A Study of Federal Transfers and Fiscal Capacity of States in India Thesis

A STUDY OF FEDERAL TRANSFERS AND FISCAL CAPACITY OF STATES IN INDIA

THESIS SUBMITTED FOR THE AWARD OF THE DEGREE OF Doctor of Philosophy IN ECONOMICS

BY ABBAS HAIDER NAQVI

UNDER THE SUPERVISION OF PROF. ASHOK MITTAL

DEPARTMENT OF ECONOMICS ALIGARH MUSLIM UNIVERSITY ALIGARH (INDIA) 2017 : 0571 2700920 Phone : 1405, 푒푥푡푒푟푛푎푙 −1406 � 푖푛푡푒푟푛푎푙 퐶ℎ푎푖푟푚푎푛 ∶ DEPARTMENT OF ECONOMICS ALIGARH MUSLIM UNIVERSITY ALIGARH-202002 (INDIA)

Ref No………………. Dated : ……………………

CANDIDATE’S DECLARATION

I, Abbas Haider Naqvi, Department of Economics certify that the work embodied in this Ph.D. thesis is my own bonafide work carried out by me under the supervision of Dr. Ashok Mittal at Aligarh Muslim University, Aligarh. The matter embodied in this Ph.D. thesis has not been submitted for the award of any other degree.

I declare that I have faithfully acknowledged, given credit to and referred to the research workers wherever their works have been cited in the text and the body of the thesis. I further certify that I have not willfully lifted up some other's work, para, text, data, result, etc. reported in the journals, books, magazines, reports, dissertations, theses, etc., or available at web-sites and included them in this Ph.D. thesis and cited as my own work.

Dated ...... Abbas Haider Naqvi Enrolment no.: GD2426 Faculty no.:

…………………………………………………………………………………….

Certificate from the Supervisor

This is to certify that the above statement made by the candidate is correct to the best of my knowledge.

Dr. Ashok Mittal (Professor) Department of Economics Aligarh Muslim University, Aligarh

(Signature of the Chairman of the Department with seal)

: 0571 2700920 Phone : 1405, 푒푥푡푒푟푛푎푙 −1406 � 푖푛푡푒푟푛푎푙 퐶ℎ푎푖푟푚푎푛 ∶ DEPARTMENT OF ECONOMICS ALIGARH MUSLIM UNIVERSITY ALIGARH-202002 (INDIA)

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COURSE/COMPREHENSIVE EXAMINATION/PRE-SUBMISSION SEMINAR COMPLETION CERTIFICATE

This is to certify that Abbas Haider Naqvi, Department of Economics has satisfactorily completed the course work/comprehensive examination and pre- submission seminar requirement, which is part of his Ph.D programme.

Prof. Nighat Ahmad (Chairman) Department of Economics Aligarh Muslim University, Aligarh

Title of the Thesis : A Study Federal Transfers and Fiscal Capacity of States in India

Candidate’s Name : Abbas Haider Naqvi

The undersigned hereby assigns to the Aligarh Muslim University, Aligarh copyright that may exist in and for the above thesis submitted for the award of the

Ph.D. degree.

ABBAS HAIDER NAQVI

ACKNOWLEDGEMENTS

Towards the path of success of an individual, perseverance and motivation have always played a key role. At any level, it is often quite difficult to understand the wide spectrum of knowledge without proper guidance and advice.

On the very outset of this work, I would like to express my deepest gratitude to my research supervisor, Professor Ashok Mittal for allotting me such a good topic on which I could come up with best of my work.

I am grateful to him for extending me an unfettered support and concentrated my efforts in the right direction from the very start. His inspiring guidance and unfailing succor has truly helped me to project and organize the entire research work in a scientific and systematic manner. I shall remain highly obliged to him for lifetime.

I am thankful to Professor Nighat Ahmad, Chairman, Department of Economics, Aligarh Muslim University, who imparted her valuable support throughout the tenure of my work.

I would also like to thank department library incharge Mr. Buniyad Ali Khan for furnishing me with the books and available information that has helped me compiling the work in an authentic way and Mr. Aqeel Ahmad (Section In-charge), for his cooperation and support as and when required.

No words of appreciation will ever be enough for my wonderful friends and colleagues who supported me with their advice, suggestions and comments. I am grateful in particular to Dr. Imran Ali, Dr. Azeem, Dr. Shahid Rasool, Dr. Arifa Saleem, Dr. Qamar Alam, Nasir, Shahid, Arsalan, Arfaz, Wasi, Haris, Aamir, Tabish, Jafar, Sohail, Sohrab, Musab, Midhat, Javeria, Vishal, Aiman, Yateesh, Abdullah etc. The beginning has been so enjoyable with them that I keep guessing the beauty beyond the horizon. It is my pleasure to thank them all.

