Government Budgeting – 1/3: Taxation & GST

Kautilya’s Taxation: “Kosha Moolo Danda”

Kosha Moolo Danda, which means ” revenue is the backbone (of administration)” is sourced from Kautilya’s Arthshastra Part 8, Chapter 1. This implies that a nation’s status relies upon its fiscal power. He expressed that the Government’s power had source of treasury. This verse is used in the logo of Income Tax Department of India in Devanagari script.

Taxation as discussed by Kautilya

Arthashashtra was the first authoritative text on Public Finance, Public Administration and the Fiscal Laws in this country. In Arthashashtra, Kautilya has mentioned various types of taxes and duties such as those imposed on agricultural produce, trade, octroi, tolls and custom duties. Some of the important taxes were as follows:

  • Custom Duty (Sulka), which consisted of import duty (praveshya), export duty (nishkramya) and gate tolls / octroi (dwarabahirikadeya).
  • Transaction tax (vyaji), which included manavyaji (transaction tax for Crown goods)
  • Share of Production (Bhaga) which included 1/6th share called (Shadbhaga)
  • Tax in cash called (Kara)
  • Taxes in Kind (Pratikara), which included Labour (vishti), for military (Ayudhiya)
  • Counterveiling duties (Vaidharana)
  • Road Cess (Vartani)
  • Monopoly Tax (Parigha)
  • Royalty (Prakriya)
  • Taxes paid in kind by villages (Pindakara)
  • Army Maintenance Tax (Senabhaktham)
  • Surcharges (Parsvam)

The basic premise of Kautilya’s taxation doctrine was that public should not be exploited by imposing tax more than their competence to pay. People should be willing to pay so that the receipts can be effectively used to build social and physical infrastructure.

Kautilya’s System of Tax Administration and Present Day Tax System

There are many similarities between the current day tax system and the Kautilya’s system of Tax administration prevalent more than two thousand years ago. For example, Kautilya had specifically laid down the terms for taxation, without any scope for arbitrariness. Further, he fixed a time table for payment of taxes and also what share of the produce or product value is to be paid as tax. Further, the stance of Kautilya on a kind of progressive taxation and ability to pay principle are followed in modern day practice also. Further, the personnel responsible for collection of the tax needed to keep proper record of the entire collection as done today. There were additional taxes for emergency situation (such as tax on liquor levied during war or emergencies).

Types of Taxes

There are two types of taxes viz. Direct and Indirect Taxes. The Direct taxes are paid directly by the tax payer (individuals and the companies) while indirect taxes are paid while purchasing goods and services. Examples of Direct Taxes are Corporate Tax, Personal Income Tax, Securities Transaction Tax, Banking Cash Transaction Tax, Fringe Benefit Tax etc. Examples of Indirect taxes are  Sales Tax, Service Tax, Custom and Excise Duties, VAT, Anti-Dumping Duties, Good and Services Tax etc.  Apart from the above conventional taxes, there are also other taxes imposed for a particular objective or agenda. Such taxes are called wachh Bharat Cess tax, Krishi Kalyan Cess tax, and infrastructure Cess tax among others.

Progressive, Regressive and Proportional Taxes

There are three kinds of the taxes on the basis of their quantum / ratio of charging viz. regressive tax progressive tax and proportional or flat tax.

Regressive Tax

A regressive tax is the one in which tax rate decreases as the amount subject to taxation increases; and the tax rate progresses from high to low. The lowest amount is subject to higher taxation and this leads to individuals with low income bear the highest burden of regressive taxes. Such tax does not take into account the ability to pay.

Indirect taxes, such as sales / service tax, are an example of regressive tax as the poor and rich pay the same tax in purchasing everyday products and services. Apart from indirect taxes, some other regressive tax examples are sin tax (tax on intoxicants such as tobacco and alcohol, which are more consumed by lower classes); toll tax (every passing vehicle of same type has to pay irrespective of income of the person travelling in that vehicle) etc.

Progressive Tax

In progressive taxation, the tax liability increases with individual or entity income. This is based on principle of “ability to pay”. Under this system, lowest income people are generally exempted while highest income people pay highest taxes. Income Tax is thus an example of progressive tax. Progressive taxation results in redistribution of income from rich to poor.

Proportional Tax

In this system, a flat tax is levied regardless of income of wealth. One example of corporation tax in India whereby  government charges a flat rate of 30% on the income earned by the companies in India.

Implications of  Progressive and Regressive Taxes

Progressive Tax follows the principle of ‘ability to pay’ because they are levied on the basis of individual’s income and wealth. Since, ability to pay can be measured, the direct taxes are imposed at progressive rate whereby richer persons pay higher taxes in comparison to the poor person. A regressive tax is generally a tax that is applied uniformly and is indirect in nature. This means that it hits lower-income individuals harder. The direct taxes are easy to collect in comparison to indirect taxes because a tax payer makes his own payments. It is generally paid as large amount and sometimes involves too much personal information. Further, since there is no scientific principle of defining the degree of progression, the direct taxes are fixed arbitrarily. Direct taxes are easy to manipulate and collect in comparison to indirect taxes. Indirect taxes have wider coverage and broad base. So, the governments end up collecting more revenues as the taxes cover almost every goods. Since the indirect taxes are a part of the price of commodities; these taxes are generally not evadable. Indirect taxes inflate the price of the goods, they lead to inflation. Also, since the indirect prices are paid concealed in the price, they don’t bring on civic awareness among the taxpayers in contrast to the direct taxes.

Direct Taxes

Direct tax is a tax directly paid to the government by the individuals or organizations on whom it is imposed.  The main examples of Direct Taxes are Income Tax, Gift Tax, Wealth Tax, Property Tax etc.

Important Laws on Direct Tax

The Various laws under direct taxes are collected in India are as follows:

Income Tax Act, 1961

This act sets out the rules and regulations for collection of taxes on income that comes from any source such as business, owning a property, gains received from investments, salaries and pensions, winning in lottery etc. The income tax slabs, various tax benefits etc. are listed in this act.

Wealth Tax Act, 1951

Wealth Tax, 1951 is the law for collection of tax on net wealth of individuals and HUFs in India. This tax was abolished 2015 due to its meagre contribution. At the time of its abolition, it was calculated as 1% of the net wealth (wealth –debt) of a person / HUF exceeding Rs. 30 Lakh. Currently, its place has been taken by surcharges on income above Rs. 50 Lakh and Rs. 1 Crore.

