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State VAT leads to inflation: a study

Implementation of Value Added Tax by states has led to inflation in most states. State VAT, which is in the form of replacement of Sales Tax, was first introduced in Haryana in 2003 and by 2008, nearly all states had implemented it.

On the basis of a study on State VAT and its Price Effect, K R Shanmugam, Director, Madras School of Economics said that inflation follows tax introduction but remains stable thereafter.

While the price effect of state VAT was highest in Punjab (with 2.8 per cent hike in price), it was lowest in Uttar Pradesh by a drop in price by 1.12 per cent. He said that this could be because UP was the last to introduce the state VAT, in 2008, and would have learned to keep inflation low from the experience of other states. Tamil Nadu that brought in the tax in 2007 saw an inflationary trend with price rise of 1.22 per cent. He highlighted that sales tax had not put much money in the government treasury, but the revenues from state VAT account for 70 per cent of the total.

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