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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.

Introduction and Motivation

T

he revenue performance of the state-level value added
tax (VAT) in India relative to the turnover-type sales
taxes it replaced is assessed here. Besides being the first
econometric assessment of sub-national VAT revenue performance, this assessment may serve as a benchmark for the proposed national and state Goods and Services Tax (GST). Barring further consensus building or implementation problems,
the GST is to replace several central and state levies, including
the central and state VATs over the next few years.
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
informal 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
impact of the VAT in Ebrill et al (2001) and also in Keen and
Table 1: Revenue Gain from VAT Adoption Region (% of GDP)
Region

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.
Economic & Political Weekly

EPW

march 10, 2012

vol xlvii no 10

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
Asia and Pacific
Americas
Central Europe and BRO1
EU (plus Norway and Switzerland)
North Africa and west Asia
Small Islands

1.10
0.70
1.42
-1.88
1.05
0.10
1.96

11 (14)
19 (3)
14 (9)
Not studied
17(0)
3 (2)
8 (0)

-0.81
2.10
0.51
Not studied
4.15
0.45
4.03

(1) BRO: Baltic states, Russia and other states of the former Soviet Union.
(2) Figures based on IMF staff calculations.
(3) Illustrative calculations by the authors based on their equation 4 (of 7 equations) estimated
with panel data for 143 countries having at least 10 years of data between 1975 and 2000.The
authors also estimate predicted revenue gain from VAT adoption for countries not having a VAT.
(4) Revenue variables: Ebrill et al (2001): VAT to GDP ratio over predecessor sales tax to GDP
ratio. Keen and Lockwood (2007): tax-GDP ratio pre- and post-VAT.

55

only administrative efficiency and evasion proneness are partly addressed below. oil and lubricants from the VAT. Two robustness tests of the main empirical findings and a review of a recent performance audit by the Comptroller and Auditor General (CAG) in 2010 are then presented. before and after VAT are examined. An increase only in the VAT/GSDP ratio may reflect a one time increase in revenues due to the VAT. 2012 vol xlvii no 10 EPW Economic & Political Weekly . As Ebrill et al (2001) point out..7 Implementation dates for the 29 states are in Table 2. in India it is likely that the VAT was introduced to. Manipur. and result in differential cascading across both goods and services. 56 • Exclusion of certain goods including basic necessities. inter alia. Rajasthan. simplicity.LNGt) . Jammu and Kashmir. predictability. These variables.inINDIA. as in the Indian states. Though VAT designs differ across states..9 Data and Modelling Issues To assess the revenue impact of the state VAT. • No VAT on imports from abroad. • Thresholds (differing across states) for registration of VAT dealers. estimate pooled regressions and so include additional “tax effort” determinants including a per capita income variable.LNGt is a slope dummy variable.LNGt). Meghalaya. impact on economic efficiency...6 Clearly revenue gain from VAT adoption.SPECIAL ARTICLE Lockwood (2006. . Even so. Administrative and cost efficiency. Second. which has had VATs on goods at both national and sub-national levels for around six years. the same two equations but with state’s own revenue receipts (SORR) replacing ST are estimated: LNSORRt = B0 + B1LNGt + B2(VATt.(5) These models do not include other possible determinants of revenue performance.(3) (SORR/G)t = B0 + B1VATt . equity and economic welfare as a whole are other important evaluation criteria. Orissa. Assam. is of interest. So an assessment of the VAT in India. Gujarat.10 For the first question two equations. First. Kerala. The revenue performance of the VAT reported in Ebrill et al and in Keen and Lockwood (2007) are reproduced in Table 1 (p 55). 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. Also in some states a simplified tax regime without input crediting for dealers below the VAT threshold but above a floor turnover. Himachal Pradesh. (equations 1a and 3a) is also reported. Karnataka. Punjab. between 2003-04 and 2007-08 VATs on goods were implemented in all Indian states and several union territories. • Limits on VAT crediting for inputs and capital goods. Table 2: Dates of VAT Implementation by States in India Haryana Andhra Pradesh. tax intermediate inputs. these results need not reflect poor VAT revenue potential. were not universal. Consequently commodity taxes in the states continue to be partly origin based. West Bengal. Arunachal Pradesh. even if there was no revenue increase. the (a) gross state domestic product (GSDP) buoyancy of sales taxes (ST). Furthermore. unintended or intended. followed by the presentation of empirical results.Org (2011).and post VAT implementation were compared: LNSTt = B0 + B1LNGt + B2(VATt. Mizoram. The VAT in Indian States Starting with Haryana and ending with Uttar Pradesh. GSDPt is abbreviated to Gt and the t is an annual time period subscript ranging from 1993-94 to 2008-09. modelling and data issues are discussed. evasion proneness. if the VAT causes less economic distortion than the tax it replaces. many countries intended a revenue neutral replacement of their earlier consumption taxes by the VAT.. there are fewer design differences across the states than. for example. while fairly widespread. VATt is a dummy variable taking the value 1 for years in which the VAT prevailed and zero otherwise. Policy suggestions based on the analysis conclude the paper.(4) An alternative to equations (1) and (3) with lagged Gt-1 replacing current Gt. Jharkhand Tamil Nadu Uttar Pradesh 1st Apr 2003 1st Apr 2005 1st Oct 2005 1st Apr 2006 1st Jan 2007 1st Jan 2008 Source: Halakhandi (2007) except Tamil Nadu: Government of Tamil Nadu (no date).11 A fifth equation was estimated to check if. and disallowance or carry forward of refunds in excess of tax paid on sales except for exports. has the VAT done better than the sales tax it replaced? Second. Goa.. First. GDP (here GSDP) is the standard proxy for the base of general consumption taxes in most revenue performance studies. and Uttar Pradesh: CA. Madhya Pradesh. Of these. improve revenue but indirectly by reducing economic distortions and increasing the tax base. are unlikely to contribute to the explanatory march 10. Keen and Lockwood (2007). Nagaland. After describing Indian state VAT design features.(2) In (1) LN prefixed to a variable name denotes its natural logarithm. Haryana. Third. which will vary little over the sample period in Indian states. design differences in VATs in different countries cause them to depart in various ways from a textbook VAT. this may lead to VAT base (proxied by GDP) gains. a trade openness variable and the share of agriculture in GDP. For the second question. and (b) the revenue to GSDP ratio. the VAT at least contributed a larger share of state revenue:12 (ST/SORR)t = B0 + B1VATt . The VAT fails on revenue grounds only if both the direct revenue impact plus its indirect impact on the VAT base are negative. among major widely prevailing design differences compared to a destination based consumption-type VAT are:8 • The continuing origin-based central sales tax (CST) on interstate sales. 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. petroleum. with no trend impact. in the cross-country studies cited above.... ST revenue pre. increasing the denominator in Table 1’s revenue ratios. Tripura Uttarakhand Chhattisgarh. Bihar.(1) (ST/G)t = B0 + B1VATt . again as in the states. 2007) were limited to national level VATs. Sikkim. for example. Two issues are examined. Note that revenue is not the only performance criterion. Maharashtra.. NCT New Delhi. Thus VATt.

