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Indirect Taxation Prior to GST: India Case Study

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Taxation History, Theory, Law and Administration

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Abstract

Reflecting the constitution’s tax assignment, India’s indirect tax history began with state-level sales taxes on goods and a handful of services and central level excises on manufacturing. Both suffered from rate dispersion and cascading. In 1985–1986, the central government—centre—allowed input tax credit (ITC) in its excise structure though not comprehensively, calling it Modified VAT (MODVAT). In 1994, the centre introduced a tax on three services—insurance, telecommunications and stockbroking—at 5%. Gradually, more services were taxed, and the rate increased to 15% by 2017. Services as a category were not mentioned in the constitution; the centre used an assigned ‘residual’ category to tax services. In 2005, states introduced their own VAT on goods with the centre providing financial compensation for 3 years. The state VAT slashed the number of rates and had the same VAT base for all states with few exemptions. Using a constitutional amendment, India consolidated its indirect tax structure with a Goods and Services Tax (GST) in 2017 covering central and state governments and including both goods and services. Though somewhat flawed in structure, it was an achievement for a fiscally federal country. India’s experience before the GST comprises this chapter.

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Notes

  1. 1.

    Arguments that France was the first is erroneous since it introduced the debit–credit principle in the calculation of tax for selected goods while Brazil introduced the tax on a comprehensive base; and it was a fiscal federal VAT comprising three levels—federal (central), state and municipal—of government. The fact that Brazil’s VAT needs fundamental reform in current times is another matter; it reveals the wearing out of the VAT with age, and the difficulty in forging understandings, leave alone agreements, between the states on the one hand, and the centre, on the other.

  2. 2.

    See Aggarwal (1995).

  3. 3.

    Government of India (1997).

  4. 4.

    Physical attributes of a vehicle may not reflect the price.

  5. 5.

    Octroi was a tax that imposed physical checks on transport vehicles prior to entering a municipal area. Entry Tax, a later version, was imposed based on financial accounts rather than physical checks though selected large municipalities including Mumbai had continued with the Octroi. The tax caused immense costs to the production–distribution chain. As already indicated, purchase tax on purchasers was collected in a few large agricultural states on their produce at the wholesale marketplace.

  6. 6.

    The power ministry began deliberations on bringing electricity under GST, as a recent study it conducted showed that this would reduce per unit cost of power to generation, distribution and transmission companies by 17 paise per unit, leading to big savings for consumers. See Singh(2020). (Hundred paise equal one rupee).

  7. 7.

    The scheme covered steel ingots and re-rollables, flat products of steel, unwrought aluminium, copper, lead and zinc and waste or scrap of aluminium, copper, lead and zinc.

  8. 8.

    See Shome et al. (1997).

  9. 9.

    See Silvani(1992), p. 287.

  10. 10.

    The exception was the state of Haryana which went ahead with its own rudimentary VAT.

  11. 11.

    States ruled by opposition parties such as the Bharatiya Janata Party (BJP), the Samajwadi Party (SP) and Dravida Munnetra Kazhagam (DMK) did not join at that time.

References

  • Aggarwal, Pawan K. 1995. Incidence of Major Indirect Taxes in India. New Delhi: NIPFP.

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  • Government of India. 1997. Tax Policy for the Ninth Five Year Plan (1997–98 to 2001–02). Report of the Working Group on Tax Policy. New Delhi: Centax Publications.

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  • Shome, Parthasarathi, S. Mukhopadhyay, and Hasheem N. Saleem. 1997. MODVAT Administration. In Value Added Tax in India: A Progress Report, ed. Parthasarathi Shome. New Delhi: Centax Publications.

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  • Silvani, Carlos A. 1992. Improving Tax Compliance. In Improving Tax Administration in Developing Countries, ed. Richard M. Bird and Milka Casanegra de Jantscher, 274–309. Washington, DC: IMF.

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  • Singh, Sarita C. 2020. Government Begins Deliberations on Bringing Power Sector Under GST. The Economics Times, September 25.

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Shome, P. (2021). Indirect Taxation Prior to GST: India Case Study. In: Taxation History, Theory, Law and Administration. Springer Texts in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-68214-9_23

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