A major defect of the present state level VAT system has been the variations in tax rates between states. It is expected to result in diversion of trade, rate wars and a race to the bottom in rates. Hence, total uniformity in rates among the states has been stressed. However, this has attracted criticism because full uniformity would curb rate autonomy of states. A suggested alternative has been a uniform floor rate system. However, this may be ineffective in eliminating rate differentials among states. An appropriate solution might involve rate autonomy for the states on commodities which are not prone to trade diversion and rate wars. In the case of others, states should apply uniform rates. Unfortunately, this has been hampered by the lack of empirical evidence on rate wars and a race to the bottom among the states. This paper makes a modest attempt to provide empirical evidence on these phenomena in the context of tax rate setting behaviour of the southern states under the previous sales tax regime. The conclusions of the study are useful to arrive at an appropriate VAT rate structure for the states.