This thesis is a tribute to my late grandparents who I am sure would have been the happiest if they had been here.

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I express my gratitude to my family members who were pillars to my strength especially for undying hopes and courage.

Above all, I extend a heartful of thanks to The Almighty for making this endeavor a great success.

ABBAS HAIDER NAQVI

ABSTRACT

India being a federal country, the State governments have an exclusive Constitutional right over sources of public revenues. The financial dependence of the States on the Union Government has been on the increase in recent years. Therefore, federal transfers, as instrument of fiscal adjustment assume lot of importance in almost all the federations. In India fiscal resources have been transferred to the States through the successive Finance Commissions and the various Central Ministries. Though the objective of the fiscal transfers channeled through different channels is same, different criteria have been followed by different agencies, while transferring the resources to the States. The fiscal transfers should aim at reducing the existing inter-State disparities of fiscal capacity and levels of essential administrative and social services. But these objectives have not been achieved by the union transfers in India. The States complain against the Centre many a time that they have been deprives of their genuine opportunity of exercising their financial powers. Moreover, they strongly believe that the existing Constitutional arrangement of financial powers do not match with that of the responsibilities entrusted to them. The States feel that they have become indebted largely because of the expensive an expansive functions to be performed in the interest of public welfare and the pursuit of development plans. On the other hand the Centre accuses that the States have been depending on it unduly for fiscal resources. The Central government attributes that the resources crunch of the States is due to laxity of tax effort, enormous and unabated growth of non-plan development expenditure etc. Mutual blaming and attribution and by the Centre and the States in public have become a regular feature in the Indian federation. This situation as such explains the inadequacies in the exiting Centre-State fiscal arrangements demanding a fresh look at the problem of fiscal imbalances. An attempt is made to examine some of the issues of fiscal federalism which have become irritants in fiscal relations between Centre and the States in India.

The objective of this research is to study the impact and scenario of federal transfers in decentralized system, especially in the context of Finance Commission. An attempt has also been made to compute the fiscal capacity and tax efforts of 16 major Indian States, viz. Besides, the thesis also covers:

1. Understanding of the two vital concepts of tax effort and tax capacity and the alternative quantitative techniques that can be employed to capture them. 2. Operational aspects of fiscal federalism in India. 3. Efficacy of various channels of union transfers and analysis of operations of Planning Commission and various Finance Commissions.

The present study is organized into six chapters. The first chapter is introductory in nature which gives an idea about conceptual framework and issues of federal transfers by Finance Commission, constitutional provisions, principles and criteria of fiscal transfers, issues related to Finance Commission and Planning Commission and spells out the significance and scope, objectives of the study, methodology adopted and data sources as well as limitations of the study.

Fiscal federalism helps governmental organization to realize cost efficiency by economies of scale in providing public services which correspond most closely to the preference of the people. From the point of view of the economy, it creates a unified common market which promotes greater economic activity. In this context it will be useful to undertake comparative study of the issues and problems of fiscal federalism in India. The problem arises from the extent of decentralization and its relation to the level of development, heterogeneity of the population, harmonization of their preference pattern, allocation of functions and financial sources to different levels of government, arbitration of vertical and horizontal imbalances and the institutional mechanism to conduct inter-governmental relations.

In the literature on federal finance, more than vertical fiscal imbalances (VFI), it is the horizontal fiscal imbalances (HFI) that has received lot of attention. Horizontal fiscal imbalances arise due to the differences in the fiscal capacities and due to varied expenditure needs. Any scheme of federal fiscal transfers pursuing the objective of equalization should recognize the underlying differences in the capacity of the States to raise funds from their tax resources for financing their expenditure and investment programs.

The Indian Constitution is basically federal, but with striking unitary features. The framers of the Constitution had to depart from a purely federal concept, owing to the political circumstances of the times when 'unity and integrity' of the country was the prime concern.

The Constitution framers realized that such in-built vertical and horizontal imbalances needed to be corrected for an even and equitable development of all regions of the country. The main instrument for this was to be fiscal transfers from the Centre to the States through channels and mechanisms provided for this purpose in the Constitution. There are both mandatory and enabling provisions in the constitution for facilitating a wide-ranging transfer of resources, arranged in a systematic manner.

There are, in general, three channels through which federal transfers flow to the States: (a) Finance Commission (b) Planning Commission (c) Central Ministries. In the third chapter these three channels has been discussed separately.

The basis of federal fiscal transfers has been modified from time to time to suit the needs and objectives of changing complexion of federal polity. The criteria for devolution have also become more refined and sophisticated. The broad objectives of a federation are: (1) Equity (2) Equalization (3) Neutrality and (4) Growth.

