Taxation and Consumer Rights: An Appraisal

Submitted by
Jyoti Sharma
UID- SF0116020

Faculty in Charge
Mr. Sachin Sharma

NATIONAL LAW UNIVERISTY AND JUDICIAL ACADEMY, ASSAM

GUWAHATI
 TABLE OF CONTENTS

1. Introduction
1.1 Meaning of taxation
1.2 Classification of taxation
2. Impact of taxation on consumer
3. Issues and Challenges
3.1 Misuse of tax in restaurant
4. Case Law
5. Suggestion and Measures
5.1 What is Goods and Service Tax?
5.2 How GST regime work?
5.3 Benefits of GST?
6. Conclusion
7. Bibliography
 Taxation and Consumer Rights: An Appraisal

Abstract:

Tax is considered to be one of the most important resources of revenue for the government.
Taxation have a huge impact on the consumer rights. Now today’s scenario has changed from
caveat emptor to caveat venditor. Consumers were referred to be as ‘king’ and sellers need to
provide maximum satisfaction to the consumer. But in this new era consumers also need to face
many challenges. Consumers actually become the poor ‘victim’ of the unfair trade practices
which are being carried out by the sellers. This happens because the main goal of the seller is to
maximize their profit by engaging in all sorts of unfair trade practices and end up by either
providing poor quality goods and services or by charging high price than the marked price from
the buyer. It has been manifested that the prices of the commodity which are traded in the market
are fixed arbitrarily by the manufacturer and as a result the consumers are compelled to buy the
goods at a high price. Different products will have different rate of taxes and it becomes
extremely difficult for the consumers to check whether the retailers are actually charging the
correct amount of local taxes on the products which they sell.

Therefore this research paper is an attempt to analyze the various issues and challenges being
faced by the consumers while paying taxes particularly in the matters of purchasing a product.
The research paper also seeks to highlight proper protection measures that to be provided to
consumers and to create awareness while paying taxes in purchasing the product. Finally this
paper discuses about the various measures.

Keywords: Taxation, Consumers, Market, Goods.

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1. Introduction

1.1 Meaning of Taxation

The word tax has been derived from the Latin word ‘taxare’ meaning to estimate. Taxation is a
process by which government finance their expenditure by imposing charges on the people. Tax
is not a voluntary payment but an enforced contribution which is made to the legislative
authority. Tax is considered as one of the most vital resources of revenue for the government.
The revenue that is raised from taxation supports the government to perform several functions
for the welfare of the people. There are two types of taxes. (I) Direct Taxes (ii) Indirect Taxes
and they are governed by two different board. Direct taxes are governed by Central Board of
Direct Taxes (CBDT) and Indirect Taxes are governed by Central Board of Excise and Customs
(CBEC). Direct and Indirect taxation have different impact on the consumer. The economic
effects of taxation have both positive as well as negative impact.

1.2 Classification of Taxes

Taxes can be classified into two broad categories:

 Direct Taxes: Direct taxes are those taxes which is imposed directly on the taxpayer and
it is paid directly to the government by the person upon whom it is imposed. It cannot be
shifted by the taxpayer to someone else. For example, income tax is a form of direct
taxation, and the government levies the tax directly on individuals. Direct tax include
Income tax.
 Indirect Taxes: Indirect taxes are those taxes which are collected by an intermediary like
manufacturer/service provider from the individual who bears the ultimate economic
burden of the tax such as consumer. Indirect taxes are imposed on goods and services.
Various types of indirect taxes include: Service Tax, Excise duty, VAT, Customs duty,
Securities Transaction Tax (STT), Stamp Duty, Entertainment Tax.
Some of the indirect taxes like service tax, VAT etc. comes under consumption tax.
Consumption tax are those taxes which is levied on the consumption value of goods and
services.

