In other words, an ideal tax structure is one in which the maximum price effect cannot exceed the nominal amount of tax payable on the goods. In the language of economists the tax paid at the input stage should be allowed to be offset against the tax payable at the finished product stage. This objective is most conveniently achieved by value-added tax (VAT). In India, the question of introducing VAT in lieu of excise or local taxes is still being debated. A comprehensive VAT up to the retail stage has limitations.

The Constitution permits the central government to levy and collect excise duties on goods produced or manufactured,with the exception of alcohol, narcotic substances, etc. Sales tax and other local taxes fall within the purview of states. Given the of well-defined jurisdiction between the Centre and the states, a comprehensive VAT up to the retail stage is not possible without amendment of Constitution. The desirability of VAT kind of commodity taxation, however, cannot be ignored. Excise duties constitutes the single most important source of revenue for the Centre, estimated to yield Rs 63, 500 crore in 1999-2000. It is imperative that the tax system of this vital significance should be free from cascading effect as much as possible. The introduction of Modvat (modified value-added tax) in the excise structure in 1986 and its subsequent amplification in content and scope year after year is no doubt a step in the right direction. Despite a checkered history of numerous disputes and litigation, Modvat scheme has helped in reducing the cascading effect to considerable extent. This has, however, not been achieved without thegruelling disputes on fundamental aspects.

An example that culminated in a recent judgement by the Supreme Court is illustrative. Excise duty, being a tax on manufacture, is charged on the wholesale price at which the manufacturer sells the goods. This general rule, however, fails to apply when any intermediate goods are not sold but only used for captive consumption for further manufacture. To resolve this problem, the excise valuation rules provide for determination of value based on cost of production of captively used goods. But tax authorities and taxpayers seldom live in harmony.

A question arose whether the element of excise duty paid on inputs (raw materials) of the intermediate goods and on which Modvat credit has been taken is to be included in the computing the cost of the intermediate goods. The departmental authorities felt that it should be. The manufacturers contested this ruling. On the tribunal having affirmed their contention, the government pursued the dispute in the Supreme Court for afinal resolution. In its judgement delivered on August 11, 1999-collector of central excise vs Dai Ichi Karkaria Ltd-the Supreme Court rejected the assertion of the government that the amount of excise duty on which Modvat credit has been taken should be included in the assessable value of the intermediate goods. The apex court applied the simple test of commercial understanding to resolve the dispute.

And look at the simple manner in which the apex court explained the way to steer clear of a fundamental controversy. "A man of commerce would, in our view, look at the matter thus: `I paid Rs 100 to the seller of the raw material as the price thereof. The seller of the raw material had paid Rs 10 as the excise duty thereon. Consequent upon purchasing the raw material and by virtue of the Modvat scheme, I have become entitled to the credit of Rs 10 with the excise authorities and can utilise this credit when I pay excise duty on my finished product. The real cost of the raw material (exclusive of freight,insurance and the like) to me is, therefore, Rs 90. In reckoning the cost of the final product I would include Rs 90 on this account'. This, in real terms, is the cost of the cost of the raw material (exclusive of freight, insurance and the like) and it is this, in our view, which should be included in computing the cost of the excisable product."

A reading of the judgment leaves a moral: when in doubt on fundamental issue, don't feel weak--rely upon the strong test of common understanding. Unfortunately, to many this doesn't sound convincing unless coming from the highest court.