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Investor Considerations

Excise tax and customs duty drawbacks are available on goods exported.

MODVAT credit is available for excise tax on inputs against excise tax on final products, reducing the cascading effect of the tax.

Sales tax on goods supplied in a works contract may be a significant factor.

Excise duty

Excise duty is imposed on the manufacturer of excisable products and is levied on a wide variety of commodities manufactured in India. This duty is an important source of revenue for the central government. 

Rates vary depending on the type of commodity, and even for the same type of commodity the rates often differ depending on circumstances such as end-use and taxability of inputs. Although generally ad valorem, the rates may also be specific or a combination of ad valorem and specific. They are prescribed in the Central Excise Tariff Act and are revised from time to tie by the annual Finance Acts or through notifications. Reference to the former Act is required to determine the applicable rate for any commodity in question.

Excise duty must be paid before the goods are cleared from the factory. Small-scale industries enjoy exemption from excise tax up to the specified value of goods cleared. The state governments are also empowered to levy excise duty on a few commodities, such as liquor, if they are not taxed by the central government. Excise drawback is available if the goods manufactured are exported.


Although India does not have a typical value-added tax system, under the MODVAT (modified Excise Rule, a manufacturer can obtain credit for excise tax paid on capital goods and on inputs used in the manufacture of final products. The scheme is applicable to notified inputs and final products and covers most taxable commodities. Credit is also available for additional customs duty (countervailing duty) paid on imported capital goods and inputs. No credit of excise tax is available on inputs if the related final products are exempt unless they are exported.

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Sales tax 

Sales tax is the most important source of revenue to the states and is imposed on virtually all sales of goods. It is primarily the liability of the seller, who generally recovers it from the purchaser. Each state has its own sales tax act under which tax is imposed at different rates. Sales of imported items and sales by way of export are generally exempt from sales tax. Luxury goods are normally taxed at a higher rate than other commodities. The sales tax acts of certain states provide for certain additional levies, i.e., works contracts tax (imposed on a contractor for manufacture, erection, repairs, etc.), turnover tax (imposed on the value of turnover exceeding a certain limit) and purchaser tax (imposed on the value of goods purchased from suppliers that are not registered under the sales tax laws).

The Central Sales Tax Act covers interstate sales. A concessional rate of sales tax is applicable if the buyer is registered with the Sales Tax authorities.

It is advisable for an investor to be aware of sales tax liability under any proposed contract, because its impact can be considerable.


Customs duties 

Customs duties are levied on commodities imported into India. However, drawbacks may be available if the imported items are reexported or used in manufacture for export. Customs duty is also imposed on the value of certain exports. The rates are prescribed in the Customs Tariff Act, 1975 and are revised from time to time by the annual Finance Act or by various notifications. Customs duties, particularly on imports, may be a significant cost factor in an Indian project due to the generally high rates of duties, unless corresponding drawbacks are available upon export.


Stamp duty 

Stamp duty is levied at various rates on documents, such as bills of exchange, promissory notes, insurance policies, contracts effecting a transfer of shares, debentures, and conveyances for the transfer of immovable property. Stamp duty on the transfer of shares and conveyances of immovable property is normally payable by the purchaser. The rates are prescribed by central government legislation, the Indian Stamp Act 1899, but rates on some documents have been revised through state government legislation.


Expenditure tax 

Expenditure tax is levied under the Expenditure Tax Act, 1987 at the rate of 10 percent on payments made to hotels toward room charges, food, beverages, and other services. This tax is collected by hotels from their customers and deposited with the central government. However, it is not applicable to hotels with room charges of less than Rs 1,200 per day pr person.


Service tax 

Service tax, introduced for the first time in 1994, is imposed at 5 percent on commissions and brokerage fees charged by stockbrokers, the gross amount of telephone bills, and premiums for nonlife insurance.


Wealth tax 

Wealth tax is essentially a direct tax and is levied on the taxable wealth of individuals and companies.


Other taxes  

Various other taxes or rates are levied by the municipal authorities (e.g., on goods entering their jurisdiction and on the annual value of property), by state governments (e.g., on motor vehicles and amusements) and by the central government (e.g., on foreign travel and domestic air travel).

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