History of Indirect Tax and its Nature in India

History of Indirect Tax and its Nature in India

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The indirect tax history points to the fact that this tax system was conceived during the 19th century in the United States of America. The Federal Income Tax was launched on 1 July 1862 as an indirect tax and during the 1940s, it gained acceptance from around 8% to nearly 90% of the population paying it to support the war efforts of the country. In India, this type of tax was first introduced in 1944, just before independence by the British in the form of excise duty on indigenous Indian products as a means for protecting the goods that were imported from the UK.

Thus, the indirect tax of India has been there for a long time and only its form has been modified from time to time. However, there have been a lot of reforms in the indirect tax regime and its first instance can be cited from 1986 when the Modified Value Added Tax (MODVAT) was introduced by the central government. Later, in 1991, the Value- Added Tax (VAT) was introduced in its place but the need for a uniform taxation regime was needed by the government. Thus, a task force was formed in 2002 to recommend tax reforms and it finally suggested Goods and Services Tax (GST) which was also vetted by the 12th Finance Commission.

Due to the nature of this tax, an indirect tax is also known as a consumption tax because the tax applies uniformly to consumers. Thus, at times, this type of tax has also been labeled as regressive because people with lower incomes may have to bear a heavy burden as they end up paying the same amount of tax as those who are economically well off. There have also been concerns that this type of tax can be used as a policy tool for certain industries and not others. That is why a section of economists believe that it can lead to an inefficient marketplace and change the market equilibrium price.

However, the indirect tax nature is such that it helps the government to boost its finances. Moreover, it helps in creating a wide taxpayer base so that every individual irrespective of income contributes towards the economy. Additionally, the taxes also help with equitable contribution as people who consume less pay lower amounts of tax and vice versa.