Shortcomings of current IDT regime – GST in India

Tax Cascading

The most significant contributing factor to tax cascading is the partial coverage by Central and State taxes. Wholesaler, retailer and range of services remain outside the ambit of the CENVAT and service tax levied by the Centre. The exempt sector is not allowed to claim for the CENVAT of the service tax paid on their inputs.

Similarly, under the State VAT, no credits are allowed for the inputs to the exempted sectors, which include the entire service sector and sale of exempted goods. Another major contributing factor to tax cascading is the CST on inter – state sales, collected by the originating state, for which no credit is allowed by any State Government.

Complexity in determining the nature of transaction – Sale vs. Service

The distinction between goods and services has become more complex. Transfer of software, copyrights, patents and other intangible goods are always in dispute: whether these are sales of goods or provision of services.

Further, goods, services, and other types of supplies are being packaged as composite bundles and offered for sale to consumers under a variety of supply-chain arrangements.Each Government can tax only a part of the bundle, creating a possibility of gaps or overlaps in taxation.

Lack of uniformity in rates of tax and other provisions

VAT rates, procedures, methods of computation and exemptions provided vary across states in India.

Fixation of situs– Local Sale vs.Central Sale

Whether a sale takes place in one State or another, i.e. to fix the situsof a sale transaction, is the major conflict, as its taxability affects the revenue of the State. Though CST is a tax levied by the Central Government, it is collected and retained by the collecting State. A significant number of litigation pertains to this issue.

Classification issues

Classification issues which impact the duty liability is a major issue for litigation under the current indirect tax regime. Also, to decide whether an activity is sale or works contract; sale or service, is a matter of much deliberation.

Complexities in Administration

There are many structural and design deficiencies of each of the taxes under the present regime of indirect taxes. Many of the administrative processes are still manual and are not automated. This leads to increased cost of compliance and also undermines revenue collection for the Government.