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Alesina, Alberto and R. Perotti, 1996, “Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects,” NBER Working paper 5730 (Cambridge: National Bureau of Economic Research).
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Bird, Richard, and P.P. Gendron, 2005, “VAT Revisited: A New Look at the Value Added Tax in Developing and Transition Countries,” paper presented at the USAID Workshop for Practitioners on Tax on May 4, 2005, (Washington: USAID).
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Prepared by Mark Flanagan.
One possibility is that expenditure cutbacks are less reversible, for example if canceling programs permanently weakens the lobby groups promoting them.
There is also a need to review remaining excises on energy products, alcohol and tobacco. See Chapter I for a discussion of petroleum excise taxation.
This approach can be characterized as a dual VAT. An alternative approach in a fiscal federal system is the CVAT, which imposes a creditable tax on interstate trade to minimize opportunities for cross-border fraud. See Bird and Gendron (2005) for a discussion of the merits and demerits of each of these approaches.
The Report of the Task Force on Implementation of the FRBMA (2003) foresaw compliance driven revenue improvements of about ½ percent of GDP through the service tax alone.
Deposits, withdrawals and interest earned are exempt from taxation; international practice has moved towards exemptions for deposits and interest only (Government of India, 2004a).
See Bagchi et al. (2005) for a discussion of the arguments in favor of an agricultural exemption, and why they fail in the Indian context.
The vast majority of developing countries do not exempt agricultural income from taxation (Khan, 2001). However, difficulties in measuring income in the agricultural sector have led to widespread use of presumptive methods of taxation.
See Government of India, 2003a for a discussion of the pros and cons of the deduction. Among countries surveyed in the Kelkar report, one-half of high income countries, and one-quarter of emerging markets and low income countries had such a provision.
This is also before accounting for the fact that social considerations are partly built into the threshold in India: it is 25 percent higher for women, and 50 percent higher for retirees. Such a design is uncommon, although South Africa also applies a higher threshold for the aged.
Calculated using 2003 data, and assuming a threshold of 40 percent of per capita income. Assumes (i) 35 million current taxpayers; and (ii) 70 million new non-agricultural taxpayers with an average income of Rs. 20,000 and savings deductions of Rs. 4,000. Calculations also include agriculture, beyond the value of ending the exemption, and are made using data from Bagchi et al. (2005). The gains should be understood as relevant for the medium term.
See Bagchi et al (2005). Aggarwal (2004) considers export zones and finds that exports per employment unit declined sharply after a period, as the incentives could not compensate for poor governance and infrastructure in the zones.
See Zee, Stotsky and Ley (2002) for a discussion of the merits and demerits of various types of investment incentives. Income tax holidays are considered to be among the worst. South Africa’s practice—budget subsidies—is an example of a more transparent approach.
See World Bank (1997). The Ukrainian tax reform in 2005 is perhaps an example of this.
See Poirson (2005) for a discussion of the growth enhancing impact that a tax base broadening and rate reduction reform could have.
The Ukrainian authorities began publishing tax expenditure estimates in 2002, and efforts were made to broaden the tax base. Steady successes were followed by sweeping reform in 2005, when a new government sought resources to fund social initiatives.
In India, before 2001, states competed for investment via incentives and lower tax rates. An agreement in 2001, which set floor rates of sales tax and eliminated some incentives, was widely seen as mitigating the problem. See Twelfth Finance Commission report (2004).