part of the business of the assessee, the same would be assessable as ''business income'' but where the earning of the interest income is incidental to and not the direct outcome of the business carried on by the assessee, the same is assessable as ''Income from other sources''. Business implies some real, substantial and systematic or organized course of activity with a profit motive. Interest generated from such an activity is considered Business Income. Otherwise, it would be interest from other sources. What deductions are allowed in computing income from profits and gains of business or profession? A number of other deductions under Section 36 of the Income-Tax Act are allowed while computing income from profits and gains of business or profession:
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S36 (i): The amount of any premium, paid in respect of insurance against risk of damage or destruction of stocks or stores, used for the purposes of the business or profession; (ia) The amount of any premium, paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a cooperative society, being a primary society engaged in supplying milk, raised by the members of such federal milk co-operative society;

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(ib) The amount of any premium, paid by cheque by the assessee as an employer to effect or to keep in force an insurance on the health of his employees under a scheme, framed in this behalf by the General Insurance Corporation of India, formed under section 9 of the General Insurance Business (Nationalization) Act, 1972 (57 of 1972) and approved by the Central Government; (ii) Any sum, paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; (iii) The amount of the interest paid in respect of capital borrowed for acquisition of the asset from the date it is put to use for the purposes of the business or profession; (iv) Any sum, paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved Superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the Superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions, fixed on some definite basis by reference to the income chargeable under the head "Salaries" or to the contributions or to the number of members of the fund; (v) Any sum, paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust; (va) Any sum, received by the assessee from any of his employees to which the provisions of sub-clause (x) of clause (24) of section 2 apply, if such sum is credited by the assessee to the employee's account in the relevant fund or funds on or before the due date. (vi) In respect of animals which have been used for the purposes of the business or profession, otherwise than as stock-in-trade and have died or become permanently useless for such purposes, the difference between the actual cost to the assessee of the animals and the amount, if any, realized in respect of the carcasses or animals; (vii) Subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year; (viia) in respect of any provision for bad and doubtful debts made by the following: o A scheduled bank or non -- scheduled bank, an amount not exceeding five per cent of the total income and an amount not exceeding ten per cent of the aggregate average advance made by the rural branches of such bank computed in the prescribed manner; o A bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent of the total income; o public financial institution or a State financial corporation or a State industrial investment corporation, an amount not exceeding five per cent of the total income. (viii) In respect of any special reserve created by a financial corporation which is engaged in providing long term finance for industrial or agricultural development in India or, by a public company formed and registered in India with the main object of carrying on the business or providing long - term finance for construction or purchase of houses in India

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for residential purposes, an amount not exceeding forty per cent of the total income can be carried to the reserve account; (ix) Any bona fide expenditure incurred by a company for the purpose of promoting family planning amongst its employees; (x) Any sum, paid by a public financial institution by way of contribution towards any Exchange Risk Administration Fund, set up by public financial institutions, either jointly or separately. (xi) Any expenditure, incurred by the assessee on or after the 1st day of April 1999 but before the 1st day of April 2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession, so as to make such computer system Y2K compliant. (xii) Any expenditure (not being in the nature of capital expenditure) incurred by a corporation or a body corporate, by whatever name called, constituted or established by a Central, State or Provincial Act for the objects and purposes authorized by the Act, under which such corporation or body corporate was constituted or established.

It is important to note that deductions are subject to certain conditions being satisfied. What deductions are allowable in respect of rent, rates, taxes, repairs and insurance for premises, which are used for the purpose of business or profession? S 30: The deductions that are allowed while computing income from 'profits and gains from business or profession' in respect of rent, rates, taxes, repairs and insurance for premises, which are used for the purpose of business or profession while computing income from 'profits and gains from business or profession' are as follows:
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Where the premises are occupied by the assessee: 1. As a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs; excluding expenditure in the nature of capital expenditure. 2. Otherwise than as a tenant, the amount paid by him on account of current repairs to the premises; excluding expenditure in the nature of capital expenditure. Any sums, paid on account of land revenue, local rates or municipal taxes; The amount of any premium, paid in respect of insurance against risk of damage or destruction of the premises.

What deductions shall be allowed in respect of repairs and insurance of machinery, plant and furniture? S 31: The following deductions shall be allowed in respect of repairs and insurance of machinery, plant and furniture:
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The amount paid on account of current repairs thereto; excluding expenditure in the nature of capital expenditure. The amount of any premium, paid in respect of insurance against damage or destruction thereof.

Income Tax - Tax upon Income from Capital Gains

What is meant by the term ''Capital Assets''? S 2(14): Capital asset means property of any kind held by an assessee whether or not connected with his business or profession. It however does not include the following: 1. Any stock-in-trade, consumable stores or raw materials held for the purpose of his business or profession; 2. Personal effects, i.e., movable property (including wearing apparel and furniture, excluding jewellery), held for personal use by the assessee or any member of his family dependent on him. 3. Agricultural land in India, not being land situated in the following:a. In any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and, which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or b. In any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette; 4. 6.5 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National, Defence Gold Bonds, 1980, issued by the Central Government; 5. Special Bearer Bonds, 1991, issued by the Central Government; 6. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government. Which are the assets, which do not fall within the term "capital assets", and which can give rise to a tax-free surplus?
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Any stock-in-trade, consumable stores or raw materials, held for the purpose of his business or profession; Personal effects, i.e., movable property (including wearing apparel and furniture, excluding jewellery), held for personal use by the assessee or any member of his family dependent on him; Agricultural land in India, not being land situated in the following: o In any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last

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preceding census of which the relevant figures have been published before the first day of the previous year; or o In any area within such distance, not being more than eight kilometers, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette; 6.5 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National, Defence Gold Bonds, 1980, issued by the Central Government; Special Bearer Bonds, 1991, issued by the Central Government; Gold Deposit Bonds, issued under the Gold Deposit Scheme, 1999 notified by the Central Government.

Are the gains, arising from sale or transfer of property, subject to Income tax? Yes, gains, which arise from the transfer of capital assets, are subject to tax under the Income-tax Act. Section 14 of the Income-tax Act has classified Capital Gains as a separate Head of Income. Further, certain other transactions are also included in the definition of transfer. These are as follows: 1. In a case where a capital asset is converted by the owner thereof into (or is treated by him as) stock-in-trade of a business that is carried on by him, such conversion (or treatment) of the capital asset shall also be treated as "transfer of the asset" and hence chargeable to income tax. 2. Profits and gains arising from transfer made by the depository or the participant, having beneficial interest in respect of the securities, shall also be chargeable to income tax. 3. Profits and gains, arising from transfer of a capital asset by a person to a firm or other association of persons or body of individuals, in which he is or becomes a partner or member by way of capital contribution or otherwise, shall also be chargeable to income tax. 4. Profits and gains, arising from transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) shall also be chargeable to income tax as the income of a firm or other association or body. 5. Any money or assets, received by a person under an insurance policy from an insurer, on account of damage or destruction of any capital asset, any profits or gains arising from receipt of such money or other assets shall be taxable under the head "capital gains". 6. Capital gains, arising from the transfer of a capital asset, being a transfer by way of compulsory acquisition under any law or a transfer, the consideration for which was determined /approved by the Central Govt., or the RBI. What transactions are not regarded as transfers? Certain transactions are not regarded as transfers and hence, the profits and gains arising from such transfer are not taxable under the head "Capital gains". Such transactions are as follows:

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Distribution of assets in kind by a company to its shareholders on its liquidation (S 46(1)); Any distribution of capital assets in kind by a Hindu undivided family to its members at the time of total or partial partition (S 47 (i)). Any transfer of a capital asset under a gift or will or an irrevocable trust. Nevertheless, this clause is not applicable to a transfer under a gift or will or an irrevocable trust of capital asset, being shares, debentures, or warrants, allotted by a company (directly/indirectly) to its employees under an Employees Stock Option Plan or Scheme of the company, in accordance with the guidelines issued by the Central Government (S 47 (iii)). Any transfer of a capital asset by a company to its subsidiary, provided the Company wholly owns such subsidiary company and the subsidiary company is an Indian company (S 47 (iv)). Any transfer of a capital asset by a subsidiary company to the holding company, provided such holding company wholly owns the share capital of the subsidiary company and the holding company is an Indian Company (S 47 (v)). Any transfer of a capital asset in a scheme of amalgamation by the amalgamating company to the amalgamated company, provided the amalgamated company is an Indian company (S 47 (vi)). Any transfer of shares in an Indian Company, held by a foreign company to another foreign company in pursuance of a scheme of amalgamation between the 2 foreign companies, provided at least 25% of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company and such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated (S 47 (via)). Any transfer of a capital asset in a scheme of demerger, by the demerger company to the resulting company, provided that the resulting company is an Indian company (S47 (vib)). Any transfer of shares, held in an Indian company, by a demerged foreign company to the resulting foreign company, provided the shareholders, who hold not less than 3/4ths in value of the shares of the demerged foreign company, continue to remain shareholders of the resulting foreign company and such transfer does not attract tax on capital gains in the country in which the demerged foreign company is incorporated (S 47 (vic)). Any transfer or issue of shares by the resulting company in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of the demerger of the undertaking (S47 (vid))). Any transfer by a shareholder, in a scheme of amalgamation of share(s) held by him in the amalgamating company, if the transfer is made in consideration of the allotment to him of any shares(s) in the amalgamated company and the amalgamated company is an Indian company (S 47 (vii)). The transfer of a capital asset by a non-resident of such foreign currency convertible bonds or Global Depository Receipts as are referred to sub-section (1) of Section 115AC, held by him to another non-resident where the transfer is made outside India (S 47 (viia)). Any transfer of agricultural land in India, effected before March 1, 1970 (S 47 (viii)). Any transfer of a capital asset, being any work of art, archeological, scientific or art collection, book, manuscript, drawing, painting, photograph or print, to the Government or a University or the National Museum, National Art Gallery, National Archives or any

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such other public museum or institution as may be notified by the Central Government (S 47(x)). Any transfer by way of exchange of a capital asset, being membership of a recognized stock exchange for shares of a company to which such membership is transferred, provided such exchange is effected on or before December 31, 1998 and such shares are reflected by the transferor for a period of not less than 3 years from the date of transfer (S 47 (xi)). Any transfer of a land under a scheme, prepared and sanctioned under section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 by a sick industrial company, which is being managed by its workers' co-operative, provided such transfer is made during the period commencing from the previous year, during which it has become a sick industrial company under S17 (1) of that Act and ending with the previous year, during which the entire net worth of such company becomes equal to or exceeds the accumulated losses (S 47 (xii)). Any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of corporatisation of a recognized stock exchange in India, as a result of which an association of persons or body of individuals is succeeded by such company, subject to the following conditions: All the assets and liabilities of the firm, relating to the business immediately before the succession, become the assets and liabilities of the company; All the partners of the firm, immediately before the succession, become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession; The partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and The aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession. (S 47 (xiii). S.47 (xiiia): Any transfer of a capital asset, being a membership right, held by a member of a recognized stock exchange in India for acquisition of shares and trading or clearing rights, acquired by such member in that recognized stock exchange in accordance with a scheme for demutualization or corporatisation, which is approved by the Securities and Exchange Board of India, established under section 3 of the Securities and Exchange Board of India Act, 1992. Where a sole proprietary concern is succeeded by a company in the business, carried on by it as a result of which the sole proprietary concern sells or, otherwise transfers any capital asset or intangible asset to the company, provided that the following conditions exist: a. All the assets and liabilities of the sole proprietary concern, relating to the business immediately before the succession, become the assets and liabilities of the company; b. The shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and

c. The sole proprietor does not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company. (S47 (xiv)). Any transfer in a scheme for lending of any securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities and which is subject to the guidelines issued by the Securities and Exchange Board of India, in this regard, which the assessee has entered into with the borrower of such securities. (S 47 (xv)).

In what circumstances are capital gains that arise from the transfer of house property exempt? Under S 54, capital gains, arising from transfer of house property, are exempt from tax provided the following conditions are satisfied 1. The house is a residential house whose income is taxable under the head "income form house property" and transferred by an individual or a Hindu Undivided Family. 2. The house property, which may be self-occupied or let out, is a long term capital asset (i.e. held for a period of more than 36 months before sale or transfer.) 3. The assessee has purchased a residential house within a period of 1 year before the transfer (or within 2 years after the date of transfer) or has constructed a residential house property within a period of 3 years after the date of transfer. In case of compulsory acquisition, the above time limit of 1-year, 2 years and 3-years is applicable from the date of receipt of compensation (whether original or additional). 4. The house property, so purchased or constructed, has not been transferred within a period of 3 years from the date of purchase or construction. The following points should also be kept in mind:a. Construction of the house should be completed within 3 years from the date of transfer. The date of construction is irrelevant. Construction may be commenced even before the transfer of the house. b. A case of allotment of a flat under the self-financing scheme of DDA (or similar schemes of co-operative societies and other institutions) is taken as construction of house for this purpose. What are the consequences if a new house is transferred within 3 years? If the new house is transferred within a period of 3 years from the date of its purchase or construction, the amount of capital gain that arise, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of the sale of the new house property. It is also provided that if the new house is transferred within 3years from the date of its acquisition or date of completion of construction, the amount of exemption under S 54 shall be reduced from the cost of acquisition of the new house, while calculating short-term capital gain on the transfer of the new asset.

