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Defects of old tax system

 DEFECTS IN PREVIOUS TAX SYSTEM


1. Cascading Effect: each central and government levy tax on a similar merchandise. Former levy tax on manufacture of products and also the later levy VAT on sale of exact same goods. government doesn't allow credit of excise duty paid by the manufacture to the dealer on sale of products. Thus, VAT is additionally collectable on excise duty element of the price leading to cascading result. Similarly, service tax is collectable on rendering of service. No credit of service tax paid on input service utilized in marketing of products is provided by the government. So, tax is levied on tax. It boosted inflation. 

2. Multiplicity of Tax/Cess: Multiple taxes were levied in pre-GST regime like Excise duty, VAT, Entry tax, luxury tax, recreation tax, Service tax, Octroi etc. These taxes were in additions to numerous cesses obligatory by State and Central Government like Krishi Kalyan Cess, clean energy cess etc. All this created the tax structure terribly cumbersome. 

3. Overlapping of Jurisdiction: Over the years, distinction between merchandise and services has become hazy, thanks to that there's overlapping of state VAT and Central Service tax on transactions like works contract, food connected services of restaurants, caterers, computer software package, SIM cards, rental of movable property etc. In these cases, it was difficult to gauge whether or not the dealings was sale of products or rendering of service. Therefore, each the central and government would impose tax. 

4. group action amongst states: Pre-GST regime of taxation wasn't destination-based tax but origin-based tax. in this regime taxes square measure collected and used by the state administration wherever goods/services square measure transacted/manufactured or provided. this is able to encourage state to produce sales tax/VAT relief to draw in industries and at the same time discourage provider of products from different state by imposing entry tax, octroi, luxury tax etc. on merchandise returning from different states. 


5. Hindrance to Integrated market system: India despite being one nation couldn't 

develop into a national market thanks to invisible barriers of Central State tax, VAT, entry tax etc. as mentioned in last purpose. These invisible barriers were visible within the style of check posts on the boundaries of states. 

6. Loss of Man and Truck hours: thanks to check posts mounted by states on entry purpose millions of man hours and Truck hours were lost Besides that vast corruption was involved that created supplying management a pricey affair. 

7. problem in Compliance for Taxpayers: As mentioned already pre-GST regime had multiplicity of Tax and consequently tax laws. Moreover, every tax had a special taxable event like manufacture for Excise, VAT for sales etc. Also, there have been multiple of Tax authorities. Compliance needed voluminous efforts on the half taxpayers. It also promoted Inspector dominion. 



8. problem in Cross Verification of Credit availed by Assesses: Earlier it absolutely was tough for the tax department to induce the verification report from provider of products to understand whether the provider has issued explicit invoice on the premise of that input reduction has been taken by the client. thanks to lack of on-line knowledge the verification was done offline. typically, the report of provider wasn't received or received once extended lapse of your time. several scrupulous dealers exploited this and availed dishonourable credit. 

9. Tax Evasion: Burden of compliance, multiplicity of tax laws inflated the propensity to evade taxes. Fudging of records, concealment of dealings, bribing the tax officers were the tools adopted to stay out of tax web. 

10. large quantity of litigation: With multiple tax laws every having totally different rateable events result was heap of disputes relating to ailment of credit, deciding manufacture of goods, price of products, classification of products etc. Dispute settlement mechanism is almost jam-packed with such disputes leading to pendency of tax demands
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