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.
Spacial articlas
Rate War, Race to the Bottom
and Uniform State VAT Rates
An Empirical Foundation for a Difficult Policy Issue
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.
R STHANUMOORTHY
A
federation involves a national/federal government and a set of sub-national/local governments (such as states). The fiscal federalism literature suggests how various functions can be assigned to different levels of government and how they can be financed using fiscal instruments such as taxation and intergovernmental transfers. It further suggests that sub-national governments (SNGs) should avoid non-benefit taxes on mobile bases such as income (or) capital/production [Musgrave 1959; Oates 1972, 1999]. This is because a mobile tax base can migrate across jurisdictions to avoid the tax and thus produce an excess burden (the normative argument) and may lead to low or zero tax rates in equilibrium (the positive argument).
However, in reality many SNGs rely heavily on non-benefit taxes on mobile tax bases.1 Since mobile bases can move across boundaries of jurisdictions due to favourable/unfavourable tax treatment, each governmental unit will have an incentive to fix a low rate or provide tax incentives. Suppose one unit increases its tax rate, the other units will have an incentive to reduce/retain their rates, thereby increasing the tax base. Thus, any single government can increase its tax base at the expense of others by reducing its tax rate. The presence of such interdependence among SNGs in making their tax rate choices is termed as inter-jurisdictional tax competition (IJTC) or rate war in the public finance literature.2 The ramifications of IJTC include rate differentials, low level of taxes (popularly known as a race to the bottom in rates), revenue losses, under provision of public goods, distortion of location of mobile economic sources,3 tax exportation,4 regressive taxation5 and regional disparities.6
India has a federal system of government comprising a central government and state governments.7 Both the governments undertake certain spending responsibilities and for both of them tax is the major source of revenue. Among the state taxes, the sales tax (now replaced by VAT in many states) levied on the sale of goods within and across the boundaries of the state had been the major own tax revenue.8 It accounted for about 60 per cent of the total own tax revenue of all the major states taken together during the 1980s and 1990s. The sales tax, which is a non-benefit tax, falls mainly on consumption/trade, but also on production, both of which can migrate. For instance, consumers of a high-tax state can purchase a commodity from a low-tax state to take advantage of tax rate differentials. Similarly, investors can shift their location of production in accordance with the tax concessions/breaks offered by the governments. The fact that each state had its own sales tax legislation and that both trade and investment could move across state boundaries in response to favourable/unfavourable tax treatment, each state had an incentive to fix a low rate or to provide tax incentives in order to attract trade and investment. Thus, sales tax competition in India takes two forms. The first is to promote trade/sale within the territory of a state by attracting consumption/purchase of goods by residents of other states, i e, competition for trade. This is made possible by way of tax rate reduction on sale within a state. The second way is to attract investments/industries by extending various tax concessions like tax-free sale of finished goods and tax holidays. This is known as competition for investments.
Various committees/commissions and independent studies such as Tulasidhar and Rao (1986), Rao and Vaillancourt (1994), Venkatesan (2000), Rajaraman et al (1999) and Shanmugam and Sthanumoorthy (2004) have dealt with these two types of sales tax competition. However, only Shanmugam and Sthanumoorthy (2004) provide empirical evidence of the existence of tax competition among Indian states for trade.9 But no attempt has so far been made to provide empirical evidence on race to the bottom in rates. More importantly, although the theoretical works prove the relevance of IJTC in the sphere of commodity tax choice of SNGs and predict that IJTC could result in a race to the bottom in tax rates in such cases, the empirical studies analysing these aspects are virtually absent in IJTC literature.10 Hence, some scholars [Oates 1999; Brueckner 2000] consider the description of IJTC as involving a “race to the bottom” in rates as misleading and an effective rhetorical device. They only point to a “downward bias” in tax rates caused by the fear of migration of tax bases, without necessarily predicting an extreme outcome of one jurisdiction cutting its tax rates, only to be outdone by other jurisdictions, in a process that leads to a downward spiral to the “bottom”. This stand is taken due to the absence of concrete empirical evidence on such an outcome [Oates 1999]. In this background, this paper is intended to empirically examine the presence and nature of rate war/tax competition11 and race to the bottom tendency among the southern states in India in choosing their sales tax rates using data from 1980-81 to 1999-2000. The questions addressed in this paper are: whether a rate war and race to the bottom exist among Indian states? If so, are they a generalised phenomenon or commodity specific? Are the current VAT rate structure and the decision of some states to opt out of VAT causes of concern from the point of view of trade diversion and rate war?12
These questions assume extreme significance in the context of the recent decision of majority of the Indian states to switch over to a VAT regime. One of the objectives of VAT introduction was to curb trade diversion and rate war among the states by ushering in a regime of uniform tax rates across states. As the White Paper on State-Level Value Added Tax remarked, the proposed VAT system would “stop unhealthy tax-rate ‘war’ and trade diversion among the states, which had adversely affected interests of all the states in the past (p14)”. However, after implementation, it has been noticed that on several commodities VAT rates differ from state to state [Bagchi 2005; Bagchi and Poddar 2005].13 In addition, the decision of some of the states to opt out of VAT system is reported to have resulted in rate differences between VAT and non-VAT states.14 Such variations in tax rates are feared to result in diversion of trade, tax competition and the consequent race to the bottom in rates [Rustagi 2005; Patnaik 2005].15 In view of these it has been suggested to arrive at complete uniformity of VAT rates across states so that trade and industry will have no incentive to move across states in response to differences in tax rates [Rustagi 2005; Patnaik 2005]. Moreover, uniformity of rates reduce compliance cost for business, administration cost for governments and help to establish common market. Efforts have been made by the Empowered Committee of State Finance Ministers (ECSFM) to arrive at uniform VAT rates. But so far they have yielded only limited results.16 However, the insistence on uniform VAT rates has drawn flak from sections of policymakers and analysts mainly on grounds of preserving the fiscal autonomy of states. It has been argued that uniform rates would deny the states the autonomy in determining their tax rates, which is desirable to enable them to raise revenues according to their expenditure requirements [Bagchi 2005; Purohit 2005]. As an alternative, a uniform floor rates (UFR) system has been suggested.17 Under this, states are given the freedom to levy rates, which can be higher than or equal to the floor rates prescribed on any of the commodity, but cannot go below the floor rates. Such a system, it is argued, will not only retain states’ freedom to levy their rates to the extent that they cannot go below the floor rate but also check trade diversion, rate war and race to the bottom in rates.18 However, the UFR system is not without problems. It may not help to reduce the number of rates and to eliminate rate differentials fully as the states will have to adhere only to floor rates. The best example is the rate structure that prevailed under the UFR system adopted by the states as a precursor to the introduction of VAT.19 It was found that the number of rate slabs were large in many states, ranging from eight in Madhya Pradesh to 15 in Tamil Nadu, Uttar Pradesh and West Bengal, and that rate differences persisted among states.20 This has occurred mainly because many states levied higher than the prescribed floor rates on several commodities [Purohit 2001]. Thus, it is clear that neither a uniform rate nor a UFR can be optimal and effective solutions to check diversion of trade, tax competition and a race to the bottom. Any alternative solution should not only help to eliminate these possibilities but also provide a reasonable level of autonomy for states in choosing their rates. The best way to achieve this is to allow the states to choose their VAT rates on commodities which are not prone to trade diversion, rate war and a race. In case of commodities that are susceptible to these tendencies the states should apply uniform rates. Given that the full uniformity in rates has been difficult to come by,21 this appears to be the second best possible option. Unfortunately, the adoption of an effective solution like this has been hampered by the lack of appropriate empirical evidence on the phenomena of rate war and race to the bottom in rates. The current tendency is to attribute trade diversion to rate differentials in respect of all commodities no matter whether the commodity in consideration is susceptible to trade diversion or not. Hence, a study may be useful to test the existence rate war among Indian states and its race to the bottom effect on tax rates.