What is the amount of exemption available on capital gains that arise from transfer of house property? If the amount of capital gain is less than the cost of the new house property, including cost of land, the entire amount of capital gains is exempt from tax. Alternatively, if the amount of capital gains is more than the cost of the new house property, the difference between the amount of capital gains and the cost of the new house is chargeable to tax as capital gains. What is the mode of computation? The computation of capital gains depends upon the nature of capital asset that is transferred, i.e., whether it is a short-term or a long-term capital asset. Capital gain, arising on transfer of a shortterm capital asset, is short-term capital gains whereas Capital gain, arising on transfer of a longterm capital asset, is long-term capital gains. As compared to long-term capital gain, the tax incidence is higher in the case of short-term capital gain. The method of computation of short-term and long-term capital gain, as applicable from the assessment year 1993-94 onwards, is as follows: Computation of Short-term capital gain Computation of Long-term capital gain 1. Find out the full value of consideration 1. Find out the full value of consideration 2. Deduct the following: a. Expenditure incurred wholly and exclusively in connection with such transfer. b. Cost of acquisition. c. Cost of improvement 3. From the resulting sum deduct the exemption provided by section 54B, 54D and 54G. 2. Deduct the following: a. Expenditure incurred wholly and exclusively in connection with such transfer b. Indexed Cost of acquisition c. Indexed Cost of improvement. 3. From the resulting sum deduct the exemption provided by section 54, 54B, 54D, 54EC, 54ED, 54F and 54G.

4. The balancing amount is the short-term 4. The balancing amount is the long-term capital gain. capital gain.

Full value of consideration: Whole price without any deduction whatsoever. Expenditure incurred wholly and exclusively in connection with such transfer: Expenditure incurred which is necessary to effect such transfer e.g. stamp duty, registration etc. Cost of acquisition of an asset: Value for which it was acquired. Expenses of capital nature for completing or acquiring the title to the property may be included in the cost of acquisition.

Cost of improvement: a. In relation to goodwill of a business or a right to manufacture, produce or process any article or thing, the cost of improvement is taken to be nil. b. In relation to any other capital asset1. Where the capital asset became the property of the assessee before April 1, 1981 the cost of improvement includes all expenditure of capital nature incurred in making any addition/alteration to the capital asset on or after April 1, 1981 by the owner. 2. In any other case, the cost of improvement refers to all expenditure of a capital nature that is incurred in making any additions or alterations to the capital asset by the assessee or the previous owner. What is the indexed cost of acquisition? S 48 defines "indexed cost of acquisition" as the amount, which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year, in which the asset is transferred, bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later. The Cost Inflation Index, in relation to a previous year, means such Index as the Central Government may, having regard to 75% of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette. What is the indexed cost of improvement? S 48 defines indexed cost of improvement as the amount, which bears to the cost of improvement the same proportion as Cost Inflation Index for the year, in which the asset is transferred, bears to the Cost Inflation Index for the year in which the improvement to the asset takes place. Cost Inflation Index, in relation to a previous year, means such Index as the Central Government may, having regard to 75% of average rise in the Consumer Price Index for urban non-manual employees for the immediately preceding previous year to such previous year, by notification in the Official Gazette, specify in this behalf. Is there any tax shelter for avoiding capital gains tax? The Income Tax Act grants total/partial exemption of capital gains under Ss- 54, 54B, 54D, 54EC, 54F, 54G and 54H. a. Under S 54 capital gains, arising from transfer of house property, are exempt from tax provided certain conditions are satisfied. (Refer to Q5)

b. Under S 54B capital gains, arising from transfer of land, being used by an individual or his parents for agricultural purposes for a period of 2 years, immediately preceding the date of transfer, are exempt from tax, provided the assessee has purchased another land for agricultural purpose within a period of 2 years from the date of such transfer. In the case of compulsory acquisition, a period of 2 years from the date of receipt of compensation (whether original or additional) is applicable. c. Under S 54D, capital gains, arising on compulsory acquisition of any land or building forming part of an industrial undertaking, is exempt from tax, provided such land or building was used by the assessee for the purpose of the industrial undertaking for at least 2 years preceding the date of compulsory acquisition and, the assessee has, within a period of 3 years after that date, purchased any other land or building or right in any other land/ building or constructed any other building for the purpose of shifting or reestablishing the said undertaking or setting up another industrial undertaking. d. Under S 54E, where the capital gain arises from the transfer of a long-term capital asset before the 1st day of April, 1992, and the assessee has, within a period of six months after the date of such transfer, invested or deposited the whole or any part of the net consideration in any specified asset. e. Under S 54EA, where the capital gain arises from the transfer of a long-term capital asset before the 1st day of April, 2000 and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of the net consideration in any of the bonds, debentures, shares of a public company or units of any mutual fund referred to in clause (23D) of section 10, specified by the Board in this behalf by notification in the Official Gazette. f. Under S 54EB, where the capital gain arises from the transfer of a long-term capital asset before the 1st day of April, 2000, and the assessee has, at any time within a period of six months after the date of such transfer invested the whole or any part of capital gains, in any of the assets, specified by the Board in this behalf by notification in the Official Gazette. (l) Under S 54 F where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house, and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house. g. S 54 G provides exemption on transfer of assets in the case of shifting of industrial undertaking from an urban area, provided the capital asset (being plant, machinery, land or building or any right in land or building), used for the purpose of the industrial undertaking situated in an urban area, is transferred in the course of or, in consequence of the shifting of such industrial undertaking to any area other than an urban area, and the assessee has, within a period of 1 year ,before or 3 years after the date on which the transfer took place, purchased a new machinery or plant for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted or, has acquired building or land or constructed a building for the purposes of his business in the said area or shifted the original asset and transferred the establishment of such undertaking to such area; and incurred expenses on such other purpose as may be specified in a scheme, framed by the Central Government for the purposes of this section. h. S 54H, provides that where the transfer of the original asset is by way of compulsory acquisition under any law and the amount of compensation, awarded for such acquisition,

is not received by the assessee on the date of such transfer, the period of acquiring the new asset under S 54, 54B, 54D, 54EC and 54F by the assessee or the period for depositing or investing the amount of capital gain shall be extended in relation to such amount of compensation as is not received on the date of transfer. The extended period shall be reckoned from the date of receipt of the amount of compensation. Moreover, when the compensation in respect of transfer of the original asset by way of compulsory acquisition under any law is received before April 1, 1991, the period(s) aforesaid, if expired, shall extend up to December 31, 1991. If the asset has been inherited by the assessee or gifted to the assessee does that mean that the asset was acquired at no cost? S 49(1) states where the asset has been inherited by the assessee or gifted to the assessee, the cost of acquisition of the asset for which the previous owner acquired it, shall be deemed to be the cost of acquisition of the asset as increased by the cost of improvement of the assets if any, incurred or borne by the previous owner or the assessee as the case may be. (2) Where the capital asset is a share(s) in an amalgamated company, which is an Indian company, became the property of the assessee in consideration of a transfer in a scheme of amalgamation, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the shares(s) in the amalgamating company. (2A) Where the capital asset, being a share or debenture in a company became the property of the assessee in consideration of a transfer by way of conversion of bonds or debentures, debenture-stock or deposit certificates in any form, the cost of acquisition of the asset to the assessee shall be deemed to be that part of the cost of debenture, debenture- stock or deposit certificates in relation to which such asset is acquired by the assessee. (2AA) Where the capital gain arises from the transfer of the shares, debentures or warrants, the value of which has been taken into account while computing the value of perquisite under clause (2) of section 17, the cost of acquisition of such shares, debentures or warrants shall be the value under that clause. (2C) The cost of acquisition of the shares in the resulting company shall be the amount which bears to the cost of acquisition of shares, held by the assessee in the demerged company, in the same proportion as the net book value of the assets transferred in a demerger bears to the net worth of the demerged company immediately before such demerger. (2D) The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under sub-section (2C). What is the rule regarding period of holding if the assessee has inherited the property only six months ago? Can this be considered to be a short-term capital asset? Under the definition of short-term capital asset, given in section 2(42A), it is specifically

provided in sub-clause (b) that in the case of an acquisition by the modes provided in Section 49, there shall be included the period for which the previous owner held the asset. Thus, if the present holder inherited it only 6 months ago, but the previous holder had held it for three years, it will be deemed that the present holder has held it for three and a half years.

Income Tax - Tax upon Income from other sources

What income would fall under the head "income from other sources"? Income of every kind, which is not chargeable to income tax under the heads 1) salary 2) income from house property, 3) profits and gains of business and profession, and capital gains can be taxed under the head "income from other sources". However such income should also not fall under income not forming part of total income under the IT Act. The following income shall be chargeable to income tax under the head "Income from other sources", namely: 1. Dividend; 2. Any annuity due or commuted value of any annuity paid under section 280D. 3. Any winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever. 4. Any sum, received by the assessee from his employees as contributions to any provident fund or Superannuation fund or any fund set up under the provisions of the Employees State Insurance Act, 1948 (34 of 1948), or any officer fund for the welfare of such employees, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession"; 5. Income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income -- tax under the head "Profits and gains of business or profession"; 6. Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income tax under the head "Profits and gains of business or profession." 7. Any sum received under a Keyman insurance policy, including the sum allocated by way of bonus on such policy, if such income is not chargeable to income tax under the heads "Profits and gains of business and profession" or under the head "Salaries". (Keyman insurance policy means a life insurance policy taken by a person on the life of another person who is/ was the

employee of the 1st mentioned person or who is/was connected in any manner whatsoever with the business of the 1st mentioned person.) So, basically "income from other sources" is the residuary head of income, which takes within its ambit any income, which does not specifically fall under any other head of income. If certain Income is not chargeable to tax under the specific head, can it be taxed under the head "Income from other sources"? If a receipt falls under one of the specific heads of income, then such receipt can be taxed only in accordance with the provisions relating to that head. Income of every kind, which is not chargeable to income tax under the heads 1) salary 2) income from house property, 3) profits and gains of business and profession, and capital gains can be taxed under the head "income from other sources". However, this is subject to the condition that such income does not fall under income, not forming part of total income under the IT Act and provided that it is not exempted from taxation under any provision of the I-T Act. Is the dividend income of all assessees liable to tax? There are certain assessees who are exempted in respect of the taxability of dividend income and therefore, dividend income in the hands of these particular assessees, to the extent as specified in the section, is not taxable even though the same falls under the head "Income from other sources". The dividend income, earned by the following entities or institutions, is exempt from tax, namely: 1. Local Authorities. 2. An approved scientific research association. 3. A venture capital fund or venture capital company from investments made by way of equity shares in a venture capital undertaking. 4. Notified news agency. 5. Pension fund set up by LIC or any other insurer approved by the Controller of Insurance or Insurance Regulatory and Development Authority 6. Fund established for the welfare of employees. 7. Trust or society approved by Khadi and Village Industries Commission. 8. An authority whether known as Khadi and Village Industries Board or any other name for the development of Khadi and Village Industries. 9. Any body or authority established, constituted or appointed under any enactment for the administration or public, religious, or charitable trusts or endowments or societies for religious or

charitable purposes. 10. SAARC Fund for Regional Projects. 11. Secretariat of Asian Organization of Supreme Audit Institutions. 12. Insurance Regulatory and Development Authority. 13. Any person, receiving income on behalf of specified national funds, approved public charitable institutions, educational institutes, and hospital. 14. Mutual funds registered under SEBI Act or set up by a public sector bank or a public financial institution or authorized by the Reserve Bank of India. However, w.e.f. 1.4.20003, income from units of the UTI and mutual funds will also be taxed. 15. Investor Protector Fund. Synonym 16. Credit Guarantee Fund Trust thesaurus 17. Infrastructure capital fund. 18. Statutory provident funds, Recognized provident funds, Approved Superannuation funds, approved gratuity funds, and approved coal mines provident funds. 19. Registered Trade Unions or association of Registered Trade Unions. 20. Employees State Insurance Fund. 21. Members of a Scheduled Tribe, residing in Manipur, Nagaland, Tripura, Arunachal Pradesh, Mizoram and Ladakh. 22. Statutory Corporation or a body/ institution financed by the Govt., formed for promoting the interest of Scheduled castes/tribes, minority community. 23. Co-operative societies formed for promoting the interest of Scheduled castes/tribes. 24. Marketing authority, engaged in letting godowns and warehouses. 25. Certain Commodity Boards/ Authorities. 26. Political parties. Would the interest income be assessed as 'business income' or as 'income from other sources'? Interest Income is either assessed as 'Business Income' or as 'Income from other sources'

