SPECIAL ARTICLE An Assessment of the Revenue Impact of State-Level VAT in India
Arindam Das-Gupta
Revenue and GSDP data for 29 states for 1993-94 to 2008-09 are used to study the revenue performance of the state value added tax in India. The direct revenue impact was assessed by testing if VAT introduction increased VAT or state’s own revenue buoyancies or the VAT or SOR to GSDP ratios. The indirect impact of VAT introduction on the VAT base (proxied by GSDP) and base growth were also examined. No indirect impacts of the VAT on its base was found. The direct revenue impact of the VAT was found to be positive in two-thirds of sample jurisdictions. A positive impact on SOR was however found only in Orissa and Haryana among 11 major states and 50% of other jurisdictions. Limited VAT revenue performance can partly be traced to large-scale evasion given weaknesses in VAT administration identified in a 2009 performance audit by the Comptroller and Auditor General. The implications of this study for the planned move to a goods and services VAT (from the current goods only VAT) are drawn and a suggestion is made for a non-VAT goods and services tax which should be less vulnerable to tax evasion.
This is an extensively revised and extended version of “A Preliminary Evaluation of the Revenue Impact of the State Level VAT in India” co-authored with Joy Chowdhury presented at the National Institute of Public Finance and Policy, New Delhi in March 2011. For this paper data have been corrected and updated, and the analysis has been altered drawing largely on comments received from seminar participants. Their suggestions are gratefully acknowledged individually where appropriate. Thanks are due to Fernanda Andrade for excellent research assistance. The usual disclaimers apply.
Arindam Das-Gupta (ronnie@gim.ac.in) is at the Centre for Economic Research, Goa Institute of Management, Goa.
Introduction and Motivation
T
In developing countries the VAT is the consumption tax of choice of most applied public economists.1 However, Stiglitz and Dasgupta (1971) identified conditions under which VATlike exemption of productive intermediate inputs would not ensure economic efficiency. Some recent theoretical papers on the VAT also found it wanting when imperfect markets or i nformal sectors exist in the economy.2 On the other hand by granting input tax credits (ITC), the base of the VAT is narrower than a consumption tax without ITC, thus violating a widely accepted rule of thumb for practical design of general taxes, broad bases permitting low tax rates.3 One justification for this violation is that opposed interests of input suppliers (who benefit from evasion of VAT on their output) and buyers (who would like to claim ITC) make the VAT partly “self-enforcing”.4
Whatever its merits or drawbacks, the VAT is now implemented in at least 138 nations.5 In at least three of them ( Brazil, India and Quebec province of Canada) a sub-national VAT is also in place. The empirical assessments of the revenue i mpact of the VAT in Ebrill et al (2001) and also in Keen and
Table 1: Revenue Gain from VAT Adoption Region (% of GDP)
Region Ebrill et al (2001) Keen and Lockwood (2007)3, 4 Average Gain Number of: Average Gain (%) over Predecessor Countries Gaining Sales Tax (% of GDP)2, 4 Revenue from the VAT (Countries Losing Revenue)
Sub-Saharan Africa 1.10 11 (14) -0.81
Asia and Pacific 0.70 19 (3) 2.10
Americas 1.42 14 (9) 0.51
Central Europe and BRO1 -1.88 Not studied Not studied
EU (plus Norway and Switzerland) 1.05 17(0) 4.15
North Africa and west Asia 0.10 3 (2) 0.45
Small Islands 1.96 8 (0) 4.03
Economic & Political Weekly
EPW
Lockwood (2006, 2007) were limited to national level VATs. So an assessment of the VAT in India, which has had VATs on goods at both national and sub-national levels for around six years, is of interest. The revenue performance of the VAT reported in Ebrill et al and in Keen and Lockwood (2007) are reproduced in Table 1 (p 55).6 Clearly revenue gain from VAT adoption, while fairly widespread, were not universal.
As Ebrill et al (2001) point out, these results need not refl ect poor VAT revenue potential. First, many countries intended a revenue neutral replacement of their earlier consumption taxes by the VAT, as in the Indian states. Second, design differences in VATs in different countries cause them to depart in various ways from a textbook VAT, again as in the states. Third, if the VAT causes less economic distortion than the tax it r eplaces, this may lead to VAT base (proxied by GDP) gains, i ncreasing the denominator in Table 1’s revenue ratios. The VAT fails on revenue grounds only if both the direct revenue impact plus its indirect impact on the VAT base are negative.
Note that revenue is not the only performance criterion. A dministrative and cost efficiency, predictability, simplicity, impact on economic effi ciency, evasion proneness, equity and economic welfare as a whole are other important evaluation criteria. Of these, only administrative efficiency and evasion proneness are partly addressed below.
After describing Indian state VAT design features, modelling and data issues are discussed, followed by the presentation of empirical results. Two robustness tests of the main e mpirical fi ndings and a review of a recent performance audit by the Comptroller and Auditor General (CAG) in 2010 are then presented. Policy suggestions based on the analysis conclude the paper.
The VAT in Indian States
Starting with Haryana and ending with Uttar Pradesh, between 2003-04 and 2007-08 VATs on goods were implemented in all Indian states and several union territories.7 Implementation dates for the 29 states are in Table 2.
Table 2: Dates of VAT Implementation by States in India
| Haryana | 1st Apr 2003 |
| Andhra Pradesh, Bihar, Haryana, Karnataka, Kerala, Maharashtra, | |
| Orissa, Punjab, West Bengal, Arunachal Pradesh, Assam, | |
| Himachal Pradesh, Goa, Jammu and Kashmir, Manipur, | |
| Meghalaya, Mizoram, Nagaland, NCT New Delhi, Sikkim, Tripura | 1st Apr 2005 |
| Uttarakhand | 1st Oct 2005 |
| Chhattisgarh, Madhya Pradesh, Gujarat, Rajasthan, Jharkhand | 1st Apr 2006 |
| Tamil Nadu | 1st Jan 2007 |
Uttar Pradesh 1st Jan 2008
Source: Halakhandi (2007) except Tamil Nadu: Government of Tamil Nadu (no date), and Uttar Pradesh: CA.inINDIA.Org (2011).
Though VAT designs differ across states, among major widely prevailing design differences compared to a destination based consumption-type VAT are:8
Consequently commodity taxes in the states continue to be partly origin based, tax intermediate inputs, and result in differential cascading across both goods and services. Even so, there are fewer design differences across the states than, for example, in the cross-country studies cited above. Furthermore, in India it is likely that the VAT was introduced to, inter alia, improve revenue but indirectly by reducing economic distortions and increasing the tax base.9
Data and Modelling Issues
To assess the revenue impact of the state VAT, the (a) gross state domestic product (GSDP) buoyancy of sales taxes (ST), and (b) the revenue to GSDP ratio, before and after VAT are examined. GDP (here GSDP) is the standard proxy for the base of general consumption taxes in most revenue performance studies. Two issues are examined. First, has the VAT done better than the sales tax it replaced? Second, has the VAT contributed to an improved own revenue performance? The latter is not assured if VAT gains are eroded by losses from other revenue sources, unintended or intended.10
For the first question two equations, ST revenue pre- and post VAT implementation were compared:
LNST = B0 + B1LNG + B2(VAT.LNG) ...(1)
tttt
(ST/G) = B0 + B1VAT ...(2)
tt
In (1) LN prefixed to a variable name denotes its natural logarithm, GSDP is abbreviated to G and the t is an annual time
tt
period subscript ranging from 1993-94 to 2008-09. VAT is a
t
dummy variable taking the value 1 for years in which the VAT prevailed and zero otherwise. Thus VATt.LNG is a slope dummy
t
variable. An increased coefficient of the VAT dummy in the buoyancy equation (1) is consistent with higher secular revenue productivity of the VAT compared to the earlier sales tax. An increase only in the VAT/GSDP ratio may reflect a one time increase in revenues due to the VAT, with no trend impact.
