results in cascading. Another feature of Bangladesh’s VAT law is that it has a narrow definition of inputs for tax purposes and excludes labor, land, buildings, office equipment and transport. This provision increases the cost of final goods and services.

In India, the existence of both central and state level VAT on manufacturing results in tax cascading on industrial goods. This is because no input credit is available for VAT levied at the central level. There is also a Service tax charged at the rate of 12% by the central government in VAT mode.<sup>30</sup> The Service tax is not integrated with VAT on goods leading to either under or over‐taxation of “bundled goods” – products that represent a mixture of goods and services. For example, software upgrades (which are goods) can be supplied as part of a contract for software repair and maintenance services.<sup>31</sup> The so‐called “value added services” provided as part of telecommunication services (wallpaper for mobile phones, ring tones, weather reports) include supplies that may be considered goods. Under the current legislation, both the states and the federal government can tax only parts of such bundles, which creates the possibility of gaps or overlaps of taxation.<sup>32</sup> In addition to VAT, both the central government and the states levy several other indirect taxes (Box 1). This results in cascading of taxes and undermines competitiveness of Indian producers.

# **Box 1. Cascading of Indirect Taxes in India**

India has multiple indirect taxes that are not integrated with each other. The central government levies CENVAT on manufactured products, Service tax, and Central Sales tax on interstate sale transactions. Taxes charged by state governments include state level VAT and entry tax (on entry of goods into certain states). The Service and CENVAT tax are not integrated, so manufacturers are not eligible for input credit on services used to produce industrial goods. The sale of goods is taxed at the state level on top of the taxes already levied by the Central Government through CENVAT. The central sales tax (CST) is charged at 2% on interstate sale of goods and fragments India’s internal market. It is collected by the origin state and does not allow for any credit. CST also has high administrative and compliance costs. There are frequent delays on state border check points, where CST is collected, resulting in higher logistics costs for producers.<sup>33</sup> The multiplicity of indirect taxes reduces competitiveness of Indian producers. The share of indirect taxes can be as high as 30% of the retail price in India.<sup>34</sup> In fact for some goods, such as cars, the total tax burden can vary from 58% for small vehicles to 90% for large ones.<sup>35</sup> Some of these taxes are not reimbursable and are estimated to add 4‐6% to the cost of exported goods.<sup>36</sup> In Pakistan, there is double taxation of select services (e.g. banking, insurance and franchise services) that are taxed both by the Federal Board of Revenue (through the Federal Excise Duty) and by provincial

> 30 The Service Tax rate will be increased to 14% in the FY15‐16 budget.

> 31 Poddar, Satya and Ehtisham Ahmad. 2009.“GST Reforms and Intergovernmental Considerations in India”, Ministry of Finance, India

> 32 Ibid

> 33 Bhattacharya, Arvind, Ravi Srivastava and Nimisha Jain. 2010. “Indian Manufacturing: The next Growth Orbit”. Boston Consulting Group

> 34 Ibid.

> 35 The Economist. 2014. “Revving Up in India”. June 16, 2014

> 36 Bhattacharya, Arvind, Ravi Srivastava and Nimisha Jain. 2010. “Indian Manufacturing: The next Growth Orbit”. Boston Consulting Group

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