GAUHATI UNIVERSITY INDIRECT TAX LAWS NOTES
UNIT -1 Introduction to Indirect Tax Laws
Q. What are Direct and Indirect Taxes? [GU BCom 2022]
ANSWER:
DIRECT TAX: A direct tax is a tax that is imposed on an individual or an entity’s income or wealth, which is paid directly to the government. The burden of a direct tax cannot be shifted to another person or entity. Examples of direct taxes include income tax, corporate tax, capital gains tax, and wealth tax.
INDIRECT TAX: An indirect tax is a tax that is imposed on goods and services, which is ultimately paid by the end consumer. Unlike direct taxes, the burden of an indirect tax can be shifted from one entity to another before it is ultimately borne by the final consumer. Indirect taxes can be levied on various goods and services, including excise duty, customs duty, value-added tax (VAT), service tax, and sales tax. These taxes are typically included in the price of the goods or services and are paid by the consumer at the time of purchase.
Q. What are the features of indirect taxes? [GU BCom 2022]
Ans: Features of Indirect Tax
The features of Indirect Tax are as follows:
1. Tax Liability: In Indirect Tax, the tax liability is borne by the consumer of the product or service. The tax is collected by the manufacturer and seller from the consumer.
2. Payment of Tax: The responsibility of payment of tax to the government under indirect tax is on the seller of the product who collects tax on behalf of the consumer.
3. Nature: Before the implementation of GST, the nature of indirect taxes was regressive. After the introduction of GST, it became progressive.
4. Saving & Investment: Indirect Tax encourages saving and investment as it is not charged directly on income but on consumer’s expenditure.
5. Tax Evasion: It is very difficult to evade tax in this because it is directly charged on the purchase of goods and services and not on income.
Q. Write about the History of Indirect Tax In India. [GU BCom 2022]
Ans: The history of Indirect Taxation in India dates back a few centuries and a cue of the same is found in Kautilya’s Arthashastra. During those days, taxes were collected in kind in the form of crops and/or any agricultural product. Over the centuries, the nature and scope of indirect taxes in India have undergone significant changes.
During British rule, several indirect taxes were introduced in India, such as customs duties, excise duties, and income tax. The Indian government continued to levy these taxes after independence in 1947. However, with the introduction of economic reforms in the early 1990s, the government embarked on a new tax policy aimed at simplifying the tax system and reducing the burden on taxpayers.
One of the significant changes in the history of indirect taxes in India was the introduction of Value Added Tax (VAT) in 2005. The VAT replaced the earlier Sales Tax system and was designed to make the tax system more transparent and reduce the cascading effect of taxes.
In 2017, the Indian government introduced the Goods and Services Tax (GST), which is considered the most significant tax reform in India’s history. The GST replaced several indirect taxes such as VAT, excise duty, service tax, and customs duty, and brought the entire country under a unified tax regime.
The GST system is based on the principle of destination-based taxation and is designed to simplify the tax system, increase compliance, and reduce the burden of multiple taxes on businesses. The GST is administered by both the central and state governments and is levied on the supply of goods and services.
In conclusion, the history of indirect taxes in India is a long and varied one, marked by several changes and reforms. The introduction of the GST is a significant milestone in India’s tax history, which aims to simplify the tax system and promote economic growth.
Q. What is VAT? What Are The Silent Features of VAT?
ANS: Value Added Tax (VAT) is a tax on the value added to a product or service at each stage of its production or distribution. It is a consumption tax, which means it is ultimately borne by the end consumer of the product or service.
In simple terms, VAT is a tax on the value that is added to a product or service at each stage of the supply chain, from the raw materials to the finished product.
Definition: According to Section 2(56) of the Assam Value Added Tax Act 2003, “Value Added Tax’ means a tax on the sale of any goods at every point in the series of sales made by the registered dealer with the provisions of credit of input tax paid at the points of previous purchases thereof.”
FOLLOWING ARE THE SILENT FEATURES OF VAT:
(i) Taxable at every point of sale: VAT is a tax paid at each point of sale of goods where value is added. It starts from the stage of production and continues through each stage of distribution till final consumption.
