Indian Public Finance
Value Added Tax
- Under the constitution the States have the exclusive power to tax sales and purchases of goods other than newspapers
- There are however defects of sales tax
- It is regressive in nature. Families with low income a larger proportion of their income as sales tax.
- Has a cascading effect – tax is collected at all stages and every time a commodity is bought or sold
- Sales tax is easily evaded by the consumers by not asking for receipts.
- VAT is the tax on the value added to goods in the process of production and distribution.
- With the implementation of VAT, the origin based Central Sales Tax is phased out.
- Introduced from April 1, 2005
- Is a neutral tax. Does not have a distortionary effect
- Imposed on a large number of firms instead of at the final stage
- Easier to enforce as tax paid by one firm is reported as a deduction by a subsequent firm
- Difficult to evade as collection is done at different stages
- Incentive to produce and invest more as producer goods can be easily excluded under VAT
- Encourages exports since VAT is identifiable and fully rebated on exports
- Difficulties in implementing
- For collection of VAT all producers, distributers, traders and everyone in the chain of production should keep proper account of all their transactions
- Bribing of sales tax officials to escape taxes
- The government has to simplify VAT procedures for small traders and artisans
Goods and Services Tax
- Has not yet been introduced because of the support of opposition in Rajya Sabha
- Borrowing by the State governments is subordinated to prior approval by the national government <Article 293>
- Furthermore, State Governments are not permitted to borrow externally unlike the centre.
- The aggregate stock of public debt of the Centre and States as a percentage of GDP is high (around 75 pc)
- Unique features of public debt in India
- States have no direct exposure to external debt
- Almost the whole of PD is local currency denominated and held almost wholly by residents
- The PD of both centre and states is actively managed by the RBI ensuring comfort the financial markets without any undue volatility.
- The g-sec market has developed significantly in recent years
- Contractual savings supplement marketable debt in financing deficits
- Direct monetary financing of primary issues of debt has been discontinued since April 2006.
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