CHAPTER IV INTER STATE COMPARISON OF TOTAL REVENUE This chapter deals with the inter state comparison of total revenue and its components namely, tax revenue and non-tax revenue. We also examine the growth of the states own tax revenue, Income elasticity, taxincome ratio and the relative tax effort of the major states in India. We have briefly mentioned the theories of taxation and the objectives of Indian tax policy. Government always needs funds to perform numerous functions for the betterment of the people. The financing of government activities is a matter of universal concern. Nowadays, a modern democratic government has to perform more functions for the welfare of its people and these functions are not possible without the aid of money. If the Government wants to provide more welfare facilities to its citizens, it has to think of from where and how the revenue should be raised. Governments can not provide public goods unless they have necessary resources. A state can secure its funds from two main sources such as tax and non-tax sources. Of these two sources, taxation causes not only money burden but real burden also. Therefore, just distribution of burden among the people is necessary. A.THEORIES OF TAXATION Several theories have been advocated from time to time for achieving the principles of justice in taxation. Here we make a brief reference to those theories.
(a) Cost of service theory 61 According to this theory, the basis of taxation should be the cost incurred by the Government on different services for the benefit of the individual tax payers. Each tax payer has to pay the tax equal to the cost of service to him. It means the higher cost, higher should be tax rate and vice versa. (b) Benefit principle This view was held by German writers, including Grotices and Pufend. It was also accepted by writers such as Aobber, the physiocrats and the Locke. The benefit approach to taxation was accepted widely among the political theoreticians of seventeenth century. Subsequently the benefit view was adopted by eighteenth century writers, Such as Hence and Rousseau. Taxation as a price for services rendered seemed to be a natural complement to the contract theory of state. According to the benefit theory, the burden of taxation should be divided among the people in proportions to the benefits received from the state. The person receiving equal benefits from the state should pay equal amount as taxes, and those who receive greater benefits should pay more as taxes than those getting less benefit. (c) Ability to pay Theory The ability theory is the most generally accepted theory. According to this theory, each person should contribute to the state in proportion to his ability to pay Ability is the ideal ethical basis of taxation 1. There are two approaches to this problem; a subjective approach and an objective one.
62 As per ability to pay theory, all should be treated equally under law. (i) Subjective Approach The subjective approach is based on the psychological or mental reactions of the taxpayer. In this approach, we estimate the burden felt by the taxpayer or the sacrifice undergone by him. Each taxpayer should make equal sacrifice for tax burden is to be justly distributed. Equal sacrifice Principle Equal sacrifice as a just distribution of tax burden was stated by J.S.Mill. He says that Equity in taxation means equality in sacrifice. Taxpayers are said to be treated equally if their tax payments involve an equal sacrifice or loss of welfare. The equal sacrifice principle has been explained in different forms, such as equal proportional sacrifice, equal marginal sacrifice, proportional sacrifice and minimum aggregate sacrifice. (ii) Objective Approach Modern economists feel that the ability to pay is measure better by a person s wealth, consumption and income. Higher the wealth, income and consumption higher is the ability to pay tax. This work to some extent is based on ability to pay theory. B.OBJECTIVES OF TAX POLICY Tax policy may be defined as the Policy of the Government to achieve certain chosen objectives through a set of taxes. Before independence the objective of the tax policy was to raise revenue for carrying on administration, controlling internal disturbances and conducting war with other Europeans and princely states of India. Later, a
little part of the revenue was used to construct railroads and a few multipurpose river projects. 2 63 After Independence, the tax policy was clearly outlined only after the implementation of Fiver year plans. As such, in India, the objectives of tax policy are; (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) to raise revenue to promote savings and investment to accelerate economic growth to reduce inequalities in the distribution of income and wealth to achieve stability to generate employment to reduce regional disparity to promote exports Dr. Raja Chelliah 3 has proved that the Indian tax policy has achieved the objective of revenue raising only. Here we see how far the Indian states are successful in mobilising revenue by means of taxation. In India, the tax revenue has grown enormously, The ratio of combined tax revenue of the union and state governments has gone up from 6.69% of Gross Domestic Product in 1950-51 to about 12.81% in 2005-06. 4 C.GROWTH OF TOTAL REVENUE The growth trend of Total Revenue is provided by Table IV 1 and Table IV 2 at current and constant prices respectively.
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66 From the Table IV 1 and Table IV 2, we can understand that the total revenue has increased in all states at current and constant prices during the study period from 1985 86 to 2005 06. Per capita revenue also has increased in all states during this period. In Maharashtra, the total revenue rapidly increased from Rs.4174 crs in 1985 86 to Rs.48438 crs in 2005 06 and the per capita revenue has increased from Rs.634.76 in 1985 86 to Rs.4468.45 in 2005 06. Likewise, total revenue and per capita revenue increased in all the states. Every year, the revenues have increased. The state governments have taken sustained efforts for raising revenue. But the revenues have not increased at the uniform rate. They have increased continuously in different states at different rates. In real terms also the same trends are observed. However at constant 1980 81 prices, the total revenue in all the states has grown at a much lower rate. The ranking of the states show changes in the relative position of the states due to the variations in the levels of per capita revenue. In the relative ranking of the states, Haryana, Punjab and Maharashtra occupied the first, second and third places interchangeably. The positions of all states were changing in every year.
