State level tax reforms -General backdrop

States in India had General Sales Tax regime in which there was cascading of input taxes and multiplicity of rates. Under this, States were taxing sale of commodities at their first point. Besides, turn over Tax was also levied in some cases. There was cascading of taxes paid on inputs.  As regards inter-State sales, the exporting State collected Central Sales Tax. Eventually, Value Added Tax (VAT) with input credit replaced the General Sales Tax levied by the States on purchase and sale of commodities within their jurisdiction[1] since 2005-06. Rates were harmonised through discussions in the Empowered Committee of State Finance Ministers. Though there were minor deviations in rates made by States, by and large rates were harmonised under the VAT regime. VAT was subsumed in the Goods and Services Tax (GST) regime[2]  with effect from July 1, 2017. The taxes subsumed in GST have been about two thirds of the Own Tax Revenue (OTR) of the States. After introduction of GST, harmonised rates are recommended by the GST Council, which is formed as mandated in Article 279A of the Constitution of India. Under GST, the tax on sales taxes on goods and supply of services is collected by the State where the final consumption takes place. Major taxes still remaining outside the purview of GST are petroleum products and alcoholic liquor for human consumption.[3]

2. Data sources and methodology

With these major tax policy shifts in background, we analyse the trend in tax effort of 15 major States in India during the 30 year period from 1990-91 to 2018-19[4]. The tax effort is proxied by the ratio of Own Tax Revenue (OTR) to Gross State Domestic Product (GSDP) at current prices.

For the purpose of the study, States have been classified as High, Middle and Low Income States based in their per capita incomes. Maharashtra, Gujarat, Haryana, Goa and Punjab have been classified as High income States, Andhra Pradesh, Telangana, Karnataka, Kerala[5], Tamil Nadu, Uttarakhand and West Bengal as Middle income States and Bihar, Jharkhand, Chhattisgarh, Madhya Pradesh, Rajasthan, Odisha and Uttar Pradesh as Low income States.

The study has utilised the OTR data from Reserve Bank of India's 'State Finances: A Study of the Budgets' and the GSDP data from National Income Accounts. The GSDP in current prices is of different bases and splicing has not been done.[6]

Question can be raised whether the more appropriate base for consumption taxes like General Sales Tax, VAT and GST is Private Final Consumption Expenditure (PFCE). The limitation in using PFCE from sample surveys of National Sample Survey Organisation (NSSO) is that the data are available from quinquennial surveys[7] and for the intervening years, there needs to be extrapolation, which can lead to unrealistic estimations. Moreover, PFCE is a component of GSDP.

 

 

3. State-wise trends

The trend is observed at five year sub-periods. 2017-18 and 2018-19 is treated as a separate sub-period.[8]  In the initial five year period, Middle income States performed better than High and Low Income States. This continued till 2009-10. During the last two sub-periods, High income States performed slightly better than the Middle Income States. The Low income States have shown a consistent increase in the third, fourth and fifth sub-periods and a minor fall in the last sub-period (Table 1).

Table 1. Comparative OTR-GSDP ratios of high, middle and low income states – 1990-91 to 2018-19

States	1990-91 to 1994-95	1995-96 to 1999-2000	2000-01 to 2005-06	2005-06-2009-10	2010-11 to 2016-17	2017-18 to 2018-19
High	7.63	6.86	6.92	6.74	6.79	6.46
Middle	8.2	7.32	7.53	7.53	6.66	6.45
Low	5.3	4.86	5.73	6.1	6.41	6.21
All States Average	7.04	6.35	6.62	6.71	6.6	6.5

Source: Computed from data sources mentioned in the text.

Figure 1. OTR-GSDP ratios of high, middle and low income states

Source: Table 1

Figure 2. Movement of OTR-GSDP ratio of High income States and All States Average

Reference