For the second question, the same two equations but with state’s own revenue receipts (SORR) replacing ST are estimated:
LNSORR = B0 + B1LNG + B2(VAT.LNG), ...(3)
tttt
(SORR/G) = B0 + B1VAT ...(4)
tt
An alternative to equations (1) and (3) with lagged Gt-1 replacing current G, (equations 1a and 3a) is also reported.11
t
A fifth equation was estimated to check if, even if there was no revenue increase, the VAT at least contributed a larger share of state revenue:12
(ST/SORR) = B0 + B1VAT ...(5)
tt
These models do not include other possible determinants of revenue performance. Keen and Lockwood (2007), for example, estimate pooled regressions and so include additional “tax effort” determinants including a per capita income variable, a trade openness variable and the share of agriculture in GDP. These variables, which will vary little over the sample period in Indian states, are unlikely to contribute to the explanatory
march 10, 2012 vol xlvii no 10
power of the time series models analysed here. Furthermore trade openness data are not available for Indian states.13 However, as in other Indian studies, states are classified as major states and non-major states, the latter including the 10 special category states. Special category states are officially held to suffer from poor infrastructure, difficult terrain and in most cases large tribal populations.14
The equations above neglect the indirect impact, if any, of VAT introduction on the VAT base. To assess this, two more equations were estimated using pooled data for the jurisdictions studied. The reason for data pooling was to take into a ccount possible cross-state economic spillovers on the VAT base.15 Using the subscript j for the jth state, the estimated equations were:
LNGSDPjt = B + B1VATjt + B2Time + B3Statej, ...(6)
o t
ǻLNGSDPjt = B + B1VATjt + B2Time + B3Statej. ...(7)
o t
There is little alternative to the admittedly weak methodology of using a VAT dummy variable to assess the impact of the VAT. This methodology, with all its problems, is also used in earlier VAT impact studies including Ebrill et al (2001) and Keen and Lockwood (2006, 2007).16 However, this implies that differences between VAT and pre-VAT periods rather than the impact of the VAT are being studied. The technique cannot distinguish between the VAT’s impact and the impact of other tax and fi scal reforms during the period. For this detailed, state by state, for BJ and UPU in all equations. VAT1equals 1 for years in
t
which only one sibling state had the VAT and zero otherwise.
Empirical Results
In Table 3, VAT dummy coefficients and their signifi cances are summarised from the detailed Appendix Tables A1 to A7 (pp 61-64). Table 4 (p 58) reports the mean values of the GSDP and SORR
inquiries on the quality of VAT implementation Table 3: VAT Dummy Variable Signs and Significances for Equations (1) to (5)
and also other reforms are needed. The quality of State ST GSDP ST Lagged ST/GSDP SORR GSDP SORR SORR/GSDP ST/SORR Buoyancy GSDP Buoyancy (Eq 2) Buoyancy Lagged GSDP (Eq 4) (Eq 5)
VAT implementation is partly examined below by
(Eq 1) (Eq 1a) (Eq 3) Buoyancy drawing on a VAT performance audit.17 Two (Eq 3a)
other statistical exercises to check the robust-
Major states Andhra Pradesh (AP) 0.000 0.003 0.004* 0.004 0.005 0.008 -0.003
ness of the basic results were carried out.
Gujarat (Guj) 0.011* 0.011* -0.002 0.003 0.004 -0.015* 0.236*
Current rupee data on GSDP, ST and SORR
Haryana (Har) 0.004 0.007 0.010* 0.019* 0.027* -0.023 0.142*
are used for all 29 Indian states (clubbed into
Karnataka (Kar) 0.008* 0.012* 0.001 0.008 0.013 0.010 -0.032 26 jurisdictions as explained below) for 2003-Kerala (Ker) -0.005* 0.000 0.003 0.002 0.007 0.003 0.01
04 to 2008-09. ST and SORR data were from Maharashtra (Mah) -0.004 0.002 0.001 0.001 0.006 0.003 -0.006
the website of the Reserve Bank of India (RBI) Orissa (Ori) 0.008 0.010 0.008* 0.011 0.014 0.017* 0.000 Punjab (Pun) 0.001 0.005 0.005* -0.005 0.004 -0.002 0.056*
and GSDP data were from the website of the
Rajasthan (Raj) 0.004 0.009 0.008* 0.010 0.015* 0.005 0.067*
Ministry of Statistics and Programme Imple-
West Bengal (WB) 0.007* 0.011* 0.001 0.007 0.01 0.004 -0.025
mentation (MOSPI).18 Four data problems and
Tamil Nadu (TN) 0.000 0.002 -0.008* 0.005 0.007 -0.008 -0.039*
the manner in which they were dealt with are
Non-major states now described. Arunachal Pradesh (ArP) 0.007 -0.032 0.013* 0.077* 0.074* 0.074* 0.082*
(a) Chhattisgarh, Jharkhand, and Uttarakhand Assam (Asm) 0.007 0.005 0.015* 0.013* 0.011* 0.025* 0.047 Himachal Pradesh (HP) 0.022* 0.024* 0.013* 0.024* 0.027 0.035* 0.034
were carved respectively out of Madhya Pradesh,
Goa 0.018* 0.019* -0.014 -0.007 -0.003 -0.073* 0.065
Bihar and Uttar Pradesh in 2000. So com-
Jammu and Kashmir (JK) 0.023* 0.019* 0.022* 0.014* 0.012 0.029* 0.166*
bined data for Bihar-Jharkhand (BJ), Madhya
Manipur (Man) 0.029 0.018 0.007* 0.05* 0.053* 0.012* 0.215*
Pradesh-Chhattisgarh (MPC), and Uttar Pradesh-
Meghalaya Meg) 0.019* 0.023* 0.01* 0.011 0.015 0.008* 0.138* Uttarakhand (UPU) were used. This reduced Mizoram (Miz) 0.026 0.015 0.011* 0.05* 0.051* 0.008 0.168*
the number of jurisdictions to 26 instead of 29. Nagaland (Nag) 0.020* 0.018 0.005* 0.024* 0.028 0.005 0.098*
Since differences could arise after the split, an Sikkim (Sik) -0.020* -0.022 0.013* -0.041 0.004 -0.301 0.021 Tripura (Tri) 0.010 0.007 0.008* -0.008 -0.011 0.004 0.177
additional dummy variable term, B3Split, was
tNCT Delhi (ND) -0.010 0.007 0.006 -0.011 0.007 0.014 -0.038*
added to equations (1) to (5) for these states,
of which combined states
with Split equalling one from the year of the
tBihar+Jharkhand (BJ) 0.001 0.001 -0.002 0.007 0.005 -0.001 -0.021 split (2000 in all three cases) and zero before Madhya Pradesh+ that. Furthermore, in BJ and UPU, Bihar and Chhattisgarh (MPC) 0.003 0.007 0.006* 0.001 0.004 0.007 0.039* Uttar Pradesh+
Uttarakhand implemented the VAT before
Uttarakhand (UPU) 0.008* 0.013* 0.007* 0.017* 0.020* 0.012 0.01
their sibling states (Table 2). So additional
(1) *: Significant at 95% or better. P-values are reported in the Appendix. dummy variable terms, B4VAT1, were added (2) Of the combined states, Bihar, Madhya Pradesh and Uttar Pradesh are major states.
t
Economic & Political Weekly
EPW
| Table 4: Buoyancies and Mean Values of Ratios | The last column of Table 3 shows that the | |||||||
|---|---|---|---|---|---|---|---|---|
| State | ST GSDP Buoyancy (Eq 1) | ST Lagged GSDP Buoyancy (Eq 1a) | ST/GSDP (Eq 2) | SORR GSDP Buoyancy (Eq 3) | SORR Lagged GSDP | SORR/GSDP (Eq 4) | ST/SORR (Eq 5) | share of ST in SORR increased in only 11 states (excluding Arunachal), including four major |
| Major states Andhra Pradesh | 1.085 | 1.057 | 0.047 | 1.013 | Buoyancy (Eq 3a) 1.029 | 0.091 | 0.520 | states, after VAT introduction and reduced in one major and one non-major state. So reliance on sales taxes did not increase in the majority |
| Gujarat | 0.797 | 0.797 | 0.047 | 0.799 | 0.791 | 0.094 | 0.510 | of states after the VAT reform. |
| Haryana | 1.147 | 1.128 | 0.039 | 0.548 | 0.421 | 0.127 | 0.388 | On the indirect impact of VAT introduction, |
| Karnataka | 0.894 | 0.858 | 0.050 | 0.959 | 0.917 | 0.104 | 0.472 | coeffi cients of VAT dummies in pooled regres- |
| Kerala | 1.154 | 1.073 | 0.051 | 1.005 | 0.931 | 0.080 | 0.643 | sions with LNGSDP and the GSDP growth rate |
| Maharashtra Orissa | 1.095 1.117 | 1.034 1.119 | 0.040 0.027 | 1.015 1.061 | 0.958 1.062 | 0.082 0.062 | 0.484 0.440 | in Table 6 (p 59) are uniformly insignifi cant. The conclusion is that VAT introduction did |
| PunjabRajasthan West Bengal Tamil Nadu | 1.166 1.171 0.894 0.875 | 1.156 1.141 0.835 0.835 | 0.033 0.032 0.026 0.062 | 1.079 0.893 0.959 0.865 | 0.935 0.836 0.907 0.826 | 0.108 0.082 0.047 0.105 | 0.320 0.401 0.543 0.580 | not lead to any base expansion.22 So the direct revenue impact of the VAT is also the total r evenue impact.23 |
| Non-major states | ||||||||
| Arunachal Pradesh | 4.510 | 5.476 | 0.003 | 0.856 | 0.984 | 0.050 | 0.080 | Robustness Checks |
| Assam | 1.467 | 1.53 | 0.025 | 1.214 | 1.294 | 0.054 | 0.475 | Given the questionable data, especially for |
| Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram | 1.288 0.643 1.700 1.353 1.310 1.992 | 1.267 0.607 1.75 1.519 1.258 2.155 | 0.017 0.064 0.017 0.009 0.015 0.005 | 1.103 0.756 1.297 0.634 1.017 0.581 | 1.052 0.673 1.299 0.561 0.958 0.573 | 0.064 0.203 0.055 0.033 0.047 0.049 | 0.284 0.335 0.329 0.304 0.347 0.151 | GSDP, and methodological weakness, two r obustness checks are now presented. Further, in the next section findings of the performance audit (CAG 2010), which also tend to suggest negative or weak VAT revenue per- |
| Nagaland | 1.261 | 1.266 | 0.009 | 0.789 | 0.671 | 0.031 | 0.311 | formance are presented. |
| Sikkim | 1.811 | 1.854 | 0.020 | 1.271 | 0.501 | 0.869 | 0.042 | |
| Tripura | 1.372 | 1.349 | 0.014 | 1.223 | 1.212 | 0.037 | 0.412 | States Gaming the Centre: The centre agreed |
| New Delhi | 1.294 | 0.974 | 0.047 | 1.367 | 1.029 | 0.071 | 0.655 | to compensate states implementing the VAT in |
| of which combined states Bihar+Jharkhand Madhya Pradesh+ Chhattisgarh | 0.887 1.232 | 1.015 1.315 | 0.028 0.026 | 0.821 1.128 | 0.975 1.198 | 0.059 0.079 | 0.478 0.347 | 2005 for any revenue loss in the initial years relative to sales tax revenue in 2004-05. The compensation would equal 100%, 75% and |
| Uttar Pradesh+Uttarakhand | 1.077 | 1.018 | 0.029 | 0.812 | 0.792 | 0.064 | 0.458 | 50% of the revenue loss in the fi rst, second |
| Averages major states | 1.036 | 1.003 | 0.041 | 0.927 | 0.874 | 0.089 | 0.482 | and third years of the VAT, r espectively. Could |
| All states | 1.330 | 1.361 | 0.030 | 0.964 | 0.899 | 0.106 | 0.396 | this have led to higher than normal state tax |
All buoyancies are significant at 99%: See Tables A1, A2, A4 and A5.
