History of Indirect Taxes in India
GST Law & Practice
B.Com 6th Sem CBCS Pattern Notes
History of Indirect Taxes in India
The history of Indirect Taxation in India dates back to few centuries and cue of the same is found in Kautilya’s Arthasashtra. During those days, taxes were collected in kind in the form of crop and / or any agricultural product. Such collections were generally ear-marked for some specific purposes or for the development of the State. Taxes were also raised separately for meeting internal and external exigencies like famine, flood, war etc.
Kautilya has also described in great detail the system of tax administration in the Mauryan Empire. It is remarkable that the present day tax system is in many ways similar to the system of taxation in vogue about 2300 years ago. Arthasastra mentioned that each tax was specific and there was no scope for arbitrariness. Tax collectors determined the schedule of each payment, and its time, manner and quantity being all pre-determined.
With the advent of Industrial Revolution in the early 1800’s, European markets were inundated with machine-made material with clothing fabric being the most prominent. The inundation was so intense that selling manufactured item was becoming impossible due to market saturation. Indian market was flooded with British products. Few rare exceptions were there, few products like clothes were also produced in India in cottage industries as for obvious reasons, compared to the imported British products, and prices were lower. At that point only the British thought to impose taxes on India made products. The modern history of indirect taxes starts from the early 20th century while Excise duty was imposed on Salt, Sugar, Motor Spirit etc. Gradually, the base of Excise duties was increased. The Central Excise Act was formulated in 1944 and thereafter has gone for gradual change year by year.
When the British left India in 1947, they left India with a structure, especially that of revenue, which hasn’t completely changed till now. Also there were reasons why they implemented this structure.
The basic framework for the tax system in independent India was provided in the constitutional assignment of tax powers. The principle of separation in tax powers between the central and state governments is adopted as the basis of policy. Schedule VII enumerates the subject matters of taxation with the use of three lists: List – I: mentioning the areas on which only the parliament is competent to makes law, List – II: dealing with the areas on which only the state legislature can make laws, and List – III: Listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently is provided in Schedule VII. While there are separate heads of taxation provided under this I and II of Seventh Schedule of Indian Constitution, there is no head of taxation in the Concurrent List.
After India got independence in 1947, funds were a major problem for the government for their administration and also to allocate funds for achieving a socialistic pattern of society. As a result, “Excise Duty” introduced during British regime was not abolished but an additional tax known as “Custom Duty” was imposed on imported goods to provide protection to Indian industries across various sectors and to raise additional revenue. But gradually during 1960-1970’s, it was observed that the Indian Technology had become obsolete as compared to their foreign counterparts. The high customs duty had become a protective wall incentivizing low production, obsolete technology although there were other reasons too like license raj etc.
At the above scenarios led India ultimately to a scenario where India did not have Foreign Reserves even to support three weeks of imports. International Monetary Fund (IMF) imposed liberalization as a pre-requisite for providing a bail-out to India which was reflected in the Budget presented by the then Finance Minister Mr. Man Mohan Singh. Liberalization measures also include reduction of import tariffs like the customs duty which led to development of technology within India.
Reforms on taxation in India in notable scale were started by two committees appointed in the 1970s; though the reforms suggested by them were implemented from late 1980s.
Architect of the indirect tax reform in India
L. K. Jha is considered as the architect of the indirect tax reform in India. L. K. Jha Committee was appointed in 1970s, but their suggestions were considered only after decades.
L. K. Jha, who was considered as an accomplished reformer was an Indian Civil Service Officer. He was taught by eminent economists including Lord Keynes (Cambridge) and Harold Laski (LSE) and became the Governor of the RBI. Jha represented a generation of quality educated people opting for Indian Civil Services.
Introduction of VAT
In 1976, Jha suggested VAT in the form of MAN VAT (VAT at the Manufacturing level).
Following Jha’s recommendations a dare move was made by V. P. Singh when he introduced MODVAT (Modified Value Added Taxation) in 1986, when he was Finance Minister. MODVAT was a predecessor of the present day VAT and it was the almost the same MANVAT suggested by L. K. Jha. Initially, it was introduced for selected commodities under the Union Excise Duties (UED).
Few years later, Dr. Manmohan Singh, the architect of economic reforms in India, carried forward from where V. P. Singh left. He extended MODVAT to almost all commodities and reduced excise duty rates. Later, Yeshwant Sinha, the then Finance Minister, introduced a full-fledged VAT for Union Excise Duties (UED) in the name CENVAT in 1999.
In order to persuade the states to rationalize their tax systems, the government of India appointed a State Finance Ministers’ Committee to make recommendations to phase in the VAT within a given time frame. This was later transformed into the Empowered Committee of State Finance Ministers’. The committee’s recommendation that the VAT be implemented in 2003 was postponed repeatedly, until April, 2005. The major landmark in tax reform at the state level was in simplifying and rationalizing the sales tax system the introduction of value added tax in states from 1st April, 2005. The introduction of the VAT was a major reform exercise, even if it may cause some confusion and uncertainty. The VAT tax base has strengthened the information base for tax administration resulting in improved compliance for other taxes and thereby enhancing the overall productivity of the tax system. VAT was introduced in Assam in the year 2005.
Introduction of GST
The attempt of a nationwide VAT was an unthinkable one even at the beginning of the new millennium as it means state sales tax and central excise duties and services taxes are to be merged into one. For the states, the sales tax is the largest source of tax revenue.
But still, the advantage of a single tax and its beneficial impact on unifying the economy and promoting economic activities, the first move towards introduction of Goods and Services Tax (GST) in India was made by Atal Bihari Vajpayee government in the year 2000 by initiating discussions with State Finance Ministers. In 2004, Vijay Kelkar suggested a comprehensive GST and in the next year, Mr. P Chidambaram, the then Finance Minister, set launch of GST as a budget goal.
After year of deliberations between sales and centre, GST was introduced in India on and from 1st July, 2017 where all the states except the state of Jammu and Kashmir joined this mission of “One National One Tax”. However, the state of Jammu and Kashmir also introduced the GST in its state from 8th of July, 2017.