Per capita Revenue in Rupees 67 7000 Figure IV-1 Growth of Per capita Total Revenue at Current Prices 6000 5000 4000 3000 2000 1000 0 1985-86 1990-91 1995-96 2000-01 2005-06 Years 1.Andhra pradesh 2.Assam 3.Bihar 4.Gujarat 5.Haryana 6.Karnataka 7.Kerala 8.Madhya pradesh 9.Maharashtra 10.Orissa 11.Punjab 12.Rajasthan 13.Tamil Nadu 14.Uttar Pradesh 15.West Bengal Source:Table IV-1
68 Among the 15 states, the growth rate of total revenue was very high in Karnataka while growth of per capita revenue was very high in Orissa. But the growth of total and per capita revenue was lowest in Bihar. INTER STATE DISPARITY IN PER CAPITA TOTAL REVENUE Let us now see the inter state disparity in per capita total revenue and income elasticity of total revenue. To find the diverging or converging tendency of the per capita revenue levels of the state, we have made use of two measures. They are (a) ratio between lowest and highest per capita revenues and (b) Co-efficient of variation. To know whether the states with higher per capita levels or lower per capita levels expanded faster, we have made use of rank correlation coefficient. In our study, the all state average per capita level has been made use of to classify the states as states with higher per capita levels and lower per capita levels. The ratio between the lowest and highest per capita revenue as seen from Table IV 3 indicates that the inter state disparity has increased during the study period. But not continuously. The richer states increased their revenue faster than the poorer states. The reasons for the increasing trend in the inter state variations are the differences in the states economic development, tax rates, tax base, efficiency in tax administration and tax compliance.
69 TABLE IV-3 I. MEASURES OF INTER-STATE DISPARITY IN PER CAPITA TOTAL REVENUE Year Ratio between lowest and highest per capita revenue Mean (in Rs.) Standard Deviation Co-efficient of Variation 1985-86 1:2.14 506.86 108.70 21.45 1986-87 1:2.24 569.15 125.77 22.10 1987-88 1:2.02 629.98 139.10 22.08 1988-89 1:2.08 705.88 150.25 21.29 1989-90 1:2.00 774.22 169.51 21.89 1990-91 1:2.02 880.86 175.17 19.89 1991-92 1:2.68 1082.96 301.33 27.83 1992-93 1:1.94 1165.99 217.15 18.62 1993-94 1:2.48 1351.23 331.46 24.53 1994-95 1:3.58 1588.06 659.88 41.55 1995-96 1:2.81 1676.00 515.75 30.77 1996-97 1:3.02 1847.06 608.81 32.96 1997-98 1:2.68 2004.81 596.13 29.74 1998-99 1:2.64 2028.73 584.57 28.81 1999-00 1:2.43 2259.53 599.44 26.53 2000-01 1:2.81 2485.01 689.78 27.76 2001-02 1:3.00 2474.32 740.64 29.93 2002-03 1:3.32 2711.55 862.66 31.81 2003-04 1:3.14 3003.86 936.97 31.19 2004-05 1:3.11 3486.05 1030.08 29.55 2005-06 1:3.38 4065.62 1264.76 31.11 II. Rank correlation co-efficient between 1985-86 per capita revenue levels and the absolute variation in per capita revenue levels. 1985-86 and 1990-91 +0.5107 1985-86 and 1995-96 +0.8821 1985-86 and 2000-01 +0.8214 1985-86 and 2005-06 +0.7392 III. Rank correlation co-efficient between 1985-86 per capita revenue levels and the percentage variation in per capita revenue levels. 1985-86 and 1990-91 -0.2785 1985-86 and 1995-96 +0.525 1985-86 and 2000-01 +0.2535 1985-86 and 2005-06 +0.0857 Source: Table IV-1- Computed by us.
1985-86 1990-91 1995-96 2000-01 2005-06 Co-efficient of Variation 70 The per capita total revenue in Haryana was nearly 2 times higher than that of Orissa in 1985 86 and 3 times higher than that of Bihar in 2005 06. It also reveals that the all state average per capita revenue was Rs.506.86 in 1985 86. The states Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Punjab, and TamilNadu were above the all state average while Andhra Pradesh, Assam, Bihar, Orissa, Rajasthan, Uttar Pradesh and West Bengal stayed below the all state average. Though this trend varied in some years generally the richer states had higher per capita levels while the poor states had lower levels. 45 Figure IV-2 Inter-State Disparity in Per capita Total Revenue 40 35 30 25 20 15 10 5 0 Source: Table IV-3 Years
71 The inter state variations in per capita total revenue as shown by the co-efficient of variation though smaller it has increased. But the increase was not smooth and continuous. INCOME ELASTICITY OF TOTAL REVENUE The concept of elasticity is of great practical importance as it enables to find out whether the states can raise more revenue to meet their ever increasing obligations or not. The term income elasticity of total revenue expresses the responsiveness of state s revenue to the increase in the national income. Numerically, the elasticity of total revenue would be measured as the ratio of proportionate change in its yield to the proportionate change in income. It is obvious that the governments need more revenue to perform their functions. How for the state revenue is responsive to economic growth could be known by income elasticity. Income Elasticity of total revenue is provided by Table IV 4. Table IV 4 shows that the income elasticity is less than one in the states like Andhra Pradesh, Gujarat, Haryana, Kerala, Maharashtra, Rajasthan, TamilNadu and West Bengal and it is greater than one in the states like Assam, Bihar, Karnataka, Madhya Pradesh, Orissa, Punjab and Uttar Pradesh. The states where the income elasticity is greater than one, they take more efforts to collect a lot of additional revenue. Their tax system is more responsive to changes in state income.
72 TABLE IV-4 INCOME ELASTICITY OF TOTAL REVENUE STATES/YEAR 1985-86 - 2005-06 1.Andhra Pradesh 0.79 2.Assam 1.30 3.Bihar 1.36 4.Gujarat 0.84 5.Haryana 0.92 6.Karnataka 1.01 7.Kerala 0.69 8.Madhya pradesh 1.13 9.Maharashtra 0.78 10.Orissa 1.38 11.Punjab 1.34 12.Rajasthan 0.96 13.Tamil Nadu 0.90 14.Uttar Pradesh 1.22 15.West Bengal 0.81 Source: Tables IV -1 & A - 52- Computed by us. Let us see the components of total revenue, that is, tax revenue and non tax revenue, to know the reason for its faster growth. D.GROWTH TREND OF COMPONENTS OF TOTAL REVENUE Table IV 5. The growth trend of the components of total revenue is provided by From the Table IV-5, we can know that the tax revenue has increased in all states year by year. The Non tax revenue also has increased in all the states. But the tax and non-tax revenue witnessed many ups and downs in their course.