(ii) Tax levied on value addition: VAT is levied on the difference between the sale price of goods/ outputs and the cost of purchases/inputs i.e. on value addition.
(iii) Collected as a part of sale price: VAT is collected as a part of the sale price at every point of sale where value is added i.e. the price of the goods and services increases.
(iv) No cascading effect: VAT is a multi-point tax. Under VAT, the buyer does not pay tax twice or there is no tax on tax. So it does not have any cascading effect.
(v) Taxable from the seller’s point of view: All transactions involving sales are taxed from the viewpoint of the seller.
(vi) Uniform rate at every point of sale: The same rate and system of taxation is followed for the same item whether the goods are sold to another dealer or to a consumer.
(vii) Burden on ultimate consumer: The ultimate consumer bears the whole of the tax (VAT) burden. So, it is a consumption-based tax or retail price tax.
Q. What are the advantages of value-added Tax?
Ans: Advantages of Value added Tax (VAT) :
(a) Simple method: As there were fewer rates of tax under VAT computation and compliance became easy.
(b) Prevented cascading (tax on tax) effect: As there was an input tax credit mechanism, it prevented the cascading effect.
(c) Improved compliance: As the VAT system emphasized on self-assessment, it ensured proper compliance.
(d) Transparency: As the incidence of taxation was known clearly at each stage, it became transparent.
(g) Encouraged investment: As under the VAT regime tax credit was allowed on capital goods, it encouraged investment.
(h) Minimized tax evasion: Owing to the use of tax invoices, the possibility of evasion of tax was minimized.
Q. What are the advantages of value-added Tax?
Ans: Disadvantages of Value added Tax (VAT) :
- Complicated system: VAT is a complicated system of tax in practice. It is a multi-rate system with exemption to certain industries with a view to providing social justice and economic development.
2. High administrative cost: The administrative cost of the VAT system is very high because the work associated with this system involves a number of stages.
3. Reduces revenue of the Government: The VAT system reduces the tax burden of consumers and in consequence reduces Government revenue.
4.Tax Evasion: VAT is subject to tax evasion, where businesses may under-report or avoid paying VAT.
Q. What are the objectives of introducing value-added Tax?
Ans: The following are the objectives of Value added Tax:
(i) Avoidance of double taxation and the cascading effect of tax: The tax structure that existed before the introduction of VAT, had problems of double taxation of commodities resulting in a cascading tax burden. As a result, the cost of the product increased which was considered unfair. The introduction of VAT reduced these problems to a great extent.
(ii) Reduction in cost: Under the VAT system, double taxation was eliminated and the cost of a product did not include input tax. It reduced the cost of production leading to an increase in sales.
(iii) To avoid multiplicity of the present tax structure: Earlier, the state sales tax structure was such that there were taxes such as Sales Tax, Turnover Tax, Surcharge on Sales Tax, Additional Surcharge, etc. To bring about the required rationalization in sales tax structure by abolishing surcharges and additional surcharges etc., the system of VAT was introduced.
(iv) To eliminate avoidance of tax: The introduction of VAT system dispensed with this system. As a result, no dealer could make purchases without payment of tax or avoid payment of taxes. It resulted in more tax collection than the existing sales tax system.
(v) Introduction of the transparent self-assessment system: In order to provide for the transparent self-assessment system, the VAT system was introduced as it had an inbuilt self-assessment system by the dealers.
Q. Write the types of Value Added Tax.
Ans:
(i) Production type VAT: Under production type VAT, while calculating the amount of value addition by a firm, the amount of total expenditure incurred by a firm (excluding the amount spent on the purchase of capital goods e.g., machinery, building, etc., and depreciation charged thereon) is deducted from sales income of the firm. Production type VAT is not used in any country now and hence is of academic curiosity only.
(ii) Income type VAT: Under income type VAT, while calculating the amount of value addition by a firm, the amount of total expenditure incurred by a firm along with the amount of depreciation charged on capital goods (excluding the amount spent on the purchase of capital goods e.g., machinery, building, etc.,) is deducted from the sales income of the firm.
