Tax System Reforms in India: The
Centre-State Dimension
M. Govinda Rao
Director, National Institute of Public Finance
and Policy
Coordinating Tax System Reform In
Indian Federalism
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Introduction
Major problems with Indian Indirect tax system.
Coordinated calibration indirect taxes.
Recent reforms in indirect taxes.
Transitional steps to evolve VAT.
An assessment of design and implementation of State
VAT in India.
The idea of GST: desirability, feasibility and transitional
steps.
An agenda for tax reforms in a globalising environment.
Introduction
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Need for a paradigm shift in tax policy in a market economy.
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Compensating revenue loss from customs.
Minimising the three costs of taxation.
Enhancing revenue productivity of the tax system.
Re-look at fiscal assignments.
History of Indirect taxation:
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The assignments
Evolution: From clearance based excise duties to account based
CENVAT.
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Service taxation and its coordination with taxation of goods
Reform of the sales tax system to move towards a state VAT
Characteristics of indirect system: narrow base, high and
differentiated rates, complicated structure, poor information
system. Negotiated tax system.
Low revenue productivity and high degree of distortions and inequity.
Several committees and study reports on tax system reform during the
last five years. Many of the reform issues have been identified.
A major issue relates to evolving a coordinated consumption tax
system in the country. This presentation deals with this issue.
Major Problems with Indirect Tax System
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Major Problems with Indian Indirect tax System
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Low revenue productivity despite reforms.
Declining revenues mainly due to the inability of domestic trade taxes
to compensate revenue loss from reduction in import duties.
Disproportionate distribution of burden between sectors;
Poor information system and low tax compliance;
Customs duties: large exemption list; rate differentiation based on the
stage of production;
Octroi: problems
Small is beautiful: excessive concession to small scale industries from
excise duties;
Area based exemptions; Special economic Zones.
Taxes on inter-regional transactions – several tariff zones within the
country.
Multiple objectives: selectivity and discretion in exemptions, rate
structure and input tax credit.
Tax - GDP Ratio in Different Countries
50
45
Tota Tax GDP ratio
40
35
30
25
20
15
10
5
0
0
10000
20000
30000
Per Capita PPP
40000
50000
60000
Tax - GDP Ratios in Different Contries (According to Per Capita GDP)
50
45
Total Tax GDP Ratio
40
35
30
25
20
15
10
5
0
0
5000
10000
15000
20000
25000
Per capita GDP
30000
35000
40000
45000
Trends in Tax Revenue in India
(Per cent of GDP)
1991-92
1995-96
2000-01
2001-02
2002-03
2003-04*
2004-05#
Centre
Direct Indirect
2.4
8.0
2.8
6.5
3.3
5.8
3.0
5.2
3.4
5.4
3.8
5.4
4.3
5.6
Total
10.3
9.4
9.0
8.2
8.8
9.2
9.9
Direct
0.2
0.2
0.2
0.2
0.2
0.2
Na
States
Indirect
5.3
5.2
5.4
5.4
5.7
5.8
na
Total
5.5
5.4
5.6
5.6
5.9
6.0
na
Direct
2.6
3.0
3.4
3.2
3.5
4.0
na
Note: * Actual for the centre and revised estimate for States. #Revised estimates for Centre.
n.a: not available.
Source: Public Finance Statistics, 2003-04. Ministry of Finance, Government of India.
Total
Indirect
13.3
11.7
11.2
10.6
11.1
11.2
na
Total
15.8
14.8
14.6
13.8
14.6
15.2
na
Coordinated Calibration of Indirect Taxes
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Problems with domestic trade taxes
Reform of Union excise duties; towards a MANVAT.
Taxation of Services; Issues of reform; Integration with
taxation of goods;
Reforming the sales tax system towards a destination
based VAT
Need to have a coordinated calibration to limit the tax
burden.
Introduction of VAT in States
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Progress in VAT introduction
Revenue implications
Problems of design
Implementation issues
Further reforms:
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Phasing out the CST
Concurrent tax on services
Integration of other taxes
Correcting the design
Strengthening the information system
Risk-weighted sample selection for detailed auditing
Speeding up the appellate system.
GST: Desirability, Feasibility and
Transitional Steps
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Kelkar reforms and a blueprint for dual VAT.
Kelkar II reforms and the idea of GST.
Why is GST important: Tax harmonisation vs fiscal
autonomy.
Steps involved:
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Concurrent tax powers;
From CENVAT to GST at the centre
VAT of goods and services at the state level
Merger of the two: Should there be separate tax
administrations or Piggybacking arrangement?
Substitution of Octroi with a local turnover tax at the last
point of sale.
Critical Issues in Tax System Reform
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Need to have reforms for improving the revenue
productivity, minimize distortions and improve equity;
Tax reforms are needed at Central, state as well as
local levels.
Need to ensure a common market;
Tax harmonisation with sub-national fiscal autonomy.
Integration of tax on goods with services.
Tax Administration is tax policy: Importance of
information system and information exchange;
Strengthening TIN.
Need to reduce selectivity and discretion in tax policy
and administration;