Part III – Core – CUSTOMS DUTY AND GOODS AND SERVICES TAX

(N6BPA6T73)

Unit - 1

Tax system - Canons of taxation - Indian tax system – Indirect Tax review
and New GST Policy - introductory remarks.

TAX – AN INTRODUCTION:

 Tax is a continues revenue to the govt from the individuals.

 It is a compulsory payment to the govt on his individual income.

A tax is a mandatory financial charge or some other type of levy
imposed upon a taxpayer (an individual or other legal entity) by a
governmental organization in order to fund various public expenditures.
- education systems
- unemployment benefits,
- Welfare Activities like., public transportation.(roads, public
transportation, sanitation, legal systems, public safety, education,
health-care systems), military, scientific research, culture and the
arts, public works, distribution, data collection and dissemination,
public insurance, and the operation of government itself
- Energy, water and waste management systems are also
common public utilities.
 A failure to pay, along with evasion of or resistance to taxation, is
punishable by law.
 Taxes consist of direct or indirect taxes and may be paid in money or as
its labour equivalent.
 MEANING AND DEFINITION:

1. “ The government`s most important source of income is tax revenue.

Taxes are meant for the general purposes expenditures made by the
government.”
2. “ The compulsory payments made to governments associated with
certain activities are called Taxes.”
3. “ A specific amount of money demanded by government from its
Public levied on their income, sales, wealth etc.”
4. “ Taxes are the price we pay for a civilized society.”

TAX SYSTEM

1. Progressive Tax System

In a progressive tax rate system, higher income individuals pay a higher

proportion of tax with a rise in income. In this case, the marginal tax rate
would be higher than the average tax rate.
A progressive tax is cited as a method to reduce inequality in society.
Most economies around the world use a progressive tax to assess taxes for
individual income.

2. Proportional Tax System

In a proportional tax rate system, everyone pays the same proportion of

his or her income as tax. The tax rate does not change with an increase or
decrease in income. Here, the average tax rate is equal to the marginal tax rate.
This system exists in Latvia and Russia, and is considered to be more ‘fair’ and
easier to manage for everyone.

3. Regressive Tax System

A regressive tax is a tax which results in a decrease in the tax rate as the
amount subject to taxation increases. In a regressive tax rate system, the
individuals with lower income pay a higher proportion of his or her income as
tax.
CANONS OF TAXATION:
Adam Smith originally presented the following four canons of taxation. The
rest were developed later:

1. Canon of Equality

The word equality here does not mean that everyone should pay the
exact, equal amount of tax. What equality really means here is that the rich
people should pay more taxes and the poor pay less. This is because the
amount of tax should be in proportion to the abilities of the taxpayer. It is
one of the fundamental concepts to bring social equality in the country.

2. Canon of Certainty

The tax payers should be well-aware of the purpose, amount and manner of
the tax payment. Everything should be made clear, simple and absolutely
certain for the benefit of the taxpayer. The canon of certainty is considered a
very important guidance rule when it comes to formulating the tax laws and
procedures in a country. The canon of certainty ensures that the taxpayer
should have full knowledge about his tax payment, which includes the amount
to be paid, the mode it should be paid in and the due-date. It is believed that if
the canon of certainty is not present, it leads to tax evasion.

3. Canon of Convenience

Canon of convenience can be understood as an extension of canon of

certainty. Where canon of certainty states that the taxpayer should be well-
aware of the amount, manner and mode of paying taxes, the canon of
convenience states that all this should easy, convenient and taxpayer-friendly.
The time and manner of payment must be convenient for the tax payer so that
he is able to pay his taxes in due time. If the time and manner of the payment
is not convenient, then it may lead to tax evasion and corruption.

4. Canon of Economy

The whole purpose of collecting taxes is to generate revenue for the

company. This revenue, in turn, is spent on public welfare projects. The canon
of economy – keeping in view the above-mentioned purpose – states that the
cost of collecting taxes should be as minimum as possible.

Apart from the above canons there are few canons are developed.

1. Canon of Productivity

By virtue of the canon of productivity, it is better to have fewer taxes with

large revenues, rather than more taxes with lesser amounts of revenue. It
 is always considered better to impose the only taxes that are able to
produce larger returns.
2. Canon of Simplicity
The system of taxation should be made as simple as possible. The entire
process should be simple, non-technical and straightforward. Along with
the canon of certainty, where the amount, time duration and manner of
payment is made certain, the canon of simplicity avoids cases of corruption
and tax evasion if the entire method is made simple and easy.
3. Canon of Elasticity
An ideal system of taxation should consist of those types of taxes that
can easily be adjusted. Taxes, which can be increased or decreased,
according to the demand of the revenue, are considered ideal for the
system.
An example of such a tax can be the income tax, which is considered very
much ideal in accordance with the canon of elasticity.

INDIAN TAX SYSTEM

The tax structure in India is divided into direct and indirect taxes. There
are two different types of Taxes.
 1. Direct Taxes:
When the burden of money is on the person who is obligated to pay
tax , this type of tax is known as direct tax.
The amount of Tax which is levied on the income or wealth of
person who pays it. It is called direct tax, because government collects
tax directly from the person on whom the tax is levied.

