GROWTH AND DEVELOPMENT IN SALES TAX SYSTEM

GROWTH AND DEVELOPMENT OF SALES TAX SYSTEM

SALES TAXATION

          The important objective of all countries particularly developing countries is the attainment of rapid economic development. In these countries it becomes necessary to extend the tax net to lower income groups also, in order to make these groups contribute their share to economic development, and sales tax plays an important role in this regard. Since, India is a developing country sales tax holds a prominent place towards the contribution of the revenue to the government in order to meet the developmental expenditure for the welfare of people.

          In the present economic world sales taxation plays an important role in garnering the fiscal resources of a country. It has assumed significant dimensions in the economic and fiscal map of our country in recent years and now constitutes a major part of India’s tax revenue.

          Sales taxation has a significant role to play not only as an instrument of resource mobilization but also as a major regulator of the economy. In traditional economic thought, the purpose of taxation was solely to raise revenue for the state. But modern economic thinking has led to preposition that taxation is not simplify an instrument for raising revenue for the state. It is also to perform various socio-economic functions for an all round national development of a country. Hence, the need of a tax shifts from revenue raising to an instrument for socio-economic growth.

          Though the modern sales taxation has come in to currency only since the depression period and post-second world war period, its existence is traceable to the earliest period of civilized society. While tracing the sales taxation in India no systematic and chronological account of growth and development of sales taxation are available.

SALES TAX IN THE ANCIENT PERIOD

          The earliest trace of the existence of sales tax can be found in the Greek city states (404-354 B.C.). Here we find that the Athens levied various taxes on the sale of commodities in the market including a transfer tax on the sale of wholesale merchant and a tax on the sales of landed property.

          We also find references of such a levy in Egypt under Ptolemaic Dynasty. (343-335 B.C.) with rates as high as 5 percent. References of sales tax are found also in Kautilya’s Arthasastra. According to some authors Smrits as well refer to such a levy. While there may be difference of opinion as regards any references of sales tax in Smrits , Asrthasastra does provide clear evidence of levy. In its section of law and policy, we find mass of rules relating to sales taxation. Kautilya States that superintendent of merchandise (Panyadyaksa) was required to collect, inter-alia compensation fee (Vyaji) on sale of royal merchandise, which was imposed according to the manner of sales to the extent of 1/10^th of those sold by weight and 1/11^th on those sold by counting.  Kautily’s refernce to commodity tax in the book Arthashastra is of significance it includes the following:

1.     (Sulka) Customs duty which consists (Pravesya) import duty (Nishramya) Export duty and (Dwarabahiri Kadeya) Octroi and other gate tolls.

2.     (Vyaji) Transaction tax including manavyaji (transaction tax for crown goods)

3.     (Bhaga) Share of production including 1/6^th share (Shadbhaga).

4.     (Kara) Tax in cash.

5.     (Pratikara) Taxes in kind including (Visthi) labor supply of soldiers (Ayudhiya.).

6.     (Vaidharana) Countervailing duties or taxes

7.     (Vartani). Road cess

8.     (Parigha) Monopoly tax

9.     (Prakriya) Royalty

10. (Pindakara) Taxes paid in kind by villages

11. (Senabhaktham) Army maintenance tax

12. (Parsvam).Surcharges.      

          There are specific references of tax on the sale of threads, oil, ghee, sugar and salt as well as on the sale of animals, viz; cows, buffaloes, goats, sheep, asses, camel, horses and mules. Regarding sales tax other than these references in Arthasastra there are lots of rules in respect of differential rates, operation and administration of the tax including rules for checking of evasion.

          The tax was levied in ancient Rome as early as 6 A.D. by Augustus where centesimal rerumvenalium, a general sales or turnover tax, was imposed at a rate of 1 percent on goods sold by auction or otherwise in the market. Since the auction was their customary method of marketing all commodities except articles of domestic consumption, the tax in effect was a broad based tax. This tax was continued during the reign of Tiberius with rates reduced temporarily to one half of one percent during 17 A.D. Caligula removed it for some time but it was re-imposed by Claudius. The tax was still levied during the reign of Nero (54-68 A.D.) and is further included a levy of four percent on the sale of slaves.

