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Indirect Taxes: Types and Trend

Indirect Taxes: Types and Trend

  • Taxes are defined as a compulsory levy without any quid-pro-quo between the amount paid and the services provided by the Government. Taxes ace broadly divided into Direct and indirect taxes. At a basic level, the direct taxes are those in which the entity on which the tax is imposed also bears the burden of that tax, Income tax, wealth tax, corporation tax, etc. are some examples of direct taxes.
  • Under indirect taxes, the entity on which the tax is imposed can transfer the burden of the tax on someone also or bears partial burden only. Excise duty sales tax, custom duty, etc. are some examples of indirect taxes.
  • In the post liberalization era, a compositional shift in the tax structure in favour of direct taxes has teen observed. At present, the share of direct taxes in total tax revenues is around 54%. The decline in indirect taxes is also owed to the policy of cuts in customs and excise duties and the continuance of the exemptions.
  • In India, indirect taxes on goods are levied by both the Centre and the States. Indirect taxes at State level are mainly Sales tax (now being converted into VAT) some excise duties, entertainment tax, octroi, etc. The Central indirect taxes include excise duties, central sales tax, custom duties and service tax.
  • Indirect taxation in India has undergone a number of reforms, particularly since 1975. The pioneering reforms in this sector were incorporated in the recommendations of the L.K. Jha Committee’s Report of 1977. The report was an important landmark in the process of a long term shift to a system of Value Added Tax (VAT) in India.
  • It recommended a VAT system at the manufacturing level or MANVAT. In 1985, the government introduced MANVAT under the name MODVAT or Modified VAT. The scheme left sales tax out of its purview because the latter was a State subject As the name suggests VAT is a tax not on the total value of the goods being sold but only on the value added to it by the last seller i.e. gross value minus the value of inputs.
  • The basic difference between VAT and a sales tax is that the tax liability under VAT is split up into stages unlike sales tax which is collected either at the wholesale level or at retail level. After the introduction of MODVAT, Union excise duties have been progressively shifted to ad valorem basis with features of a VAT.
  • In 1991, the Chelliah Committee recommended that a comprehensive VAT should replace the existing system of Central excise, States Sales Taxes and other indirect taxes. However, the States were apprehensive of replacing their sales tax with VAT due to possible adverse impact on their revenue receipts and other reasons.
  • Asim Kumar Dasgupta Committee set up in 1993, played an important role in clearing the States’ doubts about VAT and the Centre promised to compensate them for the loss of revenue due to switching over from sales tax to VAT.
  • Finally, most states passed relevant legislation and introduced VAT with effect from April 2005. The indirect taxes used to be more important in contributing to the tax revenue in the pre-liberalisation era. In 1950-51, Custom and Excise duties yielded 63% of total gross tax revenue. Although, indirect taxes are still important, but the direct taxes contribute more to the revenue receipts.                                                                            Indirect Taxes: Types and Trend
  • The Union Excise duty is a tax on the production of an item. It is the third most important contributor to the tax revenues after the Corporation tax and income tax (both are direct taxes). The VAT system of their assessment has helped in increasing their yield. The general CENVAT rate on all goods was reduced from 16% to 14% in 2008-09 budget.
  • The Custom duties rank next only to the Excise duty in terms of contribution to the total tax revenue. The peak rate of customs duty on non-agriculture items has been consistently reduced to a level of 10% since 2007-08, Service tax is a tax on the provision of a specified service.
  • It is an ad valorem excise duty on the services sector. Since its introduction in 1994-95, the number of services has increased over the years and the tax rate has also been revised. Till 2007-08, 106 services were included and the tax rate has been reduced to 10% since February 2009. It ranks fifth in terms of contribution to the tax revenue.
  • As a proportion of GDP, indirect taxes accounted for 4.6% in 2013-14 (RE), i.e. slightly lower than the 4.7% in 2012-13. Collection rates are an indicator of overall incidence of custom tariffs including countervailing and special additional duties on imports. These are computed as the ratio of revenue collected from these duties to the aggregates value of imports in a year (or period) and thus represent trade weighted tariffs.                                                Indirect Taxes: Types and Trend
  • There has been a significant decrease in the collection rate for select import groups between 2007-08 and 2012-13. This calls for a retook into the custom duty policy regime, Amnesty Scheme: to encourage voluntary compliance to broaden the service tax base, VCES was launched.
  • As a part of the scheme, one time amnesty has been provided by way of 1. Waiver of interest penalty,2. immunity from prosecution, to the stop filers, non-filers, or non-registrants or service providers who have not disclosed true liability in their returns filed during the period from October 2007 to December 2012, provided such persons pay the ‘tax dues’.
  • The decline in revenues from all indirect taxes was mainly on account of general economic slowdown, reduction in duty rates (both customs and excise), lower volume of imps is of dutiable goods, and various exemptions.
  • This urgently calls for revenue augmentation measures like withdrawal / rationalization of tax exemptions, broadening of tax base, can’t see approach while signing Free Trade Agreements, increasing compliance through deterrence, simplification of tax laws, liquidation of locked revenue and recovery of arrears, and speedy disposal of pending cases.

Indian Economy

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