ratios and also the buoyancies to help interpretation of Table 3.19 State by state narrative assessments are in Table 5 (p 59).
Results for three states are difficult to interpret. In Andhra Pradesh the three ratios in the table appear mutually contradictory. They are, in any case, small. In Arunachal Pradesh, sales tax/VAT revenue grew 15,000% (in nominal terms) over the sample period while SORR grew by 1,000% or over twice as much as GSDP. Clearly, these gains cannot be attributed to VAT introduction alone. In Sikkim ratios and buoyancies appear to be mutually contradictory. In any case VAT appears to have no impact on revenue performance in Sikkim, the negative VAT buoyancy and ST/SORR may contradict this, implying questionable results. Leaving aside these states, Table 5 suggests that VAT revenue performance was positive in 15 of the remaining 23 jurisdictions including in six of 10 major states (excluding AP). Of these, in Karnataka, Kerala and UPU revenue gains were small.20
Own revenue performance after VAT introduction improved in only two major states (Haryana and Orissa) and seven nonmajor states. Overall, even if VAT performance was positive in two-thirds of the states, improved own revenue performance after VAT introduction occurred in less than 40% of jurisdictions including only two major states.21
effort in 2004-05 followed possibly by lower than normal tax effort particularly in 2005-06?24 If so VAT dummy coefficient estimates reported above would be biased downward and could turn insignifi cant.25 To examine this augmented versions of equations (1) and (2), equations (1b) and (2b) were estimated for the 21 states which implemented the VAT in 2005. The additional variables included were dummy variables for 2004-05 (PreVAT) and 2005-06 (PostVAT). These were slope dummies in (1b) and intercept dummies in (2b). The hypothesis is confirmed if PreVAT is positive and significant and, perhaps, PostVAT is negative and significant. Results are summarised in T able 7 (p 59). Further detail is in Tables A8 and A9 (p 64).
For both equations the first of the four columns for each equation reports VAT dummy signs and significances from Table 3. In equations (1b) and (2b) PreVAT is positive and signifi cant in two and five states, respectively. In no case is PostVAT signifi cant. However, PreVAT/PostVAT have the expected positive/negative sign pattern in eight cases in (1b) and 10 cases in (2b). Thus the hypothesis of gaming has weak support. What of VAT dummy coefficients? In fact addition of PreVAT and PostVAT robs some VAT dummy coefficients (including two negative coeffi cients) of their significance. In no case does addition of these dummies cause an insignifi cant VAT dummy to become signifi cant
march 10, 2012 vol xlvii no 10
though they appear to cause downward bias in some cases. Thus the hypothesis of VAT dummy coefficients being insignifi cant due to states gaming the centre can be safely rejected. Downward bias of VAT dummy variables is, however, possible.
Can Winners Compensate Losers? Instead of counting states with revenue improvements postVAT, an alternative is to see if states gaining revenue from the VAT could compensate states that
Table 5: Impact of VAT Introduction on Sales Tax and State's Own Revenues: State by State Assessment
State Assessment
Major states Andhra Pradesh See discussion in the text
Gujarat VAT not a success but other revenue sources performed even worse.
Haryana Improved revenue performance including of the VAT.
Karnataka VAT had no impact on revenue performance in Karnataka. ST buoyancy improved but by under 1%.
Kerala VAT had no impact on revenue performance in Kerala. ST buoyancy worsened but by under 1%.
Maharashtra VAT appears to have had no impact on revenue performance in Maharashtra.
Orissa ST/GSDP and SORR/GSDP dummy coefficients are both
large relative to the mean. Suggests improved revenue
performance including of the VAT.
Punjab From ST/SORR and ST/GSDP, VAT was successful. Other revenue sources eroded VAT gains.
Rajasthan From ST/SORR and ST/GSDP, VAT was successful. Other revenue sources eroded VAT gains.
West Bengal VAT had no impact on revenue performance. ST buoyancy improved but by under 1% leaving it below unity.
Tamil Nadu VAT performance was worse than the sales tax it replaced, but overall revenue performance is unchanged.
Non-major states Arunachal Pradesh See discussion in the text
Assam Improved revenue performance including of the VAT.
Himachal Pradesh Improved revenue performance including of the VAT.
Goa VAT appears to have had no impact on revenue performance in Goa. ST buoyancy may have improved by around 3% still leaving it well below unity.
Jammu and Kashmir Improved revenue performance including of the VAT.
Manipur Improved revenue performance including of the VAT.
Meghalaya Improved revenue performance including of the VAT.
Mizoram Improved revenue performance including of the VAT.
Nagaland VAT performance is positive but overall SORR performance has not improved.
Sikkim See discussion in the text.
Tripura ST/GSDP increased from a low level of 1%. No impact on overall own revenue performance.
New Delhi VAT performance worse than the sales tax it replaced. Overall revenue performance is unchanged.
of which combined states Bihar+Jharkhand VAT had no impact on revenue performance.
Madhya Pradesh+ VAT performance is positive but had no impact on Chhattisgarh revenue performance.
Uttar Pradesh+ Improved revenue performance including of the VAT, Uttarakhand though magnitude is small.
lost revenue so that the country as a whole gained.26 To test this, data were aggregated across all 29 states in the sample and the following aggregate versions of equations (1) to (4) were estimated:
LNST = B0+B1LNG+B2[VAT2003LNG] +B3[VAT2005LNG]+B4[VAT2006LNG]+B5[VAT2007LNG] (1c)
ST/G = B0+ B1+B2+B4
VAT2003VAT2005VAT2006 +B5 (2c)
VAT2007
LNSORR = B0+B1LNG+B2[VAT2003LNG] +B3[VAT2005LNG]+B4[VAT2006LNG]+B5[VAT2007LNG] (3c)
SORR/G = B0+ B1+B2
VAT2003VAT2005 +B4+B5 (4c)
VAT2006VAT2007
Four VAT dummy variables were needed given that states implemented the VAT in different years. For example, VAT2003 takes on the value 1 from 2003-04 onward to capture the VAT effect of states implementing the VAT in 2003 (from Table 2 this was only Haryana). Results, including F-tests for the joint significance of the four VAT dummies are in Table 8 (p 60).
In Table 8, only the VAT dummies in equation (2c) are signifi cant. However, looking at the individual dummies in the equation only VAT2003, when Haryana alone introduced the VAT, is significant. Furthermore states’ own revenues in equations (3c) and (4c) were not significantly affected by the VAT. So it may be concluded that revenue gainers from the VAT could not compensate the losers.
Did Tax Evasion Reduce VAT Performance?