Gift Tax Act, 1958

Gift Tax, 1958 was enacted to charge tax on gifts from the recipients. Any person was liable to pay 30% tax on gifts. It was abolished in 1998. Currently, gifts received from family members (parents, siblings, cousins, spouse, uncles and aunts) are not taxable. Apart from these, the gifts received from local authorities are also non-taxable. Other gifts are taxable if the gift amount exceeds Rs. 50000.

Income Tax

Income tax is most well known and higher resource mobilizer for Indian exchequer. It is levied on income earned by an individual or business in a financial year. Thus, there are two kinds of Income Taxes viz. Personal Income Tax and Corporation Tax.

Personal Income Tax

Personal Income tax is levied on individuals and HUF (Hindu Undivided Families) by the Central Government. The levy of the Income tax follows the principle of “ability to pay” and is a progressive tax. This implies that those who can pay more should pay more; as the rate of tax increases as the taxable amount increases. On this basis, low income people have been exempted from the Income Tax with minimum exempt limit varying from year to year. Currently, the minimum taxable income with reference to Income Tax is Rs. 250,000. It was Rs. 40,000 in 1995-96 budget. The current income tax slabs are as follows:

Capital Gains Tax

Capital gain stands for profit from sale of a property or investments such as shares, gold, real estate and valuables like paintings, antique items etc. The taxable income in capital gains tax is the difference of price of asset/share when purchased and when sold. Capital Gains tax is of two kinds viz. short term and long term. At present, while there is a 15% tax on short term capital gains, the long term capital gains are not taxed in India. One year is the period which separates long and short terms for this purpose.

Securities Transaction Tax

This tax was introduced in 2004 by UPA government to avoid the tax evasion in case of capital gains. It is levied on the value of the securities.

Perquisite Tax

Perquisites refer to all the perks or privileges that employers extend to their employees. This may include houses, vehicles, phone bills, tour packages, etc.

Corporate Income Tax

Corporation Tax is levied on the net income of the companies. The rates of corporate taxes in India were very high once upon a time. They were reduced gradually since liberalization and it was pegged at around 35% in 2005-06. Still, India is ahead of many economies in terms of corporation tax.

Currently, basic tax rate for domestic companies is 30% and for foreign companies is 40%.  A minimum alternate tax (MAT) is levied at 18.5 percent of the adjusted profits of companies where the tax payable is less than 18.5 percent of their book profits.  After including surcharges, the current effective corporate taxes are 33.9% for domestic companies and 43.26% for foreign companies. The effective rate of dividend distribution tax remains at almost 17%. Large dividend tax-paying companies include ONGC, Coal India, TCS, ITC, NTPC etc.

A brief description of different types of corporate taxes is as follows:

Minimum Alternative Tax (MAT)

MAT was first introduced in Finance Act 2000 at 7.5% of book profits. Over the years, this tax has increased and now stands at 18.5%, however, the companies in infrastructure and power sector are exempted from this tax. Once MAT is paid, the company can carry the payment forward and set it off against the regular tax payable during the subsequent five year period subject to certain conditions.

Fringe Benefit Tax (FBT)

FBT was applied to every fringe benefit passed by an employer to their employees. It covered numerous heads such as LTA, employee welfare, accommodation, entertainment, Employer Stock Option Plans (ESOPs) etc. It was started in 2005 and scrapped in 2009.

Dividend Distribution Tax (DDT)

DDT was introduced after the 2007 budget. This tax is levied on companies based on the dividends they pay to investors.  At present, DDT is 15%.

Banking Cash Transaction Tax

BTT was in force between 2005-2009 and was 0.1% of every bank transaction.

Marginal Tax Rate

Marginal Tax Rate refers to the amount of tax paid on an additional rupee of income. The marginal tax rate for individuals increases as their income increases. In India, the marginal tax rate has remained around 33-34% for the last two decades. Currently it stands above 35% for high earners.

Tax on Agricultural Income

In India, the agricultural income is exempt from tax by virtue of section 10(1) of Income Tax Act. Under the law, the agricultural income is defined as:

  • Any rent or revenue derived from land, which is situated in India and is used for agricultural purposes.
  • Any income derived from such land by agricultural operations including processing of agricultural produce, raised or received as rent-in-kind so as to render it fit for the market or sale of such produce.
  • Income attributable to a farm house (subject to some conditions).
  • Income derived from saplings or seedlings grown in a nursery.

Kindly note that for some farming activities, fraction of the income is taxable. For example, for tea cultivation (40-60 ratio is used, which implies that 40% income is considered Business Income while 60% is agricultural income. This figure stands at 35-65 for latex, 25-75 for coffee growing and curing; 40-60 for coffee growing, curing, roasting and grounding.

Merits and Demerits of Direct Taxes

There are different types of direct taxes such as Income Tax, Corporate Tax, Inheritance Tax, Property Tax, Wealth Tax (abolished now in India), Capital Gains Tax etc.


The key merits of the direct taxes are as follows:

Progressive Tax

The direct taxes follow the principle of ‘ability to pay’ because they are levied on the basis of individual’s income and wealth. Since ability to pay can be measured, the direct taxes are imposed at progressive rate whereby richer persons pay higher taxes in comparison to the poor persons.

Reduction in Inequality

Due to their progressive nature, the direct taxes help in reduction of the inequalities because the revenues collected from the rich man can be used for the good of poor man.

Economical in collection

In comparison to indirect taxes, the direct taxes are easy to collect because a tax payer makes his own payments.


Direct taxes can be manipulated / altered as per requirements of the government, change in the income of the people and economic status of the nation as a whole.

Taxpayer Consciousness

The taxpayers are conscious of their payments and are aware or make efforts to be aware where their money is being spent. It develops a national and civic consciousness among themselves. The role of RTI in recent years has become much more important in recent times towards increased awareness among tax payers.


There are several demerits of the direct taxes. Since the burden of tax payment is on individuals, it is most disliked tax. It is generally paid as large amount and sometimes involves too much personal information, direct tax gets unpopular. Further, tax burden of one person cannot be transferred to another person; so direct tax does not differentiate between ways of earning. One might be working hard while another might be earning without hard labour; but direct tax liability of both are similar so sounds unjust.  Further, since there is no scientific principle of defining the degree of progression, the direct taxes are fixed arbitrarily. Since, large number of taxpayers make self declaration, the honest tax payers end up paying more than those who involve in tax evasion by falsifying the accounts.