depending upon the activities carried on by the assessee. If the investment yielding interest is part of the business of the assessee, the same would be assessable as 'business income' but where the earning of the interest income is incidental to and not the direct outcome of the business carried on by the assessee, the same is assessable as 'Income from other sources'. Business implies some real, substantial and systematic or organized course of activity with a profit motive. Interest, generated from such an activity, is business Income; else it would be interest from other sources. What are the deductions allowed under the head 'Income from other sources'? The income, chargeable under the head 'income from other sources,' shall be computed after making the following deductions:
y

y y

In the case of interest on securities, any reasonable sum, paid by way of commission or remuneration to a banker or to any other person for the purpose of realizing such dividend or interest on behalf of the assessee; In the case of income, received by the assessee from his employees as contributions to any provident fund or Superannuation fund or any fund set up under the provisions of the Employees'' State Insurance Act, 1948, or any other fund for the welfare of such employees, which is chargeable to income tax under the head "Income from other sources" deductions so far, as may be in accordance with provisions of S 36(1) (va). In the case of income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income -- tax under the head "Profits and gains of business or profession or where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income tax under the head "Profits and gains of business or profession", deductions, so far as may, be in accordance with the provisions of clause (a), clause (3)of Section 30, Section 31, and subsections (1) and (2) of Section 32 and subject to the provisions of S 38. In the case of income in the nature of family pension, a deduction of a sum equal to thirty three and one third per cent of such income or fifteen thousand rupees, whichever is less. Any other expenditure (not being capital expenditure) laid out or used wholly and exclusively for the purpose of making or earning such income.

Tax upon Clubbing of Income The total income of an individual also includes certain income of other persons. These are:a. income of spouse from, o remuneration derived from the concern in which the individual is substantially interested unless the remuneration is by virtue of the application of technical or professional skill possessed by him or her; o assets transferred by the individual to the spouse or to any other person for the benefit of the spouse unless the transfer is for adequate consideration or in consideration of an agreement to live apart.

b. income of son's wife from assets transferred by the individual to her or to any other person for her benefit unless the transfer is for adequate consideration. c. income of his minor child - other than the minor child suffering from disability specified in section 80-U, referred to in para 5.3.9 except when such income arises to the child on account of any manual work done by him or on account of any activity which involves application of any skill, talent or specialised knowledge and experience. The individual in whose income the income of other spouse as mentioned in (a) (i) above is to be included will be the husband or wife whose total income - before including such remuneration income - is greater. Similarly the income of minor child is to be included in the income of the parent having greater income. If the marriage of the parents does not subsist, it will be parent who maintains the child.

Taxation - Tax Treaties: Witholding Tax Rates

The Central Government, acting under Section 90 of the Income Tax Act, has been authorised to enter into Double Tax Avoidance Agreements (tax treaties) with other countries. The object of such agreements is to evolve an equitable basis for the allocation of the right to tax different types of income between the 'source' and 'residence' states ensuring in that process tax neutrality in transactions between residents and non-residents. A non-resident, under the scheme of income taxation, becomes liable to tax in India in respect of income arising here by virtue of its being the country of source and then again, in his own country in respect of the same income by virtue of the inclusion of such income in the 'total world income' which is the tax base in the country of residence. Tax incidence, therefore, becomes an important factor influencing the non-residents in deciding about the location of their investment, services, technology etc. Tax treaties serve the purpose of providing protection to tax payers against double taxation and thus preventing the discouragement which taxation may provide in the free flow of international trade, international investment and international transfer of technology. These treaties also aim at preventing discrimination between the tax payers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework. In addition, such treaties contain provisions for mutual exchange of information and for reducing litigation by providing for mutual assistance procedure. Treaties signed with countries for avoidation of double taxation S.No. Name of the Country Effective from Assessment Year 1 2 Australia Austria 1993-94 1963-64

3 4 5 6 7 8 9 10 11 12 13 14 15

Bangladesh Belgium Brazil Belarus Bulgaria Canada China Cyprus Czechoslovakia Denmark Finland France F.R.G F.R.G. D.G.R. F.R.G.

1993-94 1989-90; 1999-2000 (Revised) 1994-95 1999-2000 1997-98 1987-88; 1999-2000 (Revised) 1996-97 1994-95 1986-87; 2001-2002 (Revised) 1991-92 1985-86; 2000-2001 Amending protocol 1996-97 1958-59 1984-85 1985-86 1998-99 1964-65 1989-90 1989-90 1995-96 1997-98 1991-92 2001-2002 1999-2000 1985-86 1983-84 1997-98 1973-74 1983-84 1995-96 2000-2001 1990-91 1990-91 (Revised) (Revised) (Revised) (Revised) (Original) (Protocol)

16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32

Greece Hungary Indonesia Israel Italy Japan Jordan Kazakistan Kenya Libya Malta Malaysia Muritius Mongolia Namibia Nepal Netherlands

33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

New Zealand Norway Oman Philippines Poland Qatar Romania Singapore South Africa South Korea Spain Sri Lanka Sweden Switzerland Syria Tanzania Thailand Trinidad & Tobago Turkmenistan Turkey U.A.E. U.A.R. U.K. U.S.A. Russian Federation Uzbekistan Vietnam Zambia

1988-89 1988-89 1999-2000 1996-97 1991-92 2001-2002 1989-90 1995-96 1999-2000 1985-86 1997-98 1981-82 1990-91; 1999-2000 (Revised) 1996-97 1983-84 1983-84 1988-89 2001-2002 1999-2000 1995-96 1995-96 1970-71 1995-96 1992-93 2000-2001 1994-95 1997-98 1979-80 (Revised)

(1999-2000 amending notification) (2001-2002 Supp. Protocal)

These Agreements follow a near uniform pattern in as much as India has guided itself by the UN model of double tax avoidance agreements. The agreements allocate jurisdiction between the source and residence country. Wherever such jurisdiction is given to both the countries, the agreements prescribe maximum rate of taxation in the source country which is generally lower

than the rate of tax under the domestic laws of that country. The double taxation in such cases are avoided by the residence country agreeing to give credit for tax paid in the source country thereby reducing tax payable in the residence country by the amount of tax paid in the source country. These agreements give the right of taxation in respect of the income of the nature of interest, dividend, royalty and fees for technical services to the country of residence. However, the source country is also given the right but such taxation in the source country has to be limited to the rates prescribed in the agreement. The rate of taxation is on gross receipts without deduction of expenses. Mode of taxation in different types of income Capital Gains: So far as income from capital gains is concerned, gains arising from transfer of immovable properties are taxed in the country where such properties are situated. Gains arising from the transfer of movable properties forming part of the business property of a 'permanent establishment 'or the 'fixed base' is taxed in the country where such permanent establishment or the fixed base is located. Different provisions exist for taxation of capital gains arising from transfer of shares. In a number of agreements the right to tax is given to the State of which the company is resident. In some others, the country of residence of the shareholder has this right and in some others the country of residence of the transferor has the right if the share holding of the transferor is of a prescribed percentage. So far as the business income is concerned, the source country gets the right only if there is a 'permanent establishment' or a 'fixed place of business' there. Taxation of business income is on net income from business at the rate prescribed in the Finance Acts. Chapter X may be referred to for a discussion on the subject. Professional Services: Income derived by rendering of professional services or other activities of independent character are taxable in the country of residence except when the person deriving income from such services has a fixed base in the other country from where such services are performed. Such income is also taxable in the source country if his stay exceeds 183 days in that financial year. Personal Services: Income from dependent personal services i.e. from employment is taxed in the country of residence unless the employment is exercised in the other state. Even if the employment is exercised in any other state, the remuneration will be taxed in the country of residence if i. the recipient is present in the source State for a period not exceeding 183 days; and ii. the remuneration is paid by a person who is not a resident of that state; and

iii. the remuneration is not borne by a permanent establishment or a fixed base. Others: The agreements also provides for jurisdiction to tax Director's fees, remuneration of persons in Government service, payments received by students and apprentices, income of entertainers and athletes, pensions and social security payments and other incomes. For taxation of income of artists, entertainers sportsman etc, CBDT circular No. 787 dates 10.2.2000 may be referred to. Unique clauses of agreement Agreements also contain clauses for non-discrimination of the national of a contracting State in the other State vis-a-vis the nationals of that other State. The fact that higher rates of tax are prescribed for foreign companies in India does not amount to discrimination against the permanent establishment of the nonresident company. This has been made explicit in certain agreements such as one with U.K. Provisions also exist for mutual agreement procedure which authorises the competent authorities of the two States to resolve any dispute that may arise in the matter of taxation without going through the normal process of appeals etc. provided under the domestic law. Another important feature of some agreements is the existence of a clause providing for exchange of information between the two contracting States which may be necessary for carrying out the provisions of the agreement or for effective implementations of domestic laws concerning taxes covered by the tax treaty. Information about residents getting payments in other contracting States necessary to be known for proper assessment of total income of such individual is thus facilitated by such agreements. Favourable Domestic Law It may sometimes happen that owing to reduction in tax rates under the domestic law taking place after coming into existence of the treaty, the domestic rates become more favourable to the non-residents. Since the objects of the tax treaties is to benefit the non-residents, they have, under such circumstances, the option to be assessed either as per the provisions of the treaty or the domestic law of the land. Tax Deducted at Source In order to avoid any demand or refund consequent to assessment and to facilitate the process of assessment, it has been provided that tax shall be deducted at source out of payments to nonresidents at the same rate at which the particular income is made taxable under the tax treaties. As a result of amendment made by the Finance Act, 1997 exempting from tax income from dividend declared after 1.6.1997, no deduction is required to be made in respect of such income. Countries with which no agreement exists

(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. (2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by himy y

of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or of a sum calculated on that income at the Indian rate of tax; whichever is less.

(3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. Explanation.-In this section,y y

the expression "Indian income-tax" means income-tax charged in accordance with the provisions of this Act; the expression "Indian rate of tax" means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter , by the total income; the expression "rate of tax of the said country" means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country; the expression "income-tax" in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.

Central Excise Duty - Introduction

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force. For the purpose of exercising proper surveillance over imports and exports, the Central Government has the power to notify the ports and airports for the unloading of the imported goods and loading of the exported goods, the places for clearance of goods imported or to be exported, the routes by which above goods may pass by land or inland water into or out of Indian and the ports which alone shall be coastal ports In order to give a broad guide as to classification of goods for the purpose of duty liability, the central Board of Excises Customs (CBEC) bring out periodically a book called the "Indian Customs Tariff Guide" which contains various tariff rulings issued by the CBEC. The Act also contains detailed provisions for warehousing of the imported goods and manufacture of goods is also possible in the warehouses. For a person who do not actually import or export goods customs has relevance in so far as they bring any baggage from abroad. Importance of Central Excise Duty Central excise revenue is the biggest single source of revenue for the Government of India. The Union Government tries to achieve different socio-economic objectives by making suitable adjustments in the scope and quantum of levy of Central Excise duty. The scheme of Central Excise levy is suitably adapted and modified to serve different purposes of price control, sufficient supply of essential commodities, industrial growth, promotion of small scale industries and like Authority for collecting the Central Excise duty. Article 265 of the Constitution of India has laid down that both levy and collection of taxes shall be under the authority of law. The excise duty is levied in pursuance of Entry 45 of the Central List in Government of India Act,1935 as adopted by entry 84 of List I of the seventh Schedule of the Constitution of India. Charging section is Section 3 of the Central Excises and Salt Act,1944. Liability to pay Central Excise Duty Section 3 of the Central excises and Salt Act,1944 provides that there shall be levied and collected in such manner as may be prescribed, duties of excise on all excisable goods other than salt which are produced or manufactured in India at the rates set forth in the schedule to the Central excise Tariff Act,1985.it is therefore clear that as soon as the goods in question are produced or manufactured, they will be liable to

payment of Excise duty. However for convenience duty is collected at the time of removal of the goods. While Section 3 of the Central Excises and salt Act,1944 lays down the taxable event, Rules 9 and 49 of the Central excise Rules,1944 provides for the collection of duty.
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Excise duty rate on items currently attracting 4% to be raised to 8% with following major exceptions: o Specified food items including biscuits, sharbats, cakes and pastries o Drugs and pharmaceutical products falling under Chapter 30 o Medical equipment o Certain varieties of paper, paperboard and articles thereof o Paraxylene o Power driven pumps for handling water o Footwear of RSP exceeding Rs.250 but not exceeding Rs.750 per pair o Pressure cookers o Vacuum and gas filled bulbs of RSP not exceeding Rs.20 per bulb o Compact Fluorescent Lamps o Cars for physically handicapped Specific component of excise duty applicable to large cars/utility vehicles of engine capacity 2000 cc and above to be reduced from Rs. 20,000/- per vehicle to Rs.15,000 per vehicle. Excise duty on petrol driven trucks/lorries to be reduced from 20% to 8%. Excise duty on chassis of such trucks/lorries to be reduced from 20% + Rs.10000 to 8% + Rs.10000. Excise duty on Special Boiling Point spirits to be reduced to 14%. Excise duty on naphtha to be reduced to 14%. Duty paid High Speed Diesel blended with upto 20% bio-diesel to be fully exempted from excise duties. The ad valorem component of excise duty of 6% on petrol intended for sale with a brand name to be converted into a specific rate. Consequently, such petrol would now attract total excise duty of Rs.14.50 per litre instead of 6% + Rs.13 per litre. The ad valorem component of excise duty of 6% on diesel intended for sale with a brand name to be converted into a specific rate. Consequently, such diesel would now attract total excise duty of Rs.4.75 per litre instead of 6% + Rs.3.25 per litre. Excise duty on manmade fibre and yarn to be increased from 4% to 8%. Excise duty on PTA and DMT to be increased from 4% to 8%. Excise duty on polyester chips to be increased from 4% to 8%. Excise duty on acrylonitrile to be increased from 4% to 8%. The scheme of optional excise duty of 4% for pure cotton to be restored. Excise duty for man-made and natural fibres other than pure cotton, beyond the fibre and yarn stage, to be increased from 4% to 8% under the existing optional scheme.