To what extent was VAT performance eroded by poor administration permitting leakage through tax non-compliance? For this the findings of the performance audit in CAG (2010) are revealing. The audit conducted during April-November 2009 covered 23 states27 and the post-VAT period 2005-06 to 2008-09, which is precisely the VAT years included in the sample in this paper (barring Haryana’s early VAT years). Using the 2005 white paper of the Empowered Committee of State Finance Ministers (ECSFM) which set out desirable basic VAT design and tax administration (TA) features as a benchmark, CAG (2010) assessed VAT performance.28
The main findings of importance for this paper were:
• Inability or unwillingness to
Table 6: Impact of VAT Introduction on GSDP (pooled regressions for all states on state dummy variables, a time trend, and VAT
cross-check information with
period dummy variable)
| LNGSDP (Eqn 6) | ǻLNGSDP (Eqn 7) | |||||
|---|---|---|---|---|---|---|
| Regression | VAT Dummy Variable | Regression | VAT Dummy Variable | |||
| Significance | Coefficient | Significance | Significance | Coefficient | Significance | |
| Regression without combined states | 0.000 | 0.024 | 0.484 | 0.000 | -0.037 | 0.129 |
| Regression with combined states | 0.000 | 0.029 | 0.344 | 0.000 | -0.030 | 0.178 |
Additional dummy variables for combined states are (a) from the year of states splitting, and (b) years during which only one of the combined states implemented the VAT.
Economic & Political Weekly
EPW
that available in other tax departments like the central excise and customs departments.
• Ineffective procedures for verifying ITC claims and detecting fake ITC claims.
Table 7: Signs and Significances of VAT, PreVAT and PostVAT Dummy Variables These official performance audit findings, based on extensive
ST Buoyancy (eq 1b) ST/GSDP (eq 2b)
test checks, provide independent verification of the relatively
VAT - (eq 1) VAT PreVAT PostVAT VAT - (eq2) VAT PreVAT PostVAT
poor revenue performance of the VAT found in this paper. The
Andhra Pradesh 0.000 0.000 -0.020 -0.031 0.004* 0.005* 0.002 -0.003
audit traces this to incomplete reforms and ineffective TAs.29 It
Karnataka 0.008* 0.013* 0.173* -0.056 0.001 0.002 0.003 -0.001
would be of interest to see if TA weakness can statistically ex-
Kerala -0.005 -0.004 0.008 -0.036 0.003 0.004 0.005 -0.004 Maharashtra -0.004 -0.002 0.114 0.033 0.001 0.001 0.006* 0.001 plain poor revenue performance if state by state information Orissa 0.008 0.009 0.126 0.077 0.008* 0.008* 0.005 0.001 for the CAG report were made available. Note, however, that ad-Punjab 0.001 -0.001 0.127 0.207 0.005* 0.004 0.007 0.006 ministration of the predecessor sales taxes was also ineffective West Bengal 0.007* 0.012 0.163* -0.050 0.001 0.001 0.002 0.000 as documented by several studies and o ffi cial reports.30 The
Arunachal incapacity of TAs to successfully cope with administering a Pradesh 0.007 0.005 0.311 0.448 0.013* 0.015* 0.006 -0.004
new, sophisticated, tax like the VAT is strongly suggested by
Assam 0.007 0.010 0.263 0.164 0.015* 0.015* 0.015* 0.004
the CAG performance audit.
Himachal Pradesh 0.022* 0.028* 0.164 -0.102 0.013* 0.015* 0.006* -0.005
Implications for Near Term Reform
Goa 0.018* 0.020* 0.041 -0.050 -0.014 -0.017 -0.021 0.002 Jammu Given the poor ability of states to cope with tax reforms docuand Kashmir 0.023* 0.027* 0.243 0.039 0.022* 0.024* 0.013* -0.002
mented by the CAG and the possible negative impact of this on
Manipur 0.029 0.038 0.120 -0.269 0.007* 0.009* 0.002 -0.005
revenue is several states, further large-scale tax reform at this
Meghalaya 0.019* 0.021* 0.136 0.039 0.010* 0.011* 0.005 -0.001
stage appears premature, despite the three years of planning. TAs
Mizoram 0.026 0.031 0.299 0.099 0.011* 0.012* 0.006* -0.002
will have to cope with a greatly expanded number of dealers
Nagaland 0.020* 0.021 0.024 0.008 0.005* 0.005* 0.002 0.000
under the GST. Furthermore state TAs have no experience deal-
Sikkim -0.020* -0.027 -0.208 0.022 0.013* 0.015* 0.009 -0.005
ing with dealers providing services as there have been no gen-
Tripura 0.010 0.011 0.035 -0.016 0.008* 0.009* 0.005 -0.002 New Delhi -0.010 -0.016 -0.114 0.179 0.006 0.006 0.006 0.004 eral state taxes on services. So while base broadening by
(1) *: Significant at 95% or better. P-values are reported in the Appendix. i ncluding services is desirable in due course, this should not be
attempted unless TAs expertise in taxing service providers.
On account of these TA deficiencies audit test checks of For states which had a positive VAT revenue performance around 1,00,000 dealers found widespread tax evasion and but poor own revenue performance, attention should possiavoidance through a variety of channels including (1) Under-bly be diverted to other revenue sources. Such states include declaration of sales and incorrect or false ITC claims by Chhattisgarh, Karnataka, Kerala, Madhya Pradesh, Naga50% of VAT dealers; (2) granting of incorrect VAT exemptions; land, Punjab and Rajasthan. For Goa and Gujarat causes of and (3) collection of VAT from customers which was not re-apparently declining tax effort should be identifi ed and mitted to state treasuries by some exempt dealers who con-c orrected. For Arunachal, Sikkim and Maharashtra further tinued to receive transitional benefits from earlier tax assessment to identify causes of apparently contradictory or i ncentive schemes. insignificant revenue performance indicators is needed.
Are any base broadening (and conse-
Table 8: Aggregate Regression Results for Equations (1c) to (4c)
Variable/Statistic ST Buoyancy (Eqn 1c) ST/GSDP (Eqn 2c) SORR Buoyanc (Eqn 3c) SORR/GSDP (Eqn 4c) quent tax rate lowering) options avail-Coeff P-Value Coeff P-Value Coeff P-Value Coeff P-Value able for the existing VATs on goods? LNGSDP (Buoyancy) 1.050* 0.000 0.943* 0.000 One option is a move from 100% ITC to
VAT*LNGSDP 0.003 0.227 0.003 0.197
VAT*LNGSDP 0.002 0.550 0.002 0.501
VAT*LNGSDP 0.000 0.934 0.002 0.580
VAT*LNGSDP -0.002 0.569 0.000 0.968
VAT0.004 0.028 0.002 0.467
VAT0.002 0.402 0.003 0.598
VAT0.001 0.809 0.003 0.638
VAT-0.001 0.614 -0.001 0.876
R-Squared 0.996 0.712 0.995 0.393
F-Significance 0.000 0.009 0.000 0.244
partial ITC at, say, 20% of input taxes paid by suppliers. As noted in the introduction, there is no theoretical justifi cation of any effi ciency benefit in countries like India from a 100% ITC. Evidence in Table 6 also suggests the absence of effi ciency benefi ts, though data and methodological weaknesses are present. Instead revenue loss due to
F-Test: Joint significance of VAT evasion and TA inability to administer dummy variables 1.125 6.181* 1.800 2.037
the ITC documented by the CAG will be
F-test degrees of freedom (4.9) (4.10) (4.9) (4.10)
limited as will loss from a narrow base
(1) Sample period was 1993-94 to 2007-08 due to missing 2008-09 data for two states.
