A VAT in India: Problems and Options

The Indian tax system has yielded substantial revenue increases in the last two decades but these have been outstripped by expenditure growth. A weak budgetary position, the • desire for trade and domestic liberalisation, the complexity and anomalies in the existing system and the weakness of direct taxation together point to the need for a major reform in indirect taxation. An obvious candidate is a VAT. While the benefits of a VAT in terms of economic efficiency are well known, its introduction in a federal context, such as India, poses problems. We review some conceptual issues and international experience with VAT. Careful consideration of questions relating to the choice of bases and rates, revenue sharing and tax administration will be required. A number of possible versions of a VAT in a federal context are identified. Each has its advantages and disadvantages and further research will investigate particular issues that arise.