Restructuring the Tax System

Restructuring the Tax System Hiranya Mukhopadhyay IN a recent paper K Sundaram, V Pandit and B Mukherji (henceforth KVB) argued that cascading type tax (CAT) is better than VAT (or rather, rebate-adjusted tax system, RAT) because it can generate same revenue (sector by sector) and replicate VAT prices with lower ad valorem duty rates, thus providing' lower incen-tives for tax evasion.1 It is worth mentioning that whenever pricing is done on the basis of total cost (including input duty) and then allow for set-off for input duty, revenue neutrality will not make any difference between the pre-VAT and post-VAT prices. Prices will be identical. That is precisely the reason for the result cited in their paper. The price equation in their paper with the multiplicative mark-up is.