Value Added Tax Over Sales Tax: The Revenue Impact of Change in Tax Regime for Indian Economy
Year: 2025
Type: article
Abstract: This paper evaluates the fiscal implications of transitioning from a Sales Tax to a Value Added Tax regime in India, with a focus on state-level revenue performance. Using cross-sectional data from Indian states and a sectoral breakdown of Net State Domestic Product, the study analyzes changes in tax collection efficiency, economic output, and revenue generation before and after VAT implementation. The analysis employs a regression framework to estimate untaxed portions of output, using perceived anti-corruption effort as a key proxy for institutional effectiveness. Results indicate that while VAT initially increased the untaxed share of output—likely due to transitional administrative challenges, it also enhanced transparency and demonstrated a stronger correlation with improved tax compliance over time. The construction sector emerged as a consistently significant contributor to commercial tax revenue, highlighting sector-specific variations in tax performance. Overall, the findings suggest that despite early setbacks, VAT holds long-term potential for improving tax efficiency and state revenue mobilization in India.
DOI: 10.14419/hfbndx55
Authors: Koushik Kumar Hati, Sattwik Santra
Institution: Centre for Studies in Social Sciences Calcutta
Language: English
Topic: Economic and Fiscal Studies
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4413442055