The state governments in India levy sales tax/VAT on a large number of commodities. Therefore, it is a daunting task to collect time-series information on commodity-wise tax rates applicable in all the Indian states. Significantly enough, to the knowledge of this author, such information is not available in a consolidated form for any of the states.22 In view of this, the present study considers for analysis five border-sharing southern states, namely, Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Pondicherry23 and a select number of commodities, chosen on the basis of their revenue significance and discussions with the officials of the department of commercial taxes (DCTs) in the southern states. The geographical closeness of the southern states as well as the presence of traditionally low tax regime of Pondicherry provides ample scope for analysing the questions posed above. The paper is organised as follows. Section I provides a description of the study methodology and data source. In Section II, results of the
Economic and Political Weekly June 17, 2006 study are presented. The summary and policy conclusions of the study are provided in Section III.
IIIII
Methodology and DataMethodology and DataMethodology and DataMethodology and DataMethodology and Data
To examine the rate war and race to the bottom, we employ a slight variant of the methodology adopted in studies that relate changes in rate differentials to tax competition.24 These studies consider smaller tax differentials (computed by dispersion measures such as range or standard deviation (SD)/coefficient of variation
(CV) in the tax rates) at a point of time or a narrowing of the tax differentials (i e, convergence of rates) over a period of time as evidence of the presence of tax competition. The intuition is that jurisdictions in their attempt to prevent tax-engendered losses of mobile tax bases to other jurisdictions prefer to “mimic” the tax policies of others. However, the use of dispersion measures to examine a rate war has two major defects. Firstly, apart from tax competition, tax differences may emerge among jurisdictions due to economic, social and political factors. For instance, variations in local economic conditions may contribute to tax differences across jurisdictions. Thus, dispersion measures fail to isolate rate differentials purely due to tax competition. Secondly, dispersion measures do not take into account another important outcome of tax competition, namely, race to the bottom in rates, which can be identified with falling mean tax rates [Becsi 1998]. Verifying tax competition without additional information about the race to the bottom in rates may lead to misleading conclusions about its presence or absence. This is because tax competition may not always produce convergence of rates. It may lead to convergence or divergence of rates depending upon which jurisdictions – above average or below average tax jurisdictions
– are the main movers in exerting tax changes in the rate war game. To see this, note that changes in dispersion and the mean of tax rates depend upon whether the jurisdictions that initiate tax change would have an above average tax rate (hereafter above-average tax jurisdictions) or a below average rate (hereafter below-average tax jurisdictions). The mean and dispersion will move in opposite directions if the initiation is from below-average tax jurisdictions. If such jurisdictions reduce their rate, given that the rates of above-average jurisdictions remain constant,25 dispersion will tend to rise and the mean will fall. In this case, looking only at the dispersion measure will show the absence of tax competition when in fact it is present due to a falling mean tax rate. Alternatively, if the below-average tax jurisdictions raise their tax rates, the dispersion will tend to fall and the mean will rise. In this case looking only at the dispersion measure will show the presence of tax competition when in fact it is absent due to rising mean tax rates. The dispersion and mean will move in the same direction if the initiation is from above-average tax jurisdictions. When such jurisdictions lower their tax rates, assuming no change in the rates of below-average jurisdictions, the mean and dispersion will fall. In thiscase,looking at dispersion in isolation might not be a problem because of falling mean. Alternatively, if above-average tax jurisdictions raise their tax rates, both mean and dispersion will rise. In this case also looking only at dispersion will not lead to any misleading conclusion about the absence of tax competition because of the rising mean. Table 1 presents the four possible cases of mean and dispersion co-movements described above and their implications.
An important point emerging from the above discussion is that it is improper to examine a rate war with dispersion measures alone. For a meaningful analysis, we need to examine the co-movements of the mean and dispersion of tax rates [Becsi 1998]. Moreover, the inclusion of movement of mean tax rates in the analysis helps to test the race to the bottom effect of rate war.
Discussions with officials of the DCTs in southern states revealed that diversion of trade is generally commodity specific. For instance, consumers might find it more lucrative to purchase an expensive electronic gadget from a neighbouring low tax state than a commodity like toilet soap. Hence the relevant policy variable for analysis is the commodity-wise statutory sales tax rates.26 The fact that the number of commodity classifications coming under the sales tax net of southern states was numerous27 and that trade diversion is commodity specific have rendered the selection of commodities difficult. An important requirement for trade diversion is that the taxinduced price differential should be higher than the cost of transporting commodities from other states. This is typically possible in the case of greater monetary value/physical quantity of purchases associated with a single trip across the state border [Fisher 1980; Fox 1986; Rao et al 1991]. It follows that outof-the-state purchases would be lucrative for high priced-low volume (weight) and high priced-high volume commodities whose transport cost as a proportion of the value of the commodity would be much lower than that of low priced-low volume and low priced-high volume commodities.28 Views of the officials belonging DCTs of the southern states were sought to verify this point. They suggested that trade diversion takes place primarily in the cases of “high-value, low/high-volume and easily transportable” (hereafter HLE) commodities. It is generally claimed to be absent/limited for commodities that have “low-value, low/ high-volume and transportation difficulties” (hereafter LLD). In addition, it was found that most of the revenues of the southern states were generated from selected commodities. Therefore, based on the discussion with officials and revenue significance, 21 commodities were selected for the analysis. The commodity basket has a mix of commodities having the potential for trade diversion as well as those having limited/no possibility of trade diversion. The major HLE commodities selected are bullion and specie (hereafter bullion), computers, electrical goods, electronic goods, heavy vehicles, light commercial vehicles (hereafter LCVs), motor cars, motor vehicle chassis (hereafter MV chassis), motor vehicle tyres (hereafter tyres), photographic cameras (hereafter cameras) and two- and three-wheelers.29 The LLD commodities include cement, cosmetics and toilet preparations (hereafter cosmetics), diesel oil, Indian made foreign liquor (hereafter IMFL), lifts, liquefied petroleum gas (hereafter LPG), paints, petrol, sanitary and water fittings (hereafter sanitary fittings),30 and toilet soaps (hereafter soaps). The data on sales tax rates have
Table 1: Mean-Dispersion Combinations of Tax RatesTable 1: Mean-Dispersion Combinations of Tax RatesTable 1: Mean-Dispersion Combinations of Tax RatesTable 1: Mean-Dispersion Combinations of Tax RatesTable 1: Mean-Dispersion Combinations of Tax Rates
Mean Falls Mean Rises
Dispersion Falls Case A: Presence of rate war Case D: Absence of rate war
Dispersion Rises Case C: Presence of rate war Case B: Absence of rate war
Notes: Case A and Case B result when the main movers are the aboveaverage tax states. Case C and Case D result when the main movers are the belowaverage tax states.