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74 The rate of growth of tax revenue is very high in orissa and very low in West Bengal. The growth rate of Non tax revenue is very high in Punjab and very low in Bihar. But the rate of growth alone does not bring out the financial soundness of the states. For example, the absolute level of tax revenue is highest in all the years in Maharashtra among the fifteen states. The tax revenue of Maharashtra is nearly five times greater than that of Assam in 1985 86. The same trend is observed in all the years. The relative shares of tax and non tax revenue in total revenue are shown by the Table IV 6. Generally, the tax revenue is the major component in both the developed states and backward states. However, during all the years, the tax revenue is higher than non- tax revenue in the thirteen states only. In these states, the tax revenue contributes nearly 60% and above of the total revenue. Therefore, tax revenue is the most significant source in these states. Assam and Haryana are the noted exception. In these states, no uniform pattern is seen. In Assam, the non tax revenue is higher than tax revenue from 1986 87 to 1998 99 and tax revenue is higher than non tax revenue in 1985 86 and from 1999 2000 to 2005 06. From 1999 2000 to 2005 06, these two sources contributed almost the same amount of revenue. In Haryana, the tax revenue is higher than that of Non tax revenue in all the years except in 1994 95, 1996 97 and 1997 98.
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In TamilNadu, the tax revenue forms the highest percentage of the 77 total revenue in all the years. But in other states, its position changed occasionally. Every year, the relative performance of these sources varied widely in most of the states. For instance, in Andhra Pradesh, tax revenue is nearly three times higher than non-tax revenue in all the years. But in Maharashtra, tax revenue is nearly two times higher than non-tax revenue from 1985 86 to 1992 94 and is nearly 5 times higher than non tax revenue from 1994 95 to 2005 06. The tax revenue has grown because of increase in tax base and tax rates. Even in the developed states, the non tax revenue has not expanded quickly due to various economic and political reasons. The fees and charges have not been increased much due to economic and administrative factors. The surplus from public undertakings is meager because of the poor performance of the enterprises mostly due to lack of political will. E.TAX REVENUE Taxes are the major sources for sustaining our development plans and socio-economic growth, through mobilisation of resources. A Tax is a compulsory levy and those who are taxed have to pay the sums irrespective of any corresponding return of services or goods by the Government 5. And so Taxes are compulsory payments to government without expectation of direct return or benefit to the tax payers. 6 As seen earlier besides, mobilisation of revenue, taxation has other objectives like curtailment of consumption, restriction of imports, accelerating economic growth, generating employment, achieving economic stability and allocation of resources. 7
78 In the words of a former British Chancellor of Exchequer, the job of taxation is not merely to balance government s expenditure. Taxation is nowadays devised to reduce consumption, increase savings and investment, to mop up surplus money and curb inflationary pressure, to reallocate and deploy factors and inputs, to recast the productive pattern and refashion the consumption path. 8 Taxes are divided into two types. They are (i) (ii) Direct taxes Indirect taxes According to J.S. Mill, a direct tax is One which is demanded from the very persons who, it is intended or desired, should pay it. Indirect taxes are those which have been demanded in the expectation and intention that he shall indemnify himself at the expense of another s. 9 This distinction is clearly based on the phenomenon of shifting. A tax which cannot be shifted is direct, a tax while the one which can be shifted is an indirect tax. The tax structure assumes greater importance for those countries in which government outlay is raising faster than tax revenue. 10 India has a well developed tax structure with clearly demarcated authority between central and state Governments and local bodies.
79 GROWTH TREND OF TAX REVENUE Table IV 7 shows the trend of total tax revenue, per capita revenue and its share in total revenue from 1985 86 to 2005 06. In this period, there had been a steady increase in the total as well as per capita tax revenue in all the states. But the rate of increase was not uniform. Both have increased in different states at different rates. The per capita revenue was highest at Rs.447.11 in Punjab and lowest at Rs.202.54 in Orissa in 1985 86. But subsequently their relative rankings changed due to the changes in the levels of their per capita revenue. Haryana came to the first position in 1990 91. Since 1995 96 Tamil Nadu occupied the first place. Assam was in the lower position in 1990 91 and 1995 96. Since then Bihar came down to the last position. Thus we observe vast changes in the relative rankings of the states. However, the share of tax revenue in total revenue was more than 50% in all the states in all the years except in Assam. The share of total tax revenue of all the states rose from 67.7% in 1985-86 to 75.7% of the all states total revenue in 2005-06. The tax revenue contribution has continuously been increasing. Therefore, tax revenue is the major source of revenue to the states and non-tax revenue is the secondary source.
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82 In terms of per capita tax revenue, there had been an improvement in the relative positions of the states like Karnataka, Kerala, Orissa, Rajasthan, Tamil Nadu and UttarPradesh during the 21 years. From the Table IV 8, we can understand that in real terms also total tax revenue and per capita tax revenue increased in all states during the period of our study. However at constant 1980 81 prices, tax revenue of total and per capita revenue have grown at a much lower rate in all the states. The growth rate of total tax revenue was highest in orissa and it was lowest in West Bengal whereas the rate of growth of per capita tax revenue was highest in orissa and lowest in Bihar. Let us now observe the inter state disparity in per capita tax revenue and its elasticity.