Indirect Taxes

Indirect taxes include service tax, sales tax, custom, excise duties, VAT, MODVAT, CENVAT, proposed Goods & Services Act etc. Initially the indirect tax regime was too complicated and there was an ubiquitous problem of tax on tax. Post liberalization, there is a lot of change in the Indirect tax administration of the country and there was a dramatic change when the country shifted to VAT regime in 2000s.

Custom Duties

Custom duties are imposed on both during import and export of goods. The custom duties imposed during export are generally called “export duties”. Since, export duties reduce the competitiveness of the Indian products in the international markets, the Government has abolished the export duties. The import duty is quite productive, particularly when it is levied on high value imports such as iron and steel etc.

The custom duties were very important in the decades of 50s and 60s and later their place was taken by the excise duties as more and more goods were produced domestically. From 1990-91 to till date the custom duties have fallen drastically due to trade liberalization also.

Sales Tax

Sales tax is the tax which a purchaser pays when he / she purchases goods. The sales tax in most goods (except newspapers) for intra-state sales and consumption are within the powers of the states governments, which levy, collect and appropriate these taxes. This is the reason that some goods may be cheaper in a particular state as compared to another state. The sales tax on inter-state sale of goods is levied by Central Government and is payable to the state where the particular goods are sold. Today, sales tax regime has drastically changes and its place is now taken by VAT in most states.

Value Added Tax (VAT)

Today, in many states, the Sales Tax has been abolished and replaced with the Value Added Tax (VAT). While Sales Tax is a single point tax levied on the price of the goods; VAT is a multipoint tax in which tax is levied at each stage of transaction in the production/ distribution chain. By value addition, we mean the increase in the value of goods / services at each stage in the value chain. The tax paid at earlier stage is called ‘Input tax credit (ITC)’ and this credit can be used against a tax at later stage.

Similarity between Sales Tax and VAT

Both Sales Tax and VAT are indirect taxes which are ultimately borne by the consumer. Both taxes come within the jurisdiction of the states and are levied, collected and appropriated by states. The state legislature needs to pass state level acts to provide legal backing to Sales Tax and VAT. The states where VAT acts have been enacted, the sales taxes have been abolished. The idea of replacing Sales Tax with VAT  was to rationalize the taxes and bring the retail price of products to minimum possible level.

Difference between Sales Tax and VAT

Sales tax is levied on the sale of goods/ service and thus is simple to calculate and accounting purpose. VAT is multistage tax, so involves complex accounting. This difference makes VAT evasion difficult because VAT evaded at one stage would be caught at next stage.


MODVAT was introduced in 1986-87 to overcome the problem of cascading effect of Central Excise Duty. Currently, MODVAT has been replaced by CENVAT. In MODVAT, the manufacturer was able to obtain reimbursement of the excise duty and countervailing duties paid on the components against the duty payable on the final product. For example, if the excise duty of Rs. 1,000 was already paid on inputs or raw materials; and the final good attracted an excise duty of Rs. 10,000, then the manufacturer would pay only Rs. 9000 as MODVAT.

Thus, the key objective of MODVAT was to avoid repetitive payment of duties from raw material to the final product stage. The idea was that it would reduce the cost of the final product. However, it was later found that in many consumer goods, the final price got increased due to MODVAT. Further, the tax evasion was possible by creation of false invoices.

In 2000-2001, MODVAT was replaced with the CENVAT. This system has only one basic excise duty of 16% that is applicable to almost all goods except some goods which attract special excise duties of 8%, 16% or 20%. The system is much simpler but still leaves scope for tax evasion.

Service tax

Service tax was not in the constitution until 88th Amendment was passed. Via this amendment, article 268-A was added and also added a new entry in Union List viz. 92-C (taxes on services). Like Income tax and Corporate tax, Service tax is levied by the centre but collected and appropriated by both the centre and the states.

The Service tax was imposed in India initially from 1994-95 on electricity services, telephone services, brokerage etc. With every passing year, more and more services were brought into the ambit of the service tax. The first year collection of the Service Tax in 1994-95 was Rs. 407 Crore, which rose to Rs. 2610 Crore in 2001-02.

Currently, service tax is levied at the rate of 14% subject to minimum service value exceeds Rs. 10 Lakh in a year.

Goods and Services Tax

The Goods and Services Tax (GST) is a value added tax to be implemented in near future. It will replace all indirect taxes levied on goods and services by the Union and State governments. It is aimed at being comprehensive for most goods and services with little tax exemption.

Merits and Demerits of Indirect Taxes

Indirect taxes are levied on the production or consumption of goods and services or on transaction, including imports and exports. In case of indirect taxes, it is said that the person who is hit does not bleed; someone else bleeds. Still, there are key merits of Indirect taxes as follows:


Akin to direct taxes, the indirect taxes are elastic because they can be adjusted to the changing economic environment. Further, the burden of the tax is on to the consumers of goods and services, so any change in the rates increases the revenue of the government in bulk. For example, the recent change in service tax rates from 12.5% to 14% has increased government revenue to great extent.


Indirect taxes are charged on a large number of goods and services so they are broad based. Due to wider coverage and broad base, the governments end up collecting more revenues as the taxes cover almost every goods.


To some extent, the indirect taxes can be made progressive, for example imposing such taxes on items of luxury while exempting the essential commodities.


Indirect taxes spare none. Rich or poor, all have to pay indirect taxes. This makes the lower income groups share the burden of the government while not paying the direct taxes.

Low Tax evasion

Since the indirect taxes are collected on sundry items and are a part of the price of commodities; these taxes are not evadable generally. However, they can be evaded by falsifying accounts or smuggling activities.

Sin Tax to promote social welfare

Sin Tax refers to a tax levied on all products and consumer goods known as vices or unhealthy for social growth and consumption of which may cause negative externalities. Sin Tax is thus a subtle way to discourage people from participating in such activities without implementing as complete ban on them. The tax forms a huge source of revenue to the government.

Easy to Pay

The indirect taxes are paid in small amounts while purchasing the goods and services and due to this, it’s easier to pay them.