(2) *: Significant at 99%. with a partial ITC. Furthermore, “self
march 10, 2012 vol xlvii no 10
enforcement” benefits from an ITC, if Appendix
Table A1: LNST = B0+B1 LNGSDP+B2 [VAT.LNGSDP] (Equation 1)
| present, will continue with a 20% ITC. | State | R-square | F | Buoyancy | Slope Dummy | Dummy: Only Bihar/ | Dummy: Years with | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Significance | Variable (VAT) | Uttarakhand VAT | Bifurcated States | ||||||||
| Conclusions | Coeff | P-Value | Coeff | P-Value | Coeff | P-Value | Coeff | P-Value |
The state VAT was implemented in 2005 after a decade of preparation and at an unknown but large cost. From the statistical results and the CAG audit it can be
| Andhra Pradesh | 0.993 | 0.000 | 1.085* | 0.000 | 0.000 | 0.905 |
|---|---|---|---|---|---|---|
| Gujarat | 0.992 | 0.000 | 0.797* | 0.000 | 0.011* | 0.001 |
| Haryana | 0.992 | 0.000 | 1.147* | 0.000 | 0.004 | 0.336 |
| Karnataka | 0.991 | 0.000 | 0.894* | 0.000 | 0.008* 0.023 | |
| Kerala | 0.998 | 0.000 | 1.154* | 0.000 | -0.005* | 0.011 |
inferred that the economic return in Maharashtra 0.988 0.000 1.095* 0.000 -0.004 0.262
terms of revenue and efficiency gains to this expenditure of public funds is at best zero for the country as a whole. However, in Haryana, Orissa and the six identifi ed special category states in Table 5, the re-
| Orissa | 0.985 | 0.000 | 1.117* | 0.000 | 0.008 | 0.173 |
|---|---|---|---|---|---|---|
| Punjab | 0.964 | 0.000 | 1.166* | 0.000 | 0.001 | 0.902 |
| Rajasthan | 0.979 | 0.000 | 1.171* | 0.000 | 0.004 | 0.437 |
| West Bengal | 0.989 | 0.000 | 0.894* | 0.000 | 0.007* | 0.016 |
| Tamil Nadu | 0.990 | 0.000 | 0.875* | 0.000 | 0.000 | 0.951 |
| Arunachal Pradesh | 0.816 | 0.000 | 4.510* | 0.000 | 0.007 | 0.924 |
turn may have been large enough to jus-Assam 0.969 0.000 1.467* 0.000 0.007 0.398
tify the cost of reform planning and implementation. Given the apparent lack of readiness of states, implementing the GST in 2012-13 is a high risk step whose returns may not repay the cost of planning
| Himachal Pradesh | 0.992 | 0.000 | 1.288* | 0.000 | 0.022* | 0.000 |
|---|---|---|---|---|---|---|
| Goa | 0.990 | 0.000 | 0.643* | 0.000 | 0.018* | 0.000 |
| Jammu and Kashmir | 0.985 | 0.000 | 1.700* | 0.000 | 0.023* | 0.007 |
| Manipur | 0.726 | 0.000 | 1.353* | 0.004 | 0.029 | 0.441 |
| Meghalaya | 0.992 | 0.000 | 1.31* | 0.000 | 0.019* | 0.002 |
| Mizoram | 0.972 | 0.000 | 1.992* | 0.000 | 0.026 | 0.160 |
and implementing the GST. Nagaland 0.976 0.000 1.261* 0.000 0.020* 0.019
Further state by state investigation is needed, particularly of tax administration and tax compliance, to throw more light on the costs and benefits of the 2005 VAT reform and devise a more extensive
Sikkim 0.982 0.000 1.811* 0.000 -0.020* 0.077
| Tripura | 0.991 | 0.000 | 1.372* | 0.000 | 0.010 | 0.08 | ||||
|---|---|---|---|---|---|---|---|---|---|---|
| New Delhi | 0.932 | 0.000 | 1.294* | 0.000 | -0.010 | 0.433 | ||||
| Bihar+ Jharkhand | 0.970 | 0.000 | 0.887* | 0.000 | 0.001 | 0.849 | -0.011 | 0.933 | 0.120 | 0.299 |
| Madhya Pradesh+ Chhattisgarh | 0.993 | 0.000 | 1.232* | 0.000 | 0.003 | 0.399 | 0.227 | 0.003 |
| benchmarks for the proposed GST reform. | Uttar Pradesh+ | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Uttarakhand | 0.999 | 0.000 | 1.077* | 0.000 | 0.008* 0.000 | 0.147 | 0.000 | 0.188 | 0.000 | |
| Notes | Table A2: LNST = B0+B1 LNGSDP–1+B2 [VAT–1 LNGSDP–1] (Equation 1a) |
| 1 See Bird and Gendron (2007). | State | R-square | F | Buoyancy | Slope Dummy Dummy: Only Bihar/ | Dummy: Years with |
| 2 See Das-Gupta (2005), Emran and Stiglitz | Significance | (lagged GSDP) | Variable (VAT) Uttarakhand VAT | Bifurcated States | ||
| (2005) and Keen and Ligthart (2005). These | Coeff P-Value | Coeff P-Value Coeff P-Value | Coeff P-Value | |||
| papers look variously at welfare, revenue and | Andhra Pradesh | 0.992 | 0.000 | 1.057 0.000 | 0.003 0.424 | |
| efficiency of the VAT in relation to other taxes. 3 See, for example, Bird (2011) who terms this the BBLR approach. | Gujarat Haryana | 0.990 0.992 | 0.000 0.000 | 0.797 0.000 1.128 0.000 | 0.011 0.004 0.007 0.142 | |
| 4 See, for example, Chelliah and Kavita Rao | Karnataka | 0.979 | 0.000 | 0.858 0.000 | 0.012 0.024 | |
| (1999). The other claimed advantage, removal | Kerala | 0.994 | 0.000 | 1.073 0.000 | 0.000 0.944 | |
| of cascading or tax-on-tax, merely makes estimation of effective tax rates diffi cult without | Maharashtra | 0.980 | 0.000 | 1.034 0.000 | 0.002 0.684 | |
| necessarily having any effi ciency impact. | Orissa | 0.983 | 0.000 | 1.119 0.000 | 0.010 0.092 | |
| 5 Jafari and Salehani (2010). | Punjab | 0.968 | 0.000 | 1.156 0.000 | 0.005 0.430 | |
| 6 The important study by Ebrill et al (2001) also | Rajasthan | 0.978 | 0.000 | 1.141 0.000 | 0.009 0.117 | |
| assesses efficiency, equity and administrative aspects of the VAT for 100+ countries. 7 Maharashtra introduced a subtraction type | West Bengal Tamil Nadu | 0.984 0.978 | 0.000 0.000 | 0.835 0.000 0.835 0.000 | 0.011 0.005 0.002 0.588 | |
| VAT in 1995. Due to design deficiencies, it re- | Arunachal Pradesh | 0.855 | 0.000 | 5.476 0.000 | -0.032 0.649 | |
| verted to a single point sales tax in 1999, | Assam | 0.969 | 0.000 | 1.530 0.000 | 0.005 0.564 | |
| though partial setting off of input costs from sales revenue continued till 2005 (Government of Maharashtra 2000 and Chelliah and Kavita | Himachal Pradesh Goa | 0.995 0.989 | 0.000 0.000 | 1.267 0.000 0.607 0.000 | 0.024 0.000 0.019 0.001 | |
| Rao 1999). This should be kept in mind when | Jammu and Kashmir | 0.994 | 0.000 | 1.750 0.000 | 0.019 0.001 | |
| interpreting empirical results. 8 Updated VAT Acts, Rules, Circulars and Notifi cations of different states and union territories | Manipur Meghalaya | 0.732 0.991 | 0.000 0.000 | 1.519 0.005 1.258 0.000 | 0.018 0.647 0.023 0.001 | |
| are available at www.stvat.com. | Mizoram | 0.984 | 0.000 | 2.155 0.000 | 0.015 0.298 | |
| 9 See, among others, Chelliah and Kavita Rao | Nagaland | 0.963 | 0.000 | 1.266 0.000 | 0.018 0.081 | |
| (1999). | Sikkim | 0.978 | 0.000 | 1.854 0.000 | -0.022 0.081 | |
| 10 If the cost of raising revenue through a VAT is less than that of the tax it replaces, then a state not wanting more revenue, could lower its | Tripura New Delhi | 0.994 0.987 | 0.000 0.000 | 1.349 0.000 0.974 0.000 | 0.007 0.118 0.007 0.120 | |
| overall cost of funds by reducing dependence | Bihar+Jharkhand | 0.970 | 0.000 | 1.015 0.000 | 0.001 0.920 -0.105 0.452 | 0.027 0.822 |
| on other revenue sources. Theoretical arguments for this and related propositions are in Keen and Lockwood (2006). 11 This suggestion by M Govinda Rao is gratefully acknowledged. Regressions with slope and | Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand | 0.988 0.997 | 0.000 0.000 | 1.315 0.000 1.018 0.000 | 0.007 0.219 0.013 0.001 0.223 0.000 | 0.144 0.118 0.169 0.002 |
| Economic & Political Weekly march 10, 2012 v | ol xlvii no 10 | 61 |
EPW| intercept dummies variables and both GSDPt-1 Table A3: (ST/GSDP) = B1 + B2 VAT (Equation 2) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| and GSDPt were unreliable with high multicol-State | R-Square | F | VAT Dummy Variable | Dummy: Only Bihar/ | Dummy: Years with | |||||
| linearity. These are not reported here. | Significance | (VAT) | Uttarakhand VAT | Bifurcated States | ||||||
| 12 (5) also serves as a partial data consistency | Coeff | P-Value | Coeff | Coeff | P-Value | Coeff | ||||
| check by comparing its VATt coeffi cient sign and significance with that of VAT coeffi cients Andhra Pradesh | 0.261 | 0.043 | 0.004* | 0.043 | ||||||
| tin (2) and (4). Gujarat | .0160 | 0.645 | -0.002 | 0.645 | ||||||
| 13 Keen and Lockwood (2006, 2007) use log (reve-Haryana | 0.652 | 0.000 | 0.010* | 0.000 | ||||||
| nue/GDP) as their dependent variable. This is | Karnataka | 0.032 | 0.526 | 0.001 | 0.526 | |||||
| 14 | equivalent to a restricted regression with GDP buoyancy constrained to have the value 1. Special category states include Arunachal | Kerala Maharashtra | 0.147 0.010 | 0.143 0.719 | 0.003 0.001 | 0.143 0.719 | ||||
| Pradesh, Assam, Himachal Pradesh, Jammu | Orissa | 0.607 | 0.000 | 0.008* | 0.000 | |||||
| 15 | and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Tripura and Sikkim (Saxena 2009). Given the poor estimation results from this model, a simultaneous model with VATt and GSDPt as dependent variables and additional GSDP determinants was not specifi ed. | Punjab Rajasthan West Bengal Tamil NaduArunachal Pradesh | 0.247 0.418 0.079 0.299 0.786 | 0.050 0.007 0.291 0.028 0.000 | 0.005* 0.008* 0.001 -0.008* 0.013* | 0.050 0.007 0.291 0.028 0.000 | ||||
| 16 | As Keen (2009) puts it “Such a dummy varia- | Assam | 0.588 | 0.001 | 0.015* | 0.001 | ||||
| ble, though, is a very noisy indicator…. VATs differ enormously amongst themselves: in the extent of exemptions, threshold, number of | Himachal Pradesh Goa | 0.845 0.146 | 0.000 0.144 | 0.013* -0.014 | 0.000 0.144 | |||||
| rates, ease of obtaining refunds, treatment of | Jammu and Kashmir | 0.749 | 0.000 | 0.022* | 0.000 |
| 17 18 | services …” (p 162). Government of India, Comptroller and Auditor General (2010) abbreviated CAG. An Excel file with data used is available at | Manipur Meghalaya Mizoram | 0.592 0.817 0.762 | 0.000 0.000 0.000 | 0.007* 0.010* 0.011* | 0.000 0.000 0.000 |
|---|---|---|---|---|---|---|
| http://www.gim.ac.in/data/32 states chained | Nagaland | 0.752 | 0.000 | 0.005* | 0.000 | |
| GSDP and RBI rev data 93-94 to 08-09.xls. | Sikkim | 0.391 | 0.010 | 0.013* | 0.010 |
19 The very high VAT buoyancy in Arunachal and its low VAT/GSDP ratio, discussed later, should be noted in interpreting results.
