Industry body Assocham said the government should replace multiple central and state taxes by a GST (General Sales Tax) as the present system was adversely impacting the competitiveness of Indian industry.
"Multiple taxes with different rates make tax system complex, increase litigation and cost of compliance and also encourage tax evasion," Assocham said in its Pre-Budget memorandum for 2007-08.
The chamber said under the present system, excise duty or service tax is levied on cost of goods or service which also includes an element of VAT in the input cost.
"Similarly, VAT is levied on sale price of manufactured goods which includes excise duty element. Thus, one tax is levied on another artificially increasing the cost of indigenous production due to cascading effect of multiple taxes at different stages," it said.
Assocham said the replacement of multiple state tax by Value Added Tax (VAT) in 26 states had a favourable impact on trade, industry and state governments' tax revenue.
However, even after the implementation of VAT, indirect tax structure in the country is quite complex with multiple taxes being levied by central and state government, it said.
It suggested setting up an empowered committee, consisting of state and central government representative to finalise the structure of GST.
"The replacement of multiple taxes by GST will increase the tax-GDP ratio by 2 per cent," it said.