‘Tax on tax’ popularly known as ‘tax cascading’ had been one of the major problems in present indirect taxation regime in India. It not only increases the cost of a product but also creates a disadvantage for Indian manufacturers and traders, not only in the national market but also internationally.
Through the introduction of CENVAT credit mechanism, problem of tax cascading has been resolved only partially. However, due to certain restrictions in the CENVAT scheme, Indian indirect tax structure has been unable to overcome the problem of ‘tax on tax’ completely.
Tax cascading arises in a situation where the taxes paid at any previous stage of the supply chain are taxed at the next stage, since they are included in the cost. This gives rise to a situation of ‘tax on tax’.
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