009 0.065 Bihar and Uttar Pradesh in 2000.027* -0.007 0.019* 0.019* -0. Two other statistical exercises to check the robust. dummy variable terms.018 0.017* 0..056* and GSDP data were from the website of the Punjab (Pun) Rajasthan (Raj) 0.019* 0.020* 0.001 0. were added (2) Of the combined states.(6) years before 2004-05 to the base year 2004-05.032 0.001 0. VAT revenue performance logy of using a VAT dummy variable to assess the impact of the turns out to be worse than with chained GSDP. 0.015 0.051* 0. of which combined states with Splitt equalling one from the year of the Bihar+Jharkhand (BJ) 0. the latter including the 10 special were only available to 2007-08.004 0.002 0. A dummy cases large tribal populations.007 0.002 0.series results are reported in the main text. 2012 vol xlvii no 10 57 .025* 0. Himachal Pradesh (HP) Goa 0. Furthermore for BJ and UPU in all equations.067* Ministry of Statistics and Programme ImpleWest Bengal (WB) 0.series. A chained GSDP series was.074* 0.041 0. So only chained VAT. Differences with lier VAT impact studies including Ebrill et al (2001) and Keen and unchained GSDP series are footnoted.Major states Andhra Pradesh (AP) 0.005* 0. was dropped from the regressions reported here.008* -0.236* Current rupee data on GSDP.029* 0.077* 0.15 Using ward using a linear projection equation fitted by ordinary least the subscript j for the jth state.001 -0.005* -0.010 -0.008* 0.007 0.008 0. Jharkhand.01 -0.004 0.007 -0. Lockwood (2006. So comJammu and Kashmir (JK) 0. if any. Furthermore. Jammu and Kashmir and Karnataka states and non-major states.007 0. Bihar. 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) ST GSDP ST Lagged ST/GSDP SORR GSDP SORR SORR/GSDP ST/SORR and also other reforms are needed.002 0.01* 0. The quality of State 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 17 (Eq 3a) drawing on a VAT performance audit. VAT introduction on the VAT base.027 0.004 -0.022* 0.015* 0.014* 0. P-values are reported in the Appendix. the estimated equations were: squares.002 0.039* the manner in which they were dealt with are Non-major states Arunachal Pradesh (ArP) 0.017* 0.020* 0.007* 0.011 0.023 0. Equations (1) to ΔLNGSDPjt = Bo + B1VATjt + B2Timet + B3Statej. being inThe equations above neglect the indirect impact.008 0.014 -0.002 -0.021 split (2000 in all three cases) and zero before Madhya Pradesh+ 0. in BJ and UPU.082* now described. B3Splitt.011* 0.011* 0.005* 0.001 0.005 -0.008* 0.023* 0.039* that.015* 0.018 0.(d) GSDP data were from three different series: 1993-94. an Sikkim (Sik) Tripura (Tri) 0.011 0.008* 0. with all its problems.004 -0.05* 0. This methodology.022* 0.000 0. ever.003 -0.14 variable for mid-year implementation was tried but.215* Pradesh-Chhattisgarh (MPC). For this detailed.073* 0.007* 0.003 0.007 0.008 -0.047 (a) Chhattisgarh.003 -0. state by state.029 0. is also used in ear.008* 0. of significant.(7) (4) were estimated with both chained and unchained GSDP There is little alternative to the admittedly weak methodo. Economic & Political Weekly EPW march 10.015* 0.005 0.SPECIAL ARTICLE power of the time series models analysed here.011* -0. . Gujarat (Guj) 0.024* 0.012 0.01 their sibling states (Table 2).001 0.002 0.007 0.001 -0.034 were carved respectively out of Madhya Pradesh.005 0.007 0.Meghalaya Meg) 0.098* the number of jurisdictions to 26 instead of 29. The resulting chained series thus has GSDP even for LNGSDPjt = Bo + B1VATjt + B2Timet + B3Statej.005 0. .008* 0.004 -0. This reduced Mizoram (Miz) 0.007 0.000 0.011* 0.005 0. To assess this.166* bined data for Bihar-Jharkhand (BJ).012 0.006* 0.Kerala (Ker) -0.007* 0. 1999tions were estimated using pooled data for the jurisdictions 2000 and 2004-05. this implies that differences between VAT and pre-VAT periods rather than the impact Empirical Results of the VAT are being studied.024* 0..004 0.000 0. and Uttar Pradesh. With unchained GSDP data.16 However.024* 0. states are classified as major (b) Data for two states. B4VAT1t. Special category states are officially held to (c) Tamil Nadu and Uttarakhand (then Uttaranchal) implesuffer from poor infrastructure. ST and SORR Haryana (Har) 0.. The reason for data pooling was to take into account projecting the ratio of overlapping years of these series backpossible cross-state economic spillovers on the VAT base.008 -0.001 0.025 mentation (MOSPI). and Uttarakhand Assam (Asm) 0. difficult terrain and in most mented the VAT mid-year rather than on 1 April.301 0.013* 0.013* -0.008 0.015 0.008 -0.010 0.035* 0.001 0. reforms during the period.011 0.013 0.011 0.028 0.168* 0.007 -0.019* 0.006 0.010 0.138* Uttarakhand (UPU) were used.026 0.13 How.021 Since differences could arise after the split. 2007). estimated by studied.18 Four data problems and Tamil Nadu (TN) 0.005 0.012* 0.142* are used for all 29 Indian states (clubbed into Karnataka (Kar) 0.053* 0. The technique cannot distinguish In Table 3.074* 0.014 0.003 ness of the basic results were carried out..010 0. was NCT Delhi (ND) -0.003 0.013* 0.006 04 to 2008-09. as in other Indian studies. Madhya Pradesh and Uttar Pradesh are major states.007 0.005 0. VAT1t equals 1 for years in trade openness data are not available for Indian states.007 -0.004 -0.000 the website of the Reserve Bank of India (RBI) Orissa (Ori) 0.which only one sibling state had the VAT and zero otherwise.018* 0.007 0.011* 0.001 0.014 -0.010 0.004 0.023* 0.022 0.003 0. ST and SORR data were from Maharashtra (Mah) 0. VAT dummy coefficients and their significances are between the VAT’s impact and the impact of other tax and fiscal summarised from the detailed Appendix Tables A1 to A7 (pp 61-64). category states.012* 0. Nagaland (Nag) -0.004 0.004 0.006 -0. Madhya Manipur (Man) 0.01 0.004* 0. So additional (1) *: Significant at 95% or better.003 0.177 additional dummy variable term.008* 0.010* 0.05* 0.003 0.013* 0.005 0.032 26 jurisdictions as explained below) for 2003.013* 0.038* added to equations (1) to (5) for these states. Bihar and Chhattisgarh (MPC) Uttarakhand implemented the VAT before Uttar Pradesh+ Uttarakhand (UPU) 0. two more equa.020* -0.

