ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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An Assessment of the Revenue Impact of State-Level VAT in India

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.

SPECIAL ARTICLE An Assessment of the Revenue Impact of State-Level VAT in India

Arindam Das-Gupta

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