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Indirect Tax
Under VAT, tax is imposed and collected at each stage of value addition in
the course of production and distribution of goods and services. Tax imposed
and paid on input goods and input services is reclaimed as input credit and
the total tax liability at each stage is calculated after granting input tax
credit. Generally a registered person can claim credit for input VAT on goods
and services purchased and used in connection with the taxable outputs.
Input tax credit claimed reduces tax liability. Tax base is effectively limited to
each stage of value addition. VAT secures revenue by being collected
throughout the process of production distribution without distorting
production decision.
EXEMPTION
Exemptions are derogations to main principles and reduce the tax base.
Special treatment is granted by exempting particular categories of goods and
services. Primary causality of tax exemptions is simplicity.
TYPE OF EXEMPTIONS
CONSEQUENCES
Exemptions inevitably make tax laws and tax administration complex and
provides scope for avoidance and litigation. Direct consequences of tax
exemptions are,
Certain exemptions do not depend upon the kind of goods and services
provided by the supplier but depend upon the nature of the entity. Such
exemptions are known as Entity exemptions. Entity exemptions under VAT
are of two types. The first type is exemption provided to small businesses
based on the annual sales that are below the exemption threshold limit
prescribed. Businesses availing small business exemption generally are not
registered and also do not claim input credit of tax on their taxable
purchases. Customers purchasing goods and services from the suppliers
who avail small business exemption are also denied any VAT benefit.
The second type is exemption provided for all sales or particular sales made
by an entity because of the nature of the entity e.g. Insurance premium
supplied by specific Insurance companies.
Exempt entity that is denied credit of VAT on inputs used in its exempt
business activities may attempt to avoid tax on some purchases by providing
them in-house rather than purchasing them from outside taxable suppliers.
To prevent such incentive towards vertical integration, some countries treat
certain self-supplies by exempt entities or organizations as taxable supplies
to themselves, notwithstanding the general exemption from VAT on their
outputs.
When goods are exempt from VAT, countervailing duty (CVD) is not imposed
on similar goods imported. Tax on imported goods being totally neutralized in
the exporting country, imported goods without CVD have clear competitive
advantage over similar domestically produced goods. Exemption thus
becomes injurious to domestic producers.
Service tax
Service tax refers to tax collected by the government of India from certain
service providers for providing certain services. The person who pays service
tax can be either a service provider or a service receiver or any other person
who is responsible for providing certain services. Indirect Tax is a kind of
indirect tax because the service providers pay the tax and recovers it from
the service receivers who receive or purchase the taxable services. It is a
kind of tax that you pay to the government for enjoying different services
received from various service providers.
Service tax in India came into effect in 1994 following the Finance Act, 1994.
It is imposed on certain services which are taxable under the section 65 of
Finance Act, 1994. The budget 2012 increased the range of services included
under service tax. It incorporated services such as service provided by AC
restaurants, short and long term lodging offered by hotels and private guest
houses etc. under taxable services. As per this new regulation, service tax is
charged from individual providers as well as companies in India. Individual
service providers can pay this tax via cash while companies can pay it on
accrual basis. However, they need to pay this tax only if the value of services
provided by them exceeds Rs. 10lakh in a single financial years. However,
this new additions to service tax rules are not applicable to the state of
Jammu & Kashmir. From the year 2012 onwards, all services, except the ones
specified in the negative list of services, become liable for service tax. The
negative list refers to the services listed in section 66D of the Finance Act,
1994.
Exemptions
Normally, service tax is paid on all services except for those included in the
negative list of services. All service providers including central and state
government service providers as well as private sector service providers are
liable to pay service tax. However, there are a few exceptional scenarios
wherein service providers can avoid paying service tax. Listed below the
major exemptions:
The recipients are exempted from paying service tax for the goods and
services received from the service provider, if there is written proof
indicating the value of the goods and materials and no credit of duty is
paid on such goods and materials, and if the services have been
rendered under the CENVAT Credit rules.
Insurance Companies
ESSENTIAL INGREDIENTS
TAXABLE VALUE
The insurance industry is also not going to remain untouched from its impact. It will certainly be
going to have an impact on the insurance industry as well as policyholders. Typically,
policyholder's pay service tax on the risk element of the premium component whereas the
investment element of the policies is usually out of the service tax scope. With the
implementation of the GST, insurance policies including life, health and motor will all be costlier
from April 2017 as taxes will go up by at least 3 % or 300 basis points.
Basically, the premium of an insurance policy depends on the type of an insurance policy you are
buying. Life insurance plans are broadly categorised as term plans, endowment plans, ULIPs and
pension plans.
Term Plan
Term plans purely offer death benefit and are termed as pure risk protection plans. In such plans
sum assured is paid to the nominee, if insured dies during the term of the policy. And if
policyholder survives the policy term, he has to forgo the entire premium as no maturity value is
paid in term plans, apart from the term plans with a return of premium (TROP) option.
The premium component of a term plan comprises the majority of the risk element to provide
insured a risk cover throughout the tenure of the policy. At present, service tax of 15 % is
imposed on the premium cost of the term plans. With the implementation of GST, the tax is
expected to rise to 18 % in the first year and also on renewal premium from April 2017. This
means the premium will get costlier by 3 % or 300 basis points.
Endowment Plans
Endowment plans or traditional insurance savings plans offers both death and maturity benefit,
whichever occurs first. Currently, endowment plans attract a service tax of 3.75 % on the
premium in the first year of the policy and are expected to rise to 4.5 % in the first year under the
new tax regime. As of now, 1.88 % of the service tax is levied on endowment plan's premium for
the second year which is expected to rise to 2.25 % from the second year onwards after the
implementation of GST.
ULIP
Unit Linked Insurance Plans (ULIPs) also offer dual benefit of insurance and investment. At
present, service tax of 3.5 % is levied on protection part of ULIPs in the first year and 1.75 %
from second year onwards. This would go up to 4.5 % in the first year and 2.25 % from second
year onwards.
Currently, health plan premium attracts a service tax of 15 % on its premium cost. With the
introduction and implementation of the GST, the cost of purchasing the health insurance will
become expensive as it will attract a tax of about 18 % on premium from April 2017.
Motor Insurance
Motor insurance premium also attracts the service tax of 15 % which will rise to 18 % from April
2017, if the rate is fixed up to this specified percentage mark.
CONCLUSION
In principle, a more inclusive tax base combined with targeted subsidy to the
consumption basket of the poor would be a desirable option. If that is not
possible, it may be better to supply such items at a reduced rate rather than
to exempt them completely. However, for administrative and other practical
considerations in certain cases it may be justifiable to exclude these items
which constitute major consumption expenditures of the poor.
Tax system should reduce the operating cost in the formal sector and
increase the operating cost in the informal sector. Exemptions may
discourage formalization of the economy. Despite continuing popularity and
demand for exemptions, tax incentives are proved to be ineffective. They
reduce revenue and complicate the fiscal system without achieving the
stated objectives. Simple tax system encourages people to come to formal
sector from informal sector. A complex tax system has got inbuilt tendency
to discourage entrepreneurs to move towards formal tax system.
Experiences show that loading more and more objectives on a tax system
through incentives, however well-meaning they are, do not achieve the
desired objectives.