Excise duty is a tax on manufacture of goods within the country. Excise duties are levied under the Central Excise and Salt Act, 1944, the Excise Tariff Act, 1985 and the Modified Value Added Tax (MODVAT) scheme.
The rates of excise duty leviable vary depending inter alia on the nature of item manufactured, the nature of the manufacturing concern, and the place of ultimate sale.
The duty rates are either ad valorem (i.e. a fixed percentage of the cost of production), specified(a fixed rate depending on the nature of the manufactured item), or a combination of both. In the Finance Act, 1994, there has been a shift in the basis of taxation from specific to ad valorem rates, with a reduction in excise duty proposed on a large number of items.
The MODVAT scheme, introduced in 1986, applies to certain specific items. The objective of this scheme is to limit the cascading effect of duty incidence on a number of goods sbujects to excise which are further used as inputs for other excisable goods. The Finance Act, 1994, had extended the MODVAT scheme to capital goods and petroleum products. The Finance Bill of 1995 has further extended the MODVAT Scheme to cover woollen fabrics and industrial fabrics. Under the scheme, MODVAT credit can be claimed on the purchase of raw materials on which excise has been paid. This MODVAT credit can be used to set off excise duty payable on subsequent manufacture of goods. In addition, countervaling duty paid on imports can be used to claim a MODVAT credit.
All manufacturers of excisable goods are required to register under the Central Excise Rules, 1944. The registration is valid as long as production activity cotinues and no renewals are necessary.
Customs duties are levied on imports at rates specified in the Annual Budget. The maximum rate of customs duty for 1994-95 is 65 per cent, except on baggage. The Finance Act, 1994 has withnessed a general reduction in the dury on capital goods, steel, chemicals, drugs, pesticides and project imports (see Appendix).
The Indian tariff system is based on the Customs Cooperation Council (Brussels) Nomenclature, with most taxes being ad valorem in nature. In the past, India has imposed high customs tariffs with a view to sitmulate domestic industry. These duties, which were as high as 300 per cent for specified items in the late 1980s have been progessively rduced over the last few years to a maximum of 65 per cent.
In addition, there are several schemes under which items can be imported at concessional rates of duties. An example is the Export Promotion Capital Goods (EPCG) scheme. A sample of the range of customs duty rates prior to their revision, and as revised, in April 1994 is given below.
---------------------------------------------------------------------- Items From (%) To (%) ---------------------------------------------------------------------- Electronic industry 20-50 30-40 Telecommunication equipment 50-85 20-50 Coal and petroleum products 25-85 15-35 Machinery 25-85 15-50 Steel and other metals 12.5-85 10-50 Chemicals, drugs and pesticides 40-70 30-60 Miscellaneous chemicals 10-85 15-50 Miscellaneous 5-85 10-50 ----------------------------------------------------------------------
Sales tax is levied on the sale of a commodity which is produced or imported and sold for the first time. If the product is sold subsequently without being processed further, it is exempt from sales tax.
Sales tax is levied by either the Central or the State Government, Central Sales tax or 4 per cent is generally levied on all inter-State sales. State sales taxes, that apply on sales made within a State, have rates that range from 4 to 15 per cent. Sales tax is also charged on works contracts in most States and the value of contracts subject to tax and the tax rate vary from State to State. However, exports and services are exempt from sales tax.
Any expense incurred in luxury hotels is subject to expenditure tax. The expenditure tax is 10 per cent of all payments made to luxury hotels.
A service tax at the rate of 5 per cent has been levied on services of telephones, insurance (other than life insurance) and stock brokers. The tax will be charged on the amount of telephone bills, thenet premium charged by insurance companies and the brokerage or commission charged by stock brokers for their services.
Transfer of assets attracts stamp duty. Some states also impose real estate taxes based on assessed value. Real estate taxes are also imposed by municipalities and octroi is charged on goods entering their jurisdiction. Interest tax is levied on banking and financial services companies.
Centre for Monitoring Indian Economy, Bombay
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Last updated: May 1995.