          Romans adopted this tax by introducing the tax in France and Spain. In France a general sales tax was imposed by king Philip the fair at the rate of 5/12 percent as early as 1292.  It was repealed and re-imposed many times. In 1314 Philip la Bel initiated a tax at the rate of six denier per live on the sale of provisions, the rate of which was doubled in 1355 thus infuriating the middle class people. In 1465 Louis XI levied a five percent tax at the wholesale level. A general sales tax was also imposed in 1597 but was revoked in 1602 in fact the tax was so unpopular in France that no substantial yield could be collected. It was because of the people alone that any further attempt to impose sales tax was frustrated. Besides, this general unpopularity of tax over the years made the tax to be abolished at the outbreak of French revolution. There were also many other forms of sales tax, viz; tax upon the sales of provisions, etc., prevalent in 1314.

          There are evidences that Italy, Naples collected sales tax in fifteenth century. Survival of this tax in the latter years has been referred to by Adam Smith also. Prof. Buehler in this regard states that,” Spain was the only nation in the medieval period of public finances that collected the general sales tax as a regular source of revenue. Starting in the early middle ages, the Communes, Spain introduced alcavala as a national tax in 1342. It introduced virtually all articles and was levied at first at the rate of one percent and then at five percent on all sales. Alcavala, over the years, rose to heavy rates of ten to fifteen percent. Since it was levied on every stage of production- distribution process it proved to be a serious burden on industry, trade and commerce as well as on the consumers. It has, therefore, been characterized as the most notorious tax in the history of taxation. Adam Smith has condemned it as a major factor in the decay of Spain. However, in the latter years the yield from this tax was undermined because of grants of special exemptions to fewer towns and classes. This tax was finally repealed in 1819. But its remnants were witnessed in urgency up to 1852 in Mexico in the early 20^th Century.

SALES TAX AT THE TIME OF KINGSHIP

          The origin of the idea of taxation in India may be traced back to the period when the people conceived the institution of kingship for the first time. Indian law-givers while explaining the circumstances necessitating the creation of kingship have laid emphasis on some kind of contract which the person who has sworn in as king entered into with those who offered him that responsibility. This contract contained certain privileges and obligations which the two parties concerned were expected to fulfill in reciprocity. The two privileges and obligations contained in the contract were protection and taxation. Protection was the obligation on the part of the king towards the people while he was entitled to the privilege of taxation. The people in their turn received protection in return for the payment of taxes. Thus, the idea of taxation in India is believed to have emerged as a corollary of the theory of protection. No taxation, no protection was the basis of the whole administrative machinery in India of ancient times.

          Thus originated along with the institution of kingship, the taxation system has undergone several changes through the course of Indian history. Rigvedic Aryanas were the first people known to have evolved a system of taxation under their ruler called the Rajan. In the Rigveda it is mentioned that the Rajan used to receive his revenues in the form of Bali. As to the meaning and nature of bali, as it occurs in Rigveda, there are differences of opinion among scholars. But most of them generally agree that taxation in Vedic period was “occasional and voluntary”. Thus the term bali originally used to denote voluntary offerings made to God for securing their favour, came to be applied later to the presents and taxes offered to the king more or less voluntarily. To the later Vedic literature, however, the term bali was quite familiar was contribution made by the people to the king. During the later vedic times, the machinery of government came to include ministers called sangrahiter and bhagaduk. These two ministers perhaps were the precursors of sannaharato and sannidhata respectively of Kautilya.

          Sales tax was levied in India in Mouryan period also (Circa 323-185 B.C). Mention of this sort has been made by Megastenes. Strabo’s account purporting to be based on Megasthenes shows that the rate of sales tax was 1/10^th of the prices of the articles sold.

          The Mouryan period witnessed the emergence of a full-fledged system of taxation as indeed of any other branch of government. The real foundation of taxation system in India was laid during the time of Mouryas. Arthasastra was far advanced of its age and a number of theories enunciated in this classical master-piece on rajniti have either occurred, in course of history or have been followed the later rulers of the north as well as the south. So far, no work has surpassed Arthasastra in its accuracy, depth, far-sightedness and comprehensiveness. It has evolved a perfect system of taxation with a set of maxims, administrative machinery in charge of taxes, land revenue, commercial taxes, contributions, tolls, excise duties, customs duties, forced labour, tax exemption and so on. Thus, the provisions of Arthasastra have not only laid the foundation of taxation system but also have served as source for later rulers.

