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1.1. Cascading of taxes:
This is by far the most important drawback of the system resulting in increased cost of Sales.
1.2. Renders Exports uncompetitive:
Due to the cascading and hidden effects of Single Point system, exports become uncompetitive in the international market.
1.3. Lack of transparency:
In view of the absence of any credit given on the tax collected on the output, the effective tax paid in both the Single and Multiple point of tax system is the weighted average of tax on the inputs and the output. This is certainly not the actual effective rate of tax, and makes it difficult to assess the tax impact on any commodity. This lack of transparency could disable state governments from reviewing their systems for any improvement.
1.4. Narrow Base:
Due to the fact that under the Single Point Tax system, the first sellers (who are usually constituted by Importers and Manufacturers) constitute the only base of taxation, the system fails to capture the value addition at subsequent stages. The application of turnover tax to capture the value addition at subsequent stages has not had the desired effect. Tax rates therefore are generally pegged at a high level to offset the narrow tax base.
1.5. Multiplicity of rates and Interstate competition:
Every state government has a plethora of rates, which are constantly altered, sometimes for attracting industries to their states. This has resulted in rate wars, though of late some agreement has been reached on floor rates for commodities.
1.6. Numerous exemptions and deferral schemes:
An offshoot of the inter-state war in luring new investments, every state has its own quota of exemption and deferral scheme for new industrial undertakings. With a reduced tax base given exemptions of certain companies and exemption of a long list of products from taxation, the tax base became narrower and the rates had to be higher to compensate for the loss of base.
1.7. Poor compliance:
Absence of any sort of audit trail and dependence of field staff of departments for enforcing compliance has resulted in poor compliance as well as harassment. |