Environment Protection

This is relatively new concept. The governments would use indirect taxes to modify the behaviour of the individuals to achieve goals related to environment protection. For example, increased taxation on goods produced via polluting industries can modify the demand. Similarly, increase cost of fossil fuel may promote public transport.


There are several demerits of the indirect taxes. Firstly, the cost of collection is very high. The government needs to establish network throughout the territory to enable indirect tax collection. Secondly, since the taxes are on expenditure, they affect only the consumers, the revenue generation is uncertain and is subject to price elasticity of demand / supply of the goods. Thirdly, indirect taxes need to be paid by all whether rich or poor, they are termed regressive, though they can be artificially made progressive to some extent. Fourthly, since the indirect prices are paid concealed in the price, they don’t bring on civic awareness among the taxpayers in contrast to the direct taxes. Fifthly, since indirect taxes inflate the price of the goods, they lead to inflation. To reduce inflationary pressure, government reduces indirect taxes from time to time on concerned commodities. Sixthly, being regressive in nature, the indirect taxes impose heavier burden on poorer sections of society.

Comparative Account of Direct and Indirect Taxes

There are several parameters on which the direct and indirect taxes can be compared. Firstly, direct taxes are progressive and they help to reduce inequalities but indirect taxes are regressive and they widen the gap of inequalities. Thus, direct taxes result in more equitable distribution of income and wealth, though it might not be always true. Secondly, direct taxes are narrow based so their collection is easier; but indirect taxes are broad based, so administration costs to collect them is comparatively higher. Thirdly, in comparison to direct taxes, the indirect taxes affect the purchasing power of the people more. In other words, direct taxes only remove the enhanced purchasing power of the tax payers. On the other hand, the indirect taxes affect poor people more brutally. Fourthly, in terms of the economic growth, indirect taxes are more growth oriented in comparison to direct taxes. Direct taxes are progressive and they reduce savings and investments. When saving and investments are discouraged, economic growth is more likely to be affected. In contrast, the indirect taxes discourage consumption and increase savings. The sin taxes for example discourage consumption of inconspicuous items and promote health, which has indirect effect on economic growth.

Tax Avoidance, Evasion and Planning

There are three different concepts viz. tax avoidance, tax evasion and tax planning. Tax Avoidance means an attempt to reduce tax liability through legal means, i.e. to regulate one’s financial affairs in such a way that one pays the minimum tax imposed by the law. This can be understood with a simple example. Tax Evasion and Tax avoidance are two different things. While Avoidance is legal management to avoid tax, tax evasion is illegal means to reduce tax liabilities, i.e. falsification of books, suppression of income, overstatement of deductions, etc.

Similarly, Tax planning is an accepted practice, whereby the taxpayer uses provisions of law to minimize his tax liability. Various methods of Tax avoidance are as follows:

Tax Havens

This implies to route profits through subsidiaries located in tax havens. Tax havens refers to the countries or territories where either very low tax is levied on certain items or not taken at all. Switzerland, Luxembourg, Isle of Man, British Overseas Territory, Bermuda, British Virgin Islands, Cayman Islands, Puerto Rico etc. are some of the popular tax havens around the world.

Treaty Shopping

Treaty shopping is considered to be a means of tax avoidance. The bilateral tax treaties are done to reciprocate the benefits between the residents of two countries but when someone from a third country invests in any of them just for the sake of avoiding tax and derives the benefits of low taxation, this is termed as treaty shopping. Countries use anti-treaty-shopping provisions such as Limitation of Benefit (LOB) clause and/or beneficial ownership provisions to counter the treaty shopping. For example, India included such LOB clause in relation to bilateral tax treaty with Singapore.

Limitation Of Benefit (LOB)

Limitation Of Benefit (LOB) refers to the rules that are put in place to counter the menace of treaty-shopping/ Such rules restrict availing of the treaty benefits by a conduit (compromised) entity formed for the purposes of treaty-shopping {they call it a letterbox entity}. It also restricts entities who attempt to claim double non-taxation; for example, LOB clause under India-Singapore tax treaty.

Round Tripping

India Round Tripping, money is routed back into the country by local investors through tax havens like Mauritius. In this, money from home country goes out through illegal channels and invested back in the same country via a second country with whom India has a tax treaty. For example, it was suspected that many Indians used round tripping method and invested the money back in India via Mauritius. Such problem is countered by including relevant clauses and rules in the taxation law. For example in India, the domestic companies routing their investments through Mauritius need to pay capital gains tax.

Transfer Pricing

Transfer Price is the price of the goods and services sold between related entities such as – parent company and daughter (subsidiary) company; or between branches of same entity. The fixing of price of goods and services between parent-subsidiary is called Transfer Pricing.

Tax Avoidance Using Transfer Pricing

Transfer pricing itself is not a means of tax avoidance if transfer price matches what the seller entity would charge to an unrelated customer (called customer at arm’s length). However, since lowering or increasing the prices between parent-daughter entities don’t affect the whole organization, the companies artificially increase or decrease the transfer price to avoid corporate tax. This processing of using unusual transfer pricing to avoid tax is called Base Erosion and Profit Sharing (BEPS).

Transfer Pricing Case Study

In 2009-10, TCS (Tata Consultancy Services) ad shown a net profit per employee of Rs 4.3 lakh. At the same time, Capgemini, a foreign IT firm with operations in India, recorded a net profit per employee of Rs 1.5 lakh. Thus, Capgemini showed a net profit per employee one third of TCS. Despite of similar business, similar in contract pricing and similar in salaries and other expenses, why the foreign IT firms reporting profitability numbers that are a fraction of their Indian peers? Moreover, the same difference went on the same lines on other scales such as revenue per employee, operating profit margin, net profit margin. This was due to the menace of Transfer pricing as per experts.

How it is done?

The subsidiaries of the foreign companies in India use transfer pricing to allocate most expenses / loss to India and most profits to their high-tax home country thus produce low taxable income or excessive loss on transactions. The Transfer Pricing has been under tough scrutiny by the authorities in India, which look for a better share in the tax from the companies. However, sometimes the companies claim and insist that they have done transfer pricing correctly. Due to this, Transfer pricing has been a key issue for both multinational corporations and tax authorities for a long time.

Most of the countries in the western world have their own rules regarding the transfer pricing. Indian Government also has took some proactive measures to resolve the disputes arising due to the transfer pricing.

