17.4        ndian     onom
     is known as horizontal equity. When ‘better off’              At first instance it seems that as a country
     people pay more taxes it is known as vertical equity.    achieves better levels of development, sectoral
                                                              and the item-wise expenditure of the economy
     efficiency                                               must have decreasing trends. But practical
     Efficiency of a tax system is its potential to affect    experience shows that the level of expenditure
     or interfere the efficiency of the economy. A good       needs enhancement everyday and economy always
     tax system raises revenue with the least cost on the     needs more and more revenues to fulfil the rising
     taxpayers and least interference on the allocation       expenditures. That is why for economies the best
     of resources in the economy. The tax system affects      form of government expenditure is the progressive
     the economic decisions of individuals and groups         expenditure.
     by either encouraging or discouraging them                    The best way of taxation is progressive and
     to save, spend, invest, etc. Taxes can improve           the best way of government expenditure is also
     efficiency of the economy—taxes on pollution or          progressive and they suit each other beautifully.
     on smoking give revenue to the government and            Most of the economies around the world are
     serves broader social purposes, too. This is known       having progressive taxation with progressive
     as the double dividend of a tax.                         expenditure.
     ADministrAtive simPlicity                                   Value added Tax
     This is the third criterion which includes factors       The value added tax (VAT) is a method of tax
     like computation, filing, collection, etc. of the        collection as well as name of a state level tax (at
     taxes that all should be as simple as possible.          present) in India. A tax collected at every stage
     Simplicity checks tax evasion too. Tax reform in         of value addition, i.e., either by production or
     India has simplification of tax as its major plank—      distribution is known as value added tax.12 The
     also recommended by the Chelliah Committee.              name itself suggests that this tax is collected on the
                                                              value addition (i.e., production).
     flexibility                                                   Production of goods or services is nothing but
     A good tax system has the scope of desirable             stages of value additions where production of goods
     modifications in it if there is any such need.           is done by the industrialists or manufacturers. But
                                                              these goods require value addition by different
     trAnsPArency                                             service providers/ producers (the agents, the
     How much tax taxpayers are actually paying and           wholesalers and the retailers) before they reach the
     what are they getting against it in the form of the      consumers. From production to the level of sale,
                                                              there are many points where value is added in all
     public services should be ascertainable, i.e., the
                                                              goods. VAT method of tax collection is different
     transparency factor.
                                                              from the non-VAT method in the sense that it is
                                                              imposed and collected at different points of value
        MeThods of expendiTure                                addition chain, i.e., multi-point tax collection.
     Similar to the methods of taxation the modes of          That is why there is no chance of imposing tax
     government expenditure are also of three types—          upon tax which takes place in the non-VAT
     Progressive, Regressive and Proportional.11              method—single point tax collection. This is why
                                                              VAT does not have a ‘cascading effect’ on the
       11.  Based on the discussion on Government Expenditure
            in Samuelson and Nordhaus, Economics.               12.  Ibid., p. 333