20 That Maharashtra already had partial ITC prior to 2005 could be the cause of the insignificant dummies found here. This requires further study.
21 With unchained GSDP, major states with significant, positive VAT dummies decreased from four to two while states with signifi cant, negative VAT buoyancy dummies increased from one to two. Significances of either buoyancy or ratio dummies changed for Andhra Pradesh, Gujarat, Karnataka, Rajasthan and West Bengal. VAT buoyancy and GSDP shares were both significantly positive for Rajasthan and both significantly negative for Kerala. The buoyancy dummy for Maharashtra was signifi cantly negative. For SORR, no major state had a positive significant VAT buoyancy dummy. The SORR/ GSDP VAT dummy for Andhra Pradesh was insignificant. Thus VAT performance is worse with unchained GSDP. For non-major states, dummy signs and significances were identical to those with chained GSDP except that the SORR/GSDP ratio VAT dummy for Mizoram was insignifi cant.
22 The average annual GSDP growth rate of sample states fell from 12.3% in pre-VAT years to 11.7% post -VAT implementation.
23 Significances of coefficients with unchained GSDP were identical though estimated coeffi cients were somewhat larger.
24 The Economic Times (2004): Describes the compensation scheme. The possibility of states gaming the centre is reported, 23 September, for example, in Gupta (2005), 16 September.
25 Thanks are due to Kavita Rao who fl agged this possibility, which led to this robustness check.
26 Grateful thanks are due to Pulin Nayak for sug-
Tripura 0.647 0.000 0.008* 0.000
New Delhi 0.107 0.216 0.006 0.216
Jharkhand+Bihar 0.065 0.839 -0.002 0.477 -0.002 0.657 0.001 0.437
Madhya Pradesh+ Chhattisgarh 0.884 0.000 0.006* 0.004 0.010 0.000
Uttar Pradesh+ Uttarakhand 0.982 0.000 0.007* 0.000 0.006 0.000 0.007 0.000
Table A4: LNSORR = B0+B1 LNGSDP+B2 [VAT.LNGSDP] (Equation 3)
State R-square F Buoyancy Slope Dummy Dummy for Only Bihar/ Dummy: Years Significance Variable (VAT) Uttarakhand VAT with Bifurcated Implementation States
Coeff P-Value Coeff P-Value Coeff P-Value Coeff P-Value
Andhra Pradesh 0.987 0.000 1.013 0.000 0.004 0.315
Gujarat 0.986 0.000 0.799 0.000 0.003 0.373
Haryana 0.923 0.000 0.548 0.000 0.019 0.046
Karnataka 0.978 0.000 0.959 0.000 0.008 0.140
Kerala 0.994 0.000 1.005 0.000 0.002 0.394
Maharashtra 0.988 0.000 1.015 0.000 0.001 0.766
Orissa 0.979 0.000 1.061 0.000 0.011 0.097
Punjab 0.937 0.000 1.079 0.000 -0.005 0.533
Rajasthan 0.968 0.000 0.893 0.000 0.010 0.094
West Bengal 0.968 0.000 0.959 0.000 0.007 0.178
Tamil Nadu 0.995 0.000 0.865 0.000 0.005 0.063
Arunachal Pradesh 0.879 0.000 0.856 0.007 0.077 0.003
Assam 0.982 0.000 1.214 0.000 0.013 0.024
Himachal Pradesh 0.943 0.000 1.103 0.000 0.024 0.044
Goa 0.952 0.000 0.756 0.000 -0.007 0.428
Jammu and Kashmir 0.986 0.000 1.297 0.000 0.014 0.023
Manipur 0.901 0.000 0.634 0.001 0.050 0.003
Meghalaya 0.971 0.000 1.017 0.000 0.011 0.146
Mizoram 0.965 0.000 0.581 0.000 0.050 0.000
Nagaland 0.914 0.000 0.789 0.000 0.024 0.040
gesting this check.
Sikkim 0.462 0.018 1.271 0.016 -0.041 0.418
27 That is all states studied here excluding
Tripura 0.986 0.000 1.223 0.000 -0.008 0.156
Haryana, Uttar Pradesh, Uttarakhand, Punjab,
New Delhi 0.937 0.000 1.367 0.000 -0.011 0.383
Arunachal Pradesh and Tamil Nadu.
28 The ECSFM was set up by the centre in 1999 to Bihar+Jharkhand 0.932 0.000 0.821 0.001 0.007 0.537 0.095 0.628 0.057 0.728 coordinate VAT designs across states and arrive
Madhya Pradesh+
at a consensus design. The consensus design
Chhattisgarh 0.983 0.000 1.128 0.000 0.001 0.875 0.085 0.297
was described in the white paper (CAG 2010).
Uttar Pradesh+
The ECSFM currently plays the same role across states with respect to the planned GST. Uttarakhand 0.987 0.000 0.812 0.000 0.017 0.013 0.259 0.008 0.214 0.019
62 march 10, 2012 vol xlvii no 10
29 It should be noted that administration of the Table A5: LNSORR = B0+B1 LNGSDP-1+B2 [VAT-1 LNGSDP-1] (Equation 3a) predecessor sales taxes was also ineffective as
State R-square F Buoyancy Slope Dummy Dummy for Only Bihar/ Dummy: Years
was documented by several studies and offi cial
Signi ficance (lagged GSDP) Variable Uttarakhand VAT with Bifurcated
reports.
(lagged VAT) Implementation States
30 An example is Chapter 3 in World Bank (2005).
Coeff P-Value Coeff P-Value Coeff P-Value Coeff P-Value
References
Bird, Richard (2011): “The BBLR Approach to Tax Reform in Emerging Countries” in M G Rao and M Rakshit (ed.), Public Economics: Theory and Policy (New Delhi: Sage Publishers).
Andhra Pradesh 0.990 0.000 1.029 0.000 0.005 0.168
Gujarat 0.990 0.000 0.791 0.000 0.004 0.214
Haryana 0.908 0.000 0.421 0.006 0.027 0.013
Karnataka 0.960 0.000 0.917 0.000 0.013 0.086
Kerala 0.987 0.000 0.931 0.000 0.007 0.066
Maharashtra 0.988 0.000 0.958 0.000 0.006 0.075
Bird, Richard M and Pierre-Pascal Gendron (2007): The VAT in Developing and Transitional Countries (Cambridge and New York: Cambridge University Press).
CA.inINDIA.Org (2011): e-bible for chartered accountants, available at http://www.cainindia. org/news/6_2008/vat_value_added_tax_2008_ india_news_.html, accessed 8 March.
