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

Abstract:     
Revenue and Gross State Domestic Product data for 1993-94 to 2008-09 are used to study the revenue performance of the state Value-Added Tax (VAT) in India's 29 states. Both the direct revenue impact and the indirect impact through the VAT base were assessed. No indirect impact 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 state's own revenue was however found only in two out of eleven major states and fifty percent of other states. The VAT may have had a negative revenue impact in two states. Since the VAT impact was assessed using dummy variables for the period during which the VAT was present, this implies that results actually reflect differences between VAT and pre-VAT periods rather than the impact of the VAT.

To check robustness of direct impact results, the extent to which states 'gaming' the Centre to increase their compensation for a VAT revenue shortfall could have affected statistical findings on VAT performance was assessed and rejected. Whether or not in India as a whole states gaining revenue after VAT implementation could, in principle, compensate states losing revenue was also assessed and also rejected.

Limited VAT revenue performance can partly be traced to large scale evasion given weaknesses in VAT administration identified in a 2009 performance audit. Implications of this study for the planned move to a goods and services VAT (from the current goods only VAT) are pointed out and a suggestion is made for a non-VAT goods and services tax which should be less vulnerable to tax evasion.

Number of Pages in PDF File: 24

Keywords: value-added tax, revenue performance, subnational tax, tax administration, India, empirical assessment

JEL Classification: H25, H26, H71, O23

working papers series