Our Finance Minister Mr. Arun Jaitley has described the proposed Goods and Services Tax as the single biggest tax reform since independence, and rightly so. This statement in fact describes the need for us professionals to go deep into the introduction and working of GST in the Indian taxation system, not only to be able to seize every opportunity that it entails now and will subsequently bring, but also to ensure our survival in the profession.
Hence, I am putting up this series of write-ups on GST in an orderly fashion to share knowledge on the topic.
In this first part of the series, we will discuss the present system of indirect taxation in two parts:
i. The present scheme of levy of indirect taxes in India
ii. Shortcomings of the present indirect tax structure
In the subsequent parts, we will move on to the need for GST, models adopted internationally, fine details of the working of GST and much more.
I. Present Scheme of indirect tax levy
In order to comprehend the present scheme of indirect taxation in India, it is important to understand federalism. Federalism is a system of governance, wherein the power to govern is shared between the central and state governments. In a true federal state, each type of government requires some financial independence. Therefore, the Indian constitution has laid down separately the taxation powers of the Centre and the States.
The Centre has been given the power to levy Custom Duty, Excise Duty (except alcoholic liquors for human consumption and opium, narcotics etc.), and tax on inter-state sale or purchase of goods and Service Tax. Apart from this, the residuary taxation powers also lie with the Centre.
The State has been granted powers to levy Excise Duty on alcoholic liquors for human consumption and opium, narcotics etc, octroi or entry tax, tax on consumption or sale of electricity, VAT on sale or purchase of goods (other than on inter-state sales) and luxury tax.
Of the above stated taxes, four taxes constitute major revenue for the governments. These are Excise Duty, Service Tax, Customs Duty and Central Sales Tax/ VAT.
II. Shortcomings in the present structure
Though our indirect tax structure has been improving over the years, yet it suffers from various disabilities, which have been described below.
a. Cascading of taxes
Though VAT regime has been introduced in State as well as Central Taxes, still a lot remains to be done to make the system free of cascading effect. Presently, cascading is corroding the taxation system as under:
i. Non-availability of credit of Excise Duty for VAT
ii. No credit of CST
iii. No credit of Basic Customs Duty and Customs Cess
iv. No credit of VAT to service provider
v. No credit to exempt services
b. Double taxation
The Centre and the States’ powers of taxation overlap each other at various points. This leads to double taxation. Certain exemplary cases for this are tax on works contract, tax on supply of food, taxability of software etc.
c. Classification and valuation issues
Present tax statutes have a plethora of definitions and valuation rules. This not only makes the law hard to comprehend, but also results in uncertainty and overlapping, thus causing lengthy litigations.
d. Lack of uniformity
Since there are separate statutes for each tax, there is no uniformity with regard to payment due dates, return filing dates, threshold exemption limits etc. This causes huge compliance cost for the tax payers.
e. Administrational difficulties
A different administration structure has been set up for most of the taxes. This has resulted in duplication of departmental set-ups and staff, giving rise to increased administration costs for the tax administrators.
f. Narrow base
The number of assesses in the tax net is narrow, and has become further small due to area-specific and conditional exemptions. This makes it difficult to ramp up revenue and also gives space for tax evasion.
In the next part to this series, we will dwell on the meaning and implications of GST, taxes to be subsumed in GST and models of GST across the world.
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