Sub-National Value Added Tax in India: Problems and Prospects

The book is based on the report of a UGC sponsored major research project on state-level Value Added Tax (VAT) conducted by the author during the period 2003-06. VAT models of the major federal countries specially Brazil and Canada and federation like European Union were studied to find suitability of the system under the federal structure provided by the Indian Constitution. All the states of Indian Union, with the exception of Uttar Pradesh, replaced sales tax by VAT up to January 2007 without realizing the dichotomy that a National VAT model borrowed from other countries has been implanted on sub-national or state level.The paradox of rapid rise of VAT, referred as the most important tax development of the later half of the twentieth century on one hand and unresolved problems of the tax if it is managed by sub-national government in a federation on the other, seems to be irreconcilable. Empirical studies in many countries revealed that often-claimed theoretical advantage of the tax were rarely transformed into practice. Looking into global trends of VAT revenue, the myth of revenue potentiality of the tax prophesied by tax experts, IMF and the World Bank etc. is exploded. Non-revenue advantages of the tax like neutrality, production efficiency, checking cascading or tax evasion etc. were rarely materialized. Incorporating some VAT principles in the time-tested sales tax like a few rates and specified set off is suggested as better remedy to reform commodity taxation on sub-national level.