Why GST Is Important:
Commenting on the limitations of present structure of Indirect Taxes In India, Dr. Vijay Kelkar remarked at Page 49 of Report on the Implementation of the Fiscal Responsibility and Budget Management Act, 2003 as under:
“High import tariffs, excises and turnover tax on domestic goods and services have enormous cascading effects, leading to a distorted structure of production, consumption and exports. This problem can be effectively addressed by shifting the tax burden from production and trade to final consumption, and from savings to consumption. A well designed destination-based VAT on all goods and services is the most elegant method of eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially ‘sticks’ on final consumption within the taxing jurisdiction. The existing tax system introduces myriad distortions which favor some goods and services at the expense of others. These distortions yield inefficient resource allocation, and come at the price of inferior GDP growth. The existence of such potentialities in the framework of tax policy generate rent-seeking behavior on the part of firms, who have incentives to engage in political lobbying seeking favorable modifications in the tax schedule. The Indian consumer is known to be remarkably sensitive to apparently small changes in relative prices. The goal of a rational tax system is to empower households to engage in undistorted decision making, driven by their own needs and preferences, and not decisions made in the Ministry of Finance.”
Present Structure of Indirect Taxation in India
Present structure of indirect taxation in India can be divided into Central levies & State levies. Central levies mainly comprise of Excise Duty, Custom Duty & Service Tax. State levies mainly comprise of VAT, CST, State excise on alcohol and other levies like Entry Tax, Entertainment Tax, Luxury Tax, etc. Power to levy said duties flows to the Government from the Constitution of India. Excise Duty is levied on manufacture of goods vide entry no. 84 of List – I of Schedule VII. Custom Duty is levied on imports & exports of goods vide entry no. 83 of List – I of Schedule – VII. Service tax is levied on provision of service under Residuary Entry no. 97 of List I of Schedule VII. VAT & CST is levied on transaction of sale under entry no. 54 of List II & 92A of List I respectively. Current structure however suffers from following shortcomings:
Shortcomings of Present Indirect Structure
Current system of multiple levies distributed between Center & States results into cascading (i.e. tax on tax) effect. For instance, no credit of State VAT is allowed against Central Tax. CST credit paid in the originating State is also not allowed in the receiving State. This results in the increase in the overall burden of tax in the hands of end customer and creates distortion in the market.
Exemptions & Concessions
Under the current system, businesses enjoy many kinds of exemptions & concessions under different levies which break the chain of VAT and thus create distortion. Also these kinds of benefits do not create a level playing field especially when the same commodity is taxed at different rates in different jurisdictions.
Lack of transparency
Under excise & service tax law, currently there is no mechanism to cross verify the claim of CENVAT credit made by the manufacturer/service provider. Even under State VAT laws, all the States in India do not have the mechanism to cross verify the credits.
Lack of uniformity in provisions and rates
Present VAT structure across the States lacks uniformity which is not restricted only to the rates of tax but also the credit provisions as well as procedures.
Multiple points of taxation
Under the current system there are multiple points of taxation. Excise is levied when goods manufactured are cleared from the factory premises irrespective of the fact that the clearance is on account of sale or otherwise. State VAT is levied on sale of goods. Entry tax is levied on entry of goods in a particular State.
Complexity in determining the nature of transaction – Goods vs. Service
The distinction between goods and services found in the Indian Constitution has become more complex. Today, good and service are being packaged as composite bundles and offered for sale to customers under a variety of supply-chain arrangements. Under the current division of taxation powers in the Constitution, neither the Center nor the States can apply the tax to such bundles in a seamless manner. Each Government can tax only parts of the bundle, creating overlaps in taxation.
Due to different thresholds under different laws as well as numerous exemptions and concessions, the current tax base under indirect tax is narrow as compared to other countries.
Under the current system, businessmen are required to visit different tax offices according to the applicable laws to his business. These increases the compliance cost of businesses and breeds unnecessary complexity.