          It is believed that in India this tax was also levied during Scythian period as it came from the earlier periods. Also there are reasons to believe that the tax which existed during Mouryan period was not abolished during the Gupta period. There are references of ‘grants of exemptions’ from payment of ‘Klripta’ and Upklripta’. The taxes, which have been characterized by Mukharjee as sales tax. The tax was prevalent during 11^th and 12^th centuries also. This view is supported by twenty one copper plates of the king of Kanaiuj.

          Taxes on sale of goods prevalent in India during the Hindu period continued to be levied during medieval period also. Sales tax was prevalent during the period of Firuz Shah. Firuz Shah attempted to abolish the tax but it is thought that the abolition work was done only on paper and in practice it was collected regularly. This practice went on through the reign of Sher Shah upto that of Jehangir in some form or the other. During Akbar’s regime, Hasil-i-Bazar (market dues on the sale of commodities) was abolished but differential rates of sales tax were imposed according to the religion of dealers. The rate of sales tax was five and two and half percent on Hindu and Muslim dealers respectively. Again Jahangir attempted to abolish it but some-how the tax existed even during the rule of Shah Jahan and Aurangzeb. This period of Indian history shows that the sales tax was one of the important indirect taxes imposed by the Mughal rulers. To practice differential rates of tax brackets for the sale of goods in the city were assigned to different commodities in the city. Payment of the tax on the sale of many articles is mentioned in the contemporary records.

          During the 18^th and 19^th century except India and England sales tax did not find favour among other countries England used consumption taxes in the 19^th century to finance her war with France. In India the tax continued to be levied during the East-India company rule in the same way and the form as it was passed on from the previous times. Such taxes were collected on sale of alcoholic liquors and intoxicating drugs as well during later period also.

          Thus, we find that the sales tax, which had its origin since the beginning of the human civilization, has been continuing as a revenue measure ever since.

GROWTH OF SALES TAX IN DIFFERENT COUNTRIES

          Sales tax had ceased to be an important tax after the eighteenth century. The history of the tax in the present century shows a revival of interest in it. This revival in the initial stage was due to financial difficulties created by the world war first. The period between two world wars had also witnessed its adoption by some countries to repair their damaged economy. This was true of the post-second-world-war period also. The Second World War and later the depression period had made more countries to resort to this form of taxation. In quintessence this tax was revived as a fiscal measure to raise resource immediately. Prior to world-war-first, the sales tax had lost its importance to such an extent that as a measure of any significance it existed only in two countries. The Philippines had a levy on gross sales in 1904, at a rate of 0.33 percent on the gross value of all goods, wares and merchandise with exemption of food products at retail. The other country was Mexico having a sales tax system as a descendant of the Spanish alcavala.

          Germany was the first major country to impose a sales tax. It introduced a tax on commodity transfers in 1916, which had a rate of 0.1 percent. During the depression period the rate was further raised in 1931 and also a limited use of progressive rates was introduced. The basic rate was two percent but the sale of agricultural commodities was taxed at one percent. The rate of tax on the firms, with annual turnover of one million Reichmarks, was, however, 2.5 percent according to the progressiveness introduced. This structure prevailed during 1930s and world war second period. Even after the world-war-second, the general turnover tax has been continued in West Germany and it is believed that East Germany also employed a broad turn over tax, similar to that used in West Germany, but with slightly lower rates.

          France has to resort soon after the outbreak of world war first, to the stamp tax on the sales of the big retailers in 1914 at rates ranging from 1.2 percent on the first million Frances of annual turnover to six percent on the turn over in excess of 200 million Frances. Changes were made in 1916 and 1917 but because of the need for large revenues, in 1920 it simultaneously imposed a broad commodity transfer tax at the rate of 1.1 percent on the gross monthly sales of manufacturers and merchants.