Per capita Revenue in Rupees 83 4500 Figure IV-4 Growth of Per capita Tax Revenue at Current Prices 4000 3500 3000 2500 2000 1500 1000 500 0 1985-86 1990-91 1995-96 2000-01 2005-06 Years 1.Andhra pradesh 2.Assam 3.Bihar 4.Gujarat 5.Haryana 6.Karnataka 7.Kerala 8.Madhya pradesh 9.Maharashtra 10.Orissa 11.Punjab 12.Rajasthan 13.Tamil Nadu 14.Uttar Pradesh 15.West Bengal Source: Table IV-7
84 INTER STATE DISPARITY IN PER CAPITA TAX REVENUE TABLE IV-9 I. MEASURES OF INTER-STATE DISPARITY IN PER CAPITA TAX REVENUE Year Ratio between lowest and highest per capita revenue Mean (in Rs.) Standard Deviation Co-efficient of Variation 1985-86 1:2.14 506.86 108.70 21.45 1986-87 1:2.24 569.15 125.77 22.10 1987-88 1:2.02 629.98 139.10 22.08 1988-89 1:2.08 705.88 150.25 21.29 1989-90 1:2.00 774.22 169.51 21.89 1990-91 1:2.02 880.86 175.17 19.89 1991-92 1:2.68 1082.96 301.33 27.83 1992-93 1:1.94 1165.99 217.15 18.62 1993-94 1:2.48 1351.23 331.46 24.53 1994-95 1:3.58 1588.06 659.88 41.55 1995-96 1:2.81 1676.00 515.75 30.77 1996-97 1:3.02 1847.06 608.81 32.96 1997-98 1:2.68 2004.81 596.13 29.74 1998-99 1:2.64 2028.73 584.57 28.81 1999-00 1:2.43 2259.53 599.44 26.53 2000-01 1:2.81 2485.01 689.78 27.76 2001-02 1:3.00 2474.32 740.64 29.93 2002-03 1:3.32 2711.55 862.66 31.81 2003-04 1:3.14 3003.86 936.97 31.19 2004-05 1:3.11 3486.05 1030.08 29.55 2005-06 1:3.38 4065.62 1264.76 31.11 II. Rank correlation co-efficient between 1985-86 per capita revenue levels and the absolute variation in per capita revenue levels. 1985-86 and 1990-91 +0.5107 1985-86 and 1995-96 +0.8821 1985-86 and 2000-01 +0.8214 1985-86 and 2005-06 +0.7392 III. Rank correlation co-efficient between 1985-86 per capita revenue levels and the percentage variation in per capita revenue levels. 1985-86 and 1990-91 -0.2785 1985-86 and 1995-96 +0.525 1985-86 and 2000-01 +0.2535 1985-86 and 2005-06 +0.0857 Source: Table IV 7- Computed by us.
1985-86 1990-91 1995-96 2000-01 2005-06 Co-efficient of Variation Table IV 9 reveals that the ratio between the lowest and highest per capita tax revenue has increased since 1996-97. 85 It also shows that the all state average has increased every year from 1985 86 to 200 06 and the backward states continued to stay below this level. Moreover, the inter state disparity in per capita tax revenue as indicated by co-efficient of variation also went up. 40 Figure IV-5 Inter-State Disparity in Per capita Tax Revenue 35 30 25 20 15 10 5 0 Source: Table IV-9 Years This is because states with higher per capita revenue increased their per capita levels faster. As we have already seen developed states had higher per capita levels due to enlarged tax base and higher tax effort.
86 ELASTICITY AND BUOYANCY OF TAX REVENUE High degree of responsiveness of tax yield to changes in national income is a desirable characteristic of the tax system. If a government depends on tax revenue to finance a large part of its expenditure then it is necessary to ensure that an increasing proportion of national income flows into the public treasury by way of taxes. In other words the requirement is to increase the incremental tax ratio. Thus computation of tax buoyancy becomes relevant in this context. Tax revenue may change through automatic response of the tax yield to changes in national income or through the imposition of new taxes, revision of the rates or expansion in the bases of existing taxes, tax amnesties, stricter tax compliance and other administrative measures backed by legal action. Changes in the tax yield resulting from modifying such tax parameters (i.e. rate, base etc) are called discretionary changes which are the result of legislative action. With tax parameters held constant (i.e., discretionary changes being removed) automatic changes in the tax yield resulting from variations in the National income measure the elasticity or built-in-flexibility of a tax or a tax system. It is the ratio of percentage change in tax revenue (adjusted for discretionary changes) to the percentage change in national income. Changes in the tax yield flowing from the combined effect of automatic response and discretionary changes measure the buoyancy of a tax. It is computed by dividing the percentage change in tax yield by the percentage change in the national income. 11
87 Buoyancy Co-efficient compares the actual growth of tax revenue with the growth in national income. It assesses the overall success of government measures to increase tax revenue. Elasticity co-efficient on the other hand indicates the inherent responsiveness of a tax system to changes in national income. It reflects the revenue potential of the tax system. INCOME ELASTICITY OF TAX REVENUE TABLE IV 10 INCOME ELASTICITY OF TAX REVENUE STATES/YEAR 1985-86 - 2005-06 1.Andhra Pradesh 0.81 2.Assam 1.26 3.Bihar 1.85 4.Gujarat 0.91 5.Haryana 1.14 6.Karnataka 1.07 7.Kerala 0.82 8.Madhya pradesh 1.33 9.Maharashtra 0.91 10.Orissa 1.64 11.Punjab 1.19 12.Rajasthan 1.19 13.Tamil Nadu 0.96 14.Uttar Pradesh 1.56 15.West Bengal 0.78 Source: Tables IV - 7 & A 52 - Computed by us. The table IV 10 indicates that the income elasticity of tax revenue is less than one in the states like Andhra Pradesh, Gujarat, Kerala, Maharashtra, Tamil Nadu and West Bengal. The income elasticity is greater than one in Assam, Bihar, Haryana, Karnataka, Orissa, MadhyaPradesh, Rajasthan and Uttar Pradesh.
