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Unit 1: Introduction to Indirect Taxes

1.8 Double Tax Avoidance Treaty Notes

India has entered into DTAA with 65 countries including the US. In case of countries with which
India has Double Tax Avoidance Agreement, the tax rates are determined by such agreements.
Domestic corporations are granted credit on foreign tax paid by them, while calculating tax
liability in India. In the case of the US, dividends are taxed at 20%, interest income at 15% and
royalties at 15%.

Indirect Taxes

Excise Duty

Manufacture of goods in India attracts Excise Duty under the Central Excise Act 1944 and the
Central Excise Tariff Act 1985. Herein, the term Manufacture means bringing into existence a
new article having a distinct name, character, use and marketability and includes packing,
labelling etc.

Most of the products attract excise duties at the rate of 16%. Some products also attract special
excise duty/and an additional duty of excise at the rate of 8% above the 16% excise duty. 2%
education cess is also applicable on the aggregate of the duties of excise. Excise duty is levied on
ad valorem basis or based on the maximum retail price in some cases.

Customs Duty

The levy and the rate of customs duty in India are governed by the Customs Act 1962 and the
Customs Tariff Act 1975. Imported goods in India attract basic customs duty, additional customs
duty and education cess. The rates of basic customs duty are specified under the Tariff Act. The
peak rate of basic customs duty has been reduced to 15% for industrial goods. Additional customs
duty is equivalent to the excise duty payable on similar goods manufactured in India. Education
cess at 2% is leviable on the aggregate of customs duty on imported goods. Customs duty is
calculated on the transaction value of the goods.
Rates of customs duty for goods imported from countries with whom India has entered into free
trade agreements such as Thailand, Sri Lanka, BIMSTEC, south Asian countries and MERCOSUR
countries are provided on the website of CBEC.
Customs duties in India are administrated by Central Board of Excise and Customs under
Ministry of Finance.

Service Tax

Service tax is levied at the rate of 10% (plus 2% education cess) on certain identified taxable
services provided in India by specified service providers. Service tax on taxable services rendered
in India are exempt, if payment for such services is received in convertible foreign exchange in
India and the same is not repatriated outside India. The Cenvat Credit Rules allow a service
provider to avail and utilize the credit of additional duty of customs/excise duty for payment of
service tax. Credit is also provided on payment of service tax on input services for the discharge
of output service tax liability.

Securities Transaction Tax

Transactions in equity shares, derivatives and units of equity-oriented funds entered in a
recognized stock exchange attract Securities Transaction Tax at the following rate:

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