294 5.155 1. 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).835 0.033 0.894 1.025 0.106 0. In any case VAT appears to have no impact on revenue performance in Sikkim.033 0. The additional variables included were dummy variables for 2004-05 (PreVAT) and 2005-06 (PostVAT). A4 and A5.050 0. small.041 0. Results for three states are difficult to interpret.304 0. Thus the hypothesis of gaming has weak support.000% or over twice as much as GSDP.791 0.013 0.797 1.095 1. PostVAT is negative and significant.073 1. What of VAT dummy coefficients? In fact addition of PreVAT and PostVAT robs some VAT dummy coefficients (including two negative coefficients) of their significance. In no case does addition of these dummies cause an insignificant VAT dummy to become significant march 10.015 0.009 0.061 1.214 1.030 1. They are.992 1. Further.017 0.335 0.062 0. these gains cannot be attributed to VAT introduction alone.893 0.015 1.029 0.858 1. Leaving aside these states.520 0.064 0.SPECIAL ARTICLE Table 4: Buoyancies and Mean Values of Ratios State Major states Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Non-major states Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura New Delhi of which combined states Bihar+Jharkhand Madhya Pradesh+ Chhattisgarh Uttar Pradesh+Uttarakhand Averages major states All states ST GSDP ST Lagged ST/GSDP Buoyancy GSDP Buoyancy (Eq 2) (Eq 1) (Eq 1a) SORR GSDP Buoyancy (Eq 3) SORR SORR/GSDP Lagged (Eq 4) GSDP Buoyancy (Eq 3a) 1.057 0. in Karnataka.117 1.082 0.869 0.887 1.062 0.232 1. sales tax/VAT revenue grew 15.009 0.079 0. Further detail is in Tables A8 and A9 (p 64).166 1.329 0. 2012 vol xlvii no 10 EPW Economic & Political Weekly .836 0.580 4.320 0.085 0.25 To examine this augmented versions of equations (1) and (2). Clearly. States Gaming the Centre: The centre agreed to compensate states implementing the VAT in 2005 for any revenue loss in the initial years 0.874 0.510 1. respectively. Results are summarised in Table 7 (p 59).643 1.372 1.655 0.23 Robustness Checks Given the questionable data.458 50% of the revenue loss in the first.047 0.094 0.051 0.361 0.047 0.105 0.475 0.396 this have led to higher than normal state tax 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 insignificant.014 0.561 0.958 1.171 0. 75% and 0.156 1.047 0.267 0.812 0.091 0.935 0.959 1.089 0.064 0. Kerala and UPU revenue gains were small.018 1.028 0. perhaps.037 0. On the indirect impact of VAT introduction.975 1.700 1.401 0.026 0.907 0.634 1.347 0.055 0.103 0. However.797 1.388 0. in the next section findings of the performance audit (CAG 2010).643 0.854 1. two robustness checks are now presented.412 0.21 58 ST/SORR (Eq 5) The last column of Table 3 shows that the share of ST in SORR increased in only 11 states (excluding Arunachal).607 1.128 0.005 1.964 1.062 1.082 0.671 0.050 0.151 0.040 0.799 0.467 1.519 1.079 0.127 0.510 0.543 0. PreVAT/PostVAT have the expected positive/negative sign pattern in eight cases in (1b) and 10 cases in (2b).119 1. In Andhra Pradesh the three ratios in the table appear mutually contradictory.198 0.104 0. improved own revenue performance after VAT introduction occurred in less than 40% of jurisdictions including only two major states.22 So the direct revenue impact of the VAT is also the total revenue impact. So reliance on sales taxes did not increase in the majority of states after the VAT reform.974 0. the negative VAT buoyancy and ST/SORR may contradict this.212 1. The compensation would equal 100%.003 0.026 0.315 1.476 1.266 1.959 0.673 1.367 0.054 0.017 0.042 0. in any case.080 0.811 1.75 1.581 0.223 1.917 0.064 0.128 0. Overall.003 1. Could 0.029 0.039 0. equations (1b) and (2b) were estimated for the 21 states which implemented the VAT in 2005.835 0.271 1.052 0.53 1. A2.034 1.031 0.821 0.875 1. implying questionable results.036 1.047 0.047 0. coefficients of VAT dummies in pooled regressions with LNGSDP and the GSDP growth rate in Table 6 (p 59) are uniformly insignificant. For both equations the first of the four columns for each equation reports VAT dummy signs and significances from Table 3.927 0.029 0.856 1.027 0.000% (in nominal terms) over the sample period while SORR grew by 1.294 1. In no case is PostVAT significant.353 1.071 0.288 0. and methodological weakness.865 1. which also tend to suggest negative or weak VAT revenue performance are presented.310 1.756 1. In Sikkim ratios and buoyancies appear to be mutually contradictory.032 0.141 0. second 0.548 0.931 0. even if VAT performance was positive in two-thirds of the states.284 0.440 0.299 0.261 1. ratios and also the buoyancies to help interpretation of Table 3. after VAT introduction and reduced in one major and one non-major state.789 1.349 0.203 0.894 0.108 0.077 1.421 0.826 0. especially for GSDP.19 State by state narrative assessments are in Table 5 (p 59).478 relative to sales tax revenue in 2004-05.059 0.258 2.984 1. The conclusion is that VAT introduction did not lead to any base expansion.015 0.501 1. In equations (1b) and (2b) PreVAT is positive and significant in two and five states.005 0.347 0.20 Own revenue performance after VAT introduction improved in only two major states (Haryana and Orissa) and seven nonmajor states. The hypothesis is confirmed if PreVAT is positive and significant and.899 All buoyancies are significant at 99%: See Tables A1. respectively.482 and third years of the VAT.311 0.017 0. In Arunachal Pradesh. including four major states.792 0.080 0.484 0.297 0.049 0. Of these.330 1.472 0. These were slope dummies in (1b) and intercept dummies in (2b).958 0.147 0.573 0.154 1.020 0.

000 0. VAT had no impact on revenue performance. 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. Other revenue sources eroded VAT gains. Regression without combined states 0. and differences in VAT returns and documents across states seriously handicapped cross-verification of information in VAT returns across VAT dealers within and across states.037 0. ST buoyancy improved but by under 1%. and VAT cross-check information with period dummy variable) that available in other tax deLNGSDP (Eqn 6) ΔLNGSDP (Eqn 7) partments like the central exRegression VAT Dummy Variable Regression VAT Dummy Variable Significance Coefficient Significance Significance Coefficient Significance cise and customs departments. possible. Manipur Improved revenue performance including of the VAT. Madhya Pradesh+ VAT performance is positive but had no impact on Chhattisgarh revenue performance. Improved revenue performance including of the VAT. Downward bias of VAT dummy variables is. including F-tests for the joint significance of the four VAT dummies are in Table 8 (p 60). ST/GSDP and SORR/GSDP dummy coefficients are both large relative to the mean. For example. but overall revenue performance is unchanged.344 0. which is precisely the VAT years included in the sample in this paper (barring Haryana’s early VAT years). Meghalaya Improved revenue performance including of the VAT.030 0.484 0. combined states implemented the VAT. From ST/SORR and ST/GSDP. Results. The audit conducted during April-November 2009 covered 23 states27 and the post-VAT period 2005-06 to 2008-09. Tripura ST/GSDP increased from a low level of 1%. • Incomplete automation. From ST/SORR and ST/GSDP. 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).029 0. Can Winners Compensate Losers? Instead of counting states with revenue improvements postVAT. However.129 • Ineffective procedures for veriRegression with combined states 0. CAG (2010) assessed VAT performance. Thus the hypothesis of VAT dummy coefficients being insignificant due to states gaming the centre can be safely rejected. Other revenue sources eroded VAT gains. and (b) years during which only one of the fake ITC claims. Improved revenue performance including of the VAT. of which combined states Bihar+Jharkhand VAT had no impact on revenue performance. 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+ B1VAT2003+B2VAT2005+B4VAT2006 +B5VAT2007 (2c) LNSORR = B0+B1LNG+B2[VAT2003LNG] +B3[VAT2005LNG]+B4[VAT2006LNG]+B5[VAT2007LNG] (3c) SORR/G = B0+ B1VAT2003+B2VAT2005 +B4VAT2006+B5VAT2007 (4c) Four VAT dummy variables were needed given that states implemented the VAT in different years. • The large backlog of pending assessments under the predecessor taxes burdened TAs. Uttarakhand though magnitude is small.000 0.28 The main findings of importance for this paper were: • Deficiencies in VAT acts and rules existed in many states. VAT had no impact on revenue performance in Karnataka. ST buoyancy worsened but by under 1%. Sikkim See discussion in the text. lost revenue so that the country as a whole gained. when Haryana alone introduced the VAT. Uttar Pradesh+ Improved revenue performance including of the VAT. only the VAT dummies in equation (2c) are significant.26 To test this. ST buoyancy may have improved by around 3% still leaving it well below unity.024 0. VAT was successful. VAT appears to have had no impact on revenue performance in Maharashtra. limited electronic return filing. 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 Major states Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Assessment See discussion in the text VAT not a success but other revenue sources performed even worse.178 fying ITC claims and detecting Additional dummy variables for combined states are (a) from the year of states splitting. Nagaland VAT performance is positive but overall SORR performance has not improved. however. New Delhi VAT performance worse than the sales tax it replaced. ST buoyancy improved but by under 1% leaving it below unity.SPECIAL ARTICLE though they appear to cause downward bias in some cases. 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.000 -0. a time trend. 2012 vol xlvii no 10 59 . In Table 8. Mizoram Improved revenue performance including of the VAT. So it may be concluded that revenue gainers from the VAT could not compensate the losers. No impact on overall own revenue performance. VAT performance was worse than the sales tax it replaced. looking at the individual dummies in the equation only VAT2003. Jammu and Kashmir Improved revenue performance including of the VAT. Suggests improved revenue performance including of the VAT. VAT appears to have had no impact on revenue performance in Goa. Economic & Political Weekly EPW march 10. Non-major states Arunachal Pradesh Assam Himachal Pradesh Goa See discussion in the text Improved revenue performance including of the VAT. is significant. • Inability or unwillingness to Table 6: Impact of VAT Introduction on GSDP (pooled regressions for all states on state dummy variables. VAT had no impact on revenue performance in Kerala.000 -0. Overall revenue performance is unchanged. VAT was successful. Furthermore states’ own revenues in equations (3c) and (4c) were not significantly affected by the VAT.