Source: Adapted from Becsi (1998), pp 25.
compiled from sales tax act/law publications published by private publishing houses.31
IIIIIIIIII
Findings of the StudyFindings of the StudyFindings of the StudyFindings of the StudyFindings of the Study
The commodity-wise mean and CV of the tax rates are given in Tables 2 and 3.32 An analysis of trends in mean and CV in regard to HLE commodities shows that with the exception of electrical goods, the mean tax rates of all HLE commodities declined sharply between 1980-81 and 1999-2000. However, the movement of CV shows a mixed picture. Whereas the CV in sales tax rates of six HLE commodities, namely, bullion, camera, motorcar, MV chassis, two-wheelers and electrical goods have registered an increasing trend, in case of electronic goods, heavy vehicles, LCVs and tyres no particular trend was found.33 A comparison of these results with those of LLD commodities provides an interesting picture. Against falling mean rates of HLE commodities, the rates of all LLD commodities have increased significantly over the years, 1980-81 to 1999-2000. On the other hand, the CV in the rates of all the LLD commodities (except paints and sanitary fittings) have either decreased or remained more or less same during the same period.34 An analysis of trends in mean and CV between 1980-81 and 1999-2000 on a pointto-point basis reveals a slightly different picture. Except electrical goods the mean rates of all the HLE commodities have declined. Against this, the tax differences of majority of these commodities have increased over the years. The exceptions include tyres, bullion and motorcars. In case of LLD commodities, along with a falling CV in majority of the commodities, the mean rates have increased for all the commodities. These findings, in general, show that during the study period the falling mean tax rate of HLE commodities in the southern region was accompanied by rising interstate differentials (divergence) in the tax rates of these
Table 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE CommoditiesTable 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE CommoditiesTable 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE CommoditiesTable 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE CommoditiesTable 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE Commodities
Year Bullion and Cameras Computers Electrical Electronic Heavy LCVs Motor Car MV Chassis Tyres Two- and Three-Specie Goods Goods Vehicles Wheelers Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV
Source: Computed using data compiled from Sales Tax Act/Law Publications.
Table 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD CommoditiesTable 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD CommoditiesTable 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD CommoditiesTable 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD CommoditiesTable 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD Commodities
Year Cement Cosmetics Diesel Oil IMFL Lifts LPG Paints Petrol Sanitary Fittings Soaps Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV Mean CV
Source: Computed using data compiled from Sales Tax Act/Law Publications.
Economic and Political Weekly June 17, 2006 commodities.35 This suggests that a rate war and race to the bottom in rates have occurred in regard to HLE commodities. In case of many of the LLD commodities, a convergence of rates appears to have taken place along with continuously rising mean rates. This indicates absence of a rate war and race to the bottom tendency among the states. This evidence clearly demonstrates that a rate war and the resulting race to the bottom in rates are not generalised phenomena but are commodity specific, i e, they are bound to occur in case of commodities which (a) have high monetary value, (b) are low/high in volume, and (c) are easy to transport.36 The results also suggest that a race to the bottom in tax rates might not be a theoretically extreme case, as suggested by some, and can possibly emerge in practice. The rising trend observed in the rates of all LLD commodities throughout the study period suggest that in the absence of rate war states could fix rates optimally/efficiently. The findings also highlight the major defect of using the dispersion measure alone in examining tax competition. If we would not consider the movement of mean rates, we would have concluded wrongly that the tax competition has not occurred in respect of HLE commodities (due to rising CV), but occurred in respect of LLD commodities (due to falling CV).
An analysis of trends in mean rates of HLE commodities during the 1980s and 1990s provides an interesting picture. Against a falling trend in the 1980s, the mean rates of all these commodities except electrical goods, bullion, cameras, LCVs and tyres have increased significantly in the 1990s.37 The mean rate of MV chassis experienced the largest fall of 70 per cent in the 1980s followed by electronic goods (69 per cent), two- and threewheelers (67 per cent), computers (65 per cent), motor car (56 per cent), and heavy vehicles (36 per cent). Against this in the 1990s the mean rates of motor car, MV chassis, two and three wheelers, increased considerably by 87 per cent, 80 per cent, and 70 per cent respectively. In case of electronic goods, heavy vehicles and computers the rates increased slightly by 9 per cent, 5 per cent and 3 per cent respectively during 1990s.38 The falling mean rate of HLE commodities in the 1980s indicates that rate war was intensive for these commodities during this period. The rising mean rate, particularly of motor vehicle items, in the 1990s is attributed to two important developments. First, starting from 1993-94, many states, including the southern states, have taken efforts to reduce the complexity of their sales tax system by way of reducing the number of rate categories, increasing the rates, and simplifying rules and procedures.39 Second, in the 1990s three states, namely, Andhra Pradesh, Kerala and Tamil Nadu levied entry taxes on purchases of all kinds of motor vehicles and their parts by their residents from other states.40 This was mainly to prevent large-scale out-of-the-state purchase of motor vehicles, particularly from Pondicherry. Accordingly, the tax was levied on an “importer” of a motor vehicle, who can either be a person who brings a motor vehicle into a state from any place outside the state for use or sale therein or who owns the vehicle at the time of its entry into the state. In collecting the entry tax, the sales tax paid by the importer in the state/union territory in which the vehicle was purchased will be deducted out of the entry tax payable by him/her. However, the tax is collected in such a way as to deny any undue tax advantages/savings that may accrue to an importer of a motor vehicle from other lower tax states.41 Thus, the levy of entry taxes has made a difference to trade diversion and rate differential among southern states. Not only the entry taxes has narrowed down the rate differences among the southern states as evident from the falling CV of many of the motor vehicle items in the 1990s but also enabled the states to increase their tax rates of these items significantly in the 1990s.
To understand why divergence occurred in the rates of a majority of HLE commodities and convergence occurred in the rates of LLD commodities it might be useful to identify whether the rate changes were initiated by the states having higher than the average tax rate or by those having lower than the average rate. Recall from Table 1 that if the impulse is from below-average tax states, then either of the two possibilities, namely, a falling mean accompanied by a rising CV or a rising mean accompanied by a falling CV could emerge. On the other hand, if the impulse is from above-average tax states then either a combination of falling mean and CV or a combination of rising mean and CV could emerge. To verify whether this is indeed our case and to identify the states that cause the movement of mean and CV toward a particular direction, a five-year break up of statutory rates of all selected commodities for all the study states along with their mean and CV are presented in Table 4. The rates of main movers causing a change in the mean and CV of tax rates towards a particular direction between the periods 1980-81 and 1999-2000 are indicated in bold and the rates of movers between each time interval during this period are identified with brackets. Using Table 1 one can easily verify from the Table 4 that changes in mean and CV of the tax rates between a particular time interval depends upon whether the states that initiate the tax changes have above or below average tax rates in the begin period of that interval. The following are the major conclusions emerging from Table 4.