          Like Germany and France many countries followed the suit and over a short period about thirty national governments had introduced sales taxes. Most of them adopted sales tax laws to meet the cost of post-war reconstruction, but others have utilized it to meet some other form of contingencies. Some of the belligerent countries of Europe repealed it after the war because of the strong opposition to the tax. The depression period, however, left no alternative but to re-enact such taxes. This period made those countries also to resort to sales taxation. The depressed period and later the second-world-war period made these countries to resort to sales taxation that had resisted during twenties.

          In 1919, Italy and Czechoslovakia adopted this form of tax. In fact Italy was third major European power to levy a sales tax following First World War. The tax was originally imposed as a retail sales tax in 1919 at a 10 percent rate on luxuries and a 2 percent on other items sold at retail. In 1923 and subsequently in 1930 the base was broadened and some charges were introduced to increase the yield. In spite of these efforts finally in 1940 this tax was replaced by a multiple stage tax. Presently this tax is levied on each transfer down to but not including retail level. It is also not levied on exports. The general rate is 3.3 percent with special rates for certain products ranging from 0.6 to 9.9 percent.

          Czechoslovakia levied a general one percent multiple stage sales tax in December 1919. It had supplementary tax of 10 and 12 percent on luxuries, which was collected from either the manufacturers or the retailers. In 1922 the rate was raised to 2 percent and single stage collection was introduced. This has been extended to many commodities.

          During the post-first-war period Canada had also felt the necessity to raise additional revenue sources. Accordingly in 1920 it had imposed a turnover tax of one percent levied on sales and importation to manufacturers and wholesalers. Provision was also made for a two percent tax on sales by products direct to retailers or consumers and an importation by retailers and consumers. The structure provided for exemption to necessities, viz., food, fuel and electricity etc.

          The sales tax in American States was enacted for the first time in 1921 by West Virginia. But the tax did not gather momentum in other states at that time. In fact twenty-four states enacted sales tax from 1933 through 1935. Though many states replaced it after 1937, but later many states re-enacted state sales taxes.

          Belgium imposed a general sales tax on all sales of tangible personal property except those of retail sales in 1921. The rate of tax was one percent and exemption included food. The rates were raised and reduced during 1920’s but finally in 1931, they were again raised.

          In 1923, Austria also for the first time joined the sales tax countries to meet deficit arising in the post-war period. The Austrian tax was based on the German Umsatzsteur with a one percent rate at all stages, plus a twelve percent single stage luxury tax.

          The USSR adopted the turnover tax in July 1921 along with launching of the economic policy. Hungary, Romania and Yugoslavia followed more or less the Austrian pattern and adopted turn over tax in the year 1921. Poland also joined them in 1923. Luxembourg had also a general multiple-stage sales tax. During 1925 and 1930 five more countries followed the suit. During 1931 and 1940 many other countries had imposed sales tax in some form or the other. They include Argentina, Nether land, New Zealand, Norway, India and Great Britain.

          In September 1948, Japan had also enacted a multiple stage turnover tax. It applied to all transactions at all levels including retailing. However, it was replaced after a year only in December 1949 due to its meager returns and much administrative difficulties. The Philippines had also, during the post-war period, replaced its turn over tax by a single stage retail sales tax. Other countries who have joined the line imposing tax have been Pakistan, Indonesia and Burma. India’s adoption of sales taxes, beginning since 1939, was to maintain financial autonomy by the states. In India adoption of sales tax as a fiscal measure is the outcome of present century only. For the first time provinces in India were empowered to impose this form of taxation through the autonomy provided by the 1935 Act. Bombay was the first province to impose with in a very limited urban and sub-urban area, a selective tax on the sales of tobacco in 1938. Second in line was Madhya Pradesh which imposed sales tax on retail sale of petrol and lubricants in January 1939. However, the first province to resort to general sales tax was Madras (Tamilnadu) which levied multipoint sales tax in 1939. Following Madras many provinces resorted to this form of taxation during and after the Second World War.

INDIAN TAX SYSTEM DURING PRE-INDEPENDENCE

          Prior to Independence, India was solely dependent on the tax regime rules imposed by U.K. The tax system of British, India reflected the characteristics of a traditional agricultural economy. Central government revenues were dominated by customs duties. Import duties were levied on all items of imports, and export duties were levied on jute and tea. Various customs and tariff Acts were passed as under:

i)                   The Sea Customs Act, 1878

ii)                 The Tariff Act, 1934.