Government Efforts in this Direction

The Government had introduced Transfer Pricing Regulations (TPR) through the Finance Act, 2001 on the basis of OECD guidelines. Currently, the transfer pricing rules are part of section 92 and 92F of the Income Tax Act. Basic premise of these rules is that the related party transactions should involve an arm’s length principle and the pricing should be such as if it would have been charged from an independent buyer. The rules postulate several methods of defining an arm’s length price such as Comparable uncontrolled price (CUP) method; Resale price method (RPM); Cost plus method (CPM); Profit split method (PSM); Transactional net margin method (TNMM) etc. To handle the dispute in calculation of tax liabilities, government established a  Dispute Resolution Panel (DRP) under Income Tax Act via the Finance Act 2009.

Dispute Resolution Panels

DRPs had been constituted at Delhi, Mumbai, Ahmedabad, Kolkata, Chennai, Hyderabad, Bengaluru and Pune. DRP consists of three commissioners or directors of income tax appointed by the Central Board of Direct Taxes (CBDT). Any foreign company, or any domestic company with transfer pricing issues, in whose case the income-tax assessing officer proposes to make any variation in the income or loss returned, may apply within a month of receiving the draft assessment order before the DRP for appropriate remedy by way of direction to the assessing officer.

Further, via the Finance Act 2012, the government extended these rules to domestic related party transactions exceeding Rs. 5 Crore also.

Thin Capitalization

Thin capitalization is when most part of company’s capital is made of debt instead of equity. When most of the capital is debt, the company has solvency risk. For tax avoidance purpose some companies indulge in artificial thin capitalization if there are tax benefits on receiving debt or loan. To counter this menace, governments need to introduce rules to disallow interest payments beyond certain limits.

Methods of Tax Evasion

Tax evasion involves illegal and unfair ways to get away without paying. Evasion of tax takes place when the people report dishonest tax. Falsifying the accounts, smuggling, false invoicing etc. are common methods of tax evasion.

Tax Reforms in India

Prior to the liberalization of Economy, India’s tax regime suffered numerous problems. These problems which were in vogue in 1960s and 1970s were as follows:

  • There was a high degree of progressiveness (rich needed to pay exorbitant taxes). On the other hand, tax collection efficiency was very low (rich were smart enough to evade tax).
  • There was large number of exemptions, which eroded the already narrow tax base in the country.
  • In terms of corporation tax, there were numerous discriminations between different kinds of the companies that discouraged the investments. Double taxation of dividends was also common in those days.
  • In terms of Indirect taxes, the high rates of custom / excise duties were prevalent. There was no VAT; there was no service sector within the purview of tax.

The efforts to reform India’s tax system began in mid 1980s when the government announced a Long Term Fiscal Policy, 1985. This policy recognized that the fiscal position of the country is going downhill and there was a need to make changes in the taxation system. In that decade, a technical group to review and rationalize the central excise duties was established and this led to introduction of Modified System of Value-Added Tax (MODVAT) in 1986. To rationalize the custom duties, the harmonized system (HS) of the classification of goods was introduced.

Raja Chelliah Committee

The Government appointed a Tax Reforms Committee under Prof Raja Chelliah to lay out agenda for reforming India’s tax system. This TRC came up with three reports in 1991, 1992 and 1993 with several measures, which can be summarized in these points:

  1. Reforming the personal taxation system by reducing the marginal tax rates.
  2. Reduction in the corporate tax rates.
  3. Reducing the cost of imported inputs
  4. by lowering the customs duties.
  5. Reduction in the number of Customs tariff rates and its rationalization.
  6. Simplifying the excise duties and its integration with a Value-Added Tax (VAT) system.
  7. Bringing the services sector in the tax net within a VAT system.
  8. Broadening of the tax base.
  9. Building a tax information and computerization.
  10. Improving the quality of tax administration.

The tax reforms that began with the Chelliah Committee recommendations are still going on. Later on, government appointed the Vijay Kelkar Committee in 2002 which further provided direction to the tax reforms in the country.

Vijay Kelkar Committee

The latest Impetus to direct tax reforms in India came with the recommendations of the Task Force on Direct & Indirect Taxes under the chairmanship of Vijay Kelkar in 2002. The main recommendations of this task force related to the direct taxes related to increasing the income tax exemption limit, rationalization of exemptions, abolition of long term capital gains tax, abolition of wealth tax etc. Its key recommendations were as follows:

Administration of Direct Tax
  • The taxpayer services should be extended both in quality and quantity and taxpayers should get easy access through internet and email.
  • PAN (Permanent Account Number) should be expanded and it should cover all citizens.
  • Block assessment of search and seizure cases should be abolished.
  • To clear the backlog, the department should outsource the data entry work.
  • All returns and issue of refunds should be completed in a four month period. Dispatch of refunds should be outsourced.
  • Government should establish a Tax Information Network to modernize, simplify and rationalize tax collection, particular TDS and TCS.
  • Abolish the requirement of Tax Clearance Certificate on leaving the country.
  • Empower CBDT with appropriate administrative and financial powers.
Personal income tax
  • Increase in exemption limit to Rs.1 lakh for the general categories of taxpayers and further exemption for senior citizens and widows.
  • Rationalize income tax slabs, eliminate surcharge on personal income tax.
  • Incentivise home loans by providing interest subsidy on home loans @2%.
  • Increase deduction under Section 80CCC for contribution to pension funds.
Corporation Tax
  • Reduce the Corporate tax to 30% for domestic companies and 35% for foreign companies.
  • The listed companies should be exempted from tax on dividends and capital gains.
  • Increase rate of depreciation for plant and machinery.
  • Abolish Minimum Alternate Tax.
Wealth Tax
  • Abolition of wealth tax.

The above recommendations were made 13 years ago. Today, we see that many of them have been implemented. The DTC and GST have been so far biggest reforms initiated by the Government in direct and indirect tax regime respectively. However, DTC has never arrived and government does not seem to go seriously after it because most of its provisions are already incorporated in the Income Tax Act. GST is now coming into force from July 1, 2017.

Key Direct Tax Reforms

Tax Information Network (TIN)

On behalf of the Income Tax Department, the National Securities Depository Limited (NSDL) established Tax Information Network (TIN). This is a source of the countrywide tax related data.  The basic idea behind establishing TIN was to modernise collection, processing, monitoring and accounting of direct taxes using information technology. TIN has three subsystems viz. ERACS, OLTAS and CPLGS.