(i) Two below-average tax states, namely, Andhra Pradesh and Pondicherry by reducing their rates of electronic goods, LCVs, heavy vehicles, two- and three-wheelers, MV chassis and cameras were largely responsible for the falling mean tax rate and rising tax differentials (CV) of these commodities between 1980-81 and 1999-2000. In the case of computers the falling mean and raising CV was caused by tax rate reduction by the below-average tax states of Andhra Pradesh, Karnataka and Pondicherry. The reduction in the tax rates by above-average tax states of Andhra Pradesh, Karnataka and Pondicherry was the main cause for the falling mean and CV of motor cars while for bullion the falling mean and CV was caused by tax rate reduction by the aboveaverage tax states of Karnataka, Kerala and Tamil Nadu.
(ii) As regards LLD commodities, in case of six commodities below-average tax states have caused a rise in mean and a fall in CV by way of increasing their rates. They include Andhra Pradesh, Kerala and Pondicherry (for soaps), Karnataka, Tamil Nadu and Pondicherry (for IMFL), Kerala (for lifts), Tamil Nadu and Pondicherry (for petrol), Andhra Pradesh, Tamil Nadu and Pondicherry (for diesel oil) and Andhra Pradesh, Kerala and Pondicherry (for cement). For paints and sanitary fittings the increase in the tax rates by above-average tax states of Andhra Pradesh, Kerala and Tamil Nadu were responsible for the rising mean and CV of these commodities and in case of cosmetics the same was caused mainly due to significant increase in the tax rate of two above-average tax states, namely, Kerala and Tamil Nadu.
(iii) It appears that tax changes in the below-average tax states are mainly responsible for the rising tax differentials of many of the HLE commodities and falling differentials of many of the LLD commodities between 1980-81 and 1999-2000. A reduction in the tax rates of below-average states has increased the rate differentials of seven HLE commodities. They include electronic
Table 4: Dynamics of CV MovementsTable 4: Dynamics of CV MovementsTable 4: Dynamics of CV MovementsTable 4: Dynamics of CV MovementsTable 4: Dynamics of CV Movements
Year Andhra Karnataka Kerala Tamil Pondicherry Mean CV Year Andhra Karnataka Kerala Tamil Pondicherry Mean CV Pradesh Nadu Pradesh Nadu
Source: Compiled from Sales Tax Act/Law Publications.
Economic and Political Weekly June 17, 2006 goods, computers, LCVs, heavy vehicles, two- and three-wheelers, MV chassis and cameras. On the other hand, an increase in the tax rates in such states has led to a fall in the rate differentials of five out of ten LLD commodities (soaps, IMFL, petrol, diesel oil and cement) considered for the analysis.
(iv) It is important to point out that the above conclusion about changes in CV does not imply that the rates of above-average tax states with respect to HLE and LLD commodities were not subject to any significant change between 1980-81 and 19992000. The rates of these states have also been reduced and increased for HLE and LLD commodities respectively. However, it is the mismatch between rate reduction and increase in the below and above average states that has caused the CV to increase along with a falling mean in case of HLE commodities and CV to decrease together with rising mean in case of LLD commodities. That is to say, the magnitude of the fall in the rates of HLE commodities in the below-average tax states happened to be higher than that of above-average tax states and in case of LLD commodities the quantum increase in the rates was higher in below-average tax states than the above-average ones.
Given these results, it is of interest to verify whether the present rate structure in the southern states has the potential to cause trade diversion, and the resulting rate war and race to the bottom. Table 5 presents the prevailing VAT and sales tax rates on all the commodities selected for the study in the southern states. It is clear that except tyres, all other VATable commodities attract uniform rates in all the VAT states. However, in the case of commodities which are not covered under the VAT system, namely, diesel oil, IMFL and petrol, wide variations are witnessed across the states in tax treatment. The uniform VAT rates witnessed in general among the VAT states suggest that the new system has, to a larger extent ushered in a regime of total uniformity in rates across the states in respect of the commodities selected for this study. Obviously this should have eliminated the chances of trade diversion and rate war between the VAT states in respect of these commodities. One of the important drawbacks of the present VAT system is the failure of some states to join the system. This is expected to have resulted in wide rate differentials between VAT and non-VAT states and the resulting trade diversion. Hence it is useful to verify whether such a scenario has emerged in the southern states, where two states, namely, Tamil Nadu and Pondicherry have not implemented VAT. It is clear from Table 5 that for about 12 VATable commodities tax rates differ between VAT and non-VAT states.42 This shows that interstate tax disharmony is still a feature of Indian federalism and in the present case it has emerged primarily due to the differential rate policy adopted by the non-VAT states. However, as our empirical evidence suggests, from the point of view of trade diversion and rate war, what is of importance is the rate differences in regard to HLE commodities. The analysis of HLE commodities reveals that in case of six commodities the rates are similar/more or less similar among VAT and non-VAT states. They include bullion, computers, heavy vehicles, LCVs, motor cars and MV chassis. For electrical goods, electronic goods and two- and three-wheelers the rates differ significantly between Pondicherry and others. In case of camera the rates are significantly lower in Tamil Nadu and Pondicherry on comparing the VAT states. Finally for tyres the rates are similar in Karnataka, Kerala and Tamil Nadu but significantly lower in Andhra Pradesh and Pondicherry. The lower sales tax rates on some of the HLE commodities in non-VAT states, particularly Pondicherry, lent credibility to the apprehension that the non-existence of VAT in some states has the potential to cause shift of trade. The wide variation in the rates of LLD commodities between VAT and non-VAT states is not a cause for concern because diversion of trade generally does not occur for these commodities.
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Summary and Policy ConclusionsSummary and Policy ConclusionsSummary and Policy ConclusionsSummary and Policy ConclusionsSummary and Policy Conclusions
In federations where the SNGs such as states have the autonomy to levy (non-benefit) taxes on mobile tax bases, it is not uncommon to find mobility of tax bases across jurisdictional boundaries in response to favourable/unfavourable tax treatment. An implication is that each governmental unit will attempt to attract mobile tax bases into its territory at the expense of others by way of reducing its tax rate or by providing tax breaks. This generates an interactive behaviour among SNGs in making their tax choices, called IJTC or rate war. One major consequence of IJTC is that it results in a race to the bottom in tax rates. In India, IJTC emerge among the states in the sphere of sales taxes. Sales tax competition could take place in two ways. One way is to promote trade/sale of goods within the territory of a state by way of competitive reduction of tax rates, called a rate war. The other way is to compete for investments by extending various tax concessions. Despite the importance given to sales tax competition in the state tax policy debates, concrete empirical analysis of the phenomena of rate war and race to the bottom in rates is sparse. The full import of this can be understood from the current controversy surrounding the design of appropriate VAT rate structure for the
Table 5: Commodity-wise Tax Rates in Southern StatesTable 5: Commodity-wise Tax Rates in Southern StatesTable 5: Commodity-wise Tax Rates in Southern StatesTable 5: Commodity-wise Tax Rates in Southern StatesTable 5: Commodity-wise Tax Rates in Southern States
Commodities Andhra Karnataka Kerala Tamil Pondicherry Pradesh Nadu
Notes: 1 Where cost of such liquor is more than Rs 700 per case the rate is 90 per cent and if the cost is Rs 700 or below per case the rate is 70 per cent.