          As per the British Indian Provinces, the chief source of income was land revenue followed by provincial excises, mainly on liquor. The government of India Act 1935 authorized the provincial governments to levy sales tax, they are:

i)                   Bombay Province – 1938

ii)                 Madhya Pradesh 1939

iii)               Madras multi point 1939

iv)               Bengal single point 1941

v)                 Punjab multi point model 1941

vi)               Bihar single point 1944

          Between 1946-1948 five states adopted/modified tax system viz., Bombay, Assam, Madhya Pradesh, Orissa and Uttar Pradesh.

CONSTITUTIONAL ARRANGEMENTS FOR TAXATION

          The taxation powers under the constitution between the union and the states lie on economic and administrative convenience.

          Taxes with inter-state and those in the case of which uniformity in rates is desired are vested with the central government taxes, which are location specific and of local consumption are vested with the states. Taxes on production with certain exceptions are levied by the centre and taxes on sales by the state governments.

          With growing complexity of the systems also the need for all India co-ordination, prompted by revenue needs, many states had by 1948-49 started levying taxes on exports. A number of problems arose such as defining the terminology, territories etc., in order to consider these, the government of India convened a conference of the Finance Ministers of states in October 1948. After a preliminary discussion, a committee of officials was appointed to investigate the possibility of achieving a certain essential commodities, raw materials, manufactured articles, etc., which were of all India importance. The officials committee made certain recommendations; they are-

i)                   No sales tax should be levied on exports to other states on the following commodities- Grains and pulses, Flour, Atta, and Maida, Matches and Kerosene.

ii)                 A ceiling of three pies in a rupee should be fixed in the case of the following industrial raw materials exported from one province to another- Coal, Cement, Steel, Cotton and Cotton yarn, Hides and Skins, Oilseeds, Rubber, Minerals and Jute. If the sales tax is levied subject to this ceiling by the province exporting the material: the province importing it  should not charge any further sales tax, if sold to a registered manufacturer for purposes of his manufacture.

iii)               A ceiling of three pies in a rupee should be fixed for the sales tax on the following goods exported from a province- Textile, Plant and Machinery, Vegetable oil products and Sugar. It will be open to the provinces to levy a higher tax on internal consumption if they like.

iv)               A uniform tax of the one Anna in the rupee- Three pies in the case of bullion species, should be levied on the following luxury articles- Bullion and species, Jewelry, Refrigerators, Motor vehicles, Radios, Gramophones. This tax should be levied at the point at which sales takes place to the actual user.

v)                 No province should charge any sales tax on a commodity exported by it, if on that same commodity, it does not levy a tax on its internal consumption.

vi)               No sales tax should be levied on agricultural implements worked by human or animal power.

vii)             In the case of commodities subject to multiple-point sales tax, the ceiling prescribed above should apply to the total incidence of the tax.

          The loss of the revenue resulting from the provisions of the constitution relating to inter-state trade coupled with the need to find money for the expenditure on developmental activities compelled the states to resort to various measures to readjust their sales tax systems to the changed circumstances. Different measures were taken by different states. The later developments of the sales tax systems are as follows;

i)                   There is the extent of financial need, which the particular sales tax system is designed to meet.

ii)                 The period in which the need has arisen may be one of relatively low prices coupled with a buyer’s market as in 1939 when Madras introduced the tax or one of high prices and inflation- as when Bombay and a number of other states adopted the sales tax as one of their more important fiscal measures.

iii)               There can be discerned in each state a definite degree of relationship between the tax system initially adopted and certain relevant characteristics of the economy of the state. These characteristics may be described as the pattern of consumption, the pattern of trade and the pattern of production in the state.

iv)               Apart from the origin of the tax system in different states, the later developments of the system have an intelligible connection with the further financial needs experienced by the states in the context of increased expenditure- on account of Five Year Plan or decreased revenue-on account of prohibition or some other occasion for radical financial re-adjustment-merger and integration.

v)                 Certain types of alteration in the tax system common to different states are seen to be attributable to the state governments efforts to adopt their tax to new conditions, legal and other, created by the constitution.

