This entails the development of a comprehensive IT network for real time recording, sharing, and dissemination of information for calculating taxes later on. One look at the current Tax Information Exchange System (TINXSYS) will be enough to tell even an inadvertent viewer that the system is purely inefficient in handling all these functionalities; for that matter, it is not even present in all the states. Can the presence of multiple check posts within a few kilometres on either side of the border for two bordering states help? Any frequent interstate highway traveller would tell you how even a state entry tax collection booth causes huge delays; implementation of the GST through such check posts will further aggravate the problem as the states will probe even more into the goods passing their borders in order to minimise tax arbitrage. And we’ve not even come to the other informal ‘tax’ that border post guards collect.
But to its credit, the gargantuan challenge that the proposed tax aims to tackle is to minimise the problem of tax cascading, which has by far been the biggest cause of tax evasion and has been the reason that small unorganised players have spawned uncontrolled within the Indian market, as these are largely outside the threshold level of tax – due to both real income and unreported income – under the current regime.
Tax cascading can be understood by a simple example. Imagine a producer buying raw materials from a vendor for Rs.1,000 including Rs.100 as tax at a 10% rate to the vendor. Now, when the producer sells the final product to the end consumer for Rs.2,000, the tax at the same rate of 10% in the current VAT system comes out to be Rs.200. The customer should pay only Rs.100 as Rs.100 has already been paid on the raw materials before the value addition took place. But the customer pays Rs.200 as the producer does not get any input credit on the tax already paid. Hence, in essence, the end customer ends up paying a “tax on tax”. This leads to non-accounting of transactions, especially in sectors like construction and housing, leading to massive revenue losses and a direct incentive for the parallel economy.
But to its credit, the gargantuan challenge that the proposed tax aims to tackle is to minimise the problem of tax cascading, which has by far been the biggest cause of tax evasion and has been the reason that small unorganised players have spawned uncontrolled within the Indian market, as these are largely outside the threshold level of tax – due to both real income and unreported income – under the current regime.
Tax cascading can be understood by a simple example. Imagine a producer buying raw materials from a vendor for Rs.1,000 including Rs.100 as tax at a 10% rate to the vendor. Now, when the producer sells the final product to the end consumer for Rs.2,000, the tax at the same rate of 10% in the current VAT system comes out to be Rs.200. The customer should pay only Rs.100 as Rs.100 has already been paid on the raw materials before the value addition took place. But the customer pays Rs.200 as the producer does not get any input credit on the tax already paid. Hence, in essence, the end customer ends up paying a “tax on tax”. This leads to non-accounting of transactions, especially in sectors like construction and housing, leading to massive revenue losses and a direct incentive for the parallel economy.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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