Challenges of Previous Indirect Tax Structure – GST Guide

Challenges of Previous Indirect Tax Structure: Some of the challenges under the previous indirect tax structure could be attributed to Central Excise wherein there were variable rates under Excise Duty such as 2% without CENVAT 6%, 10%, 18%, 24%, 27%, coupled with multiple valuation system and various exemptions. Further, under VAT, different states were charging VAT at different rates, which was resulting in imbalance of trade between the states. At the same time under VAT there was lack of uniformity in terms of registration, due date of payment, return filing assessment procedures, refund mechanism, appellate process etc. thus, complicating the compliance mechanism. For example: A business establishment having offices in different states was required to follow the laws of the respective states.

Challenges of Previous Indirect Tax Structure

1. In respect of taxation of goods, CENVAT was confined to the manufacturing stage and did not extend to the distribution chain beyond the factory gate. As such, CENVAT paid on goods could not be adjusted against State VAT payable on subsequent sale of goods. This was true both for CENVAT collected on domestically produced goods as well as that collected as additional duty of customs on imported goods.

2. CENVAT was itself made up of several components in the nature of cesses and surcharges such as the National Calamity Contingency Duty (NCCD), education and secondary and higher education cess, additional duty of excise on tobacco and tobacco products etc. This multiplicity of duties complicated the tax structure and often obstructed the smooth flow of tax credit.

3. While input tax credit of CENVAT or additional duty of customs paid on goods was available to service providers paying Service Tax, they were unable to neutralize the State VAT or other State taxes paid on their purchase of goods.

4. State VAT was payable on the value of goods inclusive of CENVAT paid at the manufacturing stage and thus the VAT liability of a dealer used to get inflated by this component without compensatory set-off.

5. Inter-State sale of goods attracted the Central Sales Tax (CST) levied by the Centre and collected by the States. This was an origin-based tax and could not be set-off against VAT in many situations.

6. State VAT and CST did not directly apply to the import of goods on which Special Additional Duties (SAD) of customs were levied at a uniform rate of 4% by the Centre. Input tax credit of these duties was available only to those manufacturing excisable goods. Other importers had to claim refund of this duty as and when they pay VAT on subsequent sales.

7. VAT dealers were unable to set-off any Service Tax that they had paid on their procurement of taxable input services.

8. State Governments also levied and collected a variety of other indirect taxes such as luxury tax, entertainment tax, entry tax etc. for which no set-off was available.

If VAT was a major improvement over the pre-existing Sales tax at the State level, then the Goods and Services Tax (GST) is indeed a further significant improvement at National as well as State level towards a comprehensive indirect tax reforms in the country.

GST is one of the biggest taxation reform in India aiming to integrate state economics and boost over all growth by creating a single, unified Indian market to make the economy stronger.

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