Accounting for India's Forest Wealth - Madras School of Economics

Reduction of indirect tax rates led to a fall in the share of indirecttaxes in total taxes. This was compensated by a rise in the direct taxrevenues so that the overall tax revenue relative to GDP except for a fewinitial years of reforms did not fall. It may be noted that the ratereduction led to higher tax buoyancy in the case of direct taxes and fall intax buoyancy in the case of indirect taxes (Appendix Table A2). However,it has reduced the dependence of overall tax revenues on indirect taxesthereby facilitating the move to the next stage of reforms towards GSTwhere the risk of revenue shock to the system is less now than used tobe the case.Unfinished ReformsWhile the system of taxation is thus characterized by fragmentation andoverlaps in the case of goods, the taxation of services remains separatedand disjointed. The service tax is levied by the central government.Taxation of goods by either tier of government may cascade into taxationof services and vice versa since goods are needed in the production andsale of services and services are needed in the production and sale ofgoods. The nature of a modern economy is such that it is often difficultto draw lines between goods and services as these are embedded intoeach other. Considering the value added of goods and services takentogether in the overall Indian economy as providing a comprehensive taxbase, there are three kinds of segmentations that take place in Indiaunder the existing arrangements: segmentation of goods from services,segmentation of central jurisdiction vis-à-vis state jurisdictions, andsegmentation of production/manufacture from sale. These artificialdivisions for purposes of taxation lead to various distortions,administrative and compliance costs, and inefficiencies. These are alsonot consistent with prevailing tax practices in the modern economies ofthe world who have implemented a value added tax regime includingfederal countries.14