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Taxation System in India


Indirect Tax


Excise Duty:
Manufacture of goods in India attracts Excise Duty under the Central Excise act 1944 and the Central Excise Tariff Act 1985. Herein, the term Manufacture means bringing into existence a new article having a distinct name, character, use and marketability and includes packing, labeling etc. Most of the products attract excise duties at the rate of 16%. Some products also attract special excise duty/and an extra duty of excise at the rate of 8% above the 16% excise duty. 2% education cess is also applicable on the aggregate of the duties of excise. Excise duty is levied on ad valorem basis or based on the maximum retail price in some cases.

Customs Duty:

The levy and the rate of customs duty in India are governed by the Customs Act 1962 and the Customs Tariff Act 1975. Imported goods in India attract basic customs duty, extra customs duty and education cess. The rates of basic customs duty are specified under the Tariff Act. The peak rate of basic customs duty has been reduced to 15% for industrial goods. Additional customs duty is equivalent to the excise duty payable on similar goods manufactured in India. Education cess at 2% is livable on the aggregate of customs duty on imported goods. Customs duty is calculated on the transaction value of the goods.

Rates of customs duty for goods imported from countries with whom India has entered into free trade agreements such as Thailand, Sri Lanka, BIMSTEC, south Asian countries and MERCOSUR countries are provided on the website of CBEC. Under ministry of Finance, custom duties in India are administered by the central board of excise and customs.

Service Tax:
Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified taxable services provided in India by specified service providers. Service tax on taxable services rendered in India are exempt, if payment for such services is received in convertible foreign exchange in India and the same is not repatriated outside India. The Cenvat Credit Rules allow a service provider to avail and utilize the credit of additional duty of customs/excise duty for payment of service tax. Credit is also provided on payment of service tax on input services for the discharge of output service tax liability.

Securities Transaction Tax:
Transactions in equity shares, units and derivatives of equity-oriented funds entered in a recognized stock exchange attract Securities Transaction Tax at the following rate:
  • Delivery base transactions in equity shares or buyer and seller each units of an equity-oriented fund - 0.075%
  • Sale of units of an equity-oriented fund to the seller mutual fund - 0.15%
  • Non delivery base transactions in the above - 0.015%
  • Derivatives seller - 0.01%.

Sales Tax/VAT:
Sales Tax Acts of different State Governments and Central Sales Act governed the application of Sales Tax/VAT. Sales tax is levied on the sale of movable goods. Most of the Indian States have replaced Sales tax with a new Value Added Tax (VAT) from April 01, 2005. VAT is imposed on goods only and not services and it has replaced sales tax. Other indirect taxes such as excise duty, service tax etc., are not replaced by VAT. VAT is implemented at the State level by State Governments. VAT is applied on each stage of sale with a mechanism of credit for the input VAT paid.

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