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Tax effort of Indian States: Implication for Fifteenth Finance Commission of India

Dr. Dinabandhu Sethi (Faculty Candidate), Centre of Excellence in Fiscal policy and Taxation (CEFT), Government of Odisha

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Abstract:
The Fifteenth Finance Commission (FC), Government of India was constituted on 27 November 2017 with a set of Terms of References (ToR). In the ToR, FC introduced “Tax Effort” as a new criterion along with a set of other criteria in the devolution formula to calculate state’s share in central government’s tax revenue. Tax effort provides a tool for measuring how effectively a country (or states in a country) is using its tax bases to collect revenues. A high tax effort is indicative of efficient utilization of given tax base to raise revenues. Tax effort has been given 2.5% indicating that 2.5 % of tax revenue of central government’s net divisible pool will be distributed to states of India. A state with high tax effort will receive higher revenue than that of states with low tax effort. Therefore, it is important to measure the level of tax effort of the states taking recent data. However, it is also important to take petroleum tax revenue out of it while calculating tax effort. The reason is being that petroleum ta comes to states without any much effort put in the collection.

1. Findings

The study makes an analysis of state-wise tax effort of state’s own tax revenue (SOTR) and sales tax after excluding petroleum tax revenue using a panel regression model from 2000-01 to 2016-17. The study derives two major findings. First, the low- and medium-income states turned out to be relatively better performing states in terms of tax efficiency as compared to high income states. Tax effort of these states is greater than the high-income states. Second, the inference changes when petroleum tax revenue is not included in the analysis. It is found that some of the high income states join the better performing states group along with others (Kerala, Assam, Andhra Pradesh, Tamil Nadu, Goa, Haryana, Odisha, Karnataka, Uttar Pradesh, Gujarat, and Punjab). Third, it was observed that higher electricity consumption, greater expansion of bank credit, high industry and service sector expansion helps states to increase revenue base.

Meeting ID: 914 6739 6799
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