23. Indirect Taxation Prior to GST: India Case Study

Reflecting the constitution’s tax assignment, India’s indirect tax history began with state-level sales taxes on goods and a handful of services and central level excises on manufacturing. Both suffered from rate dispersion and cascading. In 1985–1986, the central government—centre—allowed input tax credit (ITC) in its excise structure though not comprehensively, calling it Modified VAT (MODVAT). In 1994, the centre introduced a tax on three services—insurance, telecommunications and stockbroking—at 5%. Gradually, more services were taxed, and the rate increased to 15% by 2017. Services as a category were not mentioned in the constitution; the centre used an assigned ‘residual’ category to tax services. In 2005, states introduced their own VAT on goods with the centre providing financial compensation for 3 years. The state VAT slashed the number of rates and had the same VAT base for all states with few exemptions. Using a constitutional amendment, India consolidated its indirect tax structure with a Goods and Services Tax (GST) in 2017 covering central and state governments and including both goods and services. Though somewhat flawed in structure, it was an achievement for a fiscally federal country. India’s experience before the GST comprises this chapter.