Is the Value Added Tax Reform in India Poverty-Improving? An Analysis of Data from Two Major States
PEP working paper serie 2007-18
31 Pages Posted: 21 May 2018 Last revised: 12 Jul 2018
Date Written: May 1, 2007
The Value Added Tax (VAT) was introduced in India in place of Sales Tax, taking effect in April 1, 2005. These taxes are in the domain of different state governments within the country’s federal set up. Although VAT is widely acclaimed to be a better system than the sales tax on grounds of efficiency in tax collection, no study has been undertaken to assess the impact of this reform measure on social equity. This paper addresses this need with the use of concentration curves and consumption dominance curves of various orders. The simulations were done on two major states in India, namely Maharashtra and West Bengal, using National Sample Survey Unit Level data for the 55th round. The results show that the reform is largely pro-poor, although there are ways to improve it with respect to some items predominantly consumed by the relatively poorer groups.
Keywords: Value Added Tax, Marginal Tax Reform, Public Distribution System, Concentration curve, Lorenz ratio, Marginal Efficiency Cost of Funds, Consumption Dominance
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