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
Advantages
- 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

State Finances

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.

Public Debt

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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