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2. Impact of Taxation on Consumer

Taxation have a huge impact on the consumer rights. At the same time taxes also introduce the
problems of partial information and bounded rationality among the consumers. In today’s
scenario consumers are cheated, exploited and mislead by the seller. It has been manifested that
the prices of the consumer goods which are traded in the market are fixed arbitrarily by the
manufacturer. In a market, different products will have different rate of taxes and it becomes
extremely difficult for the consumers to check whether the retailers are actually charging the
correct amount of local taxes on the products which they sell. As a result a confusion is created
among the consumers about the prices of the goods and the manufacturer takes the advantage
and gains huge profit because the actual manufacturing cost is very low. Thus the consumers are
forced to purchase the goods at a higher price which is arbitrarily fixed by the manufacturer.
Sellers takes the advantage of consumer biases and further mislead them. Sellers deceive the
consumer by making them perceive market prices of goods and services as if no taxes were
imposed on them but in fact they do pay taxes. Sellers also use the method of price partitioning
strategies where the prices of the goods and services are partitioned into several components like
shipping, subscription or processing fees with the purpose of increasing consumer demand. 1

Consumers are repeatedly exploited, cheated and mislead because they lack the relevant and
accurate information about the taxes which they need to pay while purchasing a product. As the
consumers have partial information about the consumption taxes and the market participants
takes this as the advantage which ultimately leads to increase supplier’s profit. Due to the
imperfect information about the consumption taxes, they consistently underestimate the prices of
goods and services. So, the Consumer Protection Act 1986 has been enabled to protect the rights
and interest of consumers against unfair trade practices of any trader or service provider.

3. Issues and Challenges

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Jacob Nussim, “To Confuse and Protect: Taxes and Consumer Protection”, 1 Colum. J. Tax L.218
Consumers had to face a lot of issues and challenges while paying taxes particularly in the
matters of purchasing a product. Consumers face more problems while paying indirect taxes
rather than direct taxes because indirect taxes are collected indirectly from the consumers by the
government through intermediary like manufacturer. So the burden of the tax ultimately falls on
to the consumer who purchases goods and services from the intermediary, as the intermediary
applies indirect taxes on the product in the form of service tax, sales tax, VAT etc.

Many a times sellers recognizes consumer biases for their own advantages and further hurt
consumer welfare. This happens because consumers have imperfect information about taxes. It is
the imperfect information about consumption taxes like sales tax, VAT and consumers bounded
rationality that can increase suppliers profit at the expense of consumer. Due to imperfect
information about consumption taxes consumers underestimate the prices of goods and services.
For example: When consumers goes to market and the prices of goods and services are stated as
tax-exclusive and consumers may interpret that prices exclude sales tax then consumers may
interpret the prices to be lower than they actually are and thus increase their demand for such
goods and services. Consumers faces such issues and challenges in their day to day life in all the
areas of market, cinema hall, restaurant etc.

3.1 Misuse of taxes in Restaurant.

Many of us goes to restaurant and many of us do rarely check the restaurant bill in detail. We, as
a consumer do not even bother to check the different taxes which are being imposed on the bill
and also the rate at which it is imposed. Consumers would perhaps only check that the amount
mentioned is correct and they do not get charged for the items that they did not order. If the items
that they have ordered are included in the bill then they usually pay the bill and also include a tip.
But in most of the cases consumers are being overcharged because of lack of awareness and lack
of relevant and accurate information about taxes. Overcharging is an offence and accordingly a
legal action must be warranted.

Typically in a restaurant bill, there are three important tax components i.e. Service Tax, Service
Charge and VAT. Over the last few years consumers might have lost thousands of rupees in
paying extra money on restaurant bills just because most of the consumers do not understand
what does service charge, service tax and VAT actually means and how are they calculated.
Suppose when consumers go to restaurant and eat worth of Rest 1000 but after the addition of
taxes like service tax, VAT and service charge, they finally need to pay an Rs 1260. So now the
question is whether service charge, service tax and VAT can be charged by the restaurant and if
yes then on what value and at what rate can it be charged?

