Three Types of Indirect Taxation in India
Understanding international indirect tax requirements can be daunting, especially for companies who are new to doing business in a country. India is one country that is particularly challenging because not only are there several federal level indirect taxes on both goods and services, but there are also state level value added taxes. India has twenty-nine states and seven union territories, and each of these can have their own value added tax rate and schedules, which include reduced rates and increased rates for specified goods.
This introduction to India indirect taxation will provide general information on the Service tax and the Central Sales Tax (CST), as well as the Value Added Tax which is administered at the local level.
India Service Tax
The India Service Tax is 12.36% and is made up of several components, each of which must show separately on a sales invoice. Both the education CESS and the secondary and higher education CESS are a stated percentage of the service tax rate. The total tax rate then equals 12.36%. This rate has remained steady for several years, but can be increased by the Indian Government if they choose to do so. This tax applies to nearly all services and is levied by the Central Board of Excise and Customs (CBEC).
The tax rate is outlined as follows:
- India Service Tax (12% total)
- India Education CESS Tax (.24%) [2% of 12%]
- India Secondary and Higher Education CESS Tax (.12%) [1% of 12%]
Sourcing service transactions can be difficult since the rules for sourcing vary depending on the type of service transaction involved. For example, while a service is generally sourced to where the recipient of the service is located, this could change if the services being provided are online services. In 2012, a notification entitled the Place of Provision of Services Rules was issued to help provide clarification on sourcing questions: http://www.servicetax.gov.in/notifications/notfns-2012/st28-2012.htm
More information regarding the Service Tax can be found on the Department of Revenue, Ministry of Finance Indian Government website: http://www.servicetax.gov.in/.
Central Sales Tax (CST)
The Central Sales Tax applies to the sale of goods between states, often referred to as interstate sales. The CST rate charged on general sales is equal to the value added tax rate at the ship-from location, often referred to as the originating state. There are special circumstances under which the CST rate is fixed at 2%. Transactions taxable at 2% are those that take place between registered dealers, and where a C Form is presented. The C Form is issued to registered taxpayers by their state tax department.
The CST is administered and collected by the local sales tax authorities of each state. The state in which the transaction commences collects this tax and keeps this tax.
Value Added Tax (VAT) for Indian States
Up until 2005, many Indian states administered a general sales tax. Beginning April 2005, all Indian states slowly adopted Valued Added Tax Acts and Rules. The VAT system was supposed to simplify the complexity of indirect taxes in India, but due to the continuation of CST on interstate sales and the Service Tax on services, the new system did not necessarily provide simplification.
In addition to the standard VAT rate, each state has adopted a variety of VAT Schedules which specify goods that should be taxed at reduced rates or increased rates. For example, bicycles and tricycles are often taxed at a reduced rate in a variety of states whereas luxury items such as liquor are taxed at an increased rate in a variety of states.
VAT rates in Indian states range from reduced rates of 4% to increased rates of 30%. Changes to these rates do occur and Taxware regularly monitors all jurisdictions in India to insure all Indian rates and content in the Taxware Enterprise System are current.
The Future of GST in India
GST stands for Goods and Services Tax, and is an attempt to simply the indirect taxation scheme in India. Currently, as outlined above, there are three types of taxes that may be applied to the transfer of goods and services throughout India. Each one of these taxes requires different documentation and registration. From a compliance standpoint, this is very difficult for businesses, and ultimately this difficulty lessens the amount of tax collected by authorities.
When recently presenting the 2014-2015 budget, the Indian Finance Minister stated that the government will work to introduce GST by the end of this year. Similar statements have been made during the past five years, so it is unclear as to whether or not the introduction of GST tax reform will take place by December 2014. Not all Indian states are onboard with the introduction of GST because they fear they will not be adequately compensated by the Indian government for the cost of implementation.
It will be exciting to see if the Goods and Services Tax gets implemented throughout India later this year. This tax would make compliance remarkably easier for companies doing business in India. Taxware will continue to follow the implementation of the GST in India, and if such scheme is adopted our content will be adjusted appropriately.
There are many more intricacies of India indirect taxation, but hopefully this general introduction to Service Tax, Central Sales Tax, and the Value Added Tax was helpful.
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