Cascading Effect of Taxes

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Hiregange & Associates, Chartered Accountants

Cascading Effect of Tax in India

CASCADING EFFECT OF TAX IN INDIA Mahadev.R

The purpose of this article is to throw light on the cascading effect of taxation present in India and its impact and the possible remedy for the issues arising from the same. The main objective of any taxation in any part of the world is obviously not to levy tax on taxes or in simple words to avoid cascading effect. Cascading effect of tax is one of the major distortions that had crept into Indian taxation. In India, taxes are multi-layered as the central Government levies taxes like excise duty, service tax and central sales tax and State governments levies taxes like VAT/sales tax, entry tax, state excise, octroi etc. However, the fact that Indian Government is now moving towards eradicating this problem by adopting GST in a few years time cannot be overlooked. Some major developments took place in this regard in India in the recent past. Some of them are introduction of Value Added Tax in states by phasing out sales tax, decision taken to reduce the central sales tax over a period of time and phase out the tax by the year 2010 and most importantly the proposition made by the Finance Minister while presenting the budget 2006 to introduce Goods and Service tax with effect from April 2010. It is expected that this date may not be practicable and may have to be extended by a few years.

Tax principles resulting in cascading effect of taxes India has variety in its culture, religion, places, and languages. Another item which should be added to this list is taxes. Some of the types of taxes which are levied by Central and State Governments are as follows:

CENTRAL GOVERNMENT Direct Taxes • • • • Tax on corporate income Capital gains tax Personal income tax Wealth tax

STATE GOVERNMENT

• • • •

State sales tax/VAT Entry tax Octroi State excise

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Hiregange & Associates, Chartered Accountants

Cascading Effect of Tax in India

Indirect taxes • • • • • Central Excise duty Service tax Customs duty Central Sales tax Securities transaction tax

• •

Property tax Agricultural income tax

Apart from these there are many other taxes like luxury tax, entertainment tax etc. Among these taxes some of the tax principles which are leading to cascading effect of taxes are discussed under following heads. SALES TAX ON CENVAT Cenvat is a duty on the activity of manufacturing whereas sales tax is levied on transfer of property in goods. Under the present sales tax provisions which could be of either Central Sales Tax or State Value Added Tax, the sales tax shall be payable on aggregate of the sale prices received and receivable by a dealer in respect of sales made. By virtue of this, the cenvat/excise duty tax shall be includible in the assessable value for charging sales tax. This in turn results in paying sales tax on cenvat levied earlier.

Illustration: Manufacturer ‘A’ removes Electric Control Panels to ‘B’ from Bangalore to Mumbai. The value of goods is Rs.250000/-. On this ‘A’ has to charge cenvat of 10.30% which works out to Rs. 25750/- and on the total amount which is 275750/-, CST at the rate of 2% which is Rs.5515/- is payable. Out of Rs.5515/-, Rs.515/- is a tax on cenvat Rs.25750/SALES TAX ON CENTRAL SALES TAX (CST) In the present VAT system prevailing in various states of the country, the dealer can claim the credit of tax paid on inputs/capital goods purchased within the State. However, credit of Central sales tax paid on inputs/capital goods purchased from other states would not be available. Even though it seems discriminatory, it has to be accepted. This in turn, leads to tax on CST.

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Hiregange & Associates, Chartered Accountants

Cascading Effect of Tax in India

Illustration: A dealer from Karnataka State purchases tools worth Rs.85000-from Kerala on payment of CST 2% Rs.1700/-. When the dealer sells the same tools within the State, his cost would be...
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