Union List Relevant to Taxation

          List 1 called “Union List” contains items like defense of India, foreign affairs, war and peace, banking etc., Items in this list relevant to taxation provisions are as follows:

          Item No. 82: Tax on income other than agricultural income.

          Item No. 83: Duties of customs including export duties.

          Item No. 84: Duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption, opium, narcotics, but including medical and toilet preparations containing alcoholic, opium or narcotics.

          Item No. 85: Corporation tax

          Item No. 92A: Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Interstate trade or commerce.

          Item No. 92B: Taxes on consignment of goods where such consignment takes place during Interstate trade or commerce.

          Item No. 97: Any other matter not included in List II, List III and any tax not mentioned in List II or List III- residuary powers.

State List Pertaining to Taxation

          State government has exclusive powers to make laws in respect of matters in the List II of Seventh Schedule to our constitution. These items include Police, Public health, Agriculture, Land etc., Items in this list relevant to taxation provisions are as follows:

          Item No.46: Tax on Agriculture Income.

          Item No. 51: Excise Duty on Alcoholic liquors, opium and narcotics.

          Item No. 52: Tax on entry of goods into a local area for consumption, use or sale therein-called octroi.

          Item No. 54: Tax on sale or purchase of goods other than news paper except tax on inter-state sale or purchase.

List III of Seventh schedule called ‘Concurrent List’ includes matters where both central government and state government can make laws. This list includes items like criminal laws and procedures, trust and trustees, civil procedures, economic and social planning, trade unions, charitable institutions, price control and factories etc.

Evolution and Fiscal Importance of the Sales Tax

          Sales tax in its modern form was introduced in many Indian states (Provinces) in the 1930’s, 1940’s, and 1950’s. During the year 1950 sales tax had been introduced virtually throughout the country. However, it was only after the enactment of the Indian constitution in 1950 that the sales tax system took a definite shape.

          The constitution assigned the right to levy taxes on the sale or purchase of goods other than news papers to the states. It also prohibited the states from levying sales tax on inter-state transactions and further it prohibited the states from levying sales tax on sale or purchase of goods declared by parliament by law to be essential for the life of the community. However, a clear division between general sales tax and central sales tax was established only after the constitution (Sixth Amendment) Act, 1956 was passed according to which the power to levy tax on inter-state trade was vested with the parliament and provision was made for assigning the proceeds of the tax to the state governments. Thus the sales tax system comprises general sales tax over which the states have their jurisdiction (power) and a central sales tax on inter-state trade, the rate of which is fixed by the centre, but collected and retained by the states. According to the central sales tax Act, which was passed pursuant to the constitution (Sixth Amendment) Act, 1956, the states’ powers with regard to inter-state trade were restricted and also the parliament was empowered to declare certain goods as of special importance and restrict the states’ power to levy sales tax on them.

FISCAL IMPORTANCE

          Over the years the sales tax has become the most important source of revenue to the states. The following table shows the revenue from sales tax has increased by nearly 15 times between 1980-81 and 1998-99. The share of sales tax in the total states tax revenue has remained around 58 to 60 percent throughout and this is the single largest source of revenue to the state governments.

TABLE-2.1

Share of Sales Tax in the Total States Tax Revenue

Year	Revenue from Sales Tax Rs. In Crores	Revenue From States Taxes Rs. In Crores	% of 2 to 3
(1)	(2)	(3)	(4)
1980-81	3,887.6	6,616.2	58.75
1985-86	8,428.6	14,551.0	57.92
1990-91	17,667.0	30,344.8	58.22
1995-96	35,477.3	63,865.3	55.55
1996-97	43,926.9	71,101.5	61.78
1997-98	51,374.5	84,958.9	60.46
1998-99	58,824.0	98,215.0	59.89

Source: Reserve Bank of India, Report on Currency and Finance, 1993-94 and 1997-98.