The two main bodies that intermediate between the Centre and the States in the matter of fiscal transfers, viz., the Finance Commission and the Planning Commission follow approaches in a segmented way without any effective co-ordination. Especially important in this context is the impact of dynamic linkage between the two major streams of resource transfers. In fact, the combination of the gap-filling approach followed by the Finance Commission and provision of loans to the State almost by entitlement along with an emphasis on the size of the plan has led to major inefficiencies resulting in large debt burdens and corresponding burdens of interest payments and salary liabilities for the State governments.

The method of working out transfers by the Planning Commission and the Finance Commission thus sets up a circuit of adverse incentives, because in both cases, a fragmented view is taken, without addressing the issue in its totality. Finance Commission keeps looking only to the (non-plan) revenue expenditures without paying much attention to the linkage of interest payments with past fiscal deficits and accumulated debt stock. The Planning Commission looks only at new schemes. It looks at the scope of borrowing in the plan period without considering what future liabilities are being created and how they may be financed beyond the plan period. Projects financed by external assistance, which is transmitted to the State on the same

terms and conditions as normal plan assistance, also create similar liabilities regarding interest payments and maintenance.

In order to undertake focused research the present research framed the objectives of the study as follows:

1. To analyze the pattern and components of federal transfers to States of India.

2. To analyze the State level taxes of major States of India and

3. To measure the fiscal potential and tax efforts of major States in India and differences there in.

In order to support these objectives, following hypothesis were developed and tested during the course of this work:

• H0: There is no change in fiscal autonomy and fiscal dependence of the States during the period of study.

• H1: There is a change in fiscal autonomy and fiscal dependence of the States during the period of study.

• H0: The fiscal capacity of the major States in India has not changed.

• H1: The fiscal capacity of the major States in India has changed.

• H0: The efforts made by the States in utilizing potential base isstagnant.

• H1: The efforts made by the States in utilizing potential base is not stagnant.

The second chapter reviews some of the existing theoretical and empirical studies on fiscal transfers and fiscal capacity. It is divided into two parts: (i) Studies on federal fiscal transfers and Finance Commissions and (ii) Studies on fiscal capacity and tax effort.

The third chapter gives the detailed scenario of federal transfers to States. This chapter discusses and analyzes the mechanism of fiscal transfers. The analysis of union transfers from Finance Commission shows that net transfer of resources from the Centre increased by 60.96 percent over the years 2013-14 and 2014-15, there is only an increase of 8.13 percent in net transfer of resources between 2014-15 and 2015-16. Also the year 2014-15 witnessed a 124.20 percent increase in grants from

the Centre and 104.60 percent increase in gross loans from the Centre over the previous year. In 2015-16 there is 11.80 percent decline in grants from the Centre and only 14.84 percent increase in gross loan from the Centre, while State's share in Central taxes has increased by 32.58 percent over the previous year. There is an increase of 32.58 percent in States share in Central taxes in the year 2015-16 which is two times higher than previous year.

An analysis of trends in sub-components of transfer of resources reveals the contribution of sub-components in devolution of resources. It is observed that except for the year 1998-99, total devolution of States share in central taxes (SCT) has moved up. In case of grants-in-aid from the Centre (GIA), analysis of data from 1990- 1991 onwards shows an upward trend in general except for the year 1994-95 and 1998-99. Gross loans from the Centre (GLFC) shows a pattern which is very different from that of SCT and GIA.

Statutory devolution and non-statutory devolution is the major aspect of devolution and transfers of resources. The point to be noted here that other current transfer (OCT) are same as non-statutory grants, data from year 1990-91 to 2010-11 (BE) indicates that statutory devolution, i.e., total Finance Commission transfer (FCT) has always been higher than non-statutory devolution. Moreover, on an average statutory devolution was 64.16 percent and non–statutory devolution was 35.84 percent per annum of the total devolution. The annual growth rate for FCT and OCT though shows a wide range of variation.

To illustrate the measure of centralization, data have been taken from India public finance statistics from 1950-51 to 2013-14. It is evident that a high degree of centralization in pre-devolution scenario. Centre invariably had larger share in direct taxes at its command than all the States put together. However, the intensity of fiscal centralization after devolution of funds to States has been declining gradually over period.

A detailed analytical appraisal of ThFC and FFC and other relevant share of Union transfers is also undertaken in this study. It is clearly visible that transfers have a more favourable impact on the States that are relatively less developed, which is an indication that they are progressive, that is low income States are likely to receive on average much larger transfers.

The fourth chapter deals with various measures and issues of fiscal capacity and tax efforts. According to Mathews R.L. and T.A. Sweeney (1977) “A fiscal unit's taxable capacity in particular to a revenue source may be defined as the amount of tax the unit can raise by applying a standard rate schedule to its own revenue base”. On the other hand, tax effort refers to the various administrative and legislative efforts to expand the base, rationalization of the tax structure and reduction in the incidence of tax avoidance and evasion. Thus, it is possible for a high income economy to have a high tax capacity but low tax effort if it does not take initiatives to maximize its tax revenue "potential".