So, in order to examine and analyses the answer of the above question it is very important to
decode the three important component of taxes in the restaurant bill i.e. Service Tax, Service
Charge and VAT.

• Service Charge: Service Charge is a kind of a charge which is levied by the restaurant
for the services which they provide to the consumers. It is not a tax which is levied by the
government but a charge imposed by the restaurant. It is usually charged for those
services which are provided by the waiters and the hotel staff, so it is a kind of mandatory
tip which is to be paid by the consumers. It can vary from 5% to 20%, according to
restaurant internal policy. But now service charges are not mandatory to pay. Recently the
government has announced that the restaurant billing ‘Service Charge’ in addition to
taxes is optional and the consumers has discretion to pay ‘Service Charge’ or not. The
Ministry of Consumer Affairs Food and Public Distribution has also clarified that the
practice of adding service charges of about 5-20% by hotels and restaurants isn’t
mandatory and in the event that the consumers are not satisfied with the service provided
by restaurants they have the choice to waive it. The Department of Consumer Affairs has
asked the State governments to create awareness among hotels and restaurant regarding
the relevant provisions of the Consumer Protection Act, 1986 and also to direct them to
spread or publish the information through display at the appropriate place in
hotels/restaurants that the payment of service charges is voluntary and a consumer not
satisfied with the service can have it waived off.

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 Service Tax: Service Tax is a tax which is payable on service provided by the service
provider. It is a kind of tax which is levied by the government. Service Tax should be
 charged only on 40% of the food bill and not on the total bill. Currently the service tax is
15%, so the final tax that the consumer need to pay is 6% i.e. (15% X 40%) on the bill.
Then, another most important condition for the levy of service tax is that, only Air
Conditioned or Central heating restaurants can charge service tax. So if there is no AC in
the restaurant then the restaurant owner do not have the right to charge service tax. Most
of the small restaurants which do not have AC and they are found to charge service tax on
the full bill and the consumers do pay the amount because they have no idea about the
taxes.2

 VAT (Value Added Tax): Value added tax or VAT is a kind of indirect tax, which is
imposed on goods and services at each stage of production, starting from raw materials to
final product. VAT can be applied only to those food items which are prepared inside the
restaurant as they add some value. VAT cannot be charged on the packaged commodity or
food items like water bottles. So when we go to restaurant and take some packaged
commodity then in that case VAT should be applicable only on the sub total of the food
items that we have consumed not on the final bill. VAT are collected by the state
government. Restaurants charge VAT on the food bill and it vary from state to state and it
generally lie in the range of 10% to 15%. VAT can be charged only on the food bill
including service charges and it cannot be charged on the amount after service tax.

Table 1

2
Section 66E of the Finance Act, 1994
 Food and Beverage Rs 1000

Service Charge@10% Rs. 100(10% on food and beverage

amount)
Service Tax@6% Rs.66(6%on food and beverage
amount+Service Charge)
VAT@14.5% Rs.145

Total Rs.1311

In the above table, the cost of food and beverage is Rs.1000. After adding Service Charge @10%
on food and beverage the amount is Rs.100. Service Tax is charged at the rate of 6%.

Now, according to the definition provided in Finance Act, it is mentioned that-“Service Tax can
be charged only for the services provided to the customer.” 3So accordingly Service Tax should
be charged only on the services which is provided not on the entire amount. But in the above
example service tax is being charged on the service charges as well as on the food and beverage
i.e. (1000+100) =1100.
In the above example the consumer must be charged Rs. 6, whereas he has been charged Rs. 60
extra. After adding all the taxes properly the correct amount of the entire bill should be Rs 1251
not Rs. 1311. So, we can clearly see how misuse of tax have taken place and extra charges have
increased the final bill. When next time consumer visit a restaurant they must properly ensure
that all the taxes and charges are computed properly according to the rules laid by the
government.

