An autonomous research institute under the Ministry of Finance

 

Revenue Implications and Economic Impact of Introduction of VAT in Assam

Publication date

Jan, 2003

Details

Report submitted to the Government of Assam

Authors

M. C. Purohit, Gautam Naresh, Ajay K. Halen

Abstract

Sales tax is one of the most important state taxes in Assam, yielding over 65 percent of its own revenue with central sales tax (CST) contributing about 20 percent of total sales tax revenue. However, the overall low performance of sales tax revenue has called for its reform. This study has recommended that introduction of VAT would immensely benefit the state as VAT is not only a buoyant source of revenue, but would also be efficient. The reforms necessary to strengthen the organisation for efficient administration of VAT to be adopted prior to its introduction include adequate client services to promote voluntary compliance; identify stop filers and defaulters; and maintain low administrative and compliance costs. Management information system is yet another key to tax administration. It is suggested that recent advances in the field of information technology be grafted in the areas of VAT management in Assam. The introduction of VAT would impact state’s own tax revenue in three ways, namely, (I) extension of the tax base into stages subsequent to the first-point up to the retail stage; (ii) providing set off on tax paid on inputs and in previous stages; and (iii) changes in the structure of tax rates. The study also attempts to estimate revenue neutral rate (RNR) and the likely combined losses of revenue, if the agreed RNR of 12.5 percent is adopted. It has also been identified that in addition to having revenue implications for the state, VAT would have direct as well as indirect impacts on several macroeconomic variables.

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