(iii) Consumption type VAT: Under consumption type VAT while calculating the amount of value addition by a firm, the amount of total expenditure incurred by a firm including the amount spent on the purchase of capital goods e.g., machinery, building, etc. is deducted from sales income of the firm.
Q. Write a note on the concepts and general principles of Value Added Tax. [GU BCom 2022]
Ans: Concept: Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production or distribution. It is based on the increase in value of a product or service at each stage of the supply chain.
General Principles:
1. Taxable Event: VAT is triggered at each stage of production or distribution when value is added to the product or service.
2. Input-Output Tax: Businesses charge VAT on their sales (output tax) and reclaim VAT paid on their purchases (input tax), thus paying tax only on the value they add.
3. Tax Collection: VAT is collected by businesses acting as intermediaries between the government and consumers. They collect VAT on behalf of the government and remit it to the tax authorities.
4. Taxable Base: VAT is generally levied on the sale price of goods or services. However, some items may be exempt or subject to a reduced rate.
5. Destination Principle: VAT is usually based on the destination of the goods or services rather than the origin. This means that VAT is charged where the consumption occurs.
6. Registration Threshold: Businesses must register for VAT once their taxable turnover exceeds a certain threshold, as determined by the tax authorities.
7. Compliance: Businesses are required to keep detailed records of their transactions for VAT purposes and submit periodic VAT returns to the tax authorities.
8. Administrative Efficiency: VAT is considered administratively efficient because it is self-enforcing to a large extent. Businesses have an incentive to comply in order to reclaim input tax credits.
9. Revenue Generation: VAT is a significant source of government revenue in many countries, providing funds for public services and infrastructure development.
10. International Trade: VAT plays a crucial role in international trade, where it is often applied at the point of importation and refunded on exportation to avoid double taxation.
Overall, VAT is a widely used tax system known for its ability to generate revenue in a fair and efficient manner while minimizing administrative burdens on businesses.
Q. Explain the defects that existed in the indirect tax structure (during the pre-GST era) [GU BCom 2023]
Ans: Before the implementation of the Goods and Services Tax (GST) regime in India, the indirect tax structure was fragmented, complicated, and riddled with numerous defects. The indirect tax system in India is comprised of multiple taxes levied at different stages of the supply chain, including central excise duty, service tax, value-added tax (VAT), central sales tax, and other levies. These taxes were levied by different authorities, resulting in a complicated and confusing tax structure.
Here are some of the major defects in the structure of Indirect taxes before GST:
- Cascading Effect: One of the significant problems with the pre-GST indirect tax system was the cascading effect of taxes, also known as the tax on tax. In the pre-GST regime, taxes were levied at each stage of production and distribution, leading to a compounding effect of taxes. This resulted in an increase in the cost of goods and services, making them expensive for the end consumer.
- Multiple Taxes and Rates: The pre-GST indirect tax structure had multiple taxes levied at different stages of the supply chain. The central government levied taxes such as excise duty, service tax, and customs duty, while the state government levied taxes such as VAT, entry tax, and entertainment tax. Each tax had its own rate, making it complicated for businesses to calculate and comply with the tax laws.
- Compliance Burden: Compliance with the pre-GST indirect tax system was complicated and time-consuming. Businesses had to comply with multiple tax laws, file separate tax returns, maintain separate records, and undergo multiple audits. This resulted in a high compliance burden for businesses, particularly small and medium-sized enterprises.
- Tax Evasion: The pre-GST indirect tax system was plagued with rampant tax evasion due to the complex tax laws and multiple tax rates. Many businesses found ways to evade taxes, such as underreporting sales, claiming false exemptions, and claiming input tax credits fraudulently. This resulted in a loss of revenue for the government and an uneven playing field for compliant businesses.
- Lack of Uniformity: The pre-GST indirect tax system lacked uniformity across states and industries. Different states had different tax rates, and industries were subject to different tax laws and exemptions. This resulted in a lack of transparency and predictability in the tax regime, making it difficult for businesses to plan and invest in the long term.