005 0.010 -0.016 -0.114 0.002 0.012 Arunachal Pradesh 0.002 0.163* -0.004 0.243 0.005* 0.9) (4. Such states include declaration of sales and incorrect or false ITC claims by Chhattisgarh.015* 0.004 0.027 Tripura 0.005 -0.136 0.227 0. PreVAT and PostVAT Dummy Variables ST Buoyancy (eq 1b) ST/GSDP (eq 2b) VAT .005 -0.002 PostVAT -0.005 0. including services is desirable in due course.002 0.005* 0.037 the ITC documented by the CAG will be F-test degrees of freedom (4.002 0.006* 0.004 0.038 Meghalaya 0.004 march 10. tax like the VAT is strongly suggested by the CAG performance audit.007* 0.008 0. For states which had a positive VAT revenue performance On account of these TA deficiencies audit test checks of around 1.001 0.002 0.004* 0. that administration of the predecessor sales taxes was also ineffective as documented by several studies and official reports.008* 0. Kerala. based on extensive test checks.968 VAT2007*LNGSDP cation of any efficiency benefit in counVAT2003 0.033 0.569 0.550 0. despite the three years of planning.020* -0.003 -0.003 0. Moving to a GST should registration of some dealers and multiple registration of others. For Arunachal.099 0. So while base broadening by (1) *: Significant at 95% or better.809 0.638 VAT2006 sence of efficiency benefits.164 0.in implementing the VAT on goods.010 Himachal Pradesh 0.056 -0.125 6.008* 0.002 -0. attention should possiavoidance through a variety of channels including (1) Under.006* 0. P-values are reported in the Appendix. by another CAG performance audit.005 Assam 0.001 0.002 0.005 0.299 0.015* 0.006* -0.001 -0.126 0.008* 0. TAs and often not levied.012* 0. “self 60 0.036 0.000 0.000 0.007 0. provide independent verification of the relatively poor revenue performance of the VAT found in this paper.029 0.024* 0. down with respect to current TA weaknesses and procedures • Problems with VAT dealer registration procedures allowing non.004 Maharashtra -0.011 New Delhi -0.943* 0. Punjab and Rajasthan.001 0. (2) *: Significant at 99%.021 Sikkim -0.010 0.004 0.013* 0. however. land.197 VAT2003*LNGSDP partial ITC at.017 -0.164 -0.263 0.598 VAT2005 dence in Table 6 also suggests the ab0.039 -0.580 VAT2006*LNGSDP duction.207 -0. only be suggested if states can achieve the performance • Penalties for VAT non-compliance were at the discretion of benchmark as verified.934 0. Implications for Near Term Reform Given the poor ability of states to cope with tax reforms documented by the CAG and the possible negative impact of this on revenue is several states. Karnataka.023* 0.026 0.173* 0.(eq2) VAT PreVAT Andhra Pradesh 0.10) (4.027* Manipur 0.011* 0.000 One option is a move from 100% ITC to 0.015* 0.001 0.402 0.005* 0.022 -0.000 Karnataka 0. The audit traces this to incomplete reforms and ineffective TAs.002 These official performance audit findings.006 -0.001 0.035 -0.001 0.015* 0.007 0.077 0. 2012 vol xlvii no 10 EPW Economic & Political Weekly . for example. Madhya Pradesh. Are any base broadening (and conseTable 8: Aggregate Regression Results for Equations (1c) to (4c) quent tax rate lowering) options availVariable/Statistic ST Buoyancy (Eqn 1c) ST/GSDP (Eqn 2c) SORR Buoyanc (Eqn 3c) SORR/GSDP (Eqn 4c) Coeff P-Value Coeff P-Value Coeff P-Value Coeff P-Value able for the existing VATs on goods? LNGSDP (Buoyancy) 1. TAs will have to cope with a greatly expanded number of dealers under the GST.004 -0. As noted in the intro0.019* 0.127 0.024 -0.009* 0.009 0.00.102 0.006 0.001 -0.010* 0.467 tries like India from a 100% ITC.614 -0.005* 0.001 0.002 0.244 evasion and TA inability to administer F-Test: Joint significance of VAT dummy variables 1.000 0.448 0. performance benchmarks for TA s should be laid • Most states were without tax administration procedure manuals.bly be diverted to other revenue sources. further large-scale tax reform at this stage appears premature.004 0.002 0.039 0.021* Mizoram 0.004 0.002 0.114 0.000 dealers found widespread tax evasion and but poor own revenue performance.007 0.001 0. 20% of input taxes VAT2005*LNGSDP 0.018* 0.800 2.000 0.028 0.011* 0.000 0.000 0.30 The incapacity of TAs to successfully cope with administering a new. Naga50% of VAT dealers.269 0.007* 0. Furthermore state TAs have no experience dealing with dealers providing services as there have been no general state taxes on services. For Goa and Gujarat causes of and (3) collection of VAT from customers which was not re.014 -0.apparently declining tax effort should be identified and mitted to state treasuries by some exempt dealers who con.028* Goa 0.002 Orissa 0.008 0.021 0.996 0.002 0.001 West Bengal 0.SPECIAL ARTICLE Table 7: Signs and Significances of VAT.393 are present.006 0.181* 1. sophisticated.013* 0.001 0.311 0.008* 0.005 -0.015* 0.995 0.013* 0.10) 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.022* 0. this should not be attempted unless TAs expertise in taxing service providers. there is no theoretical justifi-0. Note.009 Punjab 0.(eq 1) VAT PreVAT PostVAT VAT .008 0.006 0.003 0.179 0.031 -0.000 -0.501 paid by suppliers.016 0.020* Jammu and Kashmir 0.002 0.003 0. Instead.013* Kerala -0. incentive schemes.000 0. Sikkim and Maharashtra further tinued to receive transitional benefits from earlier tax assessment to identify causes of apparently contradictory or insignificant revenue performance indicators is needed.29 It would be of interest to see if TA weakness can statistically explain poor revenue performance if state by state information for the CAG report were made available.050* 0. though -0. Instead revenue loss due to F-Significance 0.9) (4.002 0.120 0.corrected.031 Nagaland 0.009* 0.009 0.020* 0.003 0.020 0.003 0.015* 0.001 0. Furthermore.005 0.003 0.005 0.041 -0.006 -0.050 0. say. with a partial ITC.050 -0.712 0.208 0.876 VAT2007 data and methodological weaknesses R-Squared 0. Evi0.022* 0.001 -0.013* 0. (2) granting of incorrect VAT exemptions.