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An optional excise duty exemption to be provided to tops of manmade fibre manufactured from duty paid tow at par with tops manufactured from duty paid staple fibre. Suitable adjustments to be made in the rates of duty applicable to DTA clearances of textile goods made by Export Oriented Units using indigenous raw materials/ inputs for manufacture of such goods. Full exemption from excise duty to be provided on goods of Chapter 68 of Central Excise Tariff manufactured at the site of construction for use in construction work at such site. Excise duty exemption on recorded smart cards and recorded proximity cards and tags to be made optional. Manufacturers have the option to pay the applicable excise duty and avail the credit of duty paid on inputs. EVA compound manufactured on job work for further use in manufacture of footwear to be exempted from excise duty. Benefit of SSI exemption scheme to be extended to printed laminated rolls bearing the brand name of others by excluding this item from the purview of the brand name restriction. On packaged or canned software, excise duty exemption to be provided on the portion of the value which represents the consideration for transfer of the right to use such software, subject to specified conditions. Excise duty on branded articles of jewellery to be reduced from 2% to Nil.

Sales Tax
Sales Tax is a tax, levied on the sale or purchase of goods. There are two kinds of Sales Tax i.e. Central Sales Tax, imposed by the Centre and Sales Tax, imposed by each state.

When is Sales Tax payable? Central Sales tax is generally payable on the sale of all goods by a dealer in the course of interstate Trade or commerce or, outside a State or, in the course of import into or, export from India. What is interstate sale? According to S3, a sale or purchase shall be deemed to take place in the course of interstate trade or commerce in the following cases:
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when the sale or purchase occasions the movement of goods from one State to another; when the sale is effected by a transfer of documents of title to the goods during their movement from one State to another.

Where the goods are delivered to a carrier or other bailee for transmission, the movement of the goods for the purpose of clause (b) above, is deemed to start at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee. Also, when the movement of goods starts and terminates in the same State, it shall not be deemed to be a

movement of goods from one State to another. To make a sale as one in the course of interstate trade, there must be an obligation to transport the goods outside the state. The obligation may be of the seller or the buyer. It may arise by reason of statute or contract between the parties or from mutual understanding or agreement between them or, even from the nature of the transaction, which linked the sale to such transaction. There must be a contract between the seller and the buyer. According to the terms of the contract, the goods must be moved from one state to another. If there is no contract, then there is no inter-state sale. There can be an interstate sale even if the buyer and the seller belong to the same state; even if the goods move from one state to another as a result of a contract of sale; or, the goods are sold while they are in transit by transfer of documents. To whom is Sales Tax payable? By whom is it payable? Sales tax is payable to the sales tax authority in the state from which the movement of goods commences. It is to be paid by every dealer on the sale of any goods effected by him in the course of inter-state trade or commerce, notwithstanding that no liability to tax on the sale of goods arises under the tax laws of the appropriate state. What are the possible offences, which may be committed, that are liable to be penalized? What are the penalties for such offences? The offences that may be committed and, the penalties, prescribed for can be summarised as under. Offences, under section10, are punishable with simple imprisonment (up to 6months) with or without fine. 1. Giving false declaration in Form C, E-I, E-II, F or H, which he knows or has reason to believe it to be false. 2. Not getting registered under the CST Act, when required to be registered or not complying with provisions relating to security. 3. False representation by a registered dealer that the goods, purchased are covered under his certificate of registration for a concessional rate. 4. Falsely representing that he is a registered dealer, though he is not. 5. Misusing or using for different purpose, the goods, obtained under C form at a concessional rate. 6. Having possession of form C, which is not obtained as per provisions of the CST Act. 7. Collecting any amount, representing as sales tax, by an unregistered dealer or by a registered dealer in contravention of the provisions of the CST Act.

What is the liability of a Company in liquidation, with respect to payment of Central Sales Tax? What is the liability of the directors of a private company? If a liquidator or receiver is appointed in the case of a company, he should inform the Sales Tax

authorities within 30 days of his appointment. The Sales Tax Authority shall intimate him the amount of tax due from the company in liquidation within 3 months. The Sales Tax authorities are "preferential creditors' in a case of liquidation. The Liquidator shall not dispose of assets of the company before setting aside the amount of dues as intimated by sales tax department. The liquidator may, however, part with such assets or properties in compliance with any order of a court or for the purpose of payment of the tax, payable by the company under the CST Act or, for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to the government, on the date of liquidation or, for meeting such costs and expenses of the winding up of the company, as are in the opinion of the appropriate authority, reasonable. What is the liability of the directors of a private company with respect to payment of Central Sales Tax? If a private limited company is in liquidation and, any tax, assessed on the company, cannot be recovered, it becomes the personal liability of the directors, jointly and severally. Directors can however avoid this liability; if they prove that the non-payment of tax was not on account of neglect, misfeasance or breach of duty on the part of the directors, in relation to affairs of the company. The power to levy Sales tax 1. No state can levy sales tax on any sale or purchase where such sale or purchase takes place o outside the state and o in the course of import of goods into or export of goods outside India. 2. Only the parliament can levy tax on inter-state sale or purchase of goods

Main Principles in State Sales Tax Laws 1. A sale or purchase of goods is said to take place when the transfer of property in the existing goods or future goods takes place for consideration of money. 2. The goods have been divided into different categories and different rates of sales tax are charged for different categories of goods. 3. In most of the cases related to the sales tax, the tax on the sale or purchase of goods is at single point. 4. Under the provisions of some state laws the assesses are divided into several categories such as manufacturer, dealer, selling agent etc. and such as assess is required to obtain a registration certificate to that effect. The sales tax or the purchase tax is levied on that assessee on the basis of his category such as dealer, manufacturer etc. on production of certain forms or certificates (and differential rates of sales tax are levied). 5. Generally , a quarter return of sales or purchases is insisted upon and the assessee is required to furnish the return in the prescribed form.

6. At the time of assessment, the assessee has to furnish all the documentary evidence and satisfy the concerned sales tax / commercial tax officer. 7. The sales tax laws of the states prescribe the procedure to be followed in case an assessee prefers to make an appeal. 8. Every dealer should apply for registration and obtain a registration certificate to that effect. The registration certificate number should be quoted in all the bill / cash memos.

Transactions not amounting to inter-state sales Not all despatches of goods from one state to another result in inter state sales rather the movement must be on account of a covenant or incident of the contract of sales. There are some instances wherein the goods are moved out of the selling state and yet they are not considered inter state sales :y y y y y

Intra-state sales Stock transfer from head office to branch & vice versa Import and Export sales or purchases Sale through commission agent / on account sales Delivery of Goods for executing works contract

Sales Tax ID number A state sales tax ID number is basically a business version of your Social Security number under which you collect and pay tax for any service or product you sell that qualifies for taxation in your state. The state department of taxation provides sales tax ID numbers and it takes about a month to get one. The rule of thumb for sales tax is that most services are exempt and most products are taxable except for food and drugs. However, states have been gradually adding to the list of services that are taxable for the last few years. Check with your state department of taxation to determine if the product or service you sell is taxable in your state. Exception in the sales taxes
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Sales to resellers such as wholesalers and retailers that have a valid state resale certificate. Sales to tax-exempt institutions such as schools or charities

Which forms are to be filled?

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Form C; Form D; Form G;

Forms E-I & E-II.

Taxation - Customs Duty

As per AY 2009-10
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Customs duty of 5% to be imposed on Set Top Box for television broadcasting. Customs duty on LCD Panels for manufacture of LCD televisions to be reduced from 10% to 5%. Full exemption from 4% special CVD on parts for manufacture of mobile phones and accessories to be reintroduced for one year. List of specified raw materials/inputs imported by manufacturer-exporters of sports goods which are exempt from customs duty, subject to specified conditions, to be expanded by including five additional items. List of specified raw materials and equipment imported by manufacturer-exporters of leather goods, textile products and footwear industry which are fully exempt from customs duty, subject to specified conditions, to be expanded. Customs duty on unworked corals to be reduced from 5% to Nil. Customs duty on 10 specified life saving drugs/vaccine and their bulk drugs to be reduced from 10% to 5% with Nil CVD (by way of excise duty exemption). Customs duty on specified heart devices, namely artificial heart and PDA/ASD occlusion device, to be reduced from 7.5% to 5% with Nil CVD (by way of excise duty exemption). Customs duty on permanent magnets for PM synchronous generator above 500 KW used in wind operated electricity generators to be reduced from 7.5% to 5%. Customs duty on bio-diesel to be reduced from 7.5% to 2.5%. Concessional customs duty of 5% on specified machinery for tea, coffee and rubber plantations to be reintroduced for one year, upto 06.07.2010. Customs duty on mechanical harvester for coffee plantation to be reduced from 7.5% to 5%. CVD on such harvesters has also been reduced from 8% to nil, by way of excise duty exemption. Customs duty on serially numbered gold bars (other than tola bars) and gold coins to be increased from Rs.100 per 10 gram to Rs.200 per 10 gram. Customs duty on other forms of gold to be increased from Rs.250 per 10 gram to Rs.500 per 10 gram. Customs duty on silver to be increased from Rs.500 per Kg. to Rs.1000 per Kg. These increases also to be applicable when gold and silver (including ornaments) are imported as personal baggage. Customs duty on cotton waste to be reduced from 15% to 10%. Customs duty on wool waste to be reduced from 15% to 10%. Customs duty on rock phosphate to be reduced from 5% to 2%. CVD exemption on Aerial Passenger Ropeway Projects to be withdrawn. Such projects will now attract applicable CVD. Customs duty exemption on concrete batching plants of capacity 50 cum per hour or more to be withdrawn. Such plants will now attract customs duty of 7.5%.

On packaged or canned software, CVD exemption to be provided on the portion of the value which represents the consideration for transfer of the right to use such software, subject to specified conditions. Customs duty on inflatable rafts, snow-skis, water skis, surf-boats, sail-boards and other water sports equipment to be fully exempted.

