Vol. 5, Issue 5, Part D (2019)

Abstract
The National Institute of Public Finance and Policy's proposed method assesses the base in three steps. The goods base is first estimated at the level of the States. Data on actual collections and statutory rates are converted into a goods base to estimate this base. In other words, the estimation of the commodities base is based on the effective rate. The main presumption is that States collect revenues at the three rates—1%, 6%, and 14%—in a proportion that results in a total taxable base of Rs. 30.8 lakh crore in the absence of data for all the States. In the second stage, the services base is evaluated using 3.25 lakh enterprises' turnover data from the recently released MCA database (this base is estimated at Rs. 40.8 lakh crore). Third-stage changes are made to this base to exclude IT-related services due to their high export volume as well as the majority of real estate and financial services according to how these services will be handled under the GST. Then, taxable inputs utilised for service provision and services used as inputs into taxable manufacturing are deducted from the adjusted base using an input-output analysis. Coherent policy and efficient administration are needed. One potential benefit of a VAT over a cascading tax is that a tax-compliant company will want all of its suppliers to be compliant as well; otherwise, its input prices will increase by the tax amount that those suppliers have paid on their own inputs but cannot recover because they are noncompliant with the VAT's crediting mechanism. It can thus create "good" chains of compliance. However, by the same token, a noncompliant business desires that its suppliers do the same because, in such case, its input costs will increase by the full amount of the tax. Therefore, there can also be "poor" VAT chains. A fundamental administrative difficulty is promoting positive chains and preventing negative ones. The intrinsic power of a VAT can also be undermined by policy choices, possibly much more radically. Overly contrasting prices for distinct goods and services is one risk. The cost of administering and complying with the tax is undoubtedly increased by this; the lawyers, of course, love it. However, it could be a very ineffective strategy for attaining the goals of policymakers.