969 0.944 0.118 0.994 0.000 0.476 1.797 1.081 0.013 0. Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura New Delhi Bihar+ Jharkhand Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand Buoyancy Slope Dummy Dummy: Only Bihar/ Dummy: Years with Variable (VAT) Uttarakhand VAT Bifurcated States Coeff P-Value Coeff P-Value Coeff P-Value 0.000 1.849 -0.001 0.978 0.007 0.816 0.000 0.000 1. 10 If the cost of raising revenue through a VAT is less than that of the tax it replaces.000 0.000 0.530 1.001 0.920 -0.992 0. 8 Updated VAT Acts.000 0. could lower its overall cost of funds by reducing dependence on other revenue sources.000 0.095* 1.092 0. to throw more light on the costs and benefits of the 2005 VAT reform and devise a more extensive benchmarks for the proposed GST reform.000 0.993 0.011 0.000 0.349 0.998 0.001 0.000 0.000 0.732 0.000 0.08 0.887* 0.905 0. equity and administrative aspects of the VAT for 100+ countries.974 1.009 0.004 0.700* 1.894* 1. Given the apparent lack of readiness of states.988 0.984 0.000 0.000 0.000 0.811* 1.970 0.992 0. merely makes estimation of effective tax rates difficult without necessarily having any efficiency impact.008 0. Emran and Stiglitz (2005) and Keen and Ligthart (2005).120 0.024 0. then a state not wanting more revenue.219 0.990 0.000 0. Circulars and Notifications of different states and union territories are available at www.147* 0.034 1.894* 0. revenue and efficiency of the VAT in relation to other taxes.stvat.000 0.982 0.261* 1.467* 1.001 0.000 0.169 0.288* 0. if Appendix Table A1: LNST = B0+B1 LNGSDP+B2 [VAT.997 0.398 0.015 0.005* -0.141 0.000 0.999 0.002 0.372* 1.027 0.000 0.995 0.000 0.000 0.001 0.978 0.154* 1.315 0.000 0.980 0.972 0.985 0. it reverted to a single point sales tax in 1999.000 0.008* -0.005 0.com.081 0.018* 0.000 0.SPECIAL ARTICLE enforcement” benefits from an ITC.232* 0.004 0. These papers look variously at welfare.029 0.993 0. among others.000 0.000 0.000 0.227 0.128 0.002 -0.399 0. though partial setting off of input costs from sales revenue continued till 2005 (Government of Maharashtra 2000 and Chelliah and Kavita Rao 1999).000 0.007 0.643* 1.647 0.000 0. particularly of tax administration and tax compliance.000 0.968 0.000 0.607 1.012 0.156 1.032 0.976 0.000 0.000 0.000 0.000 0.144 0.117 0.010 -0.353* 1.173 0.519 1.835 0.430 0.000 0. will continue with a 20% ITC.000 0. implementing the GST in 2012-13 is a high risk step whose returns may not repay the cost of planning and implementing the GST.000 0.000 0.118 0.258 2. removal of cascading or tax-on-tax.979 0.LNGSDP] (Equation 1) present.000 0.000 0.002 61 .000 0. From the statistical results and the CAG audit it can be inferred that the economic return in terms of revenue and efficiency gains to this expenditure of public funds is at best zero for the country as a whole.000 0.854 1. Theoretical arguments for this and related propositions are in Keen and Lockwood (2006).008* 0. Due to design deficiencies.223 0.085* 0.985 0.000 0.000 0.000 0.684 0.000 0.119 1.000 0.990 0.015 0.000 0.000 0.964 0.000 0.160 0.005 0.005 0.000 0.010 0. Chelliah and Kavita Rao (1999).000 1. However.000 0. 2012 Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura New Delhi Bihar+Jharkhand Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand vol xlvii no 10 R-square F Significance Buoyancy (lagged GSDP) Coeff P-Value 0.989 0.003 0.023 0.020* 0.000 0.835 5.000 0.000 0.000 0. 11 This suggestion by M Govinda Rao is gratefully acknowledged.024 0. The other claimed advantage.019 0.994 0.000 0.000 0. 3 See.077* 0.000 0.336 0.000 0.000 0.983 0.000 0.007 0.000 0.105 0.262 0.000 0.000 0.003 Notes Table A2: LNST = B0+B1 LNGSDP–1+B2 [VAT–1 LNGSDP–1] (Equation 1a) 1 See Bird and Gendron (2007).294* 0.000 0. the return may have been large enough to justify the cost of reform planning and implementation.020* -0.000 0.007 0. 6 The important study by Ebrill et al (2001) also assesses efficiency.951 0.902 0.000 0.171* 0.992* 1.000 0.970 0.011 0.424 0.298 0.155 1.969 0. Bird (2011) who terms this the BBLR approach.001 0.000 0.000 0.797* 1.000 0.855 0.000 0.077 0.822 0. Further state by state investigation is needed. 5 Jafari and Salehani (2010). 2 See Das-Gupta (2005).000 0.437 0.011 0.924 0.000 0.000 0.004 0.000 0.000 0.000 1.963 0.007 0. in Haryana.000 0.452 0.588 0. This should be kept in mind when interpreting empirical results.992 0.142 0.019 0.002 0.987 0.001 0.117* 1.750 1.000 0.000 0.026 0.004 0.267 0.000 0.000 0.000 0.000 1.166* 1.011 0.000 1.023* 0.991 0.019* 0.023 0.007 0.990 0.000 0. 7 Maharashtra introduced a subtraction type VAT in 1995.978 0.979 0. State R-square F Significance Coeff P-Value 0.000 0.000 0.000 0.989 0.000 0.933 0.984 0.007 0.000 0. 4 See.005 0.022 0.000 0. for example.000 0.073 1.018 -0. 9 See.299 0.000 0.441 0.994 0.001 0. Regressions with slope and State Economic & Political Weekly EPW march 10.433 0.000 0.649 0.022* 0.120 0.991 0.057 0.875* 4.31* 1.011* 0.018 0.188 0. Chelliah and Kavita Rao (1999).000 0.564 0.992 0.000 0.726 0.010 0. Rules.932 0.991 0.992 0.000 0.007* 0.018 0.000 0. Orissa and the six identified special category states in Table 5.858 1.000 0.004 0.019 0. for example.003 0.992 0.000 Conclusions The state VAT was implemented in 2005 after a decade of preparation and at an unknown but large cost.000 Slope Dummy Dummy: Only Bihar/ Dummy: Years with Variable (VAT) Uttarakhand VAT Bifurcated States Coeff P-Value Coeff P-Value Coeff P-Value 0.147 0.266 1.000 0.988 0.000 0.000 0.016 0.510* 1.000 0.