88 The states where the income elasticity is greater than one a smaller increase in the income of the people leads to a greater increase in the tax revenue. Especially in Bihar, the income elasticity is very high showing that the tax effort of the state is comparatively high. BUOYANCY OF TAX REVENUE TABLE IV 11 BUOYANCY OF TAX REVENUE STATES/YEAR 1985-86 - 2005-06 Rank 1.Andhra Pradesh 0.81 14 2.Assam 1.26 5 3.Bihar 1.85 1 4.Gujarat 0.91 12 5.Haryana 1.14 8 6.Karnataka 1.07 9 7.Kerala 0.82 13 8.Madhya Pradesh 1.33 4 9.Maharashtra 0.91 11 10.Orissa 1.64 2 11.Punjab 1.19 7 12.Rajasthan 1.19 6 13.Tamil Nadu 0.96 10 14.Uttar Pradesh 1.56 3 15.West Bengal 0.78 15 Source: Tables IV -7 & A - 52 - Computed by us. Table IV 11 indicates the buoyancy of tax revenue in Indian States. In all the states tax system is buoyant and so the states are capable of mobilising revenue through discretionary changes and automatic responses. But the buoyancy varies from state to state. It is higher in Assam, Bihar, Haryana, Karnataka, Madhya Pradesh, Orissa, Punjab, Rajasthan and Uttar Pradesh. In those states, there was a higher rate of tax up surge to the increase in its state income. The tax buoyancy is lower in Andhra Pradesh,
89 Gujarat, Kerala, Maharashtra, Tamil Nadu and West Bengal. These states are demonstrating lower rate of tax upsurge to the increase in their state income. This shows a low rate of response of the tax structure to any change in the state income. Tax effort is a better measure to understand the relative efficiency of the states in mobilising revenue through tax. Therefore we have computed tax effort. F. GROWTH TREND OF NON TAX REVENUE Table IV 12 reveals the trend of total non tax revenue, per capita non tax revenue and its share in total revenue from 1985 86 to 2005 06. There has been an over all increase in the total as well as per capita non tax revenue. The per capita non tax revenue was highest in Haryana at Rs.282.67 and lowest in West Bengal at Rs.102.48 in 1985 86. It was highest in Punjab and lowest in Bihar in 2005 2006. The relative ranking of states changed often. During the 21years, there had been an improvement in the relative positions of the states like Andhra Pradesh, Gujarat, Karnataka, Orissa, Punjab, TamilNadu and West Bengal where as there had been a down fall in the relative position of some states like Bihar, Haryana, Kerala, Madhya Pradesh, Maharashtra, Rajasthan and Uttar Pradesh. The share of Non tax revenue in total revenue has fluctuated in all the states. It varied between 44.6% in Assam and 21.8% in Tamil Nadu in 1985 86. In 2005 06, the share ranged between 47.8 % in Assam and 16.6% in Tamil Nadu. The share of non tax revenue was always higher in Assam and lowest in Tamil Nadu. However in all the states the share decreased except in Assam where it went up. This reveals the fact that the
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92 states are using their tax sources for mobilising more resources and their dependency on non a tax source is decreasing. Assam is getting more revenue from non tax sources because that states has more natural resources like plantations and oil etc. As shown by Table IV 13, in real terms, total and per capita non tax revenue increased in all the states except in Bihar. In Bihar, there had been a negative rate of growth in per capita non tax revenue. The reason for the negative growth rate was that the relative proportion of non tax revenue in total revenue came down continuously from 2000 01 to 2005 06. The fall in the share of non tax revenue in Bihar, was effected by the fall in the contribution of other services during that period. The rate of growth of total and per capita non tax revenue was highest in Punjab and it was lowest in Bihar.
93 INTER STATE DISPARITY IN PER CAPITA NON TAX REVENUE TABLE IV-14 I. MEASURES OF INTER-STATE DISPARITY IN PER CAPITA NON-TAX REVENUE Year Ratio between lowest and highest per capita revenue Mean (in Rs.) Standard Deviation Co-efficient of Variation 1985-86 1:2.75 171.18 48.52 28.35 1986-87 1:3.34 191.17 75.32 39.40 1987-88 1:3.17 208.99 77.72 37.19 1988-89 1:2.70 231.43 72.76 31.44 1989-90 1:3.98 224.02 80.84 36.08 1990-91 1:3.06 272.31 95.92 35.22 1991-92 1:6.39 375.17 195.14 52.01 1992-93 1:4.00 370.03 123.22 33.30 1993-94 1:4.85 458.49 210.49 45.91 1994-95 1:11.50 573.10 506.05 88.30 1995-96 1:8.37 538.55 322.70 59.92 1996-97 1:5.17 816.81 412.88 50.55 1997-98 1:4.51 829.76 355.99 42.90 1998-99 1:6.16 630.62 372.51 59.07 1999-00 1:4.50 633.76 252.17 39.79 2000-01 1:6.83 682.88 328.82 48.15 2001-02 1:7.47 659.97 323.52 49.02 2002-03 1:7.86 732.59 436.49 59.58 2003-04 1:7.64 793.63 464.71 58.55 2004-05 1:6.48 931.00 504.56 54.20 2005-06 1:6.21 1087.50 551.62 50.72 II. Rank correlation co-efficient between 1985-86 per capita revenue levels and the absolute variation in per capita revenue levels. 1985-86 and 1990-91 +0.3464 1985-86 and 1995-96 +0.675 1985-86 and 2000-01 +0.4321 1985-86 and 2005-06 +0.375 III. Rank correlation co-efficient between 1985-86 per capita revenue levels and the percentage variation in per capita revenue levels. 1985-86 and 1990-91 -0.0535 1985-86 and 1995-96 +0.4142 1985-86 and 2000-01 -0.225 1985-86 and 2005-06 -0.0285 Source: Table IV -12- Computed by us.
