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Is the Value Added Tax Reform in India Poverty-Improving? An Analysis of Data from Two Major States

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Author Info
Ajitava Raychaudhuri
Sudip Kumar Sinha
Poulomi Roy

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Abstract

The Value Added Tax (VAT) was introduced in India in place of Sales Tax, taking effect in April 1, 2005. These taxes are in the domain of different state governments within the country's federal set up. Although VAT is widely acclaimed to be a better system than the sales tax on grounds of efficiency in tax collection, no study has been undertaken to assess the impact of this reform measure on social equity. This paper addresses this need with the use of concentration curves and consumption dominance curves of various orders. The simulations were done on two major states in India, namely Maharashtra and West Bengal, using National Sample Survey Unit Level data for the 55th round. The results show that the reform is largely pro-poor, although there are ways to improve it with respect to some items predominantly consumed by the relatively poorer groups.

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Publisher Info
Paper provided by PEP-PMMA in its series Cahiers de recherche PMMA with number 2007-18.

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Date of creation: 2007
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Handle: RePEc:lvl:pmmacr:2007-18

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Related research
Keywords: Value added tax; Marginal tax reform; public distribution system; concentration curve; Lorenz curve; marginal efficiency cost of funds; consumption dominance;

Find related papers by JEL classification:
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
I32 - Health, Education, and Welfare - - Welfare and Poverty - - - Measurement and Analysis of Poverty

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  1. Paul Makdissi & Jean-Yves Duclos, 2002. "Socially-Improving Tax Reforms," Cahiers de recherche 02-01, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke, revised 2004. [Downloadable!]
    Other versions:
  2. Shahabuddin Mosherraf Hossain, 2003. "Poverty and Social Impact Analysis-A Suggested Framework," IMF Working Papers 03/195, International Monetary Fund.
  3. Sami Bibi & Jean-Yves Duclos, 2004. "Poverty-Decreasing Indirect Tax Reforms: Evidence from Tunisia," Cahiers de recherche 0403, CIRPEE. [Downloadable!]
    Other versions:
  4. Feldstein, Martin S & Taylor, Amy, 1976. "The Income Tax and Charitable Contributions," Econometrica, Econometric Society, vol. 44(6), pages 1201-22, November. [Downloadable!] (restricted)
  5. Russell Davidson & Jean-Yves Duclos, 1997. "Statistical Inference for the Measurement of the Incidence of Taxes and Transfers," Econometrica, Econometric Society, vol. 65(6), pages 1453-1466, November.
    Other versions:
  6. Hyun H. Son & Nanak Kakwani, 2004. "Economic growth and poverty reduction: initial conditions matter," Working Papers 2, International Policy Centre for Inclusive Growth. [Downloadable!]
  7. Stanley Sang-Wook Cho & Sònia Muñoz, 2003. "Social Impact of a Tax Reform: The Case of Ethiopia," IMF Working Papers 03/232, International Monetary Fund. [Downloadable!]
  8. Younger, Stephen D, et al, 1999. "Tax Incidence in Madagascar: An Analysis Using Household Data," World Bank Economic Review, Oxford University Press, vol. 13(2), pages 303-31, May.
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  10. David E. Sahn & Stephen D. Younger, 1999. "Dominance Testing of Social Sector Expenditures and Taxes in Africa," IMF Working Papers 99/172, International Monetary Fund.
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  12. Yitzhaki, Shlomo & Lewis, Jeffrey D, 1996. "Guidelines on Searching for a Dalton-Improving Tax Reform: An Illustration with Data from Indonesia," World Bank Economic Review, Oxford University Press, vol. 10(3), pages 541-62, September.
  13. Paul Makdissi & Quentin Wodon, 2007. "Poverty-Reducing and Welfare-Improving Marginal Public Price and Price Cap Reforms," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(4), pages 683-698, 08. [Downloadable!] (restricted)
    Other versions:
  14. Yitzhaki, Shlomo & Slemrod, Joel, 1991. "Welfare Dominance: An Application to Commodity Taxation," American Economic Review, American Economic Association, vol. 81(3), pages 480-96, June. [Downloadable!] (restricted)
    Other versions:
  15. Deaton, A. & Grimard, F., 1992. "Demand Analysis and Tax Reform in Pakistan," Papers 85, World Bank - Living Standards Measurement.
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