000 0. Significances of either buoyancy or ratio dummies changed for Andhra Pradesh.007* 0. Himachal Pradesh. VATs differ enormously amongst themselves: in the extent of exemptions.000 0.011 0.645 0.000 0.986 0.000 0. negative VAT buoyancy dummies increased from one to two.008* 0.271 1. ease of obtaining refunds.000 0.799 0.014 0.005* 0.000 0.875 0.000 0. Table A3: (ST/GSDP) = B1 + B2 VAT (Equation 2) State R-Square F Significance VAT Dummy Variable (VAT) Coeff P-Value Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura New Delhi Jharkhand+Bihar Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand 0. which led to this robustness check.147 0. With unchained GSDP.0160 0.000 0.391 0.766 0.428 0.000 Dummy: Only Bihar/ Uttarakhand VAT Coeff Coeff -0.821 0.971 0.978 0.128 0.028 0.010* 0. The average annual GSDP growth rate of sample states fell from 12.007 0. For SORR.013* 0.050 0.628 0.000 0.789 1.000 0.000 Table A4: LNSORR = B0+B1 LNGSDP+B2 [VAT.000 0.247 0.001 0.LNGSDP] (Equation 3) State Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura New Delhi Bihar+Jharkhand Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand R-square F Significance Buoyancy Coeff P-Value Coeff 0.762 0.000 0.728 0.077 0.291 0.994 0. for example.156 0.008* 0.008 -0. 2012 Slope Dummy Variable (VAT) Dummy for Only Bihar/ Dummy: Years Uttarakhand VAT with Bifurcated Implementation States P-Value Coeff P-Value Coeff P-Value vol xlvii no 10 0.097 0. in Gupta (2005).533 0.005 0.812 0.000 0.000 0.010* 0.000 0.050 0.003 0.749 0. The Economic Times (2004): Describes the compensation scheme.987 0.140 0.000 0. 2007) use log (revenue/GDP) as their dependent variable. That Maharashtra already had partial ITC prior to 2005 could be the cause of the insignificant dummies found here. no major state had a positive significant VAT buoyancy dummy.291 0.004 0.216 0.965 0.011 0.001 0.000 0.7% post -VAT implementation.607 0.022* 0.982 0. Punjab. Special category states include Arunachal Pradesh.144 0. threshold. Tripura and Sikkim (Saxena 2009).000 0. Uttarakhand.817 0.000 0.SPECIAL ARTICLE 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 62 intercept dummies variables and both GSDPt-1 and GSDPt were unreliable with high multicollinearity.000 0.647 0.103 0.000 0.315 0.007 0.008* 0. Significances of coefficients with unchained GSDP were identical though estimated coefficients were somewhat larger. The possibility of states gaming the centre is reported.634 1.024 -0. Manipur.216 0.017 0.000 0.879 0. Meghalaya.000 0.839 0.002 0.367 0.000 0.146 0.005* 0.000 0.107 0.000 0.383 0.079 0.005 0.000 0.015* 0.937 0.000 0.987 0.010 0.000 0.893 0.017 0.004 0.013 0.144 0.019 0.979 0.007 0. The ECSFM was set up by the centre in 1999 to coordinate VAT designs across states and arrive at a consensus design.995 0.000 0. treatment of services …” (p 162).013 0.000 0.000 0. discussed later.000 0.006 -0.000 0.005 1.526 0.719 0.299 0. should be noted in interpreting results.000 0.000 0.000 0.968 0. The consensus design was described in the white paper (CAG 2010).095 0.in/data/32 states chained GSDP and RBI rev data 93-94 to 08-09.3% in pre-VAT years to 11. dummy signs and significances were identical to those with chained GSDP except that the SORR/GSDP ratio VAT dummy for Mizoram was insignificant.028 0.010 0.645 0. Thus VAT performance is worse with unchained GSDP.856 1.526 0.007* 0.214 0. Uttar Pradesh. Grateful thanks are due to Pulin Nayak for suggesting this check.943 0.537 0.003 0. number of rates.043 0.146 0.000 0.223 1.000 0. This is equivalent to a restricted regression with GDP buoyancy constrained to have the value 1.013* -0.001 0.000 0.000 0.000 0.002 0.581 0.000 0. The very high VAT buoyancy in Arunachal and its low VAT/GSDP ratio.652 0.019 Economic & Political Weekly .044 0. VAT buoyancy and GSDP shares were both significantly positive for Rajasthan and both significantly negative for Kerala.418 0. though.143 0.000 0.008* 0.986 0.040 0.000 0.000 0.394 0. This requires further study.002 0.016 0.000 Dummy: Years with Bifurcated States P-Value Coeff 0.010 0.000 0. (5) also serves as a partial data consistency check by comparing its VATt coefficient sign and significance with that of VATt coefficients in (2) and (4). positive VAT dummies decreased from four to two while states with significant.015 1.007 0.000 0.gim.008 0. a simultaneous model with VATt and GSDPt as dependent variables and additional GSDP determinants was not specified.786 0.592 0. Gujarat.000 0. Rajasthan and West Bengal.000 0.001 0.001 0.548 0.001 0.477 0.952 0.007 0.000 0.065 0.914 0.043 0.007 0.988 0. Comptroller and Auditor General (2010) abbreviated CAG.003 0.018 0.968 0.011 -0.000 0.007 0.001 0.061 1.297 0.000 1.000 0.959 1. Assam.000 0.002 0.000 0.006* 0. The SORR/ GSDP VAT dummy for Andhra Pradesh was insignificant.ac. Keen and Lockwood (2006.982 0.865 0. major states with significant.000 0.937 0.756 1.214 1.057 0. Thanks are due to Kavita Rao who flagged this possibility.000 0.462 0.085 0.901 0.010 0. 16 September.041 -0.050 0.013* 0.373 0.000 0.000 0.050 0.024 -0.000 0.000 0. Karnataka.178 0.845 0.259 0. Arunachal Pradesh and Tamil Nadu. Nagaland. is a very noisy indicator….986 0.001 -0. Jammu and Kashmir.046 0.013 march 10.983 0.032 0. The buoyancy dummy for Maharashtra was significantly negative. For non-major states.297 0.023 0.004* -0.884 0.011* 0.261 .003 0. Government of India.000 0. The ECSFM currently plays the same role across states with respect to the planned GST.000 0.959 0.006 0.657 0.719 0.000 0.008 EPW 0.418 0.000 0.000 0.143 0.752 0.000 1.923 0.010 0.014 0.024 0.001 0. That is all states studied here excluding Haryana.094 0.000 0.000 0.001 0.000 0.063 0.079 0.932 0. These are not reported here.588 0. Mizoram.437 0. Given the poor estimation results from this model. As Keen (2009) puts it “Such a dummy variable. An Excel file with data used is available at http://www. 23 September.xls.

