Tax Performance and Taxable Capacity: Analysis for Selected States of India

Abstract

In a federal form of government structure, the state-level governments generally receive supplementary budgetary resources from the central/federal government as support for the formers’ public expenditure activities. Such devolution of funds from the centre to the states takes the form of share of the revenue raised by central taxes and grants-in-aid. It is felt that such resource transfers should be made according to a policy based on the criteria of equity and efficiency. Formally, these criteria are defined with reference to individual state’s tax revenue collection relative to its taxable capacity. Formulation of a concrete transfer policy, however, crucially requires measures of individual state’s taxable capacity. Given an appropriate definition of a state’s taxable capacity, measurement of taxable capacity of states involves both conceptual and econometric issues. This paper proposes an econometric approach to the measurement of taxable capacity, which is similar to estimating a frontier production function using panel data. To illustrate the proposed method, it is applied to the panel data on annual state tax revenue and related variables of some selected Indian states for the period 1986-87 to 1996-97 and the relative taxable capacity and tax efforts of the states are compared.

Central Transfer a Curse or Blessing? Evidence from the Relative Revenue Effort of Indian States

“…Numerous Indian studies have calculated tax effort for states with an interest in assessing their relative tax performances (Nambiar and Rao ; Reddy ; Thimmaiah ; Sen and Tulasidhar ; Jha et al ; Coondoo et al ; Purohit ; Agarwal ; Karnik and Raju ; Maurya, Singh and Khare ; Garg, Goyal and Pal ). The two methods most frequently used in these studies are regression and the representative tax system (RTS) approaches.…”

Fiscal Performance Benchmarking of Indian States-a Robust Frontier Approach

“…Bajpai and Sachs (1999) reviewed the deteriorating fiscal position of the Indian states in the nineties and identified several reasons for the worsening position: a stagnating tax-GDP ratio, increasing proportion of non-development expenditure in the total expenditure, large quantum of clandestine subsidies, rising financial burdens of state enterprises and rising demand for public services. Coondoo et al (2001) considered the comparative tax performance of 16 states in India (as measured by tax/SDP ratio) for the period 1986-87 to 1996-97 using a quantile regression approach. On the basis of their study they classified the insample states in to four categories: best, medium, declining and worst.…”

Trends in Collection of Value Added Tax in West Bengal: A Commentary

“…Coondoo, Majumder, Mukherjee and Mukherjee (2001) argued that ‘the observed tax performance of a state (in India) gets factorized into taxable capacity and tax raising efforts made’. The tax effort is an indicator of the state’s performance on tax collections, given the tax potential and taxable capacity.…”