Advantages of Direct Taxes

1. Economical : The cost of collecting direct taxes is low as compared to
revenue collection. Government collects of deducts the amount tax from
taxpayer directly.
2. Elastic : As the population of country grows or increases the amount
collected from tax also increases. So, direct taxes are elastic,
3. Equity : Direct taxes are equitable in a sense that a person who earns
higher income pays higher amount of tax and person earning low in come
pays low level of tax.

Disadvantages of Direct Taxes :

Evasion : Direct taxes can be easily evaded because of dishonesty.
People may show their income low as to get evasion from direct taxes. People
do not show their real income and wealth.

2. Indirect Tax :
In an Indirect Tax the initial money burden is on one person who is
obligated to pay the tax but the final burden or incidence is on the some other
person.
In indirect taxes one person shifts the burden to other person.
For example : In case of sales tax , firstly some amount of tax is paid by the
businessman but then the businessman shifts the tax burden to his
customers.
Advantages of Indirect Taxes:
1. Least chances of Tax evasion : Indirect taxes are very difficult to be evaded
because taxes are included in prices of commodities.
2. Elastic : If indirect taxes are levied on necessities of life the tax can be
elastic because no matter what the price of a commodity is people will buy
those commodities. If the price of that particular commodity rises people
will buy it at higher price as well. For example if The price of medicine rises
as medicine is necessity people will still buy it.
3. Diversification : Indirect taxes can be levied on large number
of commodities and due to these large number of commodities people of
all classes can be taxed.

Disadvantages of Indirect Taxes

1. Uncertainty : Uncertainty is the major disadvantage or you can say
drawback of indirect taxes because it is quite difficult to know who is
bearing the final burden of these taxes. As indirect taxes are levied on large
number of commodities so there is also large number of buyers and
estimation by the government for the amount of tax is also not so easy and
accurate.
2. Inflation: The producers shifts the final burden of tax on its customers by
increasing the prices of particular commodity so, these increase in prices of
commodities gives birth to inflation.
3. Regressive: Indirect taxes are regressive. Every person is taxed at the same
rate. There is more burden on consumers than producers.
INDIRECT TAX REVIEW:

Indirect taxes in India are very complex and subject to frequent

amendments. This requires companies to undertake periodical mapping of
their tax system to examine instances of non compliance and potential
problems or opportunities.

Expert Team is to identify opportunities for better tax

management, as well as potential areas of contention. The objective of
reviews is to give management comfort of having fully complied with law
and simultaneously no tax incentives or benefits are missed. Our review
methodology is aimed at prevention is better than cure .

The services are provided in all indirect tax laws i.e. excise, service tax,
VAT, FTP, Customs etc.,

The review services comprise of following:

 examining applicability of indirect taxes

 examining eligibility of tax credits and export benefits
 reviewing statutory returns/ records and documentation
 evaluating tax optimization opportunities
 identifying tax exposures and inefficiencies

Nature of reviews undertaken is as follows:

Limited Review

This covers longer period say 3 to 5 years to evaluate extent of

compliance of laws and areas of value addition. We highlight non
compliance in high, medium and low risk categories inviting direct
attention of top management on the areas requiring immediate actions.
The review also brings out opportunities of better tax planning
Follow up Review

This is routine follow up review of the entity’s operations. There

could be possibility of gaps in the understanding of personnel handling
tax matters, or frequent turnover of employees or frequent amendments in
the law requiring independent review of tax compliance. The review will
pinpoint potential problems before they become real financial difficulties.
This could be quarterly, six monthly or annually.

Due Diligence Review

In business restructuring deals, tax due diligence of buyer side is

required. This may required to be done voluntarily by buyer or based on
specific direction by seller. The team identifies areas of non compliance,
potential threats thereof and suggest remedial measures. Based on review,
we are able to suggest alternative structuring strategy to optimise tax
incidence.

Review Before Departmental Audit

Departmental audit is undertaken to gauge revenue leakage. The

cost of such unearthing is very high especially due to higher rate of
interest and imposition of penalty upto 100%.

Compliance Review to Support Auditors

In recent years, reporting obligations of statutory, tax and inte rnal

auditor have increased manifold. They are required to mention the extent
of non compliance under indirect taxation also. We want to support
chartered accountants and other professionals in undertaking compliance
review during the course of their statutory, tax and internal audit so that
they are able to meet their statutory obligations. This sometimes, also
opens up huge tax planning opportunities for the client.
NEW GST POLICY INTRODUCTORY REMARKS

GST
GST stands for “Goods and Services Tax”, and is proposed to be a
comprehensive indirect tax levy on manufacture, sale and consumption of
goods as well as services at the national level.
The GST is just like State level VAT which is levied as tax on sale of
goods.

Meaning:
The Goods and Services Tax (GST) is a value-added tax levied on most
goods and services sold for domestic consumption. The GST is paid by
consumers, but it is remitted to the government by the businesses selling the
goods and services. In effect, GST provides revenue for the government.

Its main objective

To consolidate all indirect tax levies into a single tax, except customs
(excluding SAD) replacing multiple tax levies, overcoming the limitations of
existing indirect tax structure, and creating efficiencies in tax administration.

In Simply
Goods and services tax is a tax levied on goods and services imposed at
each point of sale or rendering of service.
Tax Rates :

S.No Tier rate %

Nil Rate Items
1 CGST (20%) 0
Essential Items
2 SGST (20%) 5
Standard Rate
3 IGST (40%) 12
Standard Rate
4 UGST (20%) 18
Luxury Items
5 CGST (20%) 28