94 From the table IV 14 we find an overall increase in the ratio between the lowest and highest per capita non tax revenue though there were fluctuations. The all state average also has increased. The Inter state variation in per capita levels is widening vastly. G.GROWTH TREND OF THE OWN TAX REVENUE OF THE STATES The own tax revenue of the states comprises revenues from taxes on income, taxes on property and capital and taxes on commodities and services. It is the total tax revenue net of tax transfers from the central government. Table IV 15 and IV 16 present the growth of own tax revenue of the states at current and constant 1980 81 prices respectively. The total own tax revenue and per capita own tax revenue have increased in all the states during the 21 years. In Maharashtra, total own tax revenue is grater than in any other states during the period under our study. It has increased from Rs.2377crs in 1985 86 to Rs.33540crs in 2005 06. In most of the years under our analysis, the per capita own tax revenue was highest in Haryana. The own tax revenue per head of population was lowest in Bihar in all the years. So Haryana collected more revenue from its own sources than other states. Bihar took the least effort. In real terms also the total and per capita own tax revenue went up in all the states. However, the own tax revenue per head of population had a negative growth rate in Bihar.
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97 The growth rate of per capita own tax revenue was very high in Orissa and it was very low in Bihar. In the relative ranking of the states, Punjab, Haryana and Maharashtra occupied the top most place alternatively. There is an improvement in the relative position of the states like Haryana, Karnataka, Orissa, Rajasthan and Tamil Nadu. The share of state s own tax Revenue in total Revenue has fluctuated in all the states during the period of study (See Appendix Table A-10). Generally its share was very high in Tamil Nadu than in any other states in most of the years and its share was very low in Bihar and Assam alternatively. It varied from 20% in Bihar to 68% in TamilNadu in 2005 2006. The share of state s own tax Revenue in total tax revenue also has fluctuated in all the states. There was no uniform pattern. But its share was very low in Bihar and it was followed by Assam. The contribution ranged between 25.5% in Bihar to 88.3% in Haryana in 2005 06. For all the states, the contribution of own tax revenue to total revenue and total tax revenue increased from 45.9% and 67.8% in 1985-86 to 53.1% and 70.2% in 2005-06 respectively. These shows all the states are continuously taking efforts to increase their own tax revenue. Therefore the central transfers do not affect the states willingness to raise revenue. There is no substitution effect or fiscal irresponsibility on the part of the states. Except for Assam and Bihar, own taxes are the major sources of revenue for the states. In these states, non tax sources contributed more.
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99 INTER STATE DISPARITY IN PER CAPITA OWN TAX REVENUE TABLE IV-17 I. MEASURES OF INTER-STATE DISPARITY IN PER CAPITA OWN TAX REVENUE Year Ratio between lowest and highest per capita revenue Mean (in Rs.) Standard Deviation Co-efficient of Variation 1985-86 1:3.70 236.21 99.72 42.21 1986-87 1:3.75 263.85 114.61 43.44 1987-88 1:4.03 296.54 128.61 43.37 1988-89 1:4.11 338.41 151.75 44.84 1989-90 1:4.08 384.59 171.61 44.62 1990-91 1:3.66 433.52 184.35 42.52 1991-92 1:3.88 506.50 222.56 43.94 1992-93 1:3.91 554.33 248.19 44.77 1993-94 1:3.91 630.28 290.51 46.09 1994-95 1:4.54 725.33 354.92 48.93 1995-96 1:4.51 813.37 400.08 49.19 1996-97 1:4.32 877.49 415.98 47.41 1997-98 1:4.71 973.70 460.62 47.31 1998-99 1:4.44 1037.71 480.61 46.31 1999-00 1:3.96 1189.07 556.01 46.76 2000-01 1:5.77 1301.71 639.30 49.11 2001-02 1:7.99 1344.33 689.20 51.27 2002-03 1:7.88 1475.07 734.35 49.78 2003-04 1:7.42 1631.77 804.88 49.33 2004-05 1:8.75 1887.13 939.29 49.77 2005-06 1:10.02 2183.03 1110.20 50.86 II. Rank correlation co-efficient between 1985-86 per capita revenue levels and the absolute variation in per capita revenue levels. 1985-86 and 1990-91 +0.9357 1985-86 and 1995-96 +0.8857 1985-86 and 2000-01 +0.9142 1985-86 and 2005-06 +0.8714 III. Rank correlation co-efficient between 1985-86 per capita revenue levels and the percentage variation in per capita revenue levels. 1985-86 and 1990-91 -0.0642 1985-86 and 1995-96 +0.3571 1985-86 and 2000-01 +0.2535 1985-86 and 2005-06 +0.1714 Source: Table IV-15-Computed by us.
100 Table IV 17 exhibits the ratio between lowest and highest per capita own tax revenue and the relative and absolute variations in this revenue. In 1985 86, the ratios between the lowest and highest per capita own tax revenue was 1:3.70. This means Punjab s per capita revenue was nearly 4 times higher than that of Orissa. In 2005 06, the ratio is 1:10.02 indicating the same tendency between the per capita levels of Haryana and Bihar. However, this simple measure is not sufficient to show the extent and trends in inter state variations. The better measures are all state average and Co efficient of variation. In 1985 86, the all state average per capita own tax revenue was Rs.236.21 and the states Assam, Bihar, Madya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal stayed below the all state average. Almost the same trends were observed in all the years. The inter state variation as shown by the standard deviation and co-efficient of variation is higher and expanding. The first hypothesis that the inter state disparity in per capita own tax revenue is smaller and it is narrowing has been disproved. The states with higher per capita levels expanded their levels faster than the other states.
