Changing Tax Capacity and Tax Effort of Indian States in the Era of High Economic Growth, 2001-2014

Growing demand for public expenditures, limitations in expanding fiscal space and limited scope to deviate from common harmonized tax system under the proposed Goods and Services Tax (GST) regime may induce the states to look for opportunities to xpand revenue mobilization through alternative channels (e.g. non-tax revenue mobilization). An assessment of the existing tax efficiency (or tax effort) and strengthening tax administration could be one of such alternatives available for states to pursue. Tax administration is as important as tax base to augment revenues of a state. Efficiency of tax administration helps a state to achieve a stable tax regime which is conducive for introduction of tax reforms measures like GST. Buoyancy of tax revenues of a state is not only dependent on growth in tax base and structure of taxes but also on the state of tax administration. Many papers have been written to estimate tax effort of Indian states. Taking this exercise to the next level, this paper focuses on measuring tax effort and identifying factors that explain variations in the tax effort across states. In measuring tax potential, an attempt has been made to differentiate between factors that determine the tax base and factors that constrain the state from utilizing the available base. The exercise looks at comprehensive revenue collection under Value Added Tax of general category states for the period 2001-02 to 2013-14.