The Nitish Kumar government's gamble on taxes has paid off, reconfirming that transparent laws and modest level of taxes yield greater compliance by taxpayers and higher revenues.

After the NDA came to power in Bihar in 2005, it went for simplification and rationalization of value-added tax (VAT). As a result, VAT revenues, which were around Rs 2,200 crore in 2005-06, went up to Rs 5,532.97 crore in 2009-10. The target in 2010-11 was Rs 7,124 crore. However, the receipts fell a little short at Rs 6,685 crore, according to Bihar Chamber of Commerce (BCC) sources.

BCC president O P Sah said the initiative for VAT simplification and rationalization was taken at the highest level. Within weeks of taking over, Nitish and deputy chief minister Sushil Kumar Modi held a 'VAT panchayat' on the BCC premises in December 2005. A decision was taken to remove the anomalies and lacunae in VAT laws which were implemented in the state from April 1, 2005 under the President's rule. It was decided that VAT laws be amended taking West Bengal's as the basis.

"Following easing of tax rates over time, effective tax rate came down. Unaccounted trade through imports from neighbouring states ceased to be profitable, and as a result, tax leakage came down. Despite concessions, tax revenues went up," Sah said.

However, a commercial tax official said preferring anonymity, much of the trade is yet to be brought under the tax ambit. For instance, cash memos are hardly issued in jewellery business where 'kachcha receipt' is the norm. "In fact, only 10% of the trade is under the tax net at present, leaving much scope for boosting tax revenue," he said.