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force. For the purpose of exercising proper surveillance over imports and exports, the Central Government has the power to notify the ports and airports for the unloading of the imported goods and loading of the exported goods, the places for clearance of goods imported or to be exported, the routes by which above goods may pass by land or inland water into or out of Indian and the ports which alone shall be coastal ports. In order to give a broad guide as to classification of goods for the purpose of duty liability, the central Board of Excises Customs (CBEC) bring out periodically a book called the "Indian Customs Tariff Guide" which contains various tariff rulings issued by the CBEC. The Act also contains detailed provisions for warehousing of the imported goods and manufacture of goods is also possible in the warehouses. For a person who do not actually import or export goods customs has relevance in so far as they bring any baggage from abroad. Types of duties Under the custom laws, the following are the various types of duties which are leviable. Basic Duty: This is the basic duty levied under the Customs Act. The rate varies for different items from 5% to 40%. Additional Duty (Countervailing Duty) (CVD): This additional duty is levied under section 3 (1) of the Custom Tariff Act and is equal to excise duty levied on a like product manufactured or produced in India. If a like product is not manufactured or produced in India, the excise duty that would be leviable on that product had it been manufactured or produced in India is the duty payable. If the product is leviable at different rates, the highest rate among those rates is the rate applicable. Such duty is leviable on the value of goods plus basic custom duty payable. eg. If the customs value of goods is Rs. 5000 and rate of basic customs duty is 10% and excise duty on similar goods produced in India is 20%, CVD

will be Rs.1100/-. Additional Duty to compensate duty on inputs used by Indian manufacturers. This Additional Duty is levied under section 3(3) of the Customs Act. It can be charged on all goods by the central government to counter balance excise duty leviable to raw materials, components and other inputs similar to those used in the production of such good. Anti-dumping Duty: Sometimes, foreign sellers abroad may export into India goods at prices below the amounts charged by them in their domestic markets in order to capture Indian markets to the detriment of Indian industry. This is known as dumping. In order to prevent dumping, the Central Government may levy additional duty equal to the margin of dumping on such articles, if the goods have been sold at less than normal value. Pending determination of margin of dumping, such duty may be provisionally imposed. After the exact rate of dump ing duty is finally determined, the Central government may vary the provisional rate of dumping duty. Dumping duty can be imposed even when goods are imported indirectly or after changing the condition of goods. There are however certain restrictions on imposing dumping duties in case of countries which are signatories to the GATT or on countries given "Most Favoured Nation Status" under agreement. Dumping duty can be levied on imports on such countries only if the Central Government proves that import of such goods in India at such low prices causes material injury to Indian industry. Protective Duty: If the Tariff Commission set up by law recommends that in order to protect the interests of Indian industry, the Central Government may levy protective anti-dumping duties at the rate recommended on specified goods. The notification for levy of such duties must be introduced in the Parliament in the next session by way of a bill or in the same session if Parliament is in session. If the bill is not passed within six months of introduction in Parliament, the notification ceases to have force but the action already undertaken under the notification remains valid. Such duty will be payable upto the date specified in the notification. Protective duty may be cancelled or varied by notification. Such notification must also be placed before Parliament for approval as above. Duty on Bounty Fed Articles: In case a foreign country subsidises its exporters for exporting goods to India, the Central Government may import additional import duty equal to the amount of such subsidy or bounty. If the amount of subsidy or bounty cannot be clearly deter mined immediately, additional duty may be collected on a provisional basis and after final determination, difference may be collected or refunded, as the case may be. Export Duty: Such duty is levied on export of goods. At present very few articles such as skins and leather are subject to export duty. The main purpose of this duty is to restrict exports of certain goods. The Central Government has been granted emergency powers to increase import or export duties if the need so arises. Such increase in duty must be by way of notification which is to be placed in

the Parliament within the session and if it is not in session, it should be placed within seven days when the next session starts. Notification should be approved within 15 days.

Tax Authorities & Power

Income-Tax Authorities : There shall be the following classes of income-tax authorities for the purposes of the Act 116, namely:(a) (b) (c) (cc) (cca) (d) (e) (f) (g) (h) the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963), Directors-General of Income-tax or Chief Commissioners of Income-tax, Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals), Additional Directors of Income-tax or Additional Commissioners of Incometax or Additional Commissioners of Income-tax (Appeals), Joint Directors of Income-tax or Joint Commissioners of Income-tax. Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals), Assistant Directors of Income-tax or Assistant Commissioners of Income-tax, Income-tax Officers, Tax Recovery Officers, Inspectors of Income-tax.

Powers of the authorities : For all purposes of the Income-tax Act, the IT authorities are vested with the various powers which are vested in a Court of Law under the Code of Civil Procedure while trying a suit in respect of any case. More particularly, the provisions of the Code of Civil procedure and the powers granted to the tax authorities under the code would be in respect of :
1. 2. 3. 4. 5. Discovery and inspection enforcing the attendance, including any officer of a bank and examining him on oath compelling the production of books of account and the documents collection certain information [section 133B-inserted by the finance act, 1986] Issuing commissions and summons

It shall be duty of every person who has been allotted permanent account number to quote such number in all his returns or correspondence with income tax authorities, in all challans for the payment of any sum, in all documents prescribed by the board in the interest of revenue.

Tax Rebates Introduction & General Tax Incentives

In each section of Personal Tax (income tax), Indirect taxes (sales, excise & customs duty) and the corporate taxes there are certain rebates given to the tax payer if he fits in the prescribed criteria. These concessions or Tax Holidays as they call are meant to attract more and more people to pay tax. These rebates also mean less 'pinch' on the pockets and a good fast growth of economy. Rebate is a deduction from tax payable. Since these are the best tax-slashing devices, it is absolutely essential to have a clear, concise and complete insight into these. In computing the amount of income-tax on the total income of an assessee with which he is chargeable for any assessment year, there shall be allowed from the amount of income-tax, in accordance with and subject to the provisions of certain sections, the deductions specified in those sections. The aggregate amount of the deductions under such sections shall not, in any case, exceed the amount of income tax on the total income of the assessee with which he is chargeable for any assessment year. General Tax Incentives The Government offers many incentives to investors in India with a view to stimulating industrial growth and development. The incentives offered are normally in line with the government's economic philosophy, and are revised regularly to accommodate new areas of emphasis. The following are some of the important incentives offered, which significantly reduce the effective tax rates for the beneficiary companies:
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Five year tax holiday for: o Power projects. o Firms engaged in exports. o New industries in notified states and for new industrial units established, in electronic hardware/software parks. o Export Oriented Units and units in Free Trade Zones. o As of 1994-95 budget firms engaged in providing infrastructure facilities, can also avail of this benefit. Tax deductions of of 100 per cent of export profits.

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Deduction of 30 per cent of net (total) income for 10 years for new industrial undertakings. Deduction of 50 per cent on foreign exchange earnings by construction companies, hotels and on royalty, commission etc. earned in foreign exchange. Deduction in respect of certain inter-corporate dividends to the extent of dividend declared.

Taxation - Useful and Important Definitions

Assessee Income Tax Act 1961 (Act no. 43) defines 'assessee' as a person by whom any tax or any other sum of money is payable under this Act, and includes y

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Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or the amount of refund due to him or to such other person; Every person who is deemed to be an assessee under any provision of this Act; Every person who is deemed to be an assessee in default under any provision of this Act;

Assessment year Assessment year means the period of twelve months commencing on 1st April every year and ending on 31st March of the next year. Income of previous year of an assessee is taxed during the following assessment year at the rates prescribed by the relevant Finance Act. Company Section 2(17) of the act defines company. The term company includes: 1. any Indian company 2. any corporate incorporated by or under the laws of country outside India 3. any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the 1922 Act or under the 1961 act any institution, association or body, whether incorporated or not and whether Indian or non Indian, which is declared by general or special order of the board to be a company only for such assessment year or assessment years Convertible Foreign exchange This mean foreign exchange which is for the time being treated by the Reserve Bank of India as

convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 and any rules made there under. Foreign Exchange Asset This mean any specified asset which the assessee has acquired, purchased with or subscribed to, in convertible foreign exchange. Gross Total Incom Under the scheme of computation of total income under the Income Tax Act, the income falling under each head is to be computed as per the relevant provisions of the Act relating to computation of income under that head. The aggregate of income under each head is known as 'Gross Total Income' Income There is no specific definition of income but for statutory purposes there are certain items which are listed under the head income. These items include those heads also which normally will not be termed as income but for taxation we consider them as income. These items are included under section 2(24) of the income tax act, 1961. As per the definition in section 2(24), the term income means and includes:
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profits and gains dividends voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes the value of any perquisite or profit in lieu of salary taxable under clause (2) and (3) of section 17 of the act any special allowance or benefit, other than those included above any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profits are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living capital gains any sum chargeable to income tax under section 28 of the income tax act any winnings from lotteries, crossword puzzles, races, including horse races, card games and games of any sort or from gambling or betting of any form or nature whatsoever any received as contribution to the assessee's provident fund or superannuation fund or any fund for the welfare of employees or any other fund set up under the provisions of the emplyees state insurance act profits on sale of a licence granted under the imports (control) order, 1955 made under the imports and exports (control) act, 1947

Indian company

Indian company means a company formed and registered under the companies act, 1956. Any company formed and registered under any law relating to companies formerly in force in any part of India, other than Jammu and Kashmir and the union territories as specified or a corporation established by or under a central, state or provincial act or any institution, association or a body which is declared by the board to be company under section 2 (17) are referred as Indian company. In the case of state of Jammu and Kashmir, a company formed and registered under any law for the time being in force in the state. Similarly in case of union territories. Investment Income This mean any income other than dividends derived from a foreign exchange asset. Long term Capital Gains This mean income chargeable under the head "capital gains relating to a capiatl asset being a foreign exchange asset which is not a short term capital asset. Manufacture To "manufacture" is to produce new out of the existing materials.It further implies transformation in to new and different articles having a distinct name,character or use.Section2(f) of the Central Excises and Salt Act,1944 gives statutory definition for "manufacture". Non Resident Indian (NRI) NRI means an individual being a citizen of India or a person of Indian origin who is not a resident. A person shall be deemed to be of Indian origin if he or either of his parents or any of his grand parents was born in undivided India. Person The income tax is charged in respect of the total income of the previous year of every 'person'. Here the person means-1. an individual : a natural human being i.e male, female minor or a person of sound or unsound mind 2. a Hindu undivided family (HUF) 3. a company : o any Indian company o any body corporate incorporated by under the laws of a country outside India o any institution, association or body whether Indian or non Indian, which is declared by general or special order of the board to be a company o any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income tax Act, 1922 or which is or was assessable or was assesses under this act as a company for any assessment year commencing on or before the 1st day of April. 1970

4. a firm i.e a partnership firm 5. an association of persons or a body of individuals whether incorporated or not 6. a local authority-- means a municipal committee, district board, body of port commissioners, or other authority legally entitled to or entrusted by the government with the control and management of a municipal or local fund. 7. every artificial, juridical person, not falling within any of the above categories. Previous year The Financial Year in which the income is earned is known as the previous year. Any financial year begins from 1st of April and ends on subsequent 31st March. The financial year beginning on 1st of April 2003 and ending on 31st March 2004 is the previous year for the assessment year 2004-2005. Principal Officer Any public body or association of persons or any body of individuals or a company or a local authority is referred as the principle officer. They include the secretary, treasurer, manager or agent of the authority, company, association or body. Also any person connected with the management or administration of the local authority, company, association or body upon which the assessing officer has served a notice of his intention of treating him as the principal officer. Specified Asset This includes any of the following assets1. Shares in an Indian company 2. debentures issued by an Indian company which is not a private company as defined in the companies act, 1956 3. deposits with an Indian company which is not a private company 4. any security of the central government 5. units of the unit trust of India 6. Such other assets as the central government may specify in this behalf by notification in the official gazette

VAT - The Global Meaning

Globally, VAT is regarded as a tax that is best levied by the Central government - a condition that is difficult to meet in a federal finance system such as ours. It is true that 123 countries have adopted VAT, but most of them have unitary systems of government. VAT is a centrally-administered tax with a revenue-sharing mechanism. It is hard to visualise VAT as a revenue-neutral measure, or one where the states will not lose out in relation to the present system, in a federal set-up. If VAT is Centrally administered, the tax base is quite wide, comprising imports, production and different stages of sales. If the base is divided between the Centre and states, the chain is broken, making tax evasion easier and affecting the states' tax base. In countries where VAT is administered by a federal government, revenue collection on imports accounts for a larger portion of total VAT revenues. In an IMF study of 22 developing countries, it was discovered that in about two-third of them, more than half the VAT revenue was collected from imports. In Pakistan and Bangladesh, VAT collection from imports was 64 per cent of the total proceeds from the tax. As tax evasion on bulk imports is difficult, it also helps in checking tax evasion at subsequent stages of the tax chain.

VAT - in India
VAT will replace the present sales tax in India. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax - that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax. For instance, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands. Purchase price - Rs 100 Tax paid on purchase - Rs 10 (input tax) Sale price - Rs 120 Tax payable on sale price - Rs 12 (output tax) Input tax credit - Rs 10 VAT payable - Rs 2 VAT levy will be administered by the Value Added Tax Act and the rules made there-under. VAT can be computed by using either of the three methods detailed below
y y

The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input. The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc).

Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales.

