GST is set to become one of the biggest fiscal reform that our country is going to witness. All businesses, small or large are going to get impacted because of this paradigm shift in the indirect tax regime. Policymakers have consistently resonated the benefit of a unified taxation system in a federal country like India.
There is a long list of benefits, which are being claimed as a result of GST law and one such benefit is removal of the cascading tax effect. In simple words “cascading tax effect” means tax on tax. It is a situation wherein a consumer has to bear the load of tax on tax and inflationary prices as a result of it.
Let’s assume, when Manufacturer “A” sells his goods from Gujarat to Haryana, he is liable to collect both Excise Duty and Central Sales Tax at the rate of 12.5% and 2% respectively, being an inter-state sale. Further, Dealer “B” will not get any credit of this Excise Duty and CST. Dealer “B” in turn sells it to Dealer “C” in Gurgaon and charges VAT on such sale. Dealer “C” sells it to Dealer “D” in Delhi and collects CST, and finally Dealer “D” sells these goods to the end consumer in Delhi, collecting VAT.
One of the primary goals of a taxation regime is always avoidance of “taxation over taxes” or “cascading-effect” of the incident taxes as it adds to the deadweight loss i.e. slump in total surplus of supply chain consisting of supplier, manufacturer, retailer and consumer. These cascading caused due to levy of variety of charges by state and union governments has raised the tax-burden on Indian products and made them less competitive in the International market. The gargantuan-sizes of corporate-taxes owe much to this taxation structure and have led to adoption of tax-evasive practices. The common man finds himself strangled in a Gordian knot of multiple tax-rates, laws and elaborate processes and often fails to comply with these complex legislations. The extra tax paid due to taxation of the already taxed amount is finally bore by the end consumer which is common man and strikes them badly in addition-to inflation.
Cascading effect of taxes is one of the major distortions of the Indian taxation regime. Federal structure of our democracy, allows both states and center to levy taxes separately and this has caused this cascading. While Income tax, Excise duty, Service tax and Central Sales tax (CST), Securities Transaction tax is levied by the center; VAT/sales tax, Entry tax, State excise, Property tax, Agriculture tax and octroi is charged by the State governments. There are many possible transactions which come under the ambit of two or more of these taxes and the value of the second tax is calculated on the value arrived at by adding the value of first tax to the value of transaction. For example, inter-state purchase of goods would attract both Central Service tax and Sales tax and manufacturing and sell would be liable to Cenvat over and above CST.
The prevalent complex, multi-staged and cascading tax-structure steals the advantage of availability of cheap labour and other factors-of-production from India and brings the market-price (post-taxes) at par or above par the price of the international price. The manufacturing industry of India thus is not able to compete with that in China and Brazil. Presently, for industries, the decision of how many inventories to maintain or where to maintain them is guided heavily by the concerns of tax avoidance. Most of the industries maintain warehouses in each state and union-territories to avoid the CST charged on crossing the border. This gives rise to 25-30 warehouses as compared to 8-10 in developed countries and leads to various inefficiencies in terms of space, cost-structure and operations. Extra money is wasted in procuring space for these inventories as well as operating them. This trade-off between cost and quality manifests in inefficient quality to the final consumer. Need to ensure real-time visibility of inventory across the diversified warehouse-network amounts to higher IT cost, Further, multiple handling across the various layers of distribution and multi-layered compliance requirements result in higher material handling and cost-compliance cost. Generally, the numbers of these warehouses being high, their sizes have remained very small and have caused duplication of overheads and have inhibited racking and automation. In short, the prevalent taxation policy has left our industries with no choice but to make do with obsolete and inefficient warehouses and inventory.
Introduction: Good and Services Tax:
In a bid to see-off these complex and on a bid to see-off these complex and obsolete taxation policies and usher-in an era of transparent, fair and legitimate taxation and remove the inefficiencies of supply chain due to such lax policies, India has decided to join the bandwagon of 140 countries already practicing Goods and Services Tax (GST). GST is an indirect tax on goods and services which would be charged on every point of sale in the supply chain and every entrant in the supply-chain would be eligible for input credit of tax which she had paid to the previous entrant for the procurement of goods and services. The sellers or service providers collect the tax from their customer, who may or may not be the ultimate customer, and before depositing the same to the exchequer, they deduct the tax they have already paid.So, the manufacturer will get the input credit of all the taxes paid by them on the raw materials and also on the services.