Available evidences show that Value Added Tax (VAT) has been quite revenue productive in the case of most Indian states. This paper enquires into the factors contributing to it by piecing together evidences from various sources. There are four major factors—harmonization of the rate structure, abolition of exemptions and concessions to industries, widening of the tax base, and reduction in compliance cost—behind the revenue productivity of VAT. The paper argues that the transparency that VAT has brought about in the tax structure and the whole process of tax compliance and the reduction in compliance cost have been more important than the widening of the tax base that VAT is supposed to have brought about. In the context of switching over to Goods and Services Tax (GST), this factor has important implications.

The introduction of Value Added Tax (VAT) in India was preceded by strong apprehensions on the part of states about its revenue performance. The center had to reassure them by announcing a compensation package for the first three years. But the revenue performance of VAT during the last five years in the case of most states has been quite encouraging. Though a host of factors and processes have worked behind this, no attempt has been made to analyze it in some depth. This paper makes an attempt to understand it more closely by identifying the major factors and piecing together available evidences from various sources. The paper argues that the transparency that VAT has brought about in the tax structure and the whole process of tax compliance and the reduction in compliance cost have been more important than widening of the tax base that VAT is supposed to have brought about. In the context of switching over to Goods and Service Tax (GST), this factor has important implications.

Public Finance journal, Tax Buoyancy, Corporation Tax in Pre- and Post-Liberalization Periods, Economic Policy, Financial Reforms, Corporation Income Taxation, Economic Development, Gross Domestic Product, GDP, Linear Regression Equation, Augmented Dickey-Fuller, Vector Error Correction Mechanism, Domestic Companies, Corporate Development.