Cascading Effect under Current Tax Regime v/s GST

Cascading Effect under Current Tax Regime v/s GST

Cascading Effect of Taxation

Cascading effect of taxation is one of the major problems in the current indirect-taxation regime. It can be simply understood as tax-on-tax. One of the primary goals of any taxation regime is to avoid “taxation over taxes”. Tax-on-tax inflates the price of the goods or services, the burden of which is finally borne by the ultimate consumer.

Cascading Effect under the Current Tax Regime v/s GST

Currently, India has Value-added-tax (VAT) at state level for intrastate sale/purchase of goods and Central-sales-tax (CST) at Central level for interstate sale/purchase of goods. Generally, input credit of VAT can be used to pay the output liability of VAT or CST. Input credit of CST is not available to the purchaser of goods which adds to the cost of goods purchased and the portion of CST included in the cost again gets taxed at the time of sale of such goods by the purchaser. Thus, in most of the cases this leads to tax-on-tax.

Let’s understand the cascading effect under current tax regime v/s GST with the following example.

Diagram 1


In the example, Manufacturer (A), Gujarat, sells goods to Dealer (B), Haryana, where Excise and CST is levied. Dealer (B) sells goods to Dealer (C), Gurgaon Haryana, where VAT is levied. Dealer (C) sells goods to Dealer (D), Delhi, where CST is levied. Finally, Dealer (D) sells goods to Ultimate Consumer where VAT is levied.

Diagram 2



Although price of goods to final consumer has increased under GST regime (due to increased rate of 18% generally) but the cascading effect of tax-on-tax has been minimized. Cascading effect cannot be fully eliminated still GST will control price inflation due to tax-on-tax.

In the initial 1 to2 years of GST implementation, the rate of inflation is expected to rise by 2 to 3 percent. So, general price level of goods and services will increase. But GST has many positive sides. The positive impact of GST will be seen in the years to come. Initially the revenue of government will decrease but it will increase in the following years due to taxation of currently untaxed area and broader tax base. Increased compliances will also help to balance revenue loss. GST will also curb the flow of Black-Money in the market which will in turn bring it to ambit of taxation.

To know More on What is GST? and How Does it Work? Press Here


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