Chelliah, R J and Kavita Rao (1999): A Primer on the Value Added Tax, National Institute of Public Finance and Policy, New Delhi.
Das-Gupta, Arindam (2005): “With Non-competitive Firms, a Turnover Tax Can Dominate the VAT”, Economics Bulletin, Vol 8, No 9, pp 1-6, available at http://www.economicsbulletin.com/ 2005/volume8/EB−05H20003A.pdf, last accessed March 2011.
Diamond, P and J Mirrlees (1971): “Optimal Taxation and Public Production I: Production Effi -
Orissa 0.965 0.000 1.062 0.000 0.014 0.111
Punjab 0.939 0.000 0.935 0.000 0.004 0.610
Rajasthan 0.957 0.000 0.836 0.000 0.015 0.030
West Bengal 0.959 0.000 0.907 0.000 0.010 0.074
Tamil Nadu 0.987 0.000 0.826 0.000 0.007 0.063
Arunachal Pradesh 0.873 0.000 0.984 0.011 0.074 0.009
Assam 0.986 0.000 1.294 0.000 0.011 0.043
Himachal Pradesh 0.930 0.000 1.052 0.000 0.027 0.041
Goa 0.948 0.000 0.673 0.000 -0.003 0.679
Jammu and Kashmir 0.982 0.000 1.299 0.000 0.012 0.068
Manipur 0.890 0.000 0.561 0.005 0.053 0.004
Meghalaya 0.962 0.000 0.958 0.000 0.015 0.080
Mizoram 0.958 0.000 0.573 0.000 0.051 0.000
Nagaland 0.918 0.000 0.671 0.000 0.028 0.015
Sikkim 0.399 0.047 0.501 0.109 0.004 0.902
ciency”, American Economic Review, 61, 8-27.
Ebrill, L, M Keen, J Bodin and V Summers (2001): The Modern VAT (Washington DC: International Monetary Fund).
Emran, M Shahe and Joseph E Stiglitz (2005): “On Selective Indirect Tax Reform in Developing Countries”, Journal of Public Economics, Elsevier, Vol 89(4), pp 599-623, April.
Government of India, Comptroller and Auditor General (2010): “Implementation of Value Added Tax in India – Lessons for Transition to Goods and Services Tax – A Study Report”, Comptroller and Auditor General, New Delhi, available at http://cag.gov.in/SRA-value-added-tax.pdf, accessed on 10 October 2011.
Government of India, Ministry of Statistics and Programme Implementation (MOSPI) (2007): “Statement: Gross State Domestic Product at Current Prices” available at http://mospi.nic.in/ statewise_sdp1999_2000_8feb10.pdf on 11 Nov-
Tripura 0.984 0.000 1.212 0.000 -0.011 0.075
Delhi 0.992 0.000 1.029 0.000 0.007 0.071
Bihar+Jharkhand 0.932 0.000 0.975 0.002 0.005 0.665 -0.005 0.980 -0.046 0.794
Madhya Pradesh+ Chhattisgarh 0.976 0.000 1.198 0.000 0.004 0.520 0.010 0.920
Uttar Pradesh+ Uttarakhand 0.982 0.000 0.792 0.000 0.020 0.013 0.307 0.007 0.191 0.077
Table A6: (SORR/GSDP) = B1+B2 VAT (Equation 4)
State R-Square F VAT Dummy Variable Dummy: for Only Bihar/ Dummy: Years with Significance
Uttarakhand VAT Bifurcated States
Coeff P-Value Coeff P-Value Coeff P-Value
Andhra Pradesh 0.228 0.061 0.008 0.061
Gujarat 0.265 0.042 -0.015 0.042
Haryana 0.131 0.168 -0.023 0.168
Karnataka 0.173 0.123 0.010 0.123
Kerala 0.150 0.138 0.003 0.138
ember 2009.
Maharashtra 0.055 0.382 0.003 0.382
Government of Maharashtra (2000): “Report of the
Orissa 0.579 0.001 0.017 0.001
Expert Group to Review Value Added Tax in
Punjab 0.003 0.832 -0.002 0.832
Maharashtra” (Valluri Narayan Committee), Government of Maharashtra, Mumbai. Rajasthan 0.051 0.401 0.005 0.401
Government of Tamil Nadu, Commercial Taxes West Bengal 0.152 0.135 0.004 0.135 D epartment (no date): “Tamil Nadu Value
Tamil Nadu 0.124 0.180 -0.008 0.180
A dded Tax”, http://www.tnvat.gov.in, ac-
Arunachal Pradesh 0.634 0.000 0.074 0.000
cessed on 8 March 2011.
Gupta, Monica (2005): “States Underplay VAT Assam 0.749 0.000 0.025 0.000 Gains to Get Aid”, 16 September, Business Himachal Pradesh 0.522 0.002 0.035 0.002 Standard online edition, available at http://
Goa 0.397 0.009 -0.073 0.009
www.business-standard.com/india/news/
states-underplay-vat-gains-to-get-aid/220653/,
Jammu and Kashmir 0.669 0.000 0.029 0.000 accessed on 20 October 2011. Manipur 0.280 0.035 0.012 0.035
Halakhandi, Sudhir (2007): “CA Club India – Inter-Meghalaya 0.355 0.015 0.008 0.015 active Platform for Finance Professionals and
Mizoram 0.083 0.280 0.008 0.280
Tax Payers”, http://www.caclubindia.com/articles/value-added-tax-for-students-1508.asp,
Nagaland 0.099 0.253 0.005 0.253 accessed on 8 March 2011. Sikkim 0.126 0.178 -0.301 0.178
Jafari, Samimi, Ahmad and Fereshte Talesh Salehani (2010): “VAT and Governance: Evidence from Countries around the World”, Australian Journal of Basic and Applied Sciences, 4(10): 4852-56, available at http://www.insipub.com/ajbas/ 2010/4852-4856.pdf, last accessed March 2011.
Keen, Michael (2009): “What Do (and Don’t) We Know about the Value Added Tax?”, A Review of Richard M Bird and Pierre-Pascal Gendron’s
Economic & Political Weekly march 10, 2012
EPW| Tripura New Delhi | 0.085 0.192 | 0.273 0.089 | 0.004 0.014 | 0.273 0.089 | ||||
|---|---|---|---|---|---|---|---|---|
| Jharkhand+Bihar | 0.051 | 0.856 | -0.001 | 0.895 | 0.002 | 0.868 | -0.004 | 0.497 |
| Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand | 0.584 0.709 | 0.003 0.002 | 0.007 0.012 | 0.213 0.027 | 0.014 | 0.014 | 0.013 0.007 | 0.008 0.079 |
| vol xlvii no 10 | 63 |
“The VAT in Developing and Transitional Countries”, Journal of Economic Literature 2009, 47(1), 159-170, available at http:www.aeaweb.org/articles.php?doi=10.1257/jel.47.1.159, accessed on 15 April 2011.
Keen, Michael and Ben Lockwood (2006): “Is the VAT a Money Machine?”, National Tax Journal, 59(4), 905-928, available at http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/ lockwood/mm.pdf, accessed on 20 October 2011.
– (2007): “The Value Added Tax: Its Causes and Consequences”, http://www2.warwick.ac.uk/ fac/soc/economics/research/papers/twerp_ 801.pdf, accessed on 20 October 2011.
Keen, Michael and Jenny E Ligthart (2005): “Coordinating Tariff Reduction and Domestic Tax Reform under Imperfect Competition”, Review of International Economics, Blackwell Publishing, Vol 13(2), pp 385-90.
MO SPI (2011): “Statement: Gross State Domestic Product at Current Prices”, available at http:// mospi.gov.in/State-wise_SDP_1999-2000_ 20nov09.pdf, accessed on 11 November 2009.
– (2009): “Statement: Gross State Domestic Product at Current Prices”, available at http:// mospi.gov.in/State-wise_SDP_1999-2000_ 20nov09.pdf, accessed on 11 November.
Nellor, David (1987): “The Effect of the Value-Added Tax on the Tax Ratio”, IMF Working Paper, pp 1-28, 9 July, available at http://ssrn.com/ abstract=884798, accessed on 20 October 2011.
| State | R-Square | F | VAT Dummy Variable | Dummy: for Only Bihar/ | Dummy: Years with | |||
|---|---|---|---|---|---|---|---|---|
| Significance | Uttarakhand VAT | Bifurcated States | ||||||
| Coeff | P-Value | Coeff | P-Value | Coeff | P-Value | |||
| Andhra Pradesh | 0.002 | 0.865 | -0.003 | 0.865 | ||||
| Gujarat | 0.411 | 0.007 | 0.236 | 0.007 | ||||
| Haryana | 0.431 | 0.006 | 0.142 | 0.006 | ||||
| Karnataka | 0.187 | 0.108 | -0.032 | 0.108 | ||||
| Kerala | 0.014 | 0.658 | 0.010 | 0.658 | ||||
| Maharashtra | 0.008 | 0.740 | -0.006 | 0.74 | ||||
| Orissa | 0.000 | 0.996 | 0.000 | 0.996 | ||||
| Punjab | 0.375 | 0.012 | 0.056 | 0.012 |
Newbery, D (1986): “On the Desirability of Input Taxes”, Economics Letters, 20, 267-70.
