The consumption tax system in India is complicated and multi-layered with levies both at the federal and State levels. Taxes on goods are levied by the Centre at the manufacturing level through CENVAT, on services through the Finance Act, and on sale of goods via the Central Sales Tax Act. States levy tax on the sale of goods independently, under their own laws. Though some degree of uniformity had been arrived at after the introduction of the Value Added Tax, differences do persist. Tamil Nadu and Uttar Pradesh are yet to implement the VAT.
Goods and Services Tax (GST) is a broad based, single, comprehensive tax levied on goods and services consumed in an economy. GST is levied at every stage of the production-distribution chain with applicable set-offs in respect of the tax remitted at previous stages. It is basically a tax on final consumption. To put at a single place, GST may be defined as a tax on goods and services, which is levied at each point of sale or provision of service, in which, at the time of sale of goods or providing the services, the seller or service provider may claim the input credit of tax which he has paid while purchasing the goods or procuring the service.
It is seen as the panacea for removing the ill-effects of the current indirect tax regime, prevalent in the country. If adopted and implemented in its true spirit, GST may neutralise the existing problem of taxes being levied on top of taxes. For instance, when a shoe company produces a pair of shoes, the Central Government charges an excise duty on them as they leave the factory. At the retail level, the state where the outlet is located, charges VAT (different states charge different rates of VAT) without giving credit on the excise duty levied earlier (the state tax is levied on top of a central tax). In the GST system, both central and state taxes may be collected at the point of sale. Both components (the central and state GST) may be charged on the manufacturing cost.
The government plans to introduce dual GST structure in India. Under dual GST, a Central Goods and Services Tax (CGST) and a State Goods and Services Tax (SGST) will be levied on the taxable value of a transaction. This dual structure will ensure a higher involvement from the states, and consequently their buy-in into the GST regime, thus facilitating smoother implementation. Both the tax components will be charged on the manufacturing cost. The government is deliberating on fixing the value of combined GST rate at the moment, which is expected to be between 14-16 per cent. After the combined GST rate is decided, the centre and the states will finalise the CGST and SGST rates. All kinds of goods and services, barring some exceptions, would be under the GST purview.
Impact of GST on industry
Manufacturing sector in India is one of the highly taxed sectors in the world. A complex and high taxation structure has the tendency to render products uncompetitive in the international market or eats up large portions of the cost arbitrage available in manufacturing set-ups in low cost economies such as India. For instance, the manufacturing cost of most products in India is nearly half than in the west. But, the incidence of multistage taxation i.e. customs duty on imports, central excise duty on manufacture, central sales tax (CST) / value added tax (VAT) on sale of goods, service tax on provision of services and levies such as entry tax, octroi and cess by the State or local municipal corporations and related costs such as loss of tax credit, compliance and litigation cost chip away this advantage to the extent of almost 50 per cent.
Cascading impact of taxes on landed costs
Let us understand the cascading impact of indirect taxes through an example of a typical value chain.
There are multiple incidences on taxes and cascading impact on the cost of finished goods.
a) Custom Duty + Counter Veiling Duty + Cess paid on imported...