Central Sales Tax

          Taxation of inter-state sales is governed by the central sales tax Act, 1956 which was enacted to give effect to the Taxation Enquiry Commission’s recommendations with regard to central regulation of sales taxation by states. Taxation of inter-state trade needs to be restricted through central legislation because in the absence of it, both the producing state and the consuming state would tax at the usual rates in their respective states and this would make tax burden unduly heavy. The states power to legislate on the taxation of goods in the process of inter-state transactions is restricted by the centre under the central sales tax Act, 1956. The central sales tax rate originally fixed at one percent was later raised to two percent in 1963, three percent in 1966 and four percent in 1975. The rate of four percent is applicable to goods sold to government and other registered dealers and the rate applicable to unregistered dealers is ten percent. The reason for higher rate of ten percent on unregistered dealers is that no tax is levied by the state on goods sold by unregistered dealers whereas the goods sold by registered dealers carry the usual sales tax rate on intra-state trade in addition to central sales tax. The union government has delegated the power to states to collect and retain the proceeds of central sales tax.

          The second aspect of the central sales tax Act is that under the provisions of this Act, certain goods of special importance are treated as declared goods and they carry the rate applicable to inter-state trade even in respect of intra-state trade. The goods, which are treated as, declared goods are essential goods consisting of mostly food items and raw materials used in the process of production and thus the objective of fixing a low rate of tax on these items was to minimize the cost of food, clothing and inputs and also to ensure some degree of uniformity in the tax burden. The list of declared goods expanded twice consists of coal including coke in all its forms but not including charcoal, cereals, cotton, cotton yarn, cotton fabrics, crude oil, hides and skins, iron and steel, jute, oil seeds, pulses, rayon and artificial silk fabrics, sugar, tobacco and woolen fabrics, sugar, tobacco and textiles were included in the list of declared goods after the introduction of the scheme of additional duties of excise in lieu of sales tax in order to take the centre and reintroduce sales tax on sugar, tobacco and textiles.

          The intentions of the central sales tax Act are no doubt good as discussed above. But the purpose of central sales tax is not well served. There are some major problems associated with central sales tax.

i)                   By enhancing the rate of central tax from the original one percent to four percent, the intention of keeping the tax burden low has been defeated. Central sales tax of four percent plus the sales tax of the importing sate makes the total tax burden heavy. This encourages the consumption of goods produced within the state and comes in the way of the growth of a common market. It also discriminates between the consumers of producing states and importing states in the sense that if a good is not at all produced in a state and it is to be imported from another state, the consumer in the importing state pays the central sales tax plus the state sales tax where as the consumer in the producing state pays only the state sales tax. Thus, the two consumers bear different tax burden.

ii)                 As pointed out by the committee of state Finance Ministers on Sales Tax Reform, “The distortionary effect of input taxation is compounded by the levy of central sales tax. When a good is exported from one state to another the price of the good includes the whole or part of the tax on inputs contained in that good. On this inflated price the central sales tax is levied and since no set-off is given for the central sales tax either on input or on final good, there is an increase in cascading and an accentuation of the distortionary effect of input taxes.”

iii)               The consignment transfer adopted by the dealers frustrates the intention of the central sales tax Act. Sending consignments to different states for sale therein saves the payment of central sales tax and only about ten percent of inter-state transactions bear central sales tax. This is possible since the consignment transfers are not taxed. Though provision has been made for levying consignment tax through the constitution (Forty-sixth amendment) Act, 1982, the same has not been implemented so far.

          As a solution to the above problem, the Tax Reforms Committee made two alternative proposals.

1^st alternative

a)    The inter-state or central sales tax or the consignment tax imposed by the exporting state will be given credit by the importer.

b)    The exporting state will credit the inter-state sales tax and consignment tax collections to a central pool.

c)     Thus all collections of these two taxes will be deposited in the central pool and will be then shared among the states on the basis of an agreed formula. The formula should be so devised as to give even treatment to the producing and consuming states.

d)    The rate of inter-state sales and consignment taxes would be two percent.

2^nd Alternative

          The consignment tax would be imposed at one percent after the ceiling rate of central sales tax has been reduced to one percent without provision for set off in the first alternative. That also would have a cascading effect, but that would be much lower.

          In sum, major deficiencies of the sales tax system such as predominance of single-point levy, extensive taxation of inputs, multiplicity of rates, lack of uniformity, proliferation of incentives and exemptions, and distortionary effects of central sales tax, etc, need to be corrected. But the post-1991 tax reform is confined mostly to the central taxes. Except for limited attempts by some states to reduce the number of rates and adopt value added tax principle in respect of a very small number of commodities, no reform measures worth the name has been attempted by the state governments. The states must implement the recommendations of the committee of State Finance Ministers on Sales Tax Reform expeditiously and take the necessary steps to convert the sales tax in to value added tax.