2 Depending upon the selling price. 3 Diesel oil, petrol and IMFL are subject only to sales tax levy in relevant states. 4 For beer and wine the rate is 60 per cent. Other than this, the rate is 90 per cent. 5 VAT/sales tax is not levied on liquor in Karnataka. It is subject to only state excise. Source: Compiled from Sales Tax or VAT Act/Law Publications.
states. The present uniform rate structure – imposed with the main objective of ending the unhealthy rate war among the states – has been criticised on the ground that it curbs the autonomy of the states in determining their rates. In its place, the critics suggest a uniform floor rate (UFR) system, which, they argue, will impose only partial and not total curbs on the tax sovereignty of the states. The fundamental problem with these policy options is that they both lack empirical evidence on the basic premise underlying them, namely, variations in rates would cause trade diversion and rate war among the states. As a result, the states have adopted the policy of uniform VAT rates in respect of all commodities, no matter whether a particular commodity is susceptible to trade diversion or not. However, the fact is that trade diversion may not occur in respect of all the commodities and may be commodity specific. As such, application of uniform rates or UFR on all commodities without understanding the sensitivity of the commodities towards trade diversion and rate war makes little sense, as it would deprive the states of the freedom to set their rates in respect of commodities, which are not prone to trade diversion and rate wars. In this context, this paper has made an attempt to empirically verify the existence and nature of rate wars among the southern states in India in the sphere of sales taxation in order to evolve a more appropriate VAT rate structure.
The results of the study reveal that rate wars indeed existed among southern states in fixing their sales tax rates. But it was present only in the case of HLE commodities. The result was a race to the bottom in rates. In case of commodities that have low-value, low/high-volume and transportation difficulties, rate wars were absent. This indicates that while the southern states have acted independently in choosing the rates of LLD commodities for which there is no/limited possibility of trade diversion, in case of HLE commodities, which are sensitive to trade diversion they have been involved in a rate war. Thus, rate wars and the resulting race to the bottom are not generalised phenomena but are commodity specific. Given this result, application of uniform rates for commodities that are not subject to rate wars would serve no useful purpose. Rather they deny the states a productive revenue source. Therefore, states can be allowed to maintain their autonomous status with respect to LLD commodities. For such commodities, each state should be allowed to choose the rates according to their economic conditions, revenue needs and the rate elasticities. Such an arrangement, to a larger extent, does not impinge on the states’ freedom to levy their own rates. At the same time, application of uniform rates on HLE commodities would help to achieve desired level of results in terms of controlling trade diversion and rate wars. It was pointed out by the referee to this paper that commodities likely to be subject to trade diversion and rate wars may vary from state to state. However, as demonstrated in this study, such commodities by and large appear to be common across the states. In any case, the ideal step would be to identify a common set of commodities that are prone to trade diversion across all states in consultation with the states. If there are any discrepancies in the list of commodities which are prone to trade diversion between the states, the policy options in their order of choice could be
(a) application of uniform rates among those states which perceive a threat of trade diversion in respect of a particular commodity. For instance, if Tamil Nadu and Kerala claim diversion of trade in respect of a particular commodity whereas Andhra Pradesh and Karnataka are not, then the former states can be asked to apply uniform rates, and (b) exemption of such commodities from the purview of uniform rates. In this context, what is perplexing is the decision of the ECSFM to enforce total uniformity in rates among the states across commodity groups. This only points to the absence of an empirical basis for such a major policy initiative. An analysis of the present rate structure in the southern states reveals that although full uniformity in the rates of a majority of the commodities selected for the study have been attained among the VAT states, the lower sales tax rates present in the non-VAT states, particularly in respect of a number of HLE commodities, have the potential to cause trade diversion in favour of non-VAT states and a resulting rate war. The recent threat by the Delhi government to reduce its VAT rate on bullion from 1 per cent to 0.25 per cent present in the non-VAT states of Rajasthan and Uttar Pradesh is a case in point.43 Hence non-VAT states must be persuaded to join the VAT system without further delay. Finally, on the downside, the study is region specific as it covers only the southern states. A study covering all the states and many more commodities may help to gain further insight into the issue. Any future research, therefore, should be on this lines. However, this does not prevent us from generalising the findings of this study for other states.
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Email: moorth@hotmail.com
NotesNotesNotesNotesNotes
[This paper is based on the author’s doctoral dissertation titled ‘Sales Tax Competition and Its Impacts on Rates and Tax Revenues in Southern States of India’ and awarded by the University of Madras. The author is grateful to K R Shanmugam, his supervisor, and Raja J Chelliah for their able guidance and constant encouragement, to A V Vedpuriswar, S Bhaskaran, Jeeja Bai Manay and Leena Mary Eapen for their careful reading and useful suggestions, and to an anonymous referee whose comments helped redesign the paper and clarify some points. The usual disclaimers, however, apply.]
1 The following are reasons for the incongruity between theory and practice:
(i) all tax bases except land are mobile, (ii) benefit taxes are highly impractical to apply as benefits accruing from public goods provision are difficult to measure, and (iii) benefit taxes are inequitable and politically unfeasible because the ability-to-pay principle is generally not taken into consideration.
2 There is another type of tax policy interdependence, called intergovernmental tax competition (IGTC), witnessed in a federation. The IGTC encompasses interaction between different levels of governments in choosing their tax levels – between national and state governments and between state and local governments – and emerges when two levels of government tax the same base [Goodspeed 1998].
3 Location inefficiency results when the location of economic resources is guided solely by the goal of obtaining a favourable tax treatment rather than by economic rationale [Oates 1972].
4 For instance, when the consumers of a high taxed state purchase commodities from a low taxed state then the latter collects the tax revenue which otherwise accrues to the former if the consumers there make home purchases.
5 For instance, competition for trade tends to reduce taxes levied on luxury goods as they are sensitive to trade diversion, which otherwise are to be taxed at higher levels.
6 If there is no “competitive equality” among the competing jurisdictions, tax competition tends to widen the disparities between the jurisdictions [Breton 1987]. In particular, richer jurisdictions, due to their superior financial position can compete more vigorously in attracting mobile tax bases than poorer jurisdictions. This will affect the revenues of poorer jurisdictions.
7 In addition, there are rural and urban local governments created by each state government. However, the local governments have been virtually defunct both in terms of performing any meaningful functions and raising resources.