India opted for tax credit method, which is similar to CENVAT. Note : Also look for MODVAT States such as Andhrapradesh, Kerala, Maharashtra, Madhyapradesh, Delhi and Haryana have experimented with VAT albeit in a limited manner, covering only limited goods. The experiments never had the full-fledged features of VAT and were only concoctions. These states have even called off their experiments owing to different reasons. If one analyses why VAT or its variant failed in Maharashtra, which was the only state to come closer to a true VAT regime, the following reasons emerge: 1. Dual methodologies of computation of VAT credit Error! Hyperlink reference not valid. , one for the Manufacturing stage and the other for the trading stage, thus breaking the audit trail. It may be noted that one of the advantages of VAT system, as we would be dealing later on, is the audit trail that is created in the VAT chain. 2. Presence of a large number of tax deferral and holiday schemes, which resulted in a narrow base. It may again be noted that under VAT, which is multi-point, the tax rates have to be reasonably low, and lower tax rates presupposes that the tax base is wide. These two features were not present in the Maharashtra tax regime. 3. Low level of awareness among traders, and even administrators, giving rise to fears and apprehensions. Owing to this, there was considerable consternation among the trade, which gave rise to open revolt against the system. 4. Partial implementation of the ideal VAT with the existing system coexisting even under this regime. 5. Increased burden on retailers of Bookkeeping and compliance. 6. Multiplicity of rates of tax under the VAT regime. 7. Drop in revenue for the State Government, though there are no studies attributing such reduction to the system of taxation. Thus States had indeed tried some variations of VAT, but eventually gave up due to a variety of reasons.

Central VAT (CENVAT) The Modvat Scheme was replaced by a new set of rules called CENVAT Credit Rules 2002. A manufacturer or producer of final product is allowed to take CENVAT credit of duties specified in the Cenvat Credit Rules , 2002. WHEN AND HOW MUCH CREDIT CAN BE TAKEN 1. The Cenvat Credit in respect of inputs may be taken immediately on receipt of the inputs. 2. The Cenvat credit in respect of Capital Goods received in a factory at any point of time in a given financial year shall be taken only for an amount not exceeding fifty percent of the duty paid on such capital goods in the same financial year and the balance of Cenvat Credit may be taken in any subsequent financial year. 3. The Cenvat credit shall be allowed even if any inputs or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair etc. and it is established from the records that the goods are received back in the factory within180 days of their being sent to a job worker. 4. Where any inputs are used in the final products which are cleared for export, the Cenvat Credit in respect of the inputs so used shall be allowed to be utilised towards payment of duty on any final product cleared for home consumption and where for any reason such adjustment is not possible, the manufacture shall be allowed refund of such amount. CENVAT IF FINAL PRODUCT EXEMPTED No Cenvat credit shall be allowed on any input or capital goods which is used in the manufacture of exempted goods. This provisions shall not be applicable in case the exempted goods are either; i. Cleared to a unit in a free Trade Zone. ii. Cleared to a 100% E.O.U. iii. Cleared to a unit in an Electronic Hardware Technology Parks or Soft ware Technology Park. iv. Supplied to the UN or an International Organisation for their official use or supplied to projects funded by them. v. Cleared for export under bond. CONDITIONS 1. Various documents have been prescribed on the basis of which a manufacturer can avail the Cenvat Credit. 2. The Manufacturer shall take all reasonable steps to ensure that the inputs or Capital goods in

respect of which he has taken the Cenvat Credit are goods on which the appropriate duty has been paid. 3. The Cenvat credit in respect of inputs or Capital Goods purchased from a first stage or second stage dealer shall be allowed only if such dealer has maintained records indicating the fact that the inputs or capital goods were supplied from the stock on which duty was paid by the producer of such inputs or capital goods and only an amount of such duty on pro-rata basis has been indicated in the invoice issued by him. 4. The manufacturer of final products shall maintain proper records for the receipt, disposal, consumption and inventory of the inputs and capital goods and the burden of proof regarding the admissibility of the Cenvat Credit shall lie upon the manufacturer taking such credit SHIFTING, SALE, MERGER, AMALGATION ETC. OF UNIT If a manufacturer shifts his factory to another site or the unit is transferred on account of change in ownership, sale, merger, amalgamation etc., the manufacturer shall be allowed to transfer the Cenvat credit lying unutilised to the accounts of such transferred factory. UNUTILISED CREDIT 1. Any amount of credit earned by a manufacturer under the CENVAT Credit Rules. 2001 as they excisted prior to the 1st day of March, 2002 and remaining unutilised on that day is allowable as Cenvat credit and be allowed to be utilised. 2. A manufacturer who opts for exemption under a notification based on the value of clearances in a financial year and who has been availing of the credit of the duty paid on inputs before such option is exercised, shall be required to pay an amount equivalent to the credit in respect of the inputs lying in stock or used in any finished goods lying in stock on the date when such option is exercised.
CENVAT CREDIT RULES, 2002 Rule 1. Short title, extent and commencement.(1) These rules may be called the CENVAT Credit Rules, 2002. (2) They extend to the whole of India. (3) They shall come into force on the 1st day of March, 2002. Rule 2. Definitions.In these rules, unless the context otherwise requires,(a) "Act" means the Central Excise Act, 1944 (1 of 1944); (b) "capital goods" means,(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Tariff Act; (ii) pollution control equipment (iii) components, spares and accessories of the goods specified at (i) and (ii) above; (iv) moulds and dies; (v) refractories and refractory materials; (vi) tubes and pipes and fittings thereof; and (vii) storage tank, used in the factory of the manufacturer of the final products, but does not include any equipment or appliance used

in an office; (c) "Customs Tariff Act" means the Customs Tariff Act, 1975 (51 of 1975); (d) "exempted goods" means goods which are exempt from the whole of the duty of excise leviable thereon, and includes goods which are chargeable to "Nil" rate of duty; (e) "final products" means excisable goods manufactured or produced from inputs, except matches; (f) "first stage dealer" means a dealer who purchases the goods directly from,(i) the manufacturer under the cover of an invoice issued in terms of the provisions of Central Excise Rules, 2002 or from the depot of the said manufacturer, or from premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer, under cover of an invoice; or (ii) an importer or from the depot of an importer or from the premises of the consignment agent of the importer, under cover of an invoice; (g) "input" means all goods, except high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not, and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used for manufacture of final products or for any other purpose, within the factory of production. Explanation 1.- The high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Explanation 2.- Inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer; (h) "manufacturer" or "producer" in respect of goods falling under Chapter 61 or 62 of the First Schedule to the Tariff Act shall include a person who is liable to pay the duty of excise leviable on such goods under sub-rule (3) of rule 4 of the Central Excise Rules, 2002; (i) "notification" means the notification published in the Official Gazette; (j) "Tariff Act" means the Central Excise Tariff Act, 1985 (5 of 1986); (k) "second stage dealer" means a dealer who purchases the goods from a first stage dealer; (l) words and expressions used in these rules and not defined but defined in the Act shall have the meanings respectively assigned to them in the Act. Rule 3. CENVAT credit.(1) A manufacturer or producer of final products shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of 1. the duty of excise specified in the First Schedule to the Tariff Act, leviable under the Act; 2. the duty of excise specified in the Second Schedule to the Tariff Act, leviable under the Act; 3. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1978 ( 40 of 1978); 4. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957 ( 58 of 1957); 5. the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 (14 of 2001); and 6. the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii), (iii), (iv) and (v) above,

paid on any inputs or capital goods received in the factory on or after the first day of March, 2002, including the said duties paid on any inputs used in the manufacture of intermediate products, by a job-worker availing the benefit of exemption specified in the notification of the Government of India in the Ministry of Finance (Department of Revenue), No. 214/86- Central Excise, dated the 25th March, 1986, published vide number G.S.R. 547 (E), dated the 25th March, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final products, on or after the first day of March, 2002. Explanation.- For the removal of doubts it is clarified that the manufacturer of the final products shall be allowed CENVAT credit of additional duty leviable under section 3 of the Customs Tariff Act on goods falling under heading 98.01 of the First Schedule to the Customs Tariff Act. (2) Notwithstanding anything contained in sub-rule (1), the manufacturer or producer of final products shall be allowed to take CENVAT credit of the duty paid on inputs lying in stock or in process or inputs contained in the final products lying in stock on the date on which any goods cease to be exempted goods or any goods become excisable. (3) The CENVAT credit may be utilized for payment of any duty of excise on any final products or for payment of duty on inputs or capital goods themselves if such inputs are removed as such or after being partially processed, or such capital goods are removed as such: Provided that while paying duty, the CENVAT credit shall be utilised only to the extent such credit is available on the fifteenth day of a month for payment of duty relating to the first fortnight of the month, and the last day of a month for payment of duty relating to the second fortnight of the month or in case of a manufacturer availing exemption by a notification based on value of clearances in a financial year, for payment of duty relating to the entire month. (4) When inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the factory, the manufacturer of the final products shall pay an amount equal to the duty of excise which is leviable on such goods at the rate applicable to such goods on the date of such removal and on the value determined for such goods under sub-section (2) of section 3 or section 4 or section 4A of the Act, as the case may be, and such removal shall be made under the cover of an invoice referred to in rule 7. (5) The amount paid under sub-rule (4) shall be eligible as CENVAT credit as if it was a duty paid by the person who removed such goods under sub-rule (4). 1. Notwithstanding anything contained in sub-rule (1),(a) CENVAT credit in respect of inputs or capital goods produced or manufactured,(i) in a free trade zone or by a hundred per cent. export-oriented undertaking or by a unit in an Electronic Hardware Technology Park or Software Technology Park (other than a unit which pays excise duty under section 3 of the Act read with notification No. 8/97- Central Excise, dated the 1st March, 1997, number G.S.R 114 (E), dated the 1st March, 1997 or No. 20/2002-Central Excise, dated the 1st March, 2002) and used in the manufacture of the final products in any other place in India, in case the unit pays excise duty under section 3 of the Act read with notification No. 2/95-Central Excise, dated the 4th January, 1995, number G.S.R. 189 (E), dated the 4th January, 1995, shall be admissible equivalent to the amount calculated in the following manner, namely:Fifty per cent. of [ X multiplied by{( 1+ BCD/100) multiplied by ( CVD/100)}], where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively and X denotes the assessable value. (ii) in a Special Economic Zone, and used in the manufacture of the final products in any other place in India, shall be admissible equivalent to the amount calculated in the following manner, namely:X multiplied by {( 1+ BCD/100) multiplied by ( CVD/100)}, where BCD and CVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customs leviable on the inputs or the capital goods respectively

and X denotes the assessable value. (b) CENVAT credit in respect of 1. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Textile and Textile Articles) Act,1978; 2. the additional duty of excise leviable under section 3 of the Additional Duties of Excise (Goods of Special Importance) Act, 1957; 3. the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001; and 4. the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the duty of excise specified under clauses (i), (ii) and (iii) above, shall be utilized only towards payment of duty of excise leviable under the said Additional Duties of Excise (Textiles and Textile Articles) Act, or under the said Additional Duties of Excise (Goods of Special Importance) Act, or the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001 respectively, on any final products manufactured by the manufacturer or for payment of such duty on inputs themselves if such inputs are removed as such or after being partially processed; (c) the CENVAT credit, in respect of additional duty leviable under section 3 of the Customs Tariff Act, paid on marble slabs or tiles falling under sub-heading No. 2504.21 or 2504.31 respectively of the First Schedule to the Tariff Act shall be allowed to the extent of thirty rupees per square metre; (d) the CENVAT credit of the duty paid on the inputs shall not be allowed in respect of texturised yarn (including draw-twisted or draw-wound yarn) of polyesters falling under heading No. 54.02 of the First Schedule to the Tariff Act, manufactured by an independent texturiser, that is to say, a manufacturer engaged in the manufacture of texturised yarn (including draw-twisted or draw-wound yarn) of polyesters falling under heading No. 54.02 of the said First Schedule, who does not have the facility in his factory (including plant and machinery) for manufacture of partially oriented yarn of polyesters falling under sub-heading No. 5402.42 of the said First Schedule. Explanation.- Where the provisions of any other rule or notification provide for grant of partial or full exemption on condition of non-availability of credit of duty paid on any input or capital goods, the provisions of such other rule or notification shall prevail over the provisions of these rules. Rule 4. Conditions for allowing CENVAT credit (1) The CENVAT credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer: Provided that in respect of final products falling under Chapter 61 or 62 of the First Schedule to the Tariff Act, the CENVAT credit of duty paid on inputs may be taken immediately on receipt of such inputs in the registered premises of the person who gets such final products manufactured on his account on job work subject to the condition that such inputs are used in the manufacture of such final products by the job worker. (2) (a) The CENVAT credit in respect of capital goods received in a factory at any point of time in a given financial year shall be taken only for an amount not exceeding fifty per cent. of the duty paid on such capital goods in the same financial year: Provided that the CENVAT credit in respect of capital goods shall be allowed for the whole amount of the duty paid on such capital goods in the same financial year if the said capital goods are cleared as such in the same financial year. (b) The balance of CENVAT credit may be taken in any financial year subsequent to the financial year in which the capital goods were received in the factory of the manufacturer, if the capital goods, other than components, spares and accessories, refractories and refractory materials and goods falling under heading No. 68.02 and sub-heading No. 6801.10 of the First Schedule to the Tariff Act, are in the possession and use of the manufacturer of final products in such subsequent years.

