Consumption and Production Taxes

Two types of indirect taxes prevail, first, on selected commodities called selective excises on ‘demerit’ goods like alcoholic beverages and tobacco products, on non-renewable resources like petroleum products, and luxuries like furs and yachts. Collected at the factory gate, they are called production taxes. Excises are narrowly based, and their rates are higher than for widely based consumption taxes including retail sales tax (RST), value-added tax (VAT), and goods and services tax (GST). The United States, one among few, uses RST at the state level. Collected exclusively at the retail level, RST is prone to evasion. The GST or VAT collects tax at every stage of production and distribution including retail while giving input tax credit for taxes paid in earlier stages. This eradicates ‘tax on tax’ or cascading. Thus, if the retail stage is missed, tax is nevertheless collected at earlier stages. Some developing countries have VAT on the supply of goods though not on services. However, VAT or GST should include goods and services in the base. Only then cascading is eliminated comprehensively from the supply chain, though some cascading remains in most structures due to exemptions. Exemptions also erode the base. Production and consumption taxes are studied in this chapter.