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CMA Intermediate · Direct and Indirect Taxation · Concept of Indirect Taxes

Under the pre-GST regime, the cascading effect of taxes arose mainly because:

Cascading arose because there was no seamless input tax credit across Central and State levies; for example, excise duty or CST could not be set off against State VAT. Tax was therefore charged on a value already including earlier taxes, increasing the final cost.

  1. ACredit of excise duty on goods was not available against State VAT or service tax and vice versa, so tax was levied on taxCorrect
  2. BExports were taxed at a higher rate than domestic supplies
  3. COnly one rate of tax applied to all goods
  4. DTaxes were levied only at the final retail stage

Explanation

Before GST, the Centre taxed manufacture and services while States taxed sale, with no seamless credit across these levies, and CST paid on inter-State sales was not creditable. Hence tax was charged on a base that already included tax. A single-stage retail tax would not cascade.

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