ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Value Added Tax Efficiency across Indian States

Panel Stochastic Frontier Analysis

In India, states may be induced to mobilise revenue through alternative channels by the growing demand for public expenditure, limitations in expanding fiscal space, and the limited scope to deviate from the common harmonised tax system, the goods and services tax regime. An assessment of existing tax efficiency and strengthening the tax administration could be one such alternative. The efficiency of tax administration varies across states. Given tax capacity, measuring tax efficiency is important to identify states where enhancing tax efficiency is likely to raise revenue gains considerably.

Earlier versions of this article were presented at the Conference on Papers in Public Economics and Policy at the NIPFP in April 2017 and at the 73rd Annual Congress of the International Institute of Public Finance, Tokyo, Japan, in August 2017. The suggestions and comments received from participants and discussants of the conferences are gratefully acknowledged. Constructive comments received from R Kavita Rao and Arindam Das-Gupta helped the author to revise the article substantially.

In augmenting state revenues, tax administration is as important as tax capacity. For developing countries like India, “tax administration is tax policy” (Casanegra de Jantscher 1990). The introduction of the goods and services tax (GST) from 1 July 20171 has brought about major changes in India’s indirect tax structure. It has harmonised tax policy across states in India and left limited scope for deviation. Improving the efficiency of tax administration could help states to improve tax collection, given that the fiscal responsibility regulation adopted by states limits the budgetary deficits they can incur to augment the provision of public goods and services as required.

Sales tax or VAT (value added tax) is the most important source of revenue for states (Table 1). In India, VAT was introduced in 2003; most states adopted the VAT in April 2005 (the Economic Survey 2016–17 [GoI 2017] lists the year each state adopted the VAT). For General Category States, from 2001–02 to 2015–16, the VAT generated on average 65% own tax revenue (OTR) and 33% of total revenue receipts. Revenue from the VAT finances 27% of the states’ total expenditure (revenue and capital expenditure, excluding loans and advances) on average. The importance of VAT as a revenue source in state finances has been increasing (Table 1).

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Updated On : 31st May, 2019
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