Fiscal Overlapping, Concurrency and Competition in Indian Federalism

SCID Working Paper 30b




In this paper we provide an overview and analysis of problems with, and reform efforts aimed at the different layers of the tax system in India. Overlapping in the commodity tax systems of the three levels of government in India has made the tax system non-transparent, and rendered the pursuit of the objectives of tax policy difficult. The incidence of taxes on commodities remains unknown and multiple taxation of commodities by different levels of government creates broad wedges between producer and consumer prices. Tax sharing arrangements between the center and states have created incentive problems for tax collection. At the state level, tax competition without appropriate constraints or coordination imposed by the center has led to a multitude of tax rates, "races to the bottom," interstate tax exportation, and interstate trade barriers. Reform efforts and proposals have focused both on improving the current system and on more comprehensive overhauls. In our analysis, We demonstrate the importance of examining the redistributive impacts across states of suggested major reassignments of tax powers. These must be carefully understood, in addition to impacts across the center and the states as a whole. We provide specific suggestions concerning the reform of state-level trade and consumption taxes in India, and for steps to follow in introducing a broad-based VAT in India.