Cascading Effect

Reviewed by Annapoorna | Updated on Aug 27, 2020

Introduction to the Cascading Effect

One of the primary goals of a taxation system involves stopping the "taxation over taxes" or "cascading-effect" of incident taxes. It is because this leads to the loss of deadweight, i.e. slump in total supply chain surplus consisting of manufacturer, producer, retailer and customer.

This cascading effect is triggered by state and union governments, paying a range of charges. Eventually, it increased the tax burden on Indian goods and made them less competitive on the international market. The enormous sizes of corporate taxes owe this tax system a lot which contributed to tax-evasive practices being introduced.

Understanding the Cascading Effect

Within a Gordian knot of various tax rates, regulations, and complicated procedures, the average man finds himself strangled and sometimes refuses to comply with these complex rules.

The tax charge is a result of taxation on an already taxed amount. The additional tax charged is eventually borne by the end-user who is a common man already hit by the inflation.

One of the main drawbacks of the Indian taxation system was the cascading impact of taxes. Our democracy's federal system requires both states and the centre to collect taxes individually, and this has triggered this cascade. Centre levies the income tax, excise duty, service tax, and central sales tax (CST), Securities transaction tax. States levy VAT/sales tax, entry tax, state excise tax, property tax, agricultural tax, and grant tax.

Several potential transactions fall within reach of two or three of these taxes. The second tax is determined by adding the value of the first tax to the value of the transaction. For instance, the inter-state procurement of goods would attract both Central Service tax and Sales tax, and Cenvat would be liable for manufacturing and sale above and above CST.

India's efforts to remove Cascading Effect

India agreed to enter the bandwagon of 140 countries already practising Goods and Services Tax (GST). It allows equal and legitimate taxation and the elimination of supply chain inefficiencies due to such lax policies.

GST is an indirect tax on goods and services that will be levied at each point of sale in the supply chain. Every participant in the supply chain would be liable for the input tax credit it had paid to the previous participant for the purchase of goods and services.