 Electronic Return Acceptance And Consolidation System (ERACS)

ERACS consists of a system for interface with the taxpayers (TIN Facilitation Centres that is TIN-FC) and an internet supported system for upload of electronic returns of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) and Annual Information Return (AIR) to the central system of TIN.

Online Tax Accounting System (OLTAS)

OLTAS is used for upload to the central system the details of tax deposited in numerous tax collecting branches across the country every day.

Central PAN Ledger Generation System (CPLGS)

It is the central system that merges the details of TDS/TCS and advance tax into the PAN.

e-TDS & e-TCS

TDS refers to Tax Deduction at Source. The third parties deduct tax at source and then deposits it at pre-determined bank branches. Since 2004–2005, it has been made mandatory to file TDS returns electronically for both the operators, the Government as well as corporate sector. Further, the Income Tax Act, 1961 states that when tax is collected at source by the seller from the buyer, it is named TCS (Tax Collected at Source). Under the scheme named ‘Electronic Filing of Returns of Tax Collected at Source Scheme, 2005’, the corporate and Government deductors have to pay electronically or physically to NSDL.

Other Initiatives in Direct Taxation
eSahyog initiative : Paperless Assessments

Information Technology has made the life of tax payers easy as they don’t need physically go to banks to deposit bank challans and present the case and documents to assessing officers. To make further simple, the CBDT recently came up with a proposal paperless income tax assessment over emails. This would save the taxpayer to pay a visit to IT office, particularly in case of small amounts. Pilot projects in this direction have been launched in Mumbai, Delhi, Chennai, Bengaluru and Ahmedabad.

Sevottam: Efficient grievance redressal

To bring new life to the sluggish grievance redressal system, the department is using ‘Sevottam’ platform that connects all income tax offices in the country. The idea is to address the queries and grievances in real time.

Faster refunds

The IT department is working towards processing and sending tax refunds within 10 working days. The initiative to verify Income Tax Return (ITR) by Aadhaar or bank database has been taken.

Pre-filled ITR forms

Despite of online forms, many people still use offline downloaded forms for tax purpose. The Department is now taking an initiative to offer pre-filled forms which automatically populated with user / taxpayer data and are downloaded with most information filled already.

PAN camps

To increase coverage of the PAN, the government has been conducting PAN camps across India. There is also a proposals to launch Income Tax Business Application-Permanent Account Number (ITBA-PAN) portal, through which anyone can apply for PAN online and get it within 48 hours.

Indirect Tax Reforms

First Indirect Tax Reform occurred in India when the Modified Value Added Tax (MODVAT) was introduced for selected commodities in 1986 to replace the Central Excise Duty. It was gradually extended to all commodities through Central Value Added Tax (CENVAT). The states also followed the suit and enacted the VAT acts to replace the sales tax with Value Added Tax. Following are the key indirect tax reforms done.

Reduction In Custom Duties

In 1990, the custom duty on non-agricultural products was around 128%. It was brought down gradually. Currently, the average custom duties are 11-12%, however, they range from 0 to 150%.

Central Excise

Central Excise duties were first replaced with MODVAT and now CENVAT is applicable. The number of different types of duties was cut down.

Service Tax

Service tax was first introduced on some limited services in 1994-95 at 7%. The rate was gradually increased and so was the number of taxable services. Currently, we pay 14% service tax on around 100 services.

Goods And Services Tax

The Goods and Services Tax (GST) is so far the biggest tax reform in the country. At present, the GST-Bills have been passed and it is expected to come into force from July 1, 2017.

Goods & Services Tax

Goods and Services Tax is a comprehensive indirect tax which is to be levied on the manufacture, sale and consumption of goods and services in India. This is so far the biggest tax reform in the country. GST eliminates the cascading effect of taxes because it is taxed at every point of business and the input credit is available in the value chain.

Historical Background

France was the first country to introduce GST system in 1954. More than 140 countries have implemented the GST. Genesis of GST occurred during the previous NDA Government under Atal Bihari Vajpayee Government when it set up the Asim Dasgupta committee to design a model for GST. The UPA Government took the matter further and announced in 2006 that this tax would be introduced from April 1, 2010. However, so far it was not introduced. All the GST bills including Constitution (101st Amendment) Act have been passed now and GST is set to come into force from July 1, 2017.

Taxes Replaced by GST

GST would replace almost all vital indirect taxes  and cesses on Goods & services in the country. Among the taxes levied by centre, GST will subsume the following:

  • Central Excise duty & Service Tax
  • Duties of Excise (Medicinal and Toilet Preparations)
  • Additional Duties of Excise (Goods of Special Importance)
  • Additional Duties of Excise (Textiles and Textile Products)
  • Additional Duties of Customs (commonly known as CVD)
  • Special Additional Duty of Customs (SAD)
  • Central Surcharges and Cesses so far as they relate to supply of goods and services

Among the state taxes that would be replaced by GST include:

  • State VAT
  • Central Sales Tax c. Luxury Tax
  • Entry Tax (all forms)
  • Entertainment and Amusement Tax (except when levied by the local bodies)
  • Taxes on advertisements
  • Purchase Tax
  • Taxes on lotteries, betting and gambling
  • State Surcharges and Cesses so far as they relate to supply of goods and services
Principles followed in subsuming the taxes

The following principles were adopted while subsuming the above taxes under GST. Firstly, the taxes to be levied should primarily indirect taxes and should be part of the transaction chain that commences with production or manufacturing or import of good / service at one end and consumption at other. Secondly, such replacement of taxes should result in free flow of tax credit in intra and inter-state level. Thirdly, the GST should give fair revenue to both centre and states.

Commodities Not under GST

Kindly Note that following have been kept out of the ambit of GST:

  • Potable alcohol
  • Five petroleum products viz. petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel
  • Electricity

The above arrangement is “temporary” and the GST Council will decide the date from which they shall be included in GST. For these commodities, the existing VAT and central excise will continue to operate until they are included in GST. It’s worth note here that Tobacco and Tobacco Products have been included in GST and centre will have power to levy the GST on tobacco and tobacco products.

Apart from the above, there will be no GST on the sale and purchase of securities, which shall continue to be governed by Securities Transaction Tax (STT).