Illustration.- A manufacturer received machinery on April 16, 2002 in his factory. CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a maximum of one lakh rupees in the financial year 2002-2003, and the balance in subsequent years. (3) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer even if the capital goods are acquired by him on lease, hire purchase or loan agreement, from a financing company. (4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which the manufacturer claims as depreciation under section 32 of the Income-tax Act, 1961( 43 of 1961). (5) (a) The CENVAT credit shall be allowed even if any inputs or capital goods as such or after being partially processed are sent to a job worker for further processing, testing, repair, re-conditioning or any other purpose, and it is established from the records, challans or memos or any other document produced by the assessee taking the CENVAT credit that the goods are received back in the factory within one hundred and eighty days of their being sent to a job worker and if the inputs or the capital goods are not received back within one hundred eighty days, the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to the inputs or capital goods by debiting the CENVAT credit or otherwise, but the manufacturer can take the CENVAT credit again when the inputs or capital goods are received back in his factory. (b) The CENVAT credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent by a manufacturer of final products to a job worker for the production of goods on his behalf and according to his specifications. (6) The Commissioner of Central Excise having jurisdiction over the factory of the manufacturer of the final products who has sent the inputs or partially processed inputs outside his factory to a job-worker may, by an order, which shall be valid for a financial year, in respect of removal of such inputs or partially processed inputs, and subject to such conditions as he may impose in the interest of revenue including the manner in which duty, if leviable, is to be paid, allow final products to be cleared from the premises of the job-worker. Rule 5. Refund of CENVAT credit.Where any inputs are used in the final products which are cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate products cleared for export, the CENVAT credit in respect of the inputs so used shall be allowed to be utilized by the manufacturer towards payment of duty of excise on any final products cleared for home consumption or for export on payment of duty and where for any reason such adjustment is not possible, the manufacturer shall be allowed refund of such amount subject to such safeguards, conditions and limitations as may be specified by the Central Government by notification: Provided that no refund of credit shall be allowed if the manufacturer avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims a rebate of duty under the Central Excise Rules, 2002, in respect of such duty. Rule 6. Obligation of manufacturer of dutiable and exempted goods.(1) The CENVAT credit shall not be allowed on such quantity of inputs which is used in the manufacture of exempted goods, except in the circumstances mentioned in sub-rule (2). (2) Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputs intended to be used as fuel, and manufactures such final products which are chargeable to duty as well as exempted goods, then, the manufacturer shall maintain separate accounts for receipt, consumption and inventory of inputs meant for use in the manufacture of dutiable final products and the quantity of inputs meant for use in the manufacture of exempted goods and take CENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods.

(3) The manufacturer, opting not to maintain separate accounts shall follow either of the following conditions, as applicable to him, namely:(a) if the exempted goods are1. goods falling within heading No. 22.04 of the First Schedule to the Tariff Act; 2. Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used in the generation of electricity; 3. Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer; 4. tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling within Chapter 40 of the said First Schedule; 5. newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule; 6. final products falling within Chapters 50 to 63 of the said First Schedule, the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputs used in, or in relation to, the manufacture of such final products at the time of their clearance from the factory; or (b) if the exempted goods are other than those described in condition (a), the manufacturer shall pay an amount equal to eight per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the sale of such goods at the time of their clearance from the factory. Explanation I.- The amount mentioned in conditions (a) and (b) shall be paid by the manufacturer by debiting the CENVAT credit or otherwise. Explanation II.- If the manufacturer fails to pay the said amount, it shall be recovered along with interest in the same manner, as provided in rule 12, for recovery of CENVAT credit wrongly taken. (4) No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year. (5) The provisions of sub- rule (1), sub-rule (2), sub-rule (3) and sub-rule (4) shall not be applicable in case the exempted goods are either1. cleared to a unit in a free trade zone; or 2. cleared to a unit in a special economic zone; or 3. cleared to a hundred per cent. export-oriented undertaking; or 4. cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or 5. supplied to the United Nations or an international organization for their official use or supplied to projects funded by them, on which exemption of duty is available under notification of the Government of India in the Ministry of Finance (Department of Revenue) No.108/95-Central Excise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or 6. cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002. Rule 7. Documents and accounts.(1) The CENVAT credit shall be taken by the manufacturer on the basis of any of the following documents, namely :(a) an invoice issued by(i) a manufacturer for clearance of (I) inputs or capital goods from his factory or from his depot or from the premises of the consignment agent of the said manufacturer or from any other premises from where the goods are sold by or on behalf of the said manufacturer; (II) inputs or capital goods as such;

(ii) an importer; (iii) an importer from his depot or from the premises of the consignment agent of the said importer if the said depot or the premises, as the case may be, is registered in terms of the provisions of Central Excise Rules, 2002; (iv) a first stage dealer or a second stage dealer, in terms of the provisions of Central Excise Rules, 2002; (b) a supplementary invoice, issued by a manufacturer or importer of inputs or capital goods in terms of the provisions of Central Excise Rules, 2002 from his factory or from his depot or from the premises of the consignment agent of the said manufacturer or importer or from any other premises from where the goods are sold by, or on behalf of, the said manufacturer or importer, in case additional amount of excise duties or additional duty of customs leviable under section 3 of the Customs Tariff Act, has been paid, except where the additional amount of duty became recoverable from the manufacturer or importer of inputs or capital goods on account of any non-levy or short-levy by reason of fraud, collusion or any wilful mis-statement or suppression of facts or contravention of any provisions of the Act or of the Customs Act, 1962 or the rules made thereunder with intent to evade payment of duty. Explanation.- For removal of doubts, it is clarified that supplementary invoice shall also include Challan or any other similar document evidencing payment of additional amount of additional duty of customs leviable under section 3 of the Customs Tariff Act; 1. a bill of entry; (d) a certificate issued by an appraiser of customs in respect of goods imported through a Foreign Post Office. (2) The manufacturer or producer taking CENVAT credit on inputs or capital goods shall take all reasonable steps to ensure that the inputs or capital goods in respect of which he has taken the CENVAT credit are goods on which the appropriate duty of excise as indicated in the documents accompanying the goods, has been paid. The manufacturer or producer taking CENVAT credit on inputs or capital goods received by him shall be deemed to have taken reasonable steps if he satisfies himself about the identity and address of the manufacturer or supplier, as the case may be, issuing the documents specified in rule 7, evidencing the payment of excise duty or the additional duty of customs, as the case may be, either(a) from his personal knowledge; or (b) on the strength of a certificate given by a person with whose handwriting or signature he is familiar; or (c) on the strength of a certificate issued to the manufacturer or the supplier, as the case may be, by the Superintendent of Central Excise within whose jurisdiction such manufacturer has his factory or the supplier has his place of business, and where the identity and address of the manufacturer or the supplier is satisfied on the strength of a certificate, the manufacturer or producer taking CENVAT credit shall retain such certificate for production before the Central Excise Officer on demand. (3) The CENVAT credit in respect of inputs or capital goods purchased from a first stage or second stage dealer shall be allowed only if such dealer has maintained records indicating the fact that the inputs or capital goods were supplied from the stock on which duty was paid by the producer of such inputs or capital goods and only an amount of such duty on pro rata basis has been indicated in the invoice issued by him. (4) The manufacturer of final products shall maintain proper records for the receipt, disposal, consumption and inventory of the inputs and capital goods in which the relevant information regarding the value, duty paid, the person from whom the inputs or capital goods have been purchased is recorded and the burden of proof regarding the admissibility of the CENVAT credit shall lie upon the manufacturer taking such credit. (5) The manufacturer of final products shall submit within ten days from the close of each month to the Superintendent of Central Excise, a monthly return in the form annexed to these rules. Explanation.- In respect of a manufacturer availing of any exemption based on the value or quantity of clearances in a financial year, the provisions of this sub-rule shall have effect in that financial year as if for the expression

"month", the expression "quarter" was substituted. Rule 8. Transfer of CENVAT credit.(1) If a manufacturer of the final products shifts his factory to another site or the factory is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory to a joint venture with the specific provision for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory. (2) The transfer of the CENVAT credit under sub-rule (1) shall be allowed only if the stock of inputs as such or in process, or the capital goods is also transferred alongwith the factory to the new site or ownership and the inputs, or capital goods, on which credit has been availed of are duly accounted for to the satisfaction of the Commissioner. Rule 9. Transitional provision (1) Any amount of credit earned by a manufacturer under the CENVAT Credit Rules, 2001, as they existed prior to the 1st day of March, 2002 and remaining unutilised on that day shall be allowable as CENVAT credit to such manufacturer under these rules, and be allowed to be utilised in accordance with these rules. (2) A manufacturer who opts for exemption from the whole of the duty of excise leviable on goods manufactured by him under a notification based on the value or quantity of clearances in a financial year, and who has been taking CENVAT credit on inputs before such option is exercised, shall be required to pay an amount equivalent to the CENVAT credit, if any, allowed to him in respect of inputs lying in stock or in process or contained in final products lying in stock on the date when such option is exercised and after deducting the said amount from the balance, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export. Rule 10. Special dispensation in respect of inputs manufactured in factories located in specified areas of North East region and Kutch district of Gujarat.Notwithstanding anything contained in these rules, where a manufacturer has cleared any inputs or capital goods, in terms of notifications of the Government of India in the Ministry of Finance (Department of Revenue) No. 32/99Central Excise, dated the 8th July, 1999, number G.S.R. 508 (E), dated the 8th July, 1999 or notification No. 33/99Central Excise, dated the 8th July, 1999, number G.S.R. 509 (E), dated the 8th July, 1999 or notification No. 39/2001-Central Excise, dated the 31st July, 2001, number G.S.R. 565 (E), 31st July, 2001, the CENVAT credit on such inputs or capital goods shall be admissible as if no portion of the duty paid on such inputs or capital goods was exempted under any of the said notifications. Rule 11. Power of Central Government to notify goods for deemed CENVAT credit.Notwithstanding anything contained in rule 3, the Central Government may, by notification declare the inputs on which the duties of excise, or additional duty of customs paid, shall be deemed to have been paid at such rate or equivalent to such amount as may be specified in the said notification and allow CENVAT credit of such duty deemed to have been paid in such manner and subject to such conditions as may be specified in the said notification even if the declared inputs are not used directly by the manufacturer of final products declared in the said notification, but are contained in the said final products. Rule 12. Recovery of CENVAT credit wrongly taken.Where the CENVAT credit has been taken or utilized wrongly, the same along with interest shall be recovered from the manufacturer and the provisions of sections 11A and 11AB of the Act shall apply mutatis mutandis for effecting such recoveries. Rule 13. Confiscation and penalty.-

(1) If any person, takes CENVAT credit in respect of inputs or capital goods, wrongly or without taking reasonable steps to ensure that appropriate duty on the said inputs or capital goods has been paid as indicated in the document accompanying the inputs or capital goods specified in rule 7, or contravenes any of the provisions of these rules in respect of any inputs or capital goods, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty on the excisable goods in respect of which any contravention has been committed, or ten thousand rupees, whichever is greater. (2) In a case, where the CENVAT credit has been taken or utilized wrongly on account of fraud, willful misstatement, collusion or suppression of facts, or contravention of any of the provisions of the Act or the rules made thereunder with intention to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Act. (3) Any order under sub-rule (1) or sub-rule (2) shall be issued by the Central Excise Officer following the principles of natural justice. Rule 14. Supplementary provision.Any notification, circular, instruction, standing order, trade notice or other order issued under the CENVAT Credit Rules, 2001 by the Board, the Chief Commissioner or the Commissioner of Central Excise, and in force as on 28th February, 2002, shall, to the extent it is relevant and consistent with these rules, be deemed to be valid and issued under the corresponding provisions of these rules.