1985-86 1990-91 1995-96 2000-01 2005-06 Co-efficient of Variation 101 60 Figure IV-7 Inter-State Disparity in Per capita States' Own Tax Revenue 50 40 30 20 10 0 Source: Table IV-17 Years The reason for the widening per capita revenue levels among the states can be found more clearly by Tax income ratio, tax effort and Income elasticity of tax revenue. TAX INCOME RATIO The taxable capacity of each state can be known by the tax income ratio. Tax -income ratio represents the ability of the people to pay tax. Table IV-18 points out how much of our income is siphoned off by the government to meet its obligations. It means that how much of our income goes to the Government by way of taxes. The tax income ratio increased in some states, remained constant in some states and decreased in some other
102
103 states. The trend in the tax income ratio throughout the study period is not showing consistency. There are ups and downs in the tax income ratio of all the states. This rise and fall in ratio may be due to increase in State Domestic Product or tax revenue. It is evident that, both tax revenue and State Domestic Product have increased over the period in all the states which is a welcome trend. The differences in the tax income ratios of the states explain the variations in the levels of per capita own tax revenue of the states. The tax income ratio is very high in the states like Andhra Pradesh, Karnataka, Kerala and Tamil Nadu. It is very low in Assam in most of the period. The states whose tax income ratios are very high are efficient in collecting tax revenue. The size of the tax income ratios of the developed states are higher. In the poor states, there is an overall increase in their tax income ratios. But the increase is inadequate. Therefore, their per capita own tax revenue is lower. Hence the states whose tax income ratios are very low must take efforts to increase their tax income ratios for mobilising more revenue for financing their developmental plans. The success of tax policy changes depends heavily on the administrative ability and the political will to collect revenue through fair and efficient enforcement. 12 It is said, The tax income ratio of a high income country is more an index of political preference for the appropriate size of the Government role than an index of taxable capacity. 13 In Andhra Pradesh, the Government took away 11.04 paise from the people s income of every Rs.1 in 1985 86. But it took only 8.94 paise in
104 2005 06. In Tamil Nadu, out of one rupee 11.57 paise goes to the Government by way of tax revenue while it is only 4.71 paise in Assam. This difference undoubtedly explains the differences in their per capita revenue levels. However, the tax burden is not higher in all the states. Government can not increase taxes frequently and so the taxable capacity cannot swell up quickly. As said by peacock and wise man people s idea about tolerable limit of taxation will take time to change. 14 Tax income ratio presents the absolute taxable capacity. Relative tax effort is a more appropriate measure to indicate the state s effort to raise revenue. TAX EFFORT The Economic efficiency of taxes is important in assessing the welfare effects of various taxes. 15 Tax performance of developing countries can be evaluated on the basis of tax ratio, indices of tax effort in the static sense and income elasticity of total tax revenue 16 which are the indices of effort in a dynamic sense. A country s tax performance can be considered as higher if it has an above average tax effort index and also a high elasticity coefficient. The effort ratio or tax income ratio is affected by many factors. Hence a better method is to measure relative tax effort. A popular method is Representative Tax System Approach. 17 The tax effort or effort relative is computed by relating the own tax revenue of each state to all state average
per capita income. The effort relative is computed for the year 1985-86 and 2005 06. 105 Tax effort of the state is presented in the Table IV 19. States with effort relative higher than 100 are above the all state average in their tax effort. This means they are trying to mobilise more revenue through taxation than other states. The higher effort is reflected in the size of their per capita tax revenue. In 1985 86, Tamil Nadu stood first in tax effort followed by Kerala, Karnataka and Andhra Pradesh. In these states tax effort is high because the states are taking efforts to collect revenue. So in these states, tax-income ratio is higher. Higher the capacity higher will be the effort to raise revenue. Backward states stayed below the all state average indicating their poor tax effort. Orissa and Assam stand in the 14 th and 15 th places respectively. This is reflected in their lowest per capita own tax revenue. In these states, lower the taxable capacity lower will be the effort. That means the states are not taking adequate efforts to tap enough resources by way of taxation. In 2005 06, Karnataka came to first place followed by Tamil Nadu and Haryana. Here Bihar and West Bengal occupied the 14 th and 15 th places respectively showing poor revenue mobilisation. Thus the second hypothesis that all the states have increased their tax effort has been disproved.
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INCOME ELASTICITY An efficient Government do better services to the society. 107 For performing its functions better Government needs more revenue. So it is essential to increase tax revenue through better tax effort, when the economy is expanding. Elasticity of a tax refers to its responsiveness to steps taken by authorities in increasing its yield through an extension of its coverage or revision of its rates. Numerically, the elasticity of a tax would be measured as ratio of the proportionate change in its yield to the proportionate change in its coverage or rates. A tax system is income elastic if the tax revenue increases more than proportionately in association with a given increase in National income. In a developing economy, revenue is expected to grow as the economy develops. How for the tax system is responsive to economic growth could be known by income elasticity. Income elasticity of own tax revenue is provided by Table IV 20. The Table IV 20 reveals that the income elasticity is less than one in Andhra Pradesh, Gujarat, Kerala, Maharashtra and West Bengal. Their tax system is less responsive to changes in state income. It is greater than one in Assam, Bihar, Haryana, Karnataka, Madhya Pradesh, Orissa, Punjab, Rajasthan, Tamil Nadu and Uttar Pradesh. In Orissa, the income elasticity is 1.63. This means 1% increase in national income results in 1.63% increase in the own tax revenue of the Orissa Government. That is, in the poor states, a smaller increase in the income of the people leads to a greater increase in the own tax revenue.
108 TABLE IV-20 INCOME ELASTICITY OF STATES OWN TAX REVENUE STATES/YEAR 1985-86 - 2005-06 1.Andhra Pradesh 0.84 2.Assam 1.39 3.Bihar 1.09 4.Gujarat 0.94 5.Haryana 1.18 6.Karnataka 1.17 7.Kerala 0.84 8.Madhya pradesh 1.32 9.Maharashtra 0.96 10.Orissa 1.63 11.Punjab 1.23 12.Rajasthan 1.23 13.Tamil Nadu 1.06 14.Uttar Pradesh 1.55 15.West Bengal 0.73 Source: Tables IV -15 & A - 52- Computed by us. It is clear that all states are taking advantage of their enhanced economic development for mobilising more tax revenue to meet their development needs. SHARE OF OWN TAX REVENUE AND CENTRAL TAXES TO STATE S TOTAL TAX REVENUE From the Table IV 21, we know that own tax revenue is the major source of income to all the states. The share of own tax revenue in the states total tax revenue increased in all the states from 1985 86 to 2005 06 except in Bihar. This is a good trend as the states are depending on their own resources for meeting their developmental needs.
