CMA Intermediate · Direct and Indirect Taxation

Concept of Indirect Taxes: formula sheet

Full chapter guide

Key formulas

Impact of tax: Impact = on the person who first pays the tax to the government; Usually the manufacturer, supplier or importer.
Incidence of tax: Incidence = on the person who finally bears the burden of the tax; Usually the final consumer in an indirect tax.
Direct tax test: Direct tax: impact and incidence on the same person; Burden cannot be shifted.
Indirect tax test: Indirect tax: impact and incidence on different persons; Burden can be shifted through price.
Price including tax: Price payable = Value of supply + Tax; The tax is collected from the buyer over and above the value.
Article 265: No tax shall be levied or collected except by authority of law; Applies to all taxes. Needs a valid law, not an executive order.
Article 246A: Parliament and State Legislatures have power to make laws on GST; Inserted by the 101st Amendment. Parliament has exclusive power where supply is in the course of inter-State trade or commerce.
Article 269A: GST on inter-State supplies (including imports) is levied and collected by the Government of India and apportioned between the Union and the States as provided by Parliament by law on the GST Council's recommendations; Import into India is treated as inter-State trade or commerce.
Article 279A: GST Council makes recommendations on GST matters; Chaired by the Union Finance Minister. Members are Union and State Ministers.
Seventh Schedule lists: List I = Union, List II = State, List III = Concurrent; Use these to decide which legislature could tax a subject before GST.
Amendment Act: The Constitution (101st Amendment) Act, 2016; Enabled GST. Removed overlapping Union and State taxing powers on goods and services.
Classification by burden: Direct tax: impact and incidence on the same person. Indirect tax: impact on seller, incidence on consumer; Impact is where the tax is first levied. Incidence is who finally bears it.
Pre-GST Centre taxes: Central excise (manufacture), service tax (services), CST (inter-state sale of goods), customs duty (import/export); Learn each tax with its taxable event.
Pre-GST State taxes: VAT (intra-state sale of goods), entry tax, octroi, luxury tax, entertainment tax, purchase tax; Most were subsumed in GST.
GST structure: Intra-state supply: CGST + SGST/UTGST. Inter-state supply and imports: IGST; GST is destination-based and has credit across the chain.
Cascading effect: Tax at a later stage = rate × (value including earlier tax); Under GST with credit: net tax at each stage = rate × value added.
Intra-State supply: CGST + SGST/UTGST; Both levied on the same value. Rates are normally equal, each being half of the total GST rate.
Inter-State supply and imports: IGST; Levied and collected by the Centre. Revenue is apportioned to the destination State.
Value-added principle: Tax payable = Output tax − Input tax credit; Tax is effectively on value added at each stage.
GST Council voting: Decision needs not less than 75% of the weighted votes of members present and voting; Centre's vote is weighted at one-third and all States' votes together at two-thirds of the total votes cast.
GST Council quorum: One-half of total number of members; Chairperson is the Union Finance Minister.
Constitutional basis: 101st Amendment Act, 2016; Article 279A; Article 279A provides for the GST Council. Article 246A gives concurrent power to tax goods and services.

Quick revision

An indirect tax is levied on a transaction, not directly on the income of the person who bears it.
The person who pays the tax to the government can usually shift the burden to someone else, often the final consumer.
Impact falls on the person who pays the tax to the government; incidence falls on the person who finally bears it.
Indirect taxes are collected by the seller or service provider and deposited with the government.
They are generally regressive in effect, because the same tax on a purchase weighs more on a lower income.
Indirect taxes are hard to avoid on consumption but easier to collect, since they are built into the price.
The power to levy a tax must come from the Constitution; know which list covers each tax.
Customs duty and GST are the main indirect taxes you must be able to place and describe.
GST was introduced to reduce cascading of taxes and bring a more uniform tax across the country.
Know the problems of the earlier multiple-tax system and how GST addresses each of them.

Common mistakes

Using impact and incidence as the same thing in an indirect tax. Fix: Impact is on whoever pays the government first. Incidence is on whoever finally bears it. Write them as two separate lines.
Saying the consumer is always the one who bears an indirect tax. Fix: Say the burden can be shifted. Where demand is weak, the supplier may absorb part of it. Use the words 'usually' or 'can be'.
Saying Article 246A gives only Parliament the power to levy GST. Fix: State that both Parliament and State Legislatures can make laws on GST. Only inter-State supply is exclusively Parliament's.
Confusing Article 265 with Article 246A. Fix: Remember 265 is the safeguard: no tax without law. 246A is the GST power.
Saying customs duty was subsumed in GST. Fix: Customs duty continues. IGST is charged on imports along with it.
Treating service tax and VAT as direct taxes or as the same tax. Fix: Service tax was on services (Centre). VAT was on sale of goods (State). Both are indirect.
Saying GST is an origin-based tax Fix: Write that GST is destination based. Revenue belongs to the State of consumption, which is why IGST is passed to that State.
Applying CGST and SGST to an inter-State supply Fix: Intra-State means CGST plus SGST/UTGST. Inter-State and imports mean IGST only.

Exam tips

For MCQs, first decide what is being taxed. Income means direct. A transaction means indirect. This settles most options.
In 'differentiate' questions, use two columns and at least five points. Examiners give marks per point.
Always give Indian examples, such as income-tax for direct, and GST and customs duty for indirect.
Write impact and incidence as separate one-line definitions. Marks are lost by mixing them.
If a question gives an invoice, show the tax calculation first, then name the person bearing the incidence.
Learn the article numbers 265, 246A, 269A and 279A with one-line purposes. MCQs often test these directly.
In written answers, mention the Seventh Schedule and the three lists before explaining the change brought by GST.
Always write the Amendment Act as 101st, 2016. Do not confuse it with the 2017 implementation.