Goods and services tax the prospect in India

Abstract

Taxes are broadly classified as Direct Taxes and Indirect taxes. In the basic scheme of taxation in India, it is envisaged that central government will get tax revenue from income tax, excise, customs and service tax, while state governments will get tax revenue from sales tax/value added tax, excise etc. Article 246(1) of Constitution of India states that Parliament has exclusive powers to make laws with respect to any matter enumerated in List I of the seventh schedule to the Constitution. As per Article 246(3), the legislature of any state has exclusive power to make laws for state with respect to any matter enumerated in List II of seventh schedule to the Constitution. newlineEconomic liberalization and reforms played a great role in the development of Indian economy. In India, goods are taxable since long but till 1994 there was no tax on services. Service tax was introduced by the then Finance Minister, Dr. Manmohan Singh, in the year 1994, but only on three services. With the passing of time, the number of services were increased year by year and presently there number are more than hundred on which service tax is imposed. In the sphere of indirect tax reforms in India value added tax at the centre and states level has been considered to be a major step. newlineIntroduction of VAT in the States has been more challenging exercise in a federal country like India, where each State, in terms of Constitutional provision, have exclusive power in levying and collecting State taxes. Before introduction of VAT, in sales tax regime, apart from the problem of multiple taxation and burden of adverse cascading effect of taxes, there was also no harmony in the rates of sales tax on different commodities among the States. Not only were the rates of sales tax numerous and different from one another for the same commodity in different States, but there was also an unhealthy competition among the States in terms of sales tax rates-so-called rate war often resulting in, revenue-wise, a counter-productive situation.