8 The sales tax that is levied on the sale/purchase of goods within the state was termed as general sales tax (GST) and between the states as central
Economic and Political Weekly June 17, 2006
sales tax (CST). States levy the CST, subject to the overall ceiling rate prescribed by the centre, i e, 4 per cent for sale/purchase by registered dealers of different states and 10 per cent for the same by unregistered dealers.
9 Rao and Vaillancourt (1994) estimate the degree of tax disharmony between Indian states using CV measure. Tulasidhar and Rao (1986) and Rajaraman et al(1999) provide a quantitative analysis of cost and efficiencies of industrial incentives in the state of Madhya Pradesh. Venkatesan (2000) examine the similar issue in the context of competition among states to attract foreign direct investment by offering sales tax incentives. In contrast to the present study, Shanmugam and Sthanumoorthy (2004) employ econometric methodology to verify tax competition among southern states. However, their study covers only the 1990s.
10 Only Shanmugam and Sthanumoorthy (2004) provide empirical evidence of existence of commodity tax competition among SNGs. The empirical studies on IJTC can broadly be grouped as studies (a) relating the extent of rate differentials to tax competition [e g, Wheaton 1983; Fisher and Navin 1992; Rao and Vaillancourt 1994]; (b) testing the existence of tax competition or interaction in the sphere of property, corporate income, local and sales taxes [e g, Heyndels and Vuchelen 1998; Brett and Pinkse 2000; Brueckner and Saavedra 2001; Hayashi and Boadway 2001; Revelli 2001; and Shanmugam and Sthanumoorthy 2004]; (c) examining the effect of rate differentials on tax bases/revenues [e g, McAllister 1961; Mikesell 1971; Fox 1986]; and (d) analysing the impact of state-local taxes/tax incentives on firm/investment location and economic growth [e g, Tulasidhar and Rao 1986; Rajaraman et al 1999; Venkatesan 2000]. Notably, most of these studies are concerned with SNGs in US.
11 In the literature both the terms rate war and tax competition refer to the phenomenon in which sub-national governments compete to attract mobile tax bases by way of competitive reduction in tax rates or by offering tax incentives. Hence we use these terms interchangeably throughout this paper.
12 In April 1, 2005 when 22 states replaced sales tax system with VAT, eight states, namely, Gujarat, Rajasthan, Madhya Pradesh, Chhattisgarh, Jharkhand, Uttar Pradesh, Tamil Nadu and Uttaranchal have decided to opt out of VAT system. However, whereas Uttaranchal embraced VAT from October 1, 2005 all others except Tamil Nadu and Uttar Pradesh switched over to VAT regime from April 1, 2006.
13 See also ‘VAT Attack: States Yet to Adopt New Rates’, The Economic Times, May 21, 2005; ‘Chambers Seek Uniform VAT’, Business Standard, April 15, 2005; ‘VAT Rates Differ Across States’, Business Standard, April 23-24, 2005; and ‘States not Uniform on VAT Rates’, Business Standard, April 5, 2005.
14 Whereas, for all practical purposes, VAT states can operate only with two rates (4 and 12.5 percentages), the non-VAT states have several rate categories. For instance, the number of sales tax rates in the non-VAT states of Gujarat, Tamil Nadu, Madhya Pradesh, Jharkhand and Uttar Pradesh at present respectively is 12, 19, 10, 17 and 15.
15 Available evidences lent credibility to this apprehension. For instance, the higher VAT rates in the state of Delhi in respect of motor vehicle tyre and diesel oil, compared to the neighbouring VAT states, namely, Haryana and Punjab, were reported to have caused loss of trade to Delhi. In the first two weeks of VAT implementation, 50-60 per cent of tyre sales worth Rs 35-40 crore that should have been recorded in Delhi have moved to Haryana (‘Leaky VAT’, Business Standard (Editorial), April 19, 2005; ‘VAT Hits Bullion, Tyre, Hardware Trade in Delhi’, Business Standard, April 20, 2005). Similarly, there are reports of movement of jewellery and hardware sales from Delhi to its neighbouring non-VAT states, namely, Rajasthan and Uttar Pradesh, owning to low sales tax rates there (See ‘VAT Effect: Delhi’s Jewellers Eye Jaipur’, Economic Times, May 18, 2005). One could dismiss these instances as a temporary one since the new VAT system is just settling down. But efforts to eliminate VAT rate differences among the states have not yielded concrete results so far.
16 In a meeting of state finance ministers on this issue the states agreed to levy a uniform 4 per cent tax only on all industrial inputs, capital goods (barring a few, such as buildings), medicines and medical devices, and exempt certain essential items like lime salt, bread, khadi goods, gur and jaggery and items distributed through public distribution system from VAT levy. It was also decided that all states would notify the new VAT rates on these products within the end of April 2005. However, press reports suggest that the state governments have not issued any notifications yet on the revised rates. See ‘VAT Deal: It’s 4 Per Cent for Key Goods’, Economic Times, April 27, 2005 and ‘VAT Attack: States Yet to Adopt New Rates’, Economic Times, May 21, 2005.
17 Interestingly, this has been the stand of even the World Bank [World Bank 2005: 45].
18 Floor rates also prevent states from levying excessively high rate as it leads to migration of trade and industry to other low taxed states [Bagchi 2005].
19 The uniform floor sales tax rates agreed upon by the states were 0, 4, 8, and 12 per cent. In addition, there were two special rates of 1 and 20 per cent for certain select commodities.
20 Two reasons were attributed to this. First, instead of applying the proposed 8 per cent tax rate on all those goods that come under the “items not specified elsewhere” category, states imposed existing tax rates or new rates on such goods. Second, many states levied higher than the prescribed floor (minimum) rates on several commodities [Purohit 2001].
21 A recent admission by Ramesh Chandra, member-secretary of ECSFM is testimony to this. He is reported to have stated that “a complete convergence in tax rates is not possible as local issues differ from state to state.” See ‘Seven-states Allowed to Forgo UFR Rates on Diesel’, Business Standard, July 23-24, 2005.
22 Therefore, this study relies on the rate information provided in the sales tax act/law publications published by private publishers. These publications, which are made use of by the lawyers, tax practitioners, traders and tax officials, are considered as a reliable source of information.
23 Pondicherry is a “union territory” with a legislature. As such, it has most of the attributes of a state government. Hence throughout this paper the term “state” is used to refer Pondicherry. The geographical location of Pondicherry is unique because the state consists of four separate geographical areas spread within the boundaries of the other southern states: Pondicherry and Karaikal near Tamil Nadu, Mahe in Kerala and Yanam in Andhra Pradesh. The economy of each of these four sub-units is related to its hinterland in the respective state, and has little to do with the rest of Pondicherry as such. This is particularly true of Mahe and Yanam, which are economically integrated with Kerala and Andhra Pradesh, respectively, and cannot be said to have an autonomous existence. Even in the case of Pondicherry, the land area is non-contiguous, since there are several enclaves of Pondicherry within Tamil Nadu. The implication of this unique form of geographical location is that lower rates in Pondicherry will have a uniform effect in attracting trade from other border sharing states in the region. Another interesting point is that since Pondicherry falls in the category of union territory with a legislature, its expenditure requirement comes directly from the union home ministry. Hence it can indulge in a rate war vigorously.