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4. Case Law
M/S Valley Hotels and Restaurants
Vs.
3
Section 66E of the finance Act, 1994
The Commissioner, Commercial Tax, Dehradun

In the case of M/S Valley Hotels and Restaurants vs. The Commissioner, Commercial Tax,
Dehradun a very important landmark judgment was given by Uttarakhand High Court on the
issue of double taxation in the restaurants and hotels.

Background and Facts

In this case, Valley hotels and Restaurants is the Applicant and The Commissioner, Commercial
tax of Dehradun is the Respondent. The applicant has a partnership firm which is engaged in the
hotel business and also provides restaurant services. Now up to 1 July 2012 the activities of the
applicant were covered under the Uttarakhand VAT Act, 2005 in respect of supply of cooked
food in the restaurant. Then a notification was issued on 6 June 2012, by the Ministry of finance
amending the service tax (Determination of value) Rules, 2012. In the new service tax rules they
amended that 40% of the billed value for supply of food or any other article of consumption or
any drink in restaurant was made liable to service tax. The amendment was made effective from
1 July 2012. Accordingly the applicant moved the application with the commissioner under
section 57 of the VAT Act, 2005 and requested not to charge VAT on 40% billed value to the
customer as they have already suffered service tax. The application was rejected and an appeal
was made before the commercial tax tribunal which was also subsequently dismissed. Finally the
applicant proceeded before the High Court.

Judgment of the High Court

The Uttarakhand High Court made the decision in favor of the applicant i.e. Valley Hotels and
Restaurants and held that the Commissioner, Commercial tax tribunal has erred in rejecting the
application filed by the applicant. The court addressed the issue of double taxation and held that
VAT should be imposed only on the sale of goods and not on services as service can be taxed
only by the service tax laws. It was held that where the element of service has been so declared
and
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brought under the purview of service tax vide the notification dated on 6 June 2012 and no VAT
can be imposed thereon. And accordingly the Judgment of the Commissioner and commissioner
tax tribunal were held aside and they were directed to pass the order again in the light of the
above decision.

Conclusion
So, the critical issue of double taxation was finally addressed by the Uttarakhand High Court
which gave the verdict that two taxes i.e. VAT (Value Added Tax) and Service Tax cannot be
imposed on the same value of transaction. VAT cannot be imposed on those value which already
suffers from service tax. There will be a taxability in two different portion of 40% and 60%
service tax and Value Added Tax respectively.

5. Suggestions and Measures

5.1 What is Goods and Service Tax (GST) Bill?

There are few laws and Acts which has been introduced by the government for the protection of
consumers like MRTP Act, but the most appropriate measure which has been introduced by the
government is GST (Goods and Service Tax) bill. GST (Goods and Service Tax) is one unified
indirect tax for the whole nation which will make India one unified common market. The main
purpose of Goods and Service Tax (GST) is to replace all the indirect taxes like service tax, VAT
etc. which is levied by the government on goods and services. GST will be applied at a uniform
rate on the supply of goods and services, right from the manufacturer to consumer and will be
payable at the final point of consumption. A proposed model of GST is divided into two parts i.e.
State Goods and Services Tax (SGST) and Central Goods and Services Tax (CGST)

5.2 How GST regime will work?

Suppose, XYZ company manufactures a shirt. They purchase the raw materials like cloth, thread
etc. for Rs 200 and a sum that includes a tax of Rs 10. Now with the help of these raw materials
they manufactures a shirt. In the process of manufacturing they add value to the materials and let
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us assume the value added by them to be Rs.50. Then the gross value of the good would be Rs
200+50 or Rs 250. And at a tax rate of 10% the tax on the shirt will be Rs. 25. But if GST is
applied then the manufacturer can easily set off this tax of Rs. 25 against the tax that they already
paid on raw materials. So the effective GST incidence on the XYZ manufacturer is only Rs.15
(25-10).
Then in the next process the goods will be passed from the XYZ manufacturer to the wholesaler.
The wholesaler would purchase it for Rs 250 and adds on the value of Rs 30. So the gross value
of good will be Rs. 280. Now a tax of 10% is added then the amount will be Rs 28. But under
GST he can set off this tax on his output of Rs. 28 against the tax on his purchased good from the
XYZ manufacturer (RS 25). Thus the effective GST incidence on wholesaler is Rs.3 (28-25).

