Cascading tax effect is also termed as “tax on tax”. This effect occurs when a good is taxed on every stage of production. Such a good is taxed till it is finally sold to the consumer. This means each succeeding transfer of good is taxed inclusive of the taxes charged on the preceding transfer. As a result, the final consumer bears the burden of the multiple taxes imposed on every stage of production. Such a situation leads to inflationary prices.
Thus, ‘Tax on tax’ plagued the indirect tax structure of India prior to GST. So to understand such an effect, it is imperative to figure out:
- the tax structure in the previous indirect tax regime and
- how stakeholders ended up paying more tax in the supply chain?