24 The econometric studies that test the existence of tax competition would provide evidence of only the presence/absence of tax competition and not of the race to the bottom effect on tax rates [see Brueckner 2003 for an excellent description of the methodology used in these studies]. Hence to capture both these aspects in one single methodological framework, this study adopts a modified version of the methodology employed in studies that relate variations in rate differentials to tax competition.
25 We make this assumption to simplify the point. An explanation based on simultaneous tax changes in both categories of jurisdiction is complicated. For instance, in the present case if the above-average tax jurisdictions also reduce their rates the mean will tend to fall further but dispersion may fall or rise depending upon the extent of tax reduction exercised by both sets of jurisdictions. That is, if the magnitude of tax reduction in the below-average jurisdictions is higher than that of above-average jurisdictions then the dispersion will increase and if the magnitude of reduction in the above-average jurisdictions is higher than that of belowaverage tax jurisdictions then the dispersion will fall.
26 Rao and Vaillancourt (1994) use effective rate, measured as the ratio of sales tax revenue to state income, in examining tax competition among Indian states. The use of this measure has two major defects. Firstly, it may not adequately reflect the actual tax policy initiatives of the states as it is an outcome variable on which states have no or little control. This is because the numerator (sales tax revenue) and the denominator (state income) of the effective rate are influenced not only by pure tax policy (rate) changes but also by other economywide factors such as business cycles. Since our study is interested in examining the tax changes as outcomes of pure policy change, the employment of the effective tax rates is inappropriate. Secondly, effective tax rate is completely irrelevant in explaining tax-based competition to attract trade because, as explained below, trade diversion is generally commodity specific.
27 As on April 1, 1999, the number of commodity groups included in the sales tax acts of Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Pondicherry respectively is 257, 384, 213, 429 and 114. The situation is the same in other states as well.
28 Examples are electronic goods (high priced-low volume), motor car (high priced-high volume), toilet soap (low priced-low volume), and cement (low priced-high volume).
29 Heavy vehicles include omni buses, lorries and truckers. LCVs consist of jeeps, trekkers, vans and mini lorries. Two- and three-wheelers comprise motorcycles, motor scooters, motorettes, mopeds and autorickshaws.
30 This includes items like sinks, washbasins, washbasin pedestals, baths, showers, and water closet pans.
31 The tax variable used in the analysis is the commodity-wise general sales tax rate set by the sample states during the study period and is generally expressed in terms of percentage of sale/purchase value of commodities.
32 A graphical illustration of co-movements of mean and CV of the rates
of HLE and LLD commodities is available on request from author.
33 In case of computers both the CV and mean has fallen over the years.
34 The CV of cosmetics, diesel oil and petrol fell along with rising mean. In case of cement, IMFL, lifts, LPG and soap the trends in CV have no particular pattern.
35 Interestingly, in the 1980s also, the huge fall experienced in the mean rates of almost all of the HLE commodities has not resulted in any convergence in the rates of these commodities. Instead, as in the overall case, the rising CV accompanied the falling mean rate. The only exception is motor car in which case both the mean and CV have fallen.
36 In the light of the recent allegation by the Delhi government that the lower VAT rates on petroleum products in Haryana have caused revenue loss to it due to diversion of trade to the latter, one may wonder why there was no rate war in these products in the study states. The official explanation is that some forms of trade diversion do occur in case of commodities such as petroleum products and liquor. However, they are only isolated cases and hence do not affect tax revenues of the states significantly. For instance, motorists who travel from a high petroleum tax state to a low one may fill the fuel tanks in the low tax state. People/ tourists who visit a state, which has low tax rates on liquor may prefer to consume liquor from there. A very good example is Pondicherry, which has been attracting tourists mainly for its low liquor prices arising from low sales taxes on liquor there.
37 While the mean rate of cameras has declined both during the 1980s and 1990s by 33 and 63 per cent respectively, the rate of bullion experienced a 33 per cent increase in the 1980s, but declined in the 1990s sharply by around 65 per cent. In case of tyres and LCVs, mean rates have witnessed no particular trend in 1990s against a falling trend in the 1980s.
38 A similar trend is witnessed if we analyse the data on point-to-point basis as well.
39 The culmination of this reform process was the adoption of uniform floor sales tax rates, abolition of sales tax incentive for industries, and the recent implementation of VAT by the states.
40 Tamil Nadu was the first state in the region to introduce such a levy beginning from 1990-91, followed by Kerala and Andhra Pradesh respectively from the years 1995-96 and 1996-97.
41 This is made possible in two ways. One way is to collect entry taxes in such a manner as to completely eliminate the tax differentials between the states. Another way is to levy entry taxes so as to make the import of motor vehicles costlier than home purchases. Thus, for example, in Tamil Nadu during the year 1990-91 an importer of motor car from neighbouring Pondicherry was made liable to pay an entry tax of 2 per cent (that is 5 per cent entry tax minus 3 per cent tax paid in Pondicherry), thereby making his/her total tax liability to 5 per cent (2 per cent entry tax plus 3 per cent tax paid in Pondicherry). This 5 per cent tax liability was equivalent to the rate prevailing in Tamil Nadu. Similarly, in the year 1999-2000, an importer of motor car from Pondicherry was made to pay an entry tax of 9 per cent in Tamil Nadu. Coupled with the tax paid in Pondicherry (4 per cent) the total tax liability of the importer amounted to 13 per cent, which was higher than the rate applicable in Tamil Nadu. The implication is that in the presence of entry taxes consumers face no incentive to shop in the low tax states as the tax savings from such shopping get neutralised due to entry taxes.
42 This includes tyres in whose case rates differ among VAT states as well.
43 See ‘Delhi May Slash VAT on Bullion’, The Hindu, August 24, 2005.
Bagchi, Amaresh (2005): ‘VAT and State Autonomy’, Economic and Political Weekly, Vol 40, No 18, April 30-May 6, pp 1806-07.
Bagchi, Amaresh and Satya Poddar (2005): ‘Getting VAT Really Going’, The Economic Times, April 21.
Becsi, Zsolt (1998): ‘Fiscal Competition and Reality: A Time Series Approach’, Federal Reserve Bank of Atlanta Working Paper, WP 98-19.
Breton, Albert (1987): ‘Towards the Theory of Competitive Federalism’, European Journal of Political Economy, Vol 3, pp 263-328.
Brett, C and J Pinkse (2000): ‘The Determinants of Municipal Tax Rates in British Columbia’, Canadian Journal of Economics, Vol 33, pp 695-714.
Brueckner, Jan K (2000): ‘Welfare Reform and the Race to the Bottom: Theory and Evidence’, Southern Economic Journal, Vol 66, pp 505-25.
– (2003): ‘Strategic Interaction among Governments: An Overview of Empirical Studies’, International Regional Science Review, Vol 26, pp 175-88.
