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Input tax credit – the journey from ‘proforma credit’ to GST
A finished product comes to the consumer after multiple stages of manufacture, and taxes are levied on the product that emerges at every stage. The tax at one stage becomes part of the price of the product that is the input for the next stage, and the tax paid at the next stage will therefore include an element of tax on tax. Naturally the multiplicity of occurrence of tax on tax at different stages of manufacture of a product would add up to substantially inflate the price to the consumer if not neutralised in the intermediate stages. Input tax relief in some form, designed to neutralise this cascading effect of tax on tax, has been on the statute book in various forms since the inception of ‘proforma credit’ in 1962. It has successively mutated into ‘set-off’, Modvat, and Cenvat, and is poised to take another large stride under GST, which will provide for inter-state neutralisation of VAT on sale of goods. A quick look at this journey will show us how far we have come.