749 0.).000 0. Richard (2011): “The BBLR Approach to Tax Reform in Emerging Countries” in M G Rao and M Rakshit (ed.984 1.003 0.014 0.052 0.265 0.035 -0.014 -0.inINDIA.294 1.004 0.000 0.000 0. Government of Maharashtra (2000): “Report of the Expert Group to Review Value Added Tax in Maharashtra” (Valluri Narayan Committee).business-standard. P and J Mirrlees (1971): “Optimal Taxation and Public Production I: Production Efficiency”.000 0. available at http://www.000 0.178 0.987 0.000 0.178 0.012 0.228 0.074 0.000 0.665 -0.061 0.982 0. Public Economics: Theory and Policy (New Delhi: Sage Publishers).tnvat.980 -0.002 0.030 0.005 0.212 1.004 -0. accessed on 8 March 2011.939 0. Richard M and Pierre-Pascal Gendron (2007): The VAT in Developing and Transitional Countries (Cambridge and New York: Cambridge University Press).000 0. J Bodin and V Summers (2001): The Modern VAT (Washington DC: International Monetary Fund).002 0.792 0.043 0.173 0.074 0.123 0.918 0.000 0.005 -0.000 0.000 0.in/SRA-value-added-tax.004 0.010 0.com/articles/value-added-tax-for-students-1508. Government of India. Government of Maharashtra. accessed on 10 October 2011.832 0. a Turnover Tax Can Dominate the VAT”.000 0. accessed on 20 October 2011.501 1.273 0.061 0.000 0.068 0.015 0.000 0.931 0.086 0.015 -0. Ahmad and Fereshte Talesh Salehani (2010): “VAT and Governance: Evidence from Countries around the World”.930 0.932 0.988 0.005 0. http://www.109 0.902 0. Monica (2005): “States Underplay VAT Gains to Get Aid”.085 0.027 0.001 0.042 0.000 0.000 0.006 0. available at http://www.965 0.168 0. Gupta.307 0.958 0.890 0.pdf. 8-27.000 0.002 0. Michael (2009): “What Do (and Don’t) We Know about the Value Added Tax?”.987 0.pdf.004 -0.011 0.015 0.131 0.014 0.253 0. A Review of Richard M Bird and Pierre-Pascal Gendron’s Economic & Political Weekly EPW march 10.992 0. Economics Bulletin.001 0. pp 1-6.011 0.214 0.074 0.html.099 0.004 0.035 0.679 0.006 0.015 0.economicsbulletin.000 0.868 0. Vol 89(4).401 0.051 0.573 0.948 0.150 0. last accessed March 2011.015 0.990 0. M Shahe and Joseph E Stiglitz (2005): “On Selective Indirect Tax Reform in Developing Countries”.pdf.075 0.insipub.832 0. pp 599-623.000 0.073 0.003 0.003 0.017 -0.280 0.671 0.007 0.com/ 2005/volume8/EB−05H20003A.935 0. L.000 0.669 0.382 0.168 0.180 0.000 0.010 0.791 0.273 0.013 0.213 0.917 0.013 0.089 0.984 0.198 0.080 0. Vol 8.005 0. M Keen.007 0.957 0.caclubindia. American Economic Review. National Institute of Public Finance and Policy.856 0. CA.421 0.000 0.000 0.135 0.028 0.000 0.004 0.002 0.053 0.124 0. Ebrill.003 0.gov.asp.042 0.123 0.com/ajbas/ 2010/4852-4856. New Delhi.152 0.000 0. New Delhi.008 0.000 1.000 0. Elsevier. accessed on 8 March 2011. 30 An example is Chapter 3 in World Bank (2005).000 0.047 0.000 0.986 0.000 0. available at http://www. Business Standard online edition.004 0.908 0.012 0. 4(10): 4852-56.895 0.634 0.in/ statewise_sdp1999_2000_8feb10.990 0.051 0.000 0. Mumbai.522 0. Emran. Government of Tamil Nadu.066 0.015 0.089 0.709 0.610 0.in.000 0.975 0.009 0.579 0.071 0.168 0. Commercial Taxes Department (no date): “Tamil Nadu Value Added Tax”.063 0.027 -0.075 0.012 0.382 0.836 0.192 0.008 0.003 0.029 0.008 -0. 2012 Table A5: LNSORR = B0+B1 LNGSDP-1+B2 [VAT-1 LNGSDP-1] (Equation 3a) State Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura Delhi Bihar+Jharkhand Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand R-square F Signi ficance Buoyancy (lagged GSDP) Slope Dummy Dummy for Only Bihar/ Dummy: Years Variable Uttarakhand VAT with Bifurcated (lagged VAT) Implementation States Coeff P-Value Coeff P-Value Coeff P-Value Coeff P-Value 0. Halakhandi.pdf on 11 November 2009.035 0.000 0. Ministry of Statistics and Programme Implementation (MOSPI) (2007): “Statement: Gross State Domestic Product at Current Prices” available at http://mospi.013 0.138 0.009 0. No 9. Comptroller and Auditor General.000 0.051 0.000 0.907 0.gov.111 0.nic.280 0.062 0. 61.399 0.cainindia.584 0.046 0.002 0. April.029 0.077 Table A6: (SORR/GSDP) = B1+B2 VAT (Equation 4) State R-Square F Significance Coeff P-Value Dummy: for Only Bihar/ Uttarakhand VAT Coeff P-Value Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura New Delhi Jharkhand+Bihar Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand 0.138 0.001 0. org/news/6_2008/vat_value_added_tax_2008_ india_news_.007 0. last accessed March 2011. Keen.000 0.004 0.000 0. 16 September.000 0.180 0.253 0.007 0.000 0. available at http:// www.010 0.000 0.920 0.008 0.497 0.673 1.041 0. References Bird. Jafari.873 0. Chelliah. Journal of Public Economics.011 0.000 0.000 0.009 0.794 0.SPECIAL ARTICLE 29 It should be noted that administration of the predecessor sales taxes was also ineffective as was documented by several studies and official reports.982 0.000 0.959 0.005 0. Samimi. Bird.029 0. http://www.301 0.960 0.007 0.079 63 .962 0.002 0.000 0.000 0.com/india/news/ states-underplay-vat-gains-to-get-aid/220653/.000 0.976 0. accessed 8 March.005 0.355 0.000 0. Comptroller and Auditor General (2010): “Implementation of Value Added Tax in India – Lessons for Transition to Goods and Services Tax – A Study Report”.958 1. Das-Gupta.008 0.958 0.083 0. available at http://cag.401 0.014 Dummy: Years with Bifurcated States Coeff P-Value -0.280 0.000 1.000 0.055 0.020 0.561 0.191 0.007 0.000 0.000 0.299 0.126 0.Org (2011): e-bible for chartered accountants.135 0.397 0.027 vol xlvii no 10 VAT Dummy Variable 0. Government of India.000 0.013 0.826 0.023 0.000 0. Arindam (2005): “With Non-competitive Firms. Sudhir (2007): “CA Club India – Interactive Platform for Finance Professionals and Tax Payers”.520 0.025 0. Australian Journal of Basic and Applied Sciences. Diamond. R J and Kavita Rao (1999): A Primer on the Value Added Tax.