Brueckner, Jan K and Luz Amparo Saavedra (2001): ‘Do Local Governments Engage in Strategic Tax Competition?’, National Tax Journal, Vol 54, pp 203-29.
Fisher, Ronald C and John C Navin (1992): ‘State-Local Fiscal Behaviour: Analysis of Interjurisdictional Differences, 1962-87’, Public Finance Quarterly, Vol 20, pp 433-49.
Fox, William F (1986): ‘Tax Structure and the Location of Economic Activity Along State Borders’, National Tax Journal, Vol 39, pp 387-401.
Goodspeed, Timothy J (1998): ‘Tax Competition, Benefit Taxes and Fiscal Federalism,’ National Tax Journal, Vol 51, pp 579-86.
Hayashi, Masayoshi and Robin Boadway (2001): ‘An Empirical Analysis of Intergovernmental Tax Interaction: The Case of Business Income Taxes in Canada,’ Canadian Journal of Economics, Vol 34, pp 481-503.
Heyndels, Bruno and Jef Vuchelen (1998): ‘Tax Mimicking among Belgian Municipalities’, National Tax Journal, Vol 51, pp 89-101.
McAllister, H (1961): ‘The Border Tax Problem in Washington’, National Tax Journal, Vol 14, pp 361-74.
Mikesell, John L (1971): ‘Sales Taxation and the Border County Problem’,
Quarterly Review of Economics and Business, Vol 11, pp 23-29.
Musgrave, Richard M (1959): The Theory of Public Finance, McGraw-Hill,
New York. Oates, Wallace E (1972): Fiscal Federalism, Harcourt Brace Jovanovich, New York.
– (1999): ‘An Essay on Fiscal Federalism’, Journal of Economic Literature, Vol 37, pp 1120-49.
Patnaik, Illa (2005): ‘Wake Up, It’s VAT’, The Indian Express, April 24.
Purohit, Mahesh C (2001): ‘National and Sub-National VATs: A Road Map
for India’, Economic and Political Weekly, March 3, pp 757-72.
– (2005): ‘Do States Need Uniform VAT Rates?’, Economic Times (Face-Off), April 22.
Rajaraman, Indira, Hiranya Mukhopadya and Namita Bhatia (1999): ‘Industrial Incentives Schemes of the Government of Madhya Pradesh’, National Institute of Public Finance and Policy Study Report.
Rao, M Govinda and Francois Vaillancourt (1994): ‘Sub-national Tax Disharmony in India: A Comparative Perspective’, National Institute of Public Finance and Policy Working Paper, WP 4/94.
Rao, M Govinda, K N Balasubramanian and V B Tulasidhar (1991): Sales Taxation in Madhya Pradesh, Vikas Publishing House, New Delhi.
Revelli, F (2001): ‘Spatial Patterns in Local Taxation: Tax Mimicking or Error Mimicking?’, Applied Economics, Vol 33, pp 1101-07.
Rustagi, T R (2005): ‘Do States Need Uniform VAT Rates?’, Economic Times (Face-Off), April 22.
Shanmugam, K R and R Sthanumoorthy (2004): ‘Sales Tax Policy Interaction among the State Governments in India’, Journal of Quantitative Economics, New Series Vol 2, pp 147-63.
Tulasidhar, V B and M Govinda Rao (1986): ‘Cost and Efficacy of Fiscal Incentives: The Case of Sales Tax Subsidy’, Economic and Political Weekly, Vol 21, October 11, pp 1799-1806.
Venkatesan, R (2000): ‘Study on Policy Competition among States in India for Attracting Direct Investment’, National Council of Applied Economic Research, Monograph.
Wheaton, William C (1983): ‘Interstate Differences in the Level of Business Taxation’, National Tax Journal, Vol 36. Wilson, John D (1999): ‘Theories of Tax Competition’, National Tax Journal, Vol 52, pp 269-304. World Bank (2005): State Fiscal Reforms in India: Progress and Prospects, Macmillan, New Delhi.
A
IIIII
Methodology and DataMethodology and DataMethodology and DataMethodology and DataMethodology and Data
Table 1: Mean-Dispersion Combinations of Tax RatesTable 1: Mean-Dispersion Combinations of Tax RatesTable 1: Mean-Dispersion Combinations of Tax RatesTable 1: Mean-Dispersion Combinations of Tax RatesTable 1: Mean-Dispersion Combinations of Tax Rates
IIIIIIIIII
Findings of the StudyFindings of the StudyFindings of the StudyFindings of the StudyFindings of the Study
Table 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE CommoditiesTable 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE CommoditiesTable 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE CommoditiesTable 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE CommoditiesTable 2: Means and Coefficient of Variations of Statutory Sale Tax Rates – HLE Commodities 
Table 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD CommoditiesTable 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD CommoditiesTable 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD CommoditiesTable 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD CommoditiesTable 3: Means and Coefficient of Variations of Statutory Sale Tax Rates – LLD Commodities 
Table 4: Dynamics of CV MovementsTable 4: Dynamics of CV MovementsTable 4: Dynamics of CV MovementsTable 4: Dynamics of CV MovementsTable 4: Dynamics of CV Movements 
22222 
22222
22222 
(8)(8)(8)(8)(8) 
(8)(8)(8)(8)(8) 
44444 
(8)(8)(8)(8)(8) 
1010101010 
1212121212 
1212121212 
1212121212 
(10)(10)(10)(10)(10) 
(9)(9)(9)(9)(9) 
(3)(3)(3)(3)(3) 
(8)(8)(8)(8)(8) 
1010101010 
44444 
3030303030 
2525252525 
1616161616 
(8)(8)(8)(8)(8) 
(9)(9)(9)(9)(9) 
88888 
(8)(8)(8)(8)(8) 
44444 
55555
88888 
1212121212 
(12)(12)(12)(12)(12) 
1212121212 
(12)(12)(12)(12)(12) 
(6)(6)(6)(6)(6) 
(7)(7)(7)(7)(7) 
1010101010 
1212121212 
1515151515 
(12)(12)(12)(12)(12) 
(5)(5)(5)(5)(5) 
(3)(3)(3)(3)(3) 
1212121212 
(12)(12)(12)(12)(12) 
(12)(12)(12)(12)(12) 
(6)(6)(6)(6)(6) 
88888
88888 
1212121212 
(12)(12)(12)(12)(12) 
(5)(5)(5)(5)(5) 
55555 
22222 
IIIIIIIIIIIIIII
Summary and Policy ConclusionsSummary and Policy ConclusionsSummary and Policy ConclusionsSummary and Policy ConclusionsSummary and Policy Conclusions
Table 5: Commodity-wise Tax Rates in Southern StatesTable 5: Commodity-wise Tax Rates in Southern StatesTable 5: Commodity-wise Tax Rates in Southern StatesTable 5: Commodity-wise Tax Rates in Southern StatesTable 5: Commodity-wise Tax Rates in Southern States 
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ReferencesReferencesReferencesReferencesReferences 