Piffano, Horacio L P (2007): “Argentina and Brazil: Fiscal Harmonisation and Subnational Sales Taxation – State/Provincial VAT versus State/ Provincial Retail”, Working Paper, Departmento de Economia, Universidad Nacional de la Plata.
Reserve Bank of India (2010): “Handbook of Statistics on State Government Finances – 2010”, available at: http://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Handbook% 20of%20Statistics%20on%20State%20Gov-
| Rajasthan West Bengal Tamil Nadu | 0.249 0.089 0.543 | 0.049 0.262 0.001 | 0.067 -0.025 -0.039 | 0.049 0.262 0.001 | ernment%20Finances%20-%202010, accessed on 3 January 2010. – (2011): “State Finances: A Study of Budgets”, Revenue Receipts of States and Union Territo- |
|---|---|---|---|---|---|
| Arunachal Pradesh Assam Himachal Pradesh Goa | 0.263 0.137 0.079 0.234 | 0.042 0.158 0.292 0.058 | 0.082 0.047 0.034 0.065 | 0.042 0.158 0.292 0.058 | ries with Legislature, 31 March, Appendix I, available at http://www.rbi.org.in/scripts/ AnnualPublications.aspx?head=State+Finances +%3a+A+Study+of+Budgets, accessed on 3 July 2011. |
| Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland | 0.596 0.312 0.661 0.493 0.325 | 0.001 0.025 0.000 0.002 0.027 | 0.166 0.215 0.138 0.168 0.098 | 0.001 0.025 0.000 0.002 0.027 | Saxena, N C (2009): “Medium-term Fiscal Reforms Strategy for States”, Government of India, Planning Commission available at http://planningcommission.nic.in/reports/articles/ncsxna/index.php?repts=fi scal.htm#V.Special, accessed on 22 October 2011. |
Sikkim 0.089 0.262 0.021 0.262 Stiglitz J and P Dasgupta (1971): “Differential Taxation, Public Goods and Economic Effi ciency”,
Tripura 0.824 0.000 0.177 0.000
Review of Economic Studies, 38, 151-74.
New Delhi 0.248 0.050 -0.038 0.050
The Economic Times (2004): “VAT: States to Get Bihar+Jharkhand 0.283 0.247 -0.021 0.473 -0.042 0.353 0.049 0.055 Full Compensation, 23 September, available Madhya Pradesh+ at http://economictimes.indiatimes.com/vatstates-to-get-full-compensation/articleshow/
Chhattisgarh 0.872 0.000 0.039 0.008 0.067 0.000
860867.cms, accessed 20 October 2011.
Uttar Pradesh+
World Bank (2005): State Fiscal Reforms in India
Uttarakhand 0.443 0.063 0.010 0.751 -0.003 0.915 0.055 0.024
(New Delhi: Macmillan).
| State | R-Square | F | VAT Slope Dummy | PreVAT | PostVAT | State | R-Square | F | VAT Slope | PreVAT | PostVAT | ||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Significance | Variable | Significance | Dummy | ||||||||||||||
| Coeff | P-Value | Coeff | P-Value | Coeff | P-Value | Coeff | P-Value | Coeff | P-Value | Coeff | P-Value | ||||||
| Andhra Pradesh | 0.993 | 0.000 | 0.000 | 0.963 | -0.020 | 0.801 | -0.031 | 0.696 | Andhra Pradesh | 0.318 | 0.189 | 0.005 | 0.038 | 0.002 | 0.552 | -0.003 | 0.441 |
| Karnataka | 0.997 | 0.000 | 0.013 | 0.000 | 0.173 | 0.003 | -0.056 | 0.255 | Karnataka | 0.085 | 0.796 | 0.002 | 0.480 | 0.003 | 0.460 | -0.001 | 0.817 |
| Kerala | 0.998 | 0.000 | -0.004 | 0.082 | 0.008 | 0.825 | -0.036 | 0.362 | Kerala | 0.353 | 0.143 | 0.004 | 0.052 | 0.005 | 0.129 | -0.004 | 0.303 |
| Maharashtra | 0.991 | 0.000 | -0.002 | 0.609 | 0.114 | 0.161 | 0.033 | 0.673 | Maharashtra | 0.327 | 0.176 | 0.001 | 0.558 | 0.006 | 0.035 | 0.001 | 0.859 |
| Orissa | 0.987 | 0.000 | 0.009 | 0.202 | 0.126 | 0.286 | 0.077 | 0.501 | Orissa | 0.707 | 0.002 | 0.008 | 0.001 | 0.005 | 0.072 | 0.001 | 0.659 |
| Punjab | 0.972 | 0.000 | -0.001 | 0.892 | 0.127 | 0.374 | 0.207 | 0.170 | Punjab | 0.466 | 0.050 | 0.004 | 0.109 | 0.007 | 0.102 | 0.006 | 0.206 |
| West Bengal | 0.995 | 0.000 | 0.012 | 0.000 | 0.163 | 0.003 | -0.050 | 0.286 | West Bengal | 0.160 | 0.536 | 0.001 | 0.273 | 0.002 | 0.307 | 0.000 | 0.888 |
| Arunachal Pradesh | 0.819 | 0.000 | 0.005 | 0.960 | 0.311 | 0.827 | 0.448 | 0.748 | Arunachal Pradesh | 0.853 | 0.000 | 0.015 | 0.000 | 0.006 | 0.077 | -0.004 | 0.202 |
| Assam | 0.977 | 0.000 | 0.010 | 0.294 | 0.263 | 0.126 | 0.164 | 0.317 | Assam | 0.774 | 0.000 | 0.015 | 0.000 | 0.015 | 0.010 | 0.004 | 0.527 |
| Himachal Pradesh | 0.995 | 0.000 | 0.028 | 0.000 | 0.164 | 0.066 | -0.102 | 0.234 | Himachal Pradesh | 0.924 | 0.000 | 0.015 | 0.000 | 0.006 | 0.013 | -0.005 | 0.062 |
| Goa | 0.991 | 0.000 | 0.020 | 0.001 | 0.041 | 0.629 | -0.050 | 0.555 | Goa | 0.242 | 0.326 | -0.017 | 0.143 | -0.021 | 0.243 | 0.002 | 0.898 |
| Jammu and Kashmir | 0.988 | 0.000 | 0.027 | 0.009 | 0.243 | 0.122 | 0.039 | 0.801 | Jammu and Kashmir 0.855 | 0.000 | 0.024 | 0.000 | 0.013 | 0.017 | -0.002 | 0.695 | |
| Manipur | 0.730 | 0.004 | 0.038 | 0.438 | 0.120 | 0.876 | -0.269 | 0.723 | Manipur | 0.672 | 0.003 | 0.009 | 0.000 | 0.002 | 0.486 | -0.005 | 0.146 |
| Meghalaya | 0.993 | 0.000 | 0.021 | 0.004 | 0.136 | 0.171 | 0.039 | 0.683 | Meghalaya | 0.883 | 0.000 | 0.011 | 0.000 | 0.005 | 0.026 | -0.001 | 0.617 |
| Mizoram | 0.975 | 0.000 | 0.031 | 0.174 | 0.299 | 0.377 | 0.099 | 0.763 | Mizoram | 0.847 | 0.000 | 0.012 | 0.000 | 0.006 | 0.031 | -0.002 | 0.422 |
| Nagaland | 0.977 | 0.000 | 0.021 | 0.068 | 0.024 | 0.877 | 0.008 | 0.957 | Nagaland | 0.784 | 0.001 | 0.005 | 0.000 | 0.002 | 0.236 | 0.000 | 0.824 |
| Sikkim | 0.984 | 0.000 | -0.027 | 0.061 | -0.208 | 0.266 | 0.022 | 0.900 | Sikkim | 0.464 | 0.051 | 0.015 | 0.010 | 0.009 | 0.289 | -0.005 | 0.537 |
| Tripura | 0.991 | 0.000 | 0.011 | 0.126 | 0.035 | 0.766 | -0.016 | 0.891 | Tripura | 0.718 | 0.001 | 0.009 | 0.000 | 0.005 | 0.130 | -0.002 | 0.560 |
| New Delhi | 0.935 | 0.000 | -0.016 | 0.328 | -0.114 | 0.695 | 0.179 | 0.539 | New Delhi | 0.142 | 0.591 | 0.006 | 0.342 | 0.006 | 0.573 | 0.004 | 0.702 |
march 10, 2012 vol xlvii no 10