136 0. Working Paper.000 0.006 -0.891 0.853 Assam 0.935 F VAT Slope Dummy PreVAT PostVAT Significance Variable Coeff P-Value Coeff P-Value Coeff P-Value 0.warwick.031 -0.022 -0.362 0.077 0.ac. 20.215 0.010 0.004 0.031 0.002 0. 59(4).995 0. – (2011): “State Finances: A Study of Budgets”. National Tax Journal.000 0.nic.066 0.751 0.234 0.Special.824 0.988 0.443 0. Government of India.001 0.294 0.005 0.114 0. available at http:// mospi.015 0.001 0.039 -0.009 0.021 -0.082 0.000 0.374 0.460 0.035 0.062 0.003 0.028 0.002 0.008 0.rbi.326 0.pdf.000 0.001 0.002 0.892 0.877 0.099 0.004 -0.819 0. accessed on 3 July 2011. accessed on 20 October 2011.109 0.441 0.000 0.warwick. pp 385-90.957 0.143 0.012 0.740 0.163 0.008 0.865 0.002 0.001 0.242 Jammu and Kashmir 0.010 0.gov.005 0.286 0.108 0.995 0.179 0.005 -0.015 0.448 0.003 0.042 0. available at http://www2.005 0.1.pdf. MOSPI (2011): “Statement: Gross State Domestic Table A7: ST/SORR = B1+ B2 VAT (Equation 5) State R-Square F Significance VAT Dummy Variable P-Value Dummy: for Only Bihar/ Uttarakhand VAT Coeff P-Value Dummy: Years with Bifurcated States Coeff P-Value Coeff Andhra Pradesh Gujarat Haryana Karnataka Kerala Maharashtra Orissa Punjab Rajasthan West Bengal Tamil Nadu Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura New Delhi Bihar+Jharkhand Madhya Pradesh+ Chhattisgarh Uttar Pradesh+ Uttarakhand 0.SPECIAL ARTICLE “The VAT in Developing and Transitional Countries”. 2012 0.001 0.024 -0.012 0.002 0.aspx?head=Handbook% 20of%20Statistics%20on%20State%20Government%20Finances%20-%202010.001 0.006 0.142 -0.993 0.243 0.025 0.236 0.in/State-wise_SDP_1999-2000_ 20nov09.031 0. accessed on 11 November.236 0.027 0.065 0.068 0. N C (2009): “Medium-term Fiscal Reforms Strategy for States”.008 0.000 0.161 0.501 0.027 0.972 0.002 0.000 0.LNGSDP]+B3 PreVAT+B4 PostVAT Table A9: LNSORR = B0+B1 LNGSDP+B2 [VAT.888 0.008 0.042 0.033 0.000 0.049 0.74 0.039 0.035 -0.695 0.aeaweb.085 Kerala 0.004 -0.011 -0.187 0.014 0.025 -0. Planning Commission available at http://planningcommission.108 0.000 0. Review of Economic Studies. accessed on 20 October 2011. Newbery.051 0.067 -0.000 0.047 0. – (2009): “Statement: Gross State Domestic Product at Current Prices”.001 0.707 Punjab 0.049 0.683 0.991 0.977 0.000 0.006 0.299 0.984 0.000 0.997 0.262 0.142 march 10. 267-70.824 0.017 0.552 0.003 0.006 EPW 0. available at http://ssrn. 151-74.055 0. Economics Letters.005 -0.000 0. Journal of Economic Literature 2009.126 0. 9 July.001 -0.702 Economic & Political Weekly .480 0.202 0.658 0.536 0.000 0.000 0.591 VAT Slope Dummy Coeff P-Value 0.056 0.138 0.004 0.609 0.000 0.560 0.164 -0.021 0.730 0.uk/ fac/soc/economics/research/papers/twerp_ 801. Piffano.009 0. available at http:www.617 0.328 -0.102 0. Blackwell Publishing.006 0.000 0.255 0.002 0.LNGSDP]+B3 PreVAT+B4 PostVAT State State Andhra Pradesh Karnataka Kerala Maharashtra Orissa Punjab West Bengal Arunachal Pradesh Assam Himachal Pradesh Goa Jammu and Kashmir Manipur Meghalaya Mizoram Nagaland Sikkim Tripura New Delhi 64 R-Square 0.000 0. pp 1-28.960 0.137 0.050 0.543 0.024 0.082 0.723 0. Universidad Nacional de la Plata. Nellor.007 0.002 0.008 0.000 0.gov.050 0. Saxena.009 0.011 0.005 0.248 0.327 Orissa 0.038 0.000 0.049 0.000 0.120 0.673 0.089 0.286 0.273 0.283 0.176 0.168 0. accessed on 15 April 2011.629 0.pdf.311 0.021 0.774 Himachal Pradesh 0.006 0.898 0.079 0.000 0.243 0.050 0.org/articles.005 0.796 0. World Bank (2005): State Fiscal Reforms in India (New Delhi: Macmillan).991 0.034 0.177 -0.000 0.695 -0.000 0.262 0.486 0.067 0.042 0.269 0.012 0. accessed on 22 October 2011.658 0.672 Meghalaya 0.539 R-Square F Significance Andhra Pradesh 0.039 0. available at http:// mospi.558 0.004 0.763 0. Product at Current Prices”.847 Nagaland 0. David (1987): “The Effect of the Value-Added Tax on the Tax Ratio”.000 -0. accessed on 3 January 2010.000 0.126 0.249 0.000 0.266 0.146 0. Reserve Bank of India (2010): “Handbook of Statistics on State Government Finances – 2010”.002 0.170 0.021 0.996 0.000 0.262 0.000 0.996 0.027 0.422 0.000 0.718 New Delhi 0.924 Goa 0.052 0. Stiglitz J and P Dasgupta (1971): “Differential Taxation.000 0.900 0.050 0.021 0.055 0.247 -0.143 0.004 0.001 0.766 0.431 0.206 0.017 0.325 0.015 0.318 Karnataka 0.000 0. available at http://www.038 -0.013 0. Horacio L P (2007): “Argentina and Brazil: Fiscal Harmonisation and Subnational Sales Taxation – State/Provincial VAT versus State/ Provincial Retail”.001 0. – (2007): “The Value Added Tax: Its Causes and Consequences”.784 Sikkim 0. Departmento de Economia. accessed 20 October 2011. 159-170.464 Tripura 0.353 Maharashtra 0.158 0.47. accessed on 11 November 2009.098 0.801 0.993 0.263 0.007 0.006 0.159.263 0.002 0.127 0.865 0.056 -0.000 0.004 0.661 0.801 0.032 0.aspx?head=State+Finances +%3a+A+Study+of+Budgets.208 0.001 0.025 0.555 0. 47(1).com/vatstates-to-get-full-compensation/articleshow/ 860867.102 -0.000 0.001 -0.987 0. 23 September.883 Mizoram 0.in/scripts/OccasionalPublications.1257/jel.003 0.438 0.cms.000 0.158 0.160 Arunachal Pradesh 0.002 0.527 0. Keen.122 0.130 0.173 0.002 0. The Economic Times (2004): “VAT: States to Get Full Compensation.015 0.000 0.020 0.859 0.009 -0.003 0.010 0.012 0. Michael and Jenny E Ligthart (2005): “Coordinating Tariff Reduction and Domestic Tax Reform under Imperfect Competition”.010 -0.000 0.292 0.000 0.indiatimes.312 0.855 Manipur 0. IMF Working Paper.061 0.915 Table A8: LNST = B0+B1 LNGSDP+B2 [VAT.289 0. available at http://economictimes.077 0.748 0.000 0.039 0.001 0.000 -0.659 0.000 0.342 vol xlvii no 10 PreVAT Coeff P-Value 0.817 0.036 0.129 0.php?repts=fiscal.016 0.htm#V.001 0.963 0.872 0.026 0.001 0.991 0.537 0.114 0.016 0.pdf.876 0.ac.975 0. D (1986): “On the Desirability of Input Taxes”.013 0.000 0.rbi.015 -0.063 0.353 -0.010 0. accessed on 20 October 2011.473 -0. Appendix I.072 0.in/State-wise_SDP_1999-2000_ 20nov09. Michael and Ben Lockwood (2006): “Is the VAT a Money Machine?”.009 0.000 0.827 0.002 -0.126 0.006 0.003 -0.uk/fac/soc/economics/staff/academic/ lockwood/mm.013 -0.234 0.166 0.058 0.189 0.004 0.171 0.in/reports/articles/ncsxna/index.573 PostVAT Coeff P-Value -0.174 0. Keen. 38.202 0.038 0.977 0.998 0.org.000 0.058 0.164 0.org.307 0.377 0.in/scripts/ AnnualPublications. 31 March.292 0.262 0.050 0.005 0.303 0.027 0.002 -0. 905-928.041 0.696 0.006 0.375 0.596 0.003 0.466 West Bengal 0.411 0.com/ abstract=884798.825 0. available at: http://www. Vol 13(2).004 0.020 0.000 0.493 0. Review of International Economics.005 0.php?doi=10.006 0.000 0.207 -0.007 0.024 0. http://www2.000 0. Revenue Receipts of States and Union Territories with Legislature. Public Goods and Economic Efficiency”.317 0.005 0.089 0.