Understanding Dual GST

Most of the countries have a unified GST system. Brazil and Canada follow a dual system where GST is levied by both the Union and the State governments. India also has dual GST where Centre and States simultaneously levying it on a common tax base. The structure is as follows:

For intra-state trade

The GST levied by centre is called Central GST (CGST) while that levied by states / UTs is State GST (SGST) or UTGST.

For inter-state trade

For inter-state supply of Goods & Services, an Integrated GST (IGST) will be levied and administered by Centre.

CGST and IGST will be levied and administered by Centre; while SGST / UTGST will be levied and administered by respective states and UT administrations.

Principles followed in adopting dual GST

The principle of fiscal federalism has been adapted where by centre and states have been assigned powers to levy and collect taxes through appropriate legislations.

GST Legislation

The entire GST legislation is based on six separate acts / bills. Their current status (April 4, 2017) is as follows:

  1. Constitution 101st amendment Act, 2016: This act was passed in September 2016 and comes into force in July 1, 2017.
  2. Central GST (CGST) Bill, 2017: This bill has been now passed on Lok Sabha and expected to be passed in Rajya Sabha Soon.
  3. SGST (state GST) Bill, 2017: This bill has been approved in GST Council but yet to be introduced and passed.
  4. Union Territory GST (UTGST) Bill, 2017: This bill has been passed in Lok Sabha and yet to be passed in Raya Sabha
  5. Integrated GST (IGST) Bill, 2017: This Bill has been passed in Lok Sabha and Yet to be passed in Rajya Sabha
  6. GST (Compensation to States) Bill, 2017 (Compensation Cess Bill): This bill has been passed in Lok Sabha and yet to be passed in Rajya Sabha.

Brief information about each of them is as follows:

Constitution 101st amendment Act, 2016

This is the enabler act for GST and it amends several important articles and schedules of the constitution of India so that necessary constitutional . You can read in detail about this here. Here are important notes for your examinations.

  • The new articles added by this amendment to Indian Constitution are Article 246-A (Special provision with respect to goods and services tax); Article 269-A ((Levy and collection of goods and services tax in course of inter-State trade or commerce) and Article 279A (GST Council).
  • Two schedules have been changed viz. 6th schedule and 7th
  • As per article 246-A:
    • Both Union and States in India now have “concurrent powers” to make law with respect to goods & services
    • The intra-state trade now comes under the jurisdiction of both centre and state; while inter-state trade and commerce is “exclusively” under central government jurisdiction.
  • As per Article 269-A:
    • In case of the inter-state trade, the tax will be levied and collected by the Government of India and shared between the Union and States as per recommendation of the GST Council.
    • The article also makes it clear that the proceeds such collected will not be credited to the consolidated fund of India or state but respective share shall be assigned to that state or centre. The reason for the same is that under GST, where centre collects the tax, it assigns state’s share to state, while where state collects tax, it assigns centre’s share to centre. If that proceed is deposited in Consolidated Fund of India or state, then, every time there will be a need to pass an appropriation tax. Thus, under GST, the apportionment of the tax revenue will take place outside the Consolidated Funds.
  • Article 279-A:
    • There will be a GST council constituted by President, headed by finance minister as its chairman and one nominated member from each state who is in charge of finance or taxation. GST Council has been discussed in detail here.
    • All decisions taken at the GST council will be taken based on voting. Process of voting is clearly articulated in detail in the constitutional amendment bill.
  • Other Changes
  • The residuary power of legislation of Parliament under article 248 is now subject to article 246A.
  • Article 249 has been changed so that if 2/3rd majority resolution is passed by Rajya Sabha, the Parliament will have powers to make necessary laws with respect to GST in national interest.
  • Article 250 has been amended so that parliament will have powers to make laws related to GST during emergency period.
  • Article 268 has been amended so that excise duty on medicinal and toilet preparation will be omitted from the state list and will be subsumed in GST.
  • Article 268A has been repealed so now service tax is subsumed in GST.
  • Article 269 would empower the parliament to make GST related laws for inter-state trade / commerce.
Taxation Powers of Centre and States Post 101st Amendment Act

The 101st constitution amendment act has resulted in some important changes into the taxation power of the union and states. For basics, you may read this article on gktoday. For your examination, you should note that after the 101st amendment act:

  • Parliament as well as every state legislature in the country has powers to enact laws to levy Goods and services tax. In case of inter-state trade, only parliament has power. {Article 248}
  • The residual power of taxation i.e. to tax the subjects which are not in state or concurrent list is STILL with Parliament. However, such power is now subject to Article 246-A. {Article 248}
  • If Rajya Sabha by two-third majority passes a resolution that it is necessary and in national interest that parliament should make a law with respect to Goods and Services Tax on any matter in state list, it shall be lawful for the parliament to do so. Such a tax shall be in force for one year. To extend it further, similar resolution from Rajya Sabha will be needed. {Article 249}
  • During emergency, Parliament of India will have powers to make GST law on any subject in state list {article 250}.
  • Duties levied by the Union but collected and appropriated by the States include only Stamp duties. The stamp duties collected shall not form the part of consolidated fund of India BUT will be assigned to states. {Article 268 (1); Kindly note that excise duty on medicinal and toilet preparations has been omitted from this article}
  • Article 268-A (Service tax levied by Union and collected and appropriated by the Union and the States) has been omitted from constitution and now is part of GST.


The salient features of CGST are as follows:

CGST Registration Number

One registration number is for CGST and it is being proposed at a pan-India level unlike the existing excise registration numbers at the factory/location based. This will reduce the number of registration numbers which business have to obtain and also the number of returns which have to be filed.

Peak tax rate is 20% under CGST

This bill once becomes an act, will allow the centre to levy CGST on goods and services within the boundary of a state.  The rate of CGST will not exceed 20%. We note here that under GST, the peak rate is 20% for CGST and 20% for SGST, thus the highest tax that can be charged as GST would be 40%. However, this level of taxes has been provided only as enabling provisions. The highest tax rate tier currently is 28% (there are four tiers viz. 5, 12, 18 and 28%).

For smaller taxpayers, the composition levy is 2.5%

The taxpayers with turn over less than Rs. 50 Lakh will pay a flat rate on turnover instead of the value of goods and services supplied. This rate will be capped at 2.5%.

