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Abstract
For a long time since independence, Indian indirect taxation system comprised of Central excise duty (a tax on production/ manufacture), and customs duty (a tax on import/export) at the Central level and sales tax at State level with certain exceptions. However, tax on inter-state sale of goods was levied by the Central Government. Indirect taxes during those years (i.e. from the year 1947 to 1985) were not based on the principle of value addition and were levied in a non-coordinated manner which lead to a major problem of cascading of tax i.e. tax on tax problem. For instance, under Central excise, tax paid on purchases (i.e. excise duty levied and included in purchase of raw material) was treated as part of the cost of goods purchased and the finished products manufactured by using that raw material were liable to excise duty on a value including the excise duty on inputs which ultimately used to increase the price of goods. The cascading of tax was also prevalent in different levies as excise duty paid on finished goods used to be part of the value of goods for the purposes of levying sales tax on such goods. Apart from this, the then prevalent indirect taxes were plagued with many problems like complicated provisions, high rates of tax, different rates, classification disputes, ambiguity of interpretation, ever increasing list of case based exemptions, frequent changes in laws, rampant tax evasion and very poor tax administration. (Rustagi, T. R.,1998)