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Moving to Goods and Services Tax in India : Impact on India’s Growth and International Trade

  • Rajesh Chadha

    (National Council for Applied Economic Research)

The differential multiple tax regime across sectors of production leads to distortions in allocation of resources thus introducing inefficiencies in the sectors of domestic production. With regard to Indias exports, this leads to lack of international competitiveness of the sectors which would have been relatively efficient under distortion-free indirect tax regime. Further, there is lack of full offsets of taxes loaded on to the fob export prices. Efficient allocation of productive resources and providing full tax offsets is expected to result in gains for GDP, returns to the factors of production and exports of the economy. Implementation of a comprehensive goods and services tax (GST) is expected, ceteris paribus, to provide gains in Indias GDP somewhere within a range of 0.9 to 1.7 per cent. It is expected that the real returns to the factors of production would go up. Our results show gains in returns to land ranging between 0.42 and 0.82 per cent. Wage rate gains vary between 0.68 and 1.33 per cent. Returns to capital would gain somewhere between 0.37 and 0.74 per cent. In sum, implementation of a comprehensive GST in India is expected to lead to efficient allocation of factors of production thus leading to gains in GDP and exports. This would translate into enhanced economic welfare and higher returns to the factors of production, viz. land, labour and capital.

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Paper provided by East Asian Bureau of Economic Research in its series Trade Working Papers with number 23071.

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Date of creation: Jan 2009
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Handle: RePEc:eab:tradew:23071
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  1. Bird,Richard & Gendron,Pierre-Pascal, 2007. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9780521877657.
  2. M. Govinda Rao & Sen, Tapas Kumar & Jena, Pratap R., 2008. "Issues before the thirteenth finance commission," Working Papers 08/55, National Institute of Public Finance and Policy.
  3. M. Govinda Rao & R. Kavita Rao, 2005. "Trends and Issues in Tax Policy and Reform in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 2(1), pages 55-122.
  4. Peter B. Dixon & Maureen T. Rimmer, 1999. "The Government's Tax Package: Further Analysis based on the MONASH Model," Centre of Policy Studies/IMPACT Centre Working Papers g-131, Victoria University, Centre of Policy Studies/IMPACT Centre.
  5. G.A. Meagher & Brian R. Parmenter, 1993. "Some Short-Run Implications of Fightback: A General Equilibrium Analysis," Centre of Policy Studies/IMPACT Centre Working Papers g-101, Victoria University, Centre of Policy Studies/IMPACT Centre.
  6. Wittwer, Glyn & Anderson, Kym, 2002. "Impact of the GST and Wine Tax Reform on Australia's Wine Industry: A CGE Analysis," Australian Economic Papers, Wiley Blackwell, vol. 41(1), pages 69-81, March.
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