An Analysis of the Effectiveness of the State Tax Administration in India with Particular Reference to the Value-Added Tax

Abstract

This study reviews the effectiveness of state level tax administrations in India with reference to their implementation of a goods only Value-Added Tax (VAT), mostly in 2005. The study takes advantage of state by state audits evaluating the transition to the VAT from the predecessor sales tax carried out by India's supreme audit institution, the Office of the Comptroller and Auditor General (CAG). The average performance of the state tax administrations is poor when compared with performance evidence from other countries. The CAG audits examine different administrative activities, grouped into 12 areas here, and document a variety of lapses, from poorly drafted VAT laws, to incomplete automation, to lax tax assessment and a reluctance to levy penalties for detected non-compliance. Case studies of non-compliance, reported in Boxes in the paper, paint a clear picture of how inept some of these tax administrations are. The study finds evidence that weak tax administration and it consequence, widespread tax non-compliance, had a statistically measurable impact on tax performance. Since India plans to move shortly from the existing tax regime to a Goods and Services Tax, this study underlines the high risk to the proposed reform from weak state tax administration unless steps are first taken to strengthen the administrations.

Keywords: tax administration, tax performance, VAT, India sub-national taxes

JEL Classification: H25, H26, H71