Then in the final process, the retailer will purchase the shirt from the wholesaler at the amount of
Rs.280 and he adds the value of Rs. 10. Then the gross value of what he sells would be Rs
=.290(280+10). If a tax of 10% is applied then it will be Rs.29. But if GST is applied then he can
set off this tax of Rs29 against the tax on his purchase from the wholesaler i.e. Rs28, the retailer
brings down the effective GST incidence on himself to Re1 (29-28).
Thus, the total GST on the entire value chain from the raw materials through the manufacturer,
wholesaler and retailer is Rs 10+15+3+1= Rs29.

5.3 Benefits of GST

There are many benefits of Goods and Service Tax. They are:

 With the implementation of GST all the multiple indirect taxes which are charged on our
daily to day activities like service tax, VAT will be removed. There will be a single tax
known as GST for all the transactions.
 GST will bring a uniform tax regime so there will be no confusion among consumers
regarding taxes and it will help in computing taxes for goods and services.
 GST will help in the elimination of double taxation. Double taxation means that the
consumer pay tax on goods and services on which already government has collected tax
from the manufacturer or under some other head.

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  GST will help to aid GDP (Gross and Domestic Product) growth because the Centre and
state will earn more tax and the incremental income can be used in public expenditure.
 GST will eradicate corruption and black money practices. Corruption and black money
practices will be eradicated and will lead to more income for the government exchequer.
 With the help of GST prices of goods and services will come down and would thereby
increase consumption.4

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Conclusion

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Girish Garg, “Basic concepts and Features of Goods and Service Tax in India”, IJSRM volume 2 Issue 2 feb 2014
So, it can be finally concluded that Tax is not only an important source of revenue for the
government but also plays a vital role in consumer behavior. Taxation have a huge impact on the
day to day life of the consumer. As consumers have partial information about the taxes especially
about consumption taxes which is levied on goods and services so they are repeatedly being
fooled by the seller. The seller deceive the consumer and makes them perceive as if no taxes
were paid by them. Misuse of taxes takes place not only in restaurants but also in other areas like
cinema hall, shopping malls, market etc.

In the case of restaurant the restaurant owner mislead the consumer by charging unnecessary
taxes on their bill because they already knew that most of the consumers are unaware about the
taxes. If any consumer clarifies about those unnecessary charges and taxes which are being
imposed on the bill to the restaurant owner they fool the consumer by claiming that it is charged
according to their own restaurant policy. It’s very important that consumers remain vigilant
about the taxes and must properly check their bill carefully. If they are being overcharged it must
be immediately be brought to the notice of the restaurtant owner or manager or if required then
tax authorities. As overcharging is an offence and accordingly legal action must be warranted
against them.

Although the Consumer Protection Act of 1986, protects the interests and rights of the consumer
from the unfair trade practices of any trade or service provider and few laws and Act have also
been introduced, but the most appropriate measure to root out this evil is the implementation of
Goods and Service Tax Bill. GST is one indirect tax for the whole nation which will make India
one unified common market. It will eradicate all the other indirect taxes and a single tax will be
applied on the supply of goods and services right from the manufacturer to the consumer. With
the implementation of GST the tax system will be easily understood by the common people and
further it would greatly improve a fractured tax system.

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BIBLIOGRAPHY
1. Garg Girish, “Basic Concepts and Features of Goods and Service Tax in India”,
IJSRM volume 2 issue 2 feb 2014
2. Nussim Jacob, “To confuse and Protect: Taxes and Consumer Protection”, 1 Colum.
J. Tax L. 218
3. http://economictimes.indiatimes.com/

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