Goods and services tax, cascading, and revenue performance: Analyzing Indian commodity taxation market

• Author: Ishfaq A. Khoja,Naseer A. Khan
• Published date: 01 August 2020
• Date: 01 August 2020
• DOI: http://doi.org/10.1002/pa.2109

ACADEMIC PAPER

Goods and services tax, cascading, and revenue performance:

Analyzing Indian commodity taxation market

Ishfaq A. Khoja

1

| Naseer A. Khan

2

1

Department of Economics, School of

Humanities and Social Science, Indian Institute

of Technology Indore, Indore, Madhya

Pradesh, India

2

Faculty School of Economics, University of

Hyderabad, Telangana, Hyderabad, India

Correspondence

Ishfaq A. Khoja, Department of Economics,

School of Humanities and Social Science,

Indian institute of Technology Indore, Indore,

Madhya Pradesh 453552, India.

Email: ishfaqmajeed.ku@gmail.com

Indian economy has finally introduced an improvised value-added tax commonly

known as goods and services tax (GST) with an explicit focus to target cascading.

Cascading is by far the most serious issue of a tax structure as it leads to many other

challenges like opaqueness, complexity, evasion besides deadweight losses. GST is a

fiscal policy reform aimed at integrating and harmonizing the Indian tax structure and

hence reduce the incidence of cascading. This study is an attempt to empirically ana-

lyze the possible impacts of GST on the cascading and hence revenue collection in

the Indian economy. The study has employed a simple but representative simulta-

neous equation model representing the commodity taxation using time series data

from 1990 to 2017. This study finds that reduced cascading under GST will enhance

the revenue efficiency of the Indian commodity tax structure. The findings are cor-

roborated by the post-GST revenue performance of Indian states and the central

government.

1|INTRODUCTION

Indian economy has finally undertaken the much-needed fiscal reform

in the form of implementation of multistage comprehensive value-

added tax (VAT) encompassing both goods and services (GST).

1

At the

time of independence, the Indian economy inherited a tax structure

regressive in nature with an antitrade bias both domestic and interna-

tional (Purohit, 1992). However, overtime alternative fiscal reforms

aimed at introducing a seamless tax structure were incorporated in

the fiscal sector of the country. The introduction of VAT at the state

level was the first step toward a more transparent and competitive

tax structure with expansion in the tax base, better tax compliance,

and increased tax buoyancy (Mukherjee, 2015). The design of the

VAT was largely based on the Bagchi Report of (1994), mainly con-

cerned about the problems of state tax structure and its domestic

antitrade bias.

2

However, Indian economy could not introduce a har-

monized VAT at the subnational level for at least two explicit reasons,

that is, the constitutional arrangements governing division of fiscal

powers and consistent reluctance on the part of Indian states. More-

over, a VAT structure, that may be feasible for a unitary form of gov-

ernment need not be suitable for federation like India (Challaiah,

1973; Purohit, 2002). Apart from these challenges, the basic design of

VAT was not the perfect innovation as it has many inherent

inconsistencies. These issues are classified into psychological issues,

structural problems, and problems related to administration (Purohit,

1993).

3

One of the basic issues that continued even under VAT regime

was the incidence of cascading in the Indian tax structure. Cascading

implies double taxation or the incidence of a tax on some already paid

taxes. This double taxation leads to a snowball effect and hence gives

rise to many other complications in a tax structure. Although the

intensity of cascading was targeted to a larger extent, the reform

could not yield a completely seamless tax structure (Mukherjee, 2015;

Purohit, 2002; Poddar & Ahmad, 2009). Cascading of taxes is the

most controversial issue in the area of taxation with alternative but

competing arguments both in-favor and against. Those who favor cas-

cading or keep neutral stand for the issue argue that there is no harm

in cascading as it leads to the transfer of resources from the general

public to the government exchequer. However, over time, this line of

reasoning has experienced intense criticism at the hands of

researchers and policymakers along different dimensions.

Since cascading implies double taxation, it leads to an increase in

the general price level of the economy thus inflation, implying a diver-

sion of resources from weaker sections to richer sections of the soci-

ety (Keen, 2013). This may defeat the purposes of equity in a tax

structure wherein those with lower ability to pay are taxed more and

Received: 16 December 2019 Revised: 15 January 2020 Accepted: 3 March 2020

DOI: 10.1002/pa.2109

J Public Affairs. 2020;20:e2109. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of11

https://doi.org/10.1002/pa.2109