109
110
111 The share of states in central tax revenue fluctuated in all the states during the study period. However, poor states continue to get higher share in the central taxes when compared to the rich states. Especially Bihar s share has increased very much. Backward states get nearly 50% of their total tax revenue from the centre while developed state get nearly 18% only. However, West Bengal continues to get more than 35% of its revenue need from the centre. The decrease in the developed state s share in central tax revenue indicates that the dependency of those states on centre tends to decrease. However, a better measure is the share of total central transfers in states total revenue and total expenditure. Here again a similar condition prevails as shown by Table IV 22. Thus the third hypothesis that the developed states dependency on federal transfers has decreased has been proved correct.
112
113
114 EFFICIENCY IN COLLECTION OF TAXES The Table IV 23 reveals that the expenditure on collection of taxes as percentage of own tax revenue has shrunk in all the states and the efficiency in tax collection has increased in all the states. However, the states vary in their relative efficiency. The cost of collection is always lower in developed states like Andhra Pradesh, Gujarat, Haryana, Kerala, Punjab, Tamil Nadu and West Bengal and so they are more efficient. Gujarat is the most efficient state in collection of taxes. Cost of collection is higher in all the backward states and so they are less efficient. Bihar is the least efficient state. Maharashtra shows a different picture. Its cost of collection is very high from 1996 97 to 2005 06. This may be due to increased tax rate and increased tax base necessitated by other causes. There is a decline in Maharashtra s share in central taxes. 18 And also, there is less increase in grants in aid. 19 The relief expenditures on natural calamities have increased to a greater extent when compared to the other states. 20 Due to these reasons, in Maharashtra, the tax base might have been increased forcing an uptrend in the cost of collection of taxes. CONCLUSIONS 1. Total Revenue and per capita revenue have increased during the years from 1985 86 to 2005 06 in all the states both at current and constant prices. But the increase is not uniform. Both the total as well as per capita revenues increased at varying degrees among the states. 2. In all the 15 states, the revenues have increased continuously every year. The states have taken sustained efforts for mobilising higher
115 revenue. The total revenue increased at a faster rate in Karnataka and the per capita revenue increased faster in Orissa than in other states. Bihar has lowest growth rates in total and per capita revenue respectively. 3. The inter state differentials in per capita total revenue have increased. But not continuously. The richer states increased their revenue faster than the poorer states. So the divergence has occurred. 4. The income elasticity of total revenue is less than one in the states like AndhraPradesh, Gujarat, Haryana, Kerala, Maharashtra, Rajasthan, Tamil Nadu and West Bengal and it is greater than one in the other states. The states whose income elasticity is greater than one, take more efforts to collect additional revenue. Their tax system is more responsive to changes in state income. 5. The tax revenue and non tax revenue have grown faster in all the states. Both the sources have contributed for the growth of total revenue of the states. However, their relative contributions vary from state to state. The tax revenue forms the major source in both the developed and backward states. The share of tax revenue in total revenue was more than 50% in all the states in all the years except in Assam and Haryana. In these states, no uniform pattern is seen. The share of tax revenue of all the states rose from 67.7% in 1985-86 to 75.7% in 2005-06 of the all states total revenue. The tax revenue contribution has continuously been increasing. Therefore, tax revenue is the major source of revenue to the states and non-tax revenue is the secondary source except for Assam and Bihar.
116 6. Total tax revenue and per capita tax revenue have increased at current and constant prices in all 21 years in all the major states. The per capita tax revenue was highest in Orissa and it was lowest in Bihar. 7. There had been improvement in the relative positions of the states like Karnataka, Kerala, Orissa, Rajasthan, Tamil Nadu and Uttar Pradesh during the 21 years, in terms of per capita tax revenue. 8. The inter state disparity in per capita tax revenue has increased between 1985 86 and 2005 06. 9. The income elasticity of tax revenue is similar to that of total revenue. 10. In all the states, the tax system is buoyant and so the states are capable of mobilising revenue through discretionary changes and automatic responses. But the buoyancy varies from state to state. 11. The state s own tax revenue at absolute and per capita levels has increased steadily at current and constant prices in all the states. The per capita own tax revenue was highest in Haryana in most of the years and it was lowest in Bihar. The growth rate or per capita own tax revenue was very high in Orissa and it was very low in Bihar. In Bihar, the growth rate is negative. 12. The share of state s own tax revenue in total tax revenue fluctuates in all the states. Of the total tax revenue, it forms about 45% in backward states and more than 75% in the developed states. There was no uniform pattern. For all the states, the contribution of own tax revenue to total revenue and total tax revenue has increased from 45.9% and 67.8% in 1985-86 to 53.1% and 70.2% in 2005-06 respectively. These shows all the states are continuously taking efforts to increase their own tax
117 revenue. Therefore the central transfers do not affect the states willingness to raise revenue. There is no substitution effect or fiscal irresponsibility on the part of the states. 13. The states like Assam, Bihar, Madhyapradesh, Orissa, Rajasthan, UttarPradesh and West Bengal stayed below the all state average while other states lie above the all state average during the all years under our consideration. Therefore these states remain backward in their economic and welfare activities. 14. The inter state variation in per capita own tax revenue is higher and expanding. Thus the first hypothesis that the inter state disparity in per capita own tax revenue is smaller and converging has been disproved. 15. The tax income ratio of own tax revenue has increased in some states, remained constant in some other states and decreased in a few other states. The trend in the ratio throughout the study period is not showing consistency. There are ups and downs in the ratio of all the states. It is higher in the developed states and lower in the poor states. Though there is an increase in their tax income ratios in backward states the increase is inadequate. The tax burden is not higher in all the states. Hence the states whose tax income ratios are very low must take efforts to increase their tax income ratio for mobilising more revenue for financing their developmental plans. 16. All the developed states except West Bengal had higher tax effort. The backward states are poor in their tax effort. Thus the second hypothesis that all the states have increased their tax effort has been disproved.