Towards a Competitive Economy: VAT and Customs Duty Reform

Abstract

The working paper Towards a Competitive Economy: VAT and Customs Duty Reform by Arvind Virmani examines structural weaknesses in India’s indirect tax system and proposes comprehensive reforms to enhance economic competitiveness. The study highlights the complexity and inefficiencies arising from multiple central and state-level indirect taxes, high customs tariffs, and anomalies in the CENVAT framework. It traces the evolution of customs duty reforms since 1991 and notes that despite reductions, India’s average tariff levels remain relatively high, adversely affecting trade competitiveness and encouraging distortions such as import diversion and smuggling. The paper advocates convergence toward a simplified, dual Value Added Tax structure integrating national and state taxes, alongside phased reductions in peak customs duties. Emphasis is placed on transparency, administrative simplification, and fiscal neutrality through clearer classification of duties, inclusion of exempt goods within the CENVAT chain, and invoice-based tax administration. The reforms aim to align India’s tax system with global standards, strengthen compliance, and support sustained economic growth and integration into the international economy.