Current v Proposed Regime of Indirect Taxes in India

Current v Proposed Regime of Indirect Taxes in India

Current Indirect Tax Regime in India

Problems in the Present Structure

Present Indirect structure is marked with following problems:

Multiplicity of Taxes

Presently, the Constitution empowers the Central Government to levy excise duty on manufacturing and service tax on the supply of services. Further, it empowers the State Governments to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central sales tax (CST) is levied on inter-State sale of goods by the Central Government, but collected and retained by the exporting States. Further, many States levy an entry tax on the entry of goods in local areas. Taxes by Union Government, State Governments and the local governments have resulted in difficulties and harassment to the tax payer.  He has to contact several authorities and maintain separate records for each of  them.

Complex

The taxes are levied by central government as well as state government. So, a person has to maintain accounts which will comply which will all the applicable laws. This multiplicity of taxes at the State and Central levels has resulted in a complex indirect tax structure in the country that is ridden with hidden costs for the trade and industry.

Cascading effects of taxes

In current indirect tax structure in India, there is cascading of taxes due to ‘tax on tax’. No credit of excise duty and service tax paid at the stage of manufacture is available to the traders while paying the State level sales tax or VAT, and vice-versa. Further, no credit of State taxes paid in one State can be availed in other States. Hence, the prices of goods and services get artificially inflated to the extent of this ‘tax on tax’.

Multiple Compliance

A business person might have to comply with multiple compliance in terms of indirect taxes in India.  Certain major compliance in different states with different set of laws is as under:

Statecommissioneratedivision range jurisdiction
OrissaBhubaneswarBalasore DivisionBALASORE I RANGEBalasore Tehsil, Bhograi Tehsil of Balasore District.
OrissaBhubaneswarBalasore DivisionBALASORE II RANGERemuna Tehsil, Basta Tehsil & Jaleswar Tehsil of Balasore District.
OrissaBhubaneswarBalasore DivisionBALASORE III RANGESoro Tehsil, Bahanaga Tehsil & Nilagir Tehsil of Balasore District.
OrissaBhubaneswarBalasore DivisionBALASORE IV RANGEOupada Tehsil, Kharia Tehsil, Baliapal Tehsil & Similia Tehsil of Balasore District.
OrissaBhubaneswarBalasore DivisionBHADRAK RANGEBhadrak Tehsil, Dhamanagar Tehsil Bhandaripokhari Tehsil & Bant Tehsil of Bhadrak District.
OrissaBhubaneswarBalasore DivisionDHAMRA RANGEChandabali Tehsil, Basudebpur Tehsil & Tihidi Tehsil of Bhadrak District.

Tax Arbitrage

The problem of tax arbitrage for a single nation poses invisible barrier for free trade.  In many cases, a small difference in rate of tax can result in manifold implications and thus, can induce the business to move into a lower tax territory.  As an example, the different rate of VAT as levied on sale of goods in different states is as under

Statecommissioneratedivision range jurisdiction
West BengalHowrahBally I DivisionRANGE-IArea under erstwhile Ward Numbers 1 to 6 under the then Bally Municipality (presently within Ward No. 51 to 66 of Howrah Municipal Corporation)
West BengalHowrahBally I DivisionRANGE-IIArea under erstwhile Ward Numbers 7 to 12 under the then Bally Municipality (presently within Ward No. 51 to 66 of Howrah Municipal Corporation)
West BengalHowrahBally I DivisionRANGE-IIIArea under erstwhile Ward Numbers 13 to 18 & 26, 27 under the then Bally Municipality (presently within Ward No. 51 to 66 of Howrah Municipal Corporation)
West BengalHowrahBally I DivisionRANGE-IVArea under Ward Numbers 1 to 5 under Howrah Municipal Corporation
West BengalHowrahBally I DivisionRANGE-VArea under erstwhile Ward Numbers 19, 20 under the then Bally Municipality (presently within Ward No. 51 to 66 of Howrah Municipal Corporation) and Ward Number 6 of Howrah Municipal Corporation
West BengalHowrahBally II DivisionRANGE-IArea under Ward Number 50 of Howrah Municipal Corporation
West BengalHowrahBally II DivisionRANGE-IIArea under Ward Numbers 8, 9 and 10 under Howrah Municipal Corporation
West BengalHowrahBally II DivisionRANGE-IIIArea under erstwhile ward numbers 21, 23 and 28 under the then Bally Municipality (presently within Ward No. 51 to 66 of Howrah Municipal Corporation) and Ward Number 7 of Howrah Municipal Corporation
West BengalHowrahBally II DivisionRANGE-IVArea under erstwhile Ward Numbers 22, 24, 25 and 29 under the then Bally Municipality (presently within Ward No. 51 to 66 of Howrah Municipal Corporation)
West BengalHowrahBally II DivisionRANGE-VPanchayat area covered under entire Bally-Jagacha Block

Similarly, Entry tax also acts as barrier for free trade.

GST is seen as a solution to the above problems.

GST shall subsume the following taxes in the times to come once the law is in force:

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The proposed GST regime shall have the following features:

  • It shall be a destination based taxation
  • It shall have a Dual Administration – Centre and state
  • State wise determination of taxable person – no more centralized registration
  • Seamless credit amongst goods and services
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