Certain Goods to be exempted

Certain goods and services will be exempted from GST via notification as per recommendation of GST council. {Currently, around 80 products and services including healthcare, food items, non-ac restaurants are on exemption list).

Registration, Returns and Refund (Consumer Welfare Fund)

The businessmen whose turnover exceeds 20 Lakh will register in GSTN in their own state where they conduct business. The turnover threshold is Rs. 10 Lakh for special category states. The self assessment returns are to be filed every month.  If the tax paid was in excess of or unutilized input credit, the taxpayers can apply for refund. Upon such application, the money will be credited either to the tax payer account or in a “Consumer Welfare Fund”. The money accrued in Consumer Welfare Fund will be used for consumer welfare.

Prosecution and Appeals

For GST related offenses, the persons may be fined or imprisoned or both by the CGST commissioners. Such orders can be appeared before the GST appellate Tribunal; and further before the high court.


This bill has been approved in GST Council but yet to be introduced and passed. Its tentative draft is available in public domain and most salient features are similar to CGST. There will be a SGST Registration Number. SGST is based on the state; similar to the current TIN numbers for VAT, each business will have to have one SGST registration number in the states where it has a presence. Similar to CGST registration number the SGST registration number will also be PAN-based. Each State, including Union territory with Legislature will pass its own State / UT Goods and Services Tax (SGST) Bill.

Integrated GST (IGST) Bill

This Bill has been passed in Lok Sabha and Yet to be passed in Rajya Sabha. Once this is passed, it will pave the way to charge IGST tax on inter-state trade and commerce i.e. where supply and consumption is happening in to states or UTs. This tax will be paid by the Inter-state seller on value addition after adjusting available credit of IGST, CGST, and SGST on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

GST (Compensation to States) Bill, 2017 (Compensation Cess Bill)

This bill has been passed in Lok Sabha and yet to be passed in Rajya Sabha. The salient features are as follows:

  • This bill provides for compensation to states for any loss in revenue due to implementation of GST. The period of compensation will be five years from the date the state brings SGST in force.
  • For the purpose of calculating the compensation amount in any financial year, year 2015-16 is to be considered as base year. The revenue in that year and a 14% growth rate in revenue will be taken for calculation for five years.
  • The base year revenue of the state will be calculating by adding its revenues from VAT, CST, entry tax, octroi and other local body taxes, taxes on luxury, entertainment, advertisement etc. However, this will not include revenue on alcohol and certain petroleum products.
  • The compensation will be provisionally calculated and released at the end of every two months. The annual calculation of revenue will be audited by CAG.
  • The compensation payable to a state has to be provisionally calculated and released at the end of every two months.  Further, an annual calculation of the total revenue will be undertaken, which will be audited by the Comptroller and Auditor General of India.
  • The GST council has recommended a Compensation Cess which can be levied on certain goods and services and its proceeds will be credited to a Compensation Fund. This cess is capped at 135% for Pan Masala; Rs. 400 tonne for coal; Rs. Rs 4,170 + 290% per 1,000 sticks of tobacco, and 15% for all other goods and services including motor cars and aerated water.
  • The unused money in Compensation Fund will be distributed as follows: 50% of the fund to be shared between the states in proportion to revenues of the states, and (ii)  remaining 50% will be part of the centre’s divisible pool of taxes.

Other Important Facts and Notes about GST for UPSC (Prelims Examination)

GST is a Destination Based Tax

GST is a destination based tax, which means that it would accrue to the taxing authority which has jurisdiction over the place of consumption which is also termed as place of supply. This implies that the states which consume more than manufacture will benefit. It may not be encouraging for the states which are top in production of goods and services.

In GST, CGST and SGST will be simultaneously levied

The CGST and SGST will be simultaneously levied on every transaction of supply of goods and services. Both will be levied on same price. The location of the supplier and recipient is immaterial for the purpose of levy of both the taxes.

Both States and Centre have a say in GST rates

Under GST regime, both the CGST and SGST would be levied at rates jointly decided by centre and states. These rates would be notified on recommendations of GST Council.

GSTN is the Special Purpose Vehicle for GST administration

Goods and Service Tax Network (GSTN) is a Special Purpose Vehicle (SPV) set up to cater to the needs of GST. The GSTN shall provide a shared IT infrastructure and services to Central and State Governments, tax payers and other stakeholders for implementation of GST. The key functions of the GSTN are as follows;

  1. facilitating registration
  2. forwarding the returns to Central and State authorities
  3. computation and settlement of IGST
  4. matching of tax payment details with banking network
  5. providing various MIS reports to the Central and the State Governments based on the tax payer return information
  6. providing analysis of tax payers’ profile
  7. running the matching engine for matching, reversal and reclaim of input tax credit.

The GSTN is developing a common GST portal and applications for registration, payment, return and MIS/ reports.

GST provides for a Compliance rating mechanism for tax payers

As per Section 149 of the CGST/SGST Act, every registered person shall be assigned a compliance rating based on the record of compliance in respect of specified parameters. Such ratings shall also be placed in the public domain. A prospective client will be able to see the compliance ratings of suppliers and take a decision as to whether to deal with a particular supplier or not. This will create healthy competition amongst taxable persons.

GST Provides for an Anti-Profiteering measure

As per section 171 of the CGST/SGST Act, any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices. An authority may be constituted by the government to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.

For GST to be levied – there must be business and quid-pro-quid

In order to be a supply which is taxable under GST, the transaction should be in the course or furtherance of business. As there is no quid pro quo involved in supply for charitable activities, it is not a supply under GST.

GST differentiates between composite supply and mixed supply

Composite supply is a supply consisting of two or more taxable supplies of goods or services or both or any combination thereof, which are bundled in natural course and are supplied in conjunction with each other in the ordinary course of business and where one of which is a principal supply. For example, when a consumer buys a television set and he also gets warranty and a maintenance contract with the TV, this supply is a composite supply. In this example, supply of TV is the principal supply, warranty and maintenance service are ancillary.

Mixed supply is combination of more than one individual supplies of goods or services or any combination thereof made in conjunction with each other for a single price, which can ordinarily be supplied separately. For example, a shopkeeper selling storage water bottles along with refrigerator. Bottles and the refrigerator can easily be priced and sold separately.

Under GST, Composite supply shall be treated as supply of the principal supply. Mixed supply would be treated as supply of that particular goods or services which attracts the highest rate of tax.

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