Modified VAT (Modvat)

Modvat stands for "Modified Value Added Tax". It is a scheme for allowing relief to final manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by them. eg ABC Ltd is a manufacturer and it purchases certain components from PQR Ltd for use in manufacture. POR Ltd would have paid excise duty on components manufactured by it and it would have recovered that excise duty in its sales price from ABC Ltd. Now, ABC Ltd has to pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier, PQR Ltd. This amounts to multiple taxation. Modvat is a scheme where ABC Ltd can take credit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd. The scheme was first introduced with effect from 1 March 1986. Under this scheme, a manufacturer can take credit of excise duty paid on raw materials and components used by him in his manufacture. Accordingly, every intermediate manufacturer can take credit for the excise element on raw materials and components used by him in his manufacture. Since it amounts to excise duty only on additions in value by each manufacturer at each stage, it is called value-added-tax (VAT) The modvat credit can be utilized towards payment of excise duty on the final product. When the scheme was first introduced, it covered only some excisable goods. Gradually, the scope of the modvat scheme has been enlarged from time to time under various notifications. From 16 March 1995, all excisable goods can take the benefit of the scheme except those mentioned below:-

In case of inputs Tobacco and Manufactured Tobacco Products Matches other than pyrotechnics articles of heading number 36.04 of CETA Cinematograph Films Motor Spirits, Special Boiling Spirits, High Speed Diesel In case of final products Tobacco and Manufactured Tobacco Products Matches other than pyrotechnics articles of heading number 36.04 of CETA Cinematograph Films Woven fabrics classified under chapter 52,54 & 55 of CETA other than cotton fabrics, man made fibre fabrics and filament yarn fabrics Advantages of Modvat It reduces the effects of taxation at multiple stages of manufacture. It facilitates duty free exports. It increases the tax base. Disadvantages of Modvat It increases paper work and leads to multiplicity of records. It leads to corruption. It leads to litigation. The modvat scheme is regulated by Rules 57A and 57U of the Central Excise Rules and the notifications issued thereunder. Rule 57A This rule specifies the scope and applicability of the modvat. The modvat scheme applies to all finished excisable goods which have been notified by the Central Government in the Official Gazette for this purpose. The modvat scheme may be made applicable in respect of certain goods or classes of goods with restrictions and conditions. For the purposes of the modvat scheme, input includes: Inputs which are manufactured and used within the factory of production in or in relation to the manufacture of the final product. Paints and packing material Inputs used as fuel Inputs used for the generation of electricity, used within the factory of production for manufacturing of final products or for any other purpose, but does not include:A. Machines, machinery, plant, equipments, apparatus, tools or appliances which are used for production or processing of any goods or for bringing about any change in any substance in or in relation to the

manufacture of the final products. However, on and from 1994-95, the benefit of modvat has been extended to excise duty paid on several capital goods like plant, machinery, equipments, etc which are used for the manufacture of the finished product. As long as the capital goods are used in the factory of production, credit of modvat will be allowed. No modvat is available in respect of capital goods not used within the factory of production. Packing Material in respect of which any exemption to the extent of excise duty payable on the value of packing material is being availed of for packaging of final products. Packing materials of the cost of which is not included or had not been included during the preceding financial year in the assessable value of the final products. The manufacturer can avail of the benefit of modvat credit on the final product to the extent of specified duties paid on the inputs. The benefit of modvat will be available only if the final product is an excisable goods. Modvat credit will not be available if the final good is not an excisable goods or is exempt from duty or is chargeable at nil rate of duty. However, benefit of modvat will be available to the final goods manufactured by a unit in a Free Trade Zone or in an 100 per cent EOU where no excise duty is payable on final goods which are exported. For example ABC Ltd purchased raw materials of Rs9,900 inclusive of excise duty @ nine per cent and sales tax @ 10 per cent. Modvat credit available will be Rs743 (Cost excluding sales tax will be Rs9,000 out of which excise duty will be Rs743 ie 9000/109*9) Rule 57D Modvat credit will not be denied or varied just because some of the raw materials and other inputs in respect of which excise has been paid become waste or scrap in the course of the manufacturing process. Similarly, modvat credit will not be denied or varied just because in the course of the manufacturing process of an excisable final product, an intermediate product which is non-excisable or which is chargeable to excise at nil rate of duty or which is exempt from excise duty is created. Intermediate products are those products which get produced in the course of manufacture of the final product. eg in the manufacture of alcohol from sugarcane, first molasses are produced from which alcohol is produced. In such a situation, molasses are an intermediate product, which are charged to excise duty. The benefit of modvat will not be withdrawn if the intermediate product created is non-excisable or is chargeable to excise at nil rate of duty or is exempt from excise duty. Whether a product is an intermediate product or a final product depends on the facts and circumstances of each case. The product may be intermediate so far as a particular process of manufacturing is concerned but may be a final product for another manufacturing process. Rule 57E If the excise duty paid on modvatable inputs is subsequently increased or refunded, the modvat claimed on the basis of those inputs will also be increased or reduced, as the case may be. If any amount is found due as a result of such increase, it shall be recovered from the manufacturer either from the

balance maintained by him with the excise authorities or in cash. Rule 57F The modvatable inputs must be used in or in relation to the manufacture of final products for which they have been brought into the factory. However, the inputs may be removed from the factory for home consumption or for export under bond but only after intimating the Assistant Collector having jurisdiction over the factory and obtaining a dated acknowledgement of the same. Where the inputs are removed for home consumption, excise duty must be paid, at least of an amount equal to the modvat credit claimed in respect of such inputs. The modvatable inputs can also be removed from the factory to a place outside either, as such or after they have been partially processed in the course of manufacture but only after intimating the Assistant Collector having jurisdiction over the factory and obtaining a dated acknowledgement of the same for any of the following purposes: For testing, repairs, refining, reconditioning or carrying out any other operation required for the manufacture of final product provided that after such work, the inputs are returned to the factory to be further used in the manufacture of final product. The waste generated in such operation must also be returned to the factory. For export of inputs under bond without payment of excise duty For home consumption of inputs on payment of excise duty For manufacture of intermediate products necessary for the manufacture of final products provided that after such manufacture, the intermediate product is brought back to the factory to be further used in the manufacture of final product. The waste generated in such operation must also be returned to the factory. For export of the intermediate products under bond without payment of excise duty For home consumption of the intermediate products on payment of excise duty However waste is not required to be returned in case appropriate excise duty is paid on the waste. The main manufacturer as well as job worker are required to maintain register giving details of materials sent, challan number, etc. similar to a stock register showing goods lying with the job worker, goods returned by the job worker, etc. Generally, the goods sent must be returned to the main manufacturer within 60 days. If the job is not completed within 60 days, the period may be extended for another 60 days. The benefit of this rule is available only if the main manufacturer does a certain amount of processing or value addition to make the final product. There must not be complete manufacturing outside the factory by the job worker. Modvat credit can be utilised for the following purposes: Towards payment of excise duty on the final product Towards payment of excise duty on waste arising in the course of manufacture of final product Towards payment of excise duty on inputs themselves where they are cleared for home consumption. Modvat credit in respect of finished products exported without payment of duty (like goods

manufactured by units in a Free Trade Zone or by 100 per cent EOUs or by units in an Electronic Hardware Technology Park or by units in a Software Technology Park) may be utilized for discharging duty liability on similar final products cleared for home consumption. If the manufacturer does not have any excise liability, the modvat credit may be refunded to him provided he has not availed claimed drawback of duty under the Central Excise Rules. Any waste arising from processing of modvatable inputs in respect of which credit has been availed may: Be removed by payment of duty if such waste is produced in the factory. Be removed without payment of duty where permitted by order of the government. Be destroyed in the presence of a proper officer on application made by the manufacturer and if found unfit for further use or not worth the duty payable thereon provided the manufacturer informs the appropriate authorities at least 7 days in advance in writing as regards the quantity of waste and the date on which it is supposed to be destroyed and after complying with all the conditions as may be prescribed by the Collector of Central Excise in this behalf. The manufacturer may transfer or utilise modvat credit from one of his factories to another with approval from the Collector of Central Excise provided application is made by him in this behalf and all conditions imposed by the Collector are satisfied. Rule 57G For availing the benefit of modvat, the manufacturer must carry out certain procedures. He must file a declaration with the Assistant Collector of Central Excise having jurisdiction over his factory indicating the description of final product manufactured in the factory giving details of the inputs used for such purpose.in each of the said products. He must also give detailed information required by the Assistant Collector of Central Excise and must obtain dated acknowledgement for such declaration. The manufacturer may avail of modvat credit only after the above declaration is filed by him. However, he cannot take credit unless the inputs are accompanied with an invoice prepared as per Central Excise Rules, Form AR-1. In case of imported goods it must be accompanied with triplicate copy of Bill of Entry or Certificate of Appraisal by Custom posted in a foreign post office. In other words, the goods must be accompanied with proof that duty has been paid on them. The Central Government has the power to direct that modvat credit on specified inputs may be allowed at such rate and subject to such conditions as it may direct without production of documents evidencing the payment of duty. Where copy of invoice meant for the purpose of claiming modvat is lost or misplaced, the manufacturer can claim modvat credit on the basis of or misplaced, the manufacturer may claim modvat credit on the basis of the original invoice subject to the satisfaction of central excise authorities. A manufacturer of final products shall maintain: An account in form of RG 23A - Part I and Part II in respect of duty payable on final product. Part I is a record of inputs and subsequent utilisation in the manufacturing process. Part II is a record of modvat

credit pertaining to such inputs. An account current to cover the excise duty payable on the final product cleared at any time. A manufacturer of final products must submit within five days after the close of each month to the Superintendent of Central Excise, the following documents: Original documents evidencing payment of duty Extract of RG 23A Part I and Part II After verifying their genuineness, the Superintendent shall deface the documents and return them to the manufacturer. The Collector may, having regard to the nature, variety and extent of production or frequency of removal provide for a period shorter than 1 month for submission of such return in respect of any assessee or class of assessees. He may also permit filing of the aforesaid return by an assessee within a period not exceeding 21 days after the close of each month. He may also permit filing of the aforesaid return by an assessee within a period not exceeding 21 days after the close of each quarter where the assessee is availing of an exemption based on the quantity of clearances during a financial year. In case the manufacturer is not in a position to file the aforesaid return on time for sufficient cause, the Assistant Collector may allow the manufacture to take credit of duty paid on inputs, condoning the delay and giving reasons in writing for such condonation. The Assistant Collector must see that the following conditions are satisfied before giving allowing such modvat credit: Input in respect of which credit of duty is allowed are received in the factory not before six months from the date of filing declaration and not before date of eligibility for modvat credit. Amount of duty for which credit is sought has been actually paid on these inputs. Inputs have actually been used or are to be used in manufacture of final products. The persons issuing invoices for modvatable inputs must follow certain procedures and must get registered with the Central Excise authorities. He must maintain stock account in the RG 23D. He shall make entries in RG 23D at the end of the day of receipt and issue of excisable good and: Shall enter the date of entry Correctly keep such book, account or register in the manner required Shall not cancel, obliterate or alter any entry therein except for correction of errors Keep such book, account or register open for inspection by the concerned authorities and allow such inspection Allow the concerned officer to take copies or extracts or send the records to the concerned officer. Such person shall issue serial-wise invoice containing details as prescribed by the Central Board of Excise and Customs or by the Collector of Central Excise in quaduplicate as follows: Original copy is for the buyer. Second copy is for the transporter. Third copy is for the excise department.

 Fourth copy is to be retained by the issuer. The invoice contains the following details: Evidence showing proof of payment of excise duty Rate of duty paid, amount of duty, duty debit entry in the PLA, date and number of such entry. Postal address, range and division of the excise officer under which the manufacturer falls, name and address and code number, excise registration number of the factory and also the name and address of the consignee, description and certification of goods, number of packages, total quantity of goods, total price of goods, total assessable value, rate of duty, total duty paid, serial number of debit entry in the personal ledger account, date and time of removal of goods, mode of transport, motor vehicles registration number and certificate duly signed by authorised person stating that what is stated above is true. Each invoice book must be authenticated by a working partner or managing director or secretary. Each invoice shall bear a printed serial number running for the whole financial year beginning on the 1St. April each year. Only one invoice book of each type shall be used by the registered person for removal of excisable goods at any one time unless otherwise specially permitted by the collector in writing. Each foil of the invoice book shall be authenticated by the owner or the working partner or the managing director or the company secretary, as the case may be, before being brought into use by the registered person. The serial number of the invoice before being brought into use shall be intimated to the Assistant Collector of Central Excise and dated acknowledgement of receipt of such intimation shall be retained by the registered person. When the invoice is generated through computer, serial number serial number likely to be used in the forth-coming quarter shall be intimated to the Assistant Collector of Central Excise and as soon as the same is exhausted, a revised intimation must be send. Records and invoices generated through computer are also recognised. Such registered dealer shall send details in software used including the format for information to the Assistant Collector of Central Excise. Rule 57I The excise authority may disallow modvat credit which has been wrongly availed or incorrectly utilised. In case modvat credit has been taken on account of error or misconstruction, the proper officer may send notice to the manufacturer within 6 months from the date of filing of return to show cause why such modvat credit should not be disallowed. In such cases, where modvat credit has already been utilised, show cause notice must state the utlised amount must not be recovered from the assessee. In case such wrong modvat credit is on account of willful mis-statement, collusion or suppression of facts on the part of manufacturer, instead of the aforesaid period of 6 months, notices may be sent for a period within 5 years from date of availment of modvat credit. The period of stay by court order will not be considered while determining the aforesaid period. The proper officer must consider the representation of the manufacture with regard to the show cause notice and thereafter to determine the amount of disallowance, if any.