In conclusion, the pre-GST indirect tax system in India was fraught with several defects, making it complicated, time-consuming, and expensive for businesses to comply with the tax laws. The implementation of the GST regime in July 2017 has simplified the tax structure, reduced the compliance burden, and eliminated the cascading effect of taxes. The GST regime has brought much-needed uniformity and transparency to the indirect tax system, making it easier for businesses to operate and grow.
Q. Discuss the shortcomings of the old regime of indirect taxes. [GU BCom 2023]
Ans: For years, the Indian economy has been operating under a complicated and inefficient indirect tax structure. Prior to the introduction of the Goods and Services Tax (GST), the Indian tax system consisted of a multitude of taxes such as Value Added Tax (VAT), Central Excise, Service Tax, and others. However, this indirect tax structure had several shortcomings that made it difficult for businesses to operate and consumers to pay taxes effectively in this blog, we will discuss some of the significant shortcomings of the previous indirect tax structure in India.
- Multiple Taxes and Complex Tax Structure: The previous Indirect tax structure in India was complex and convoluted, making it difficult for taxpayers to understand and comply with. There were multiple taxes levied at the state and central levels, and businesses had to navigate through a complex web of taxes to comply with the regulations. The lack of harmonization among the states resulted in different tax rates, procedures, and rules, leading to difficulties in interstate trade.
2. Cascading Effect of Taxes: Under the previous tax structure, taxes were levied at each stage of the supply chain, resulting in a cascading effect. This meant that businesses were paying tax on top of tax, leading to increased costs and reduced competitiveness. The cascading effect of taxes also made it difficult for businesses to keep track of input tax credits and claim them effectively.
3. Limited Input Tax Credit: Input tax credit (ITC) is a mechanism that allows businesses to claim a credit for the tax paid on the inputs used in the production of goods or services. However, the previous indirect tax structure had limited scope for the input tax credit, resulting in increased costs for businesses. The lack of proper input tax credit provisions made it difficult for businesses to claim refunds and reduced their competitiveness.
4. Taxation on Exports: Under the previous tax structure. exports were subject to taxes such as Central Excise and State VAT, resulting in increased costs for exporters. This made it difficult for Indian businesses to compete globally. and reduced the country’s export potential.
5. Limited Compliance and Enforcement: The previous Indirect tax structure was plagued by limited compliance and enforcement measures. The lack of proper enforcement mechanisms resulted in tax evasion and reduced revenue collection for the government. The complicated tax structure made it difficult for businesses to comply with the regulations, increasing compliance costs
Conclusion
In conclusion, the previous indirect tax structure in India had several shortcomings that made it difficult for businesses to operate and consumers to pay taxes effectively. The introduction of the Goods and Services Tax (GST) in 2017 aimed to address these shortcomings by creating a single tax system that simplified the tax structure and reduced compliance costs for businesses. The GST has been a significant step towards creating a more efficient and transparent tax system in India, but there is still a long way to go in addressing the issues of tax evasion, compliance, and enforcement.
Q. Distinguish between GST and VAT. [GU BCom 2023]
Ans: The Distinguish between GST and VAT :
| Aspect | GST | VAT |
| Definition | A comprehensive tax levied on the supply of goods and services at each stage of the production process. | European Union, the UK, Japan, and many other countries use VAT. |
| Scope | Typically applies to both goods and services. | Generally applies only to goods. |
| Tax Structure | Applied at multiple stages of production, with tax credits for taxes paid on inputs. | Applied at each stage of production but typically only on the value added at that stage. |
| Administration | Usually administered centrally by the government. | May be administered by national, regional, or local authorities, depending on the country. |
| Complexity | Generally more complex due to multiple rates, exemptions, and compliance requirements. | Can be simpler, especially in countries with a single rate and fewer exemptions. |
| Global Usage | Adopted by several countries worldwide. | Widely used in Europe and other regions, but not as universally adopted as GST. |
| Examples | India, Australia, Canada, and Malaysia are among the countries using GST. | European Union, UK, Japan, and many other countries use VAT. |
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Also Read: Gauhati University BCom 6th Sem Indirect Tax Laws Notes & Papers
