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.