          The recommendations of the Tax Reforms Committee the overall economic reforms initiated in 1991, reforms in the area of taxation were urgently called for. Objectives of economic reforms like marketing on, globalization etc. certainly needed the support of appropriate changes on the tax system. Accordingly, the tax reform aimed at improving the tax structure and revenue buoyancy. It also aimed at making the Indian tax system rational, fair, and simple and further aimed at developing an integrated system of commodity taxation.

Tax Structure Change

          Post 1991 tax reform aimed at increasing the share of direct taxes in the total revenue of the centre and the change in this direction is very much evident as shown in Table

Table

Share of Direct and Indirect Taxes

In the Total Gross Tax Revenue of the Centre[23]

(Rs. In Crores)

Year	Direct Tax	%of 2 /6	Indirect Tax	% of 4/6	Total
1	2	3	4	5	6
1950-51	176	43.45	229	56.55	405
1955-56	171	35.25	314	64.75	485
1960-61	292	32.62	603	67.38	895
1965-66	598	29.01	1463	70.99	2061
1970-71	869	27.10	2337	72.9	3206
1975-76	2205	28.97	5404	71.03	7609
1980-81	2997	22.74	10182	77.26	13179
1985-86	5620	19.6	23050	80.4	28670
1990-91	11030	19.15	46547	80.85	57577
1991-92	15353	22.79	52008	77.21	67361
1992-93	18140	24.3	56496	75.7	74636
1993-94	20299	26.8	55443	73.2	75742
1994-95	26973	29.22	65324	70.78	92297
1995-96	33564	30.17	77660	69.83	111224
1996-97	38898	29.97	90864	70.03	129762
1997-98	48282	34.68	90938	65.32	139220
1998-99	46601	32.4	97196	67.6	143797
1999-2000	57960	33.74	113792	66.26	171752
2000-01	68305	36.21	120298	63.79	188603
2001-02	69198	36.99	117862	63.01	187060
2002-03	83363	38.61	132542	61.39	215905
2003-04	105091	41.31	149257	58.69	254348
2004-05	132183	43.34	172774	55.67	304957
2005-06	162337	44.33	203814	56.66	366151
2006-07 R.E	224975	48.08	242873	51.92	467848
2007-08 B E	262348	47.86	285774	52.14	548122

Source: Government of India, Indian Public Finance Statistics 2007-08, and Ministry of Finance June 2008

Direct and Indirect Tax Revenue

          The share of direct taxes in the total gross revenue of the centre has decreased from 43.45 percent in 1950-51 to 19.91 percent in 1990-91 and again increased to 36.21 percent in 2000-01 to 47.86 percent in 2007-08. The share of indirect taxes has increased from 56.55 percent in 1950-51 to 80.85 and again decreased to 63.79 percent in 2000-01 to 52.14 percent in 2007-08. It should be noted that the increase in the share of direct taxes from 1990-91 is not solely due to an increase in the revenue from direct taxes and that it is partly due to the fall in the rate of growth of revenue from customs.

          Sales tax reform is necessary because the sales tax system suffers from certain major deficiencies. Predominance of single-point levy, extensive taxation of inputs, and lack of uniformity in the rate structure and widespread exemptions and concessions are the major areas of concern. Some of the individual indirect taxes such as heavy reliance on manufacturer/first seller level, exclusion of services from the tax base, lack of harmony in state sales tax, complex procedures, cascading effect etc are the basic reasons for moving towards value added tax system.

          Starting from the budget for 1992-93, an attempt has been made to lower the rates and to broaden the base. The biggest achievement in the realm of taxation in the 1990s is the lowering of rates. The efforts made for broadening the base are also very significant, though the fruits of this are yet to be realized.

          So, thus developed the sales tax system in India in particular and at international level in general. Though the sales tax system provided the significant amount of revenue to the governments it had its own problems like cascading, leakage, evasion, complexity, multiplicity of rates, rate war in federal countries etc., owing to which it made way for the new generation sales tax in the form of value added tax.