It is essential to assess the inter-State differentials in fiscal potential. In this context, the problem of measurement of fiscal potential arises and this problem can be broadly addressed to in two different ways:

1. Macroeconomic approach: Income measure of fiscal capacity. 2. Tax yield/revenue approach to measuring fiscal capacity.

A 'micro-oriented' approach to the fiscal capacity issue is often the tax yield approach. The yield approach can further be classified into:

• Regression Analysis Approach. • Representation Tax System Approach.

The detailed study of different types of methods for estimating fiscal potentials and tax efforts of the States reveals that both representative tax and regression approach have their own merits and demerits. Many scholars in India and abroad have employed both the methods to compute the fiscal capacity. Due to the large detailed

data requirements on every type of tax base or a close proxy for each and on collection of tax by different tax base categories are required for the RTS approach the present study adopted regression approach.

The fifth chapter examines and computed fiscal potential and tax efforts of major States. Before estimating the fiscal capacity and tax efforts of States a brief analysis and performance of State’s own tax revenue has also been done. Analysis of tax performance of the States has been done in terms of:

1. Aggregate all-State level performance

2. Comparative inter-State performance; and

3. Performance of selected major own tax revenues of States.

As mentioned earlier, the fiscal capacity and tax efforts of States can be estimated with the help of RTS and regression approach but due to large data requirement for the RTS approach the study adopts the regression approach. However, the research do uses a disaggregated approach and estimate separate cross-section regressions for each of the major taxes, or more accurately, groups of taxes. This study confines itself to the estimation of 16 Major States of India and data pertaining to years 2005-2006 to 2013-2014. Here, an attempt has been made to compare the fiscal capacity of three periods i.e. (2005-2006 to 2007-2008), (2008- 2009 to 2010-2011) and (2011-2012 to 2013-2014). To avoid the impact of fluctuations in a particular year three yearly averages for tax revenue, GSDP and all other variables are taken.

The total fiscal capacity and tax efforts of all the 16 States with their respective ranks have been computed for three different study periods. In all the 16 States Andhra Pradesh is the only State which ranks first in tax effort in all the three periods. Though Andhra Pradesh is putting highest effort in relation to other States but the tax effort of this State is declining. Andhra Pradesh got sixth rank in terms of revenue potential except for the first study period in which it is ranked seventh. Maharashtra is having highest fiscal capacity but put less effort in mobilizing the resources of the State. Despite being the first in rank in terms of fiscal potential Maharashtra is putting very less efforts in all the reference year. Goa is having least fiscal potential and ranked

sixteenth in all the three different periods not only in fiscal potential but it is also least ranked in terms of tax effort.

West Bengal is the State which is putting least effort in utilizing their resources inspite of having good fiscal capacity and not even putting their cent percent effort in utilizing their resources. High income State like Goa and Gujarat are also not giving their best in terms of putting efforts in these different reference years.

Tax effort index and net contribution for each tax to total tax effort in all the different States are also computed here. From net contribution one can easily know the extent of positive or negative contribution by each State.

The net contribution of Andhra Pradesh is 67.01 percent above the average. The major contributors for this makeable performance have been made by sales tax (+44.97), stamp duty and registration fee (+7.12) and state excise duty (+18.07). Next State is Assam whose performance is depicted in appendix A.5.46. The net contribution made by the Assam is below the average. Assam’s performance is 10.96 percent below average. Taxes like motor vehicle (-0.87), state excise duty (-4.75), and stamp duty and registration fees (-3.22) are the taxes that have made a significant negative contribution. The land revenue and agricultural income tax is the only tax which has made a positive contribution in the State Assam.

Bihar comes under the category of low income State and has made negative (-5.75) contribution to the State. Sales tax is the major negative contributor which is affecting the overall contribution of Bihar. The net contribution of motor vehicle tax is +8.13. Surprisingly Goa is the high income State and its performance is 9.32 percent below the average performance. Here the motor vehicle tax is the major negative contributor in Goa.

Gujarat and Haryana both States are doing well in putting their efforts. Gujarat is contributing 8.53 percent and Haryana 10.44 percent above the average level performance.

Karnataka and Kerala have also performed very well in terms of net contribution made to the State. Karnataka has made 35.84 percent contribution above the average level and performance of Kerala is 35.25 percent above the average level. The main positive contributor to Karnataka is excise duty and for Kerala is sales tax. As Kerala

8 is prohibiting alcohol consumption in a phased manner since 2014, and thus contributing only 0.15 percent above average level.

Low income State Madhya Pradesh is also putting effort above average level in utilizing its potential base but its near average level. Sales tax contribution is not significant in Madhya Pradesh; rather it is 18 percent below the average.

The performance of Maharashtra is better than Madhya Pradesh and is contributing 6.39 percