Indirect Taxes in India

Indirect taxes include service tax, sales tax, custom, excise duties, VAT, MODVAT, CENVAT, proposed Goods & Services Act etc. Initially the indirect tax regime was too complicated and there was an ubiquitous problem of tax on tax. Post liberalization, there is a lot of change in the Indirect tax administration of the country and there was a dramatic change when the country shifted to VAT regime in 2000s.

Custom Duties

Custom duties are imposed on both during import and export of goods. The custom duties imposed during export are generally called “export duties”. Since, export duties reduce the competitiveness of the Indian products in the international markets, the Government has abolished the export duties. The import duty is quite productive, particularly when it is levied on high value imports such as iron and steel etc.

The custom duties were very important in the decades of 50s and 60s and later their place was taken by the excise duties as more and more goods were produced domestically. From 1990-91 to till date the custom duties have fallen drastically due to trade liberalization also.

Sales Tax

Sales tax is the tax which a purchaser pays when he / she purchases goods. The sales tax in most goods (except newspapers) for intra-state sales and consumption are within the powers of the states governments, which levy, collect and appropriate these taxes. This is the reason that some goods may be cheaper in a particular state as compared to another state. The sales tax on inter-state sale of goods is levied by Central Government and is payable to the state where the particular goods are sold. Today, sales tax regime has drastically changes and its place is now taken by VAT in most states.

Value Added Tax (VAT)

Today, in many states, the Sales Tax has been abolished and replaced with the Value Added Tax (VAT). While Sales Tax is a single point tax levied on the price of the goods; VAT is a multipoint tax in which tax is levied at each stage of transaction in the production/ distribution chain. By value addition, we mean the increase in the value of goods / services at each stage in the value chain. The tax paid at earlier stage is called ‘Input tax credit (ITC)’ and this credit can be used against a tax at later stage.

Similarity between Sales Tax and VAT

Both Sales Tax and VAT are indirect taxes which are ultimately borne by the consumer. Both taxes come within the jurisdiction of the states and are levied, collected and appropriated by states. The state legislature needs to pass state level acts to provide legal backing to Sales Tax and VAT. The states where VAT acts have been enacted, the sales taxes have been abolished. The idea of replacing Sales Tax with VAT  was to rationalize the taxes and bring the retail price of products to minimum possible level.

Difference between Sales Tax and VAT

Sales tax is levied on the sale of goods/ service and thus is simple to calculate and accounting purpose. VAT is multistage tax, so involves complex accounting. This difference makes VAT evasion difficult because VAT evaded at one stage would be caught at next stage.

MODVAT / CENVAT

MODVAT was introduced in 1986-87 to overcome the problem of cascading effect of Central Excise Duty. Currently, MODVAT has been replaced by CENVAT. In MODVAT, the manufacturer was able to obtain reimbursement of the excise duty and countervailing duties paid on the components against the duty payable on the final product. For example, if the excise duty of Rs. 1,000 was already paid on inputs or raw materials; and the final good attracted an excise duty of Rs. 10,000, then the manufacturer would pay only Rs. 9000 as MODVAT.

Thus, the key objective of MODVAT was to avoid repetitive payment of duties from raw material to the final product stage. The idea was that it would reduce the cost of the final product. However, it was later found that in many consumer goods, the final price got increased due to MODVAT. Further, the tax evasion was possible by creation of false invoices.

In 2000-2001, MODVAT was replaced with the CENVAT. This system has only one basic excise duty of 16% that is applicable to almost all goods except some goods which attract special excise duties of 8%, 16% or 20%. The system is much simpler but still leaves scope for tax evasion.

Service tax

Service tax was not in the constitution until 88th Amendment was passed. Via this amendment, article 268-A was added and also added a new entry in Union List viz. 92-C (taxes on services). Like Income tax and Corporate tax, Service tax is levied by the centre but collected and appropriated by both the centre and the states.

The Service tax was imposed in India initially from 1994-95 on electricity services, telephone services, brokerage etc. With every passing year, more and more services were brought into the ambit of the service tax. The first year collection of the Service Tax in 1994-95 was Rs. 407 Crore, which rose to Rs. 2610 Crore in 2001-02.

Currently, service tax is levied at the rate of 14% subject to minimum service value exceeds Rs. 10 Lakh in a year.

Goods and Services Tax

The Goods and Services Tax (GST) is a value added tax to be implemented in near future. It will replace all indirect taxes levied on goods and services by the Union and State governments. It is aimed at being comprehensive for most goods and services with little tax exemption.