Notes

that differentiation creates. (The additional welfare considerations of multiple tax rates are outside the scope of the study, which is focused on efficiency.)

To what extent could the results apply to the rest of India and to other countries in the region? The elasticity is estimated using a wide range of products and thus has wider validity than if it were focused on a rate change for a single product. Diverse products face a rate change. For instance, some of the products that were important in terms of total sales and numbers of firms and that faced rate changes are cement, bottled water, prepared foods, and paints. Although there is some variation, the elasticity is substantial in most sectors.

The large elasticity may reflect (1) the high sensitivity of demand to formal prices or (2) substantial evasion and avoidance of tax rates. One may speculate about how the characteristics of the state of Karnataka—richer than the average Indian state, with a manufacturing and information technology hub and a well-functioning administration—might impact the two mechanisms leading to a large elasticity. Regarding the first channel, there is no reason to believe that demand would not be as elastic in other Indian states for the same products. However, the Karnataka industrial mix is heavy in the most elastic sectors (such as electronics; see figure 4.5), which may contribute to the large aggregate elasticity. By contrast, richer households are considered to be less price sensitive; households and firms in poorer states might then exhibit even larger demand increases following tax cuts.

Regarding the second channel, Karnataka is considered to have a well-functioning administration and so may offer fewer evasion possibilities than other states in India or other countries in the region. However, relative to equivalent taxes in other countries, the design of India’s GST is more complex, and the analysis estimates the elasticity during the period immediately after the introduction of the GST, at a time when taxpayers and administrations might still have been adjusting to the new tax system.

This chapter is part of a review on informality prepared by the Office of the Chief Economist,

South Asia Region, World Bank. The authors thank Maurizio Bussolo, Ravi Kanbur, Martin

Kanz, and Siddharth Sharma for their feedback and Sam Asher and the Development Data

Lab for their partnership. 1. See ASI (Annual Survey of Industries) (dashboard), Industrial Statistics Wing, National

Statistical Office, Ministry of Statistics and Program Implementation, Kolkata, http:// www.csoisw.gov.in/CMS/En/1023-annual-survey-of-industries.aspx; “India: Unorganised

Manufacturing Enterprises Survey [List Frame], July 2005–June 2006, NSS 62nd Round” (data portal), National Data Archive, National Sample Survey Office, Ministry of Statistics and Programme Implementation, New Delhi, http://microdata.gov.in/nada43/index.php /catalog/112/overview. 2. 2017 data of GFS (Government Finance Statistics) (dashboard), International Monetary

Fund, Washington, DC, http://data.imf.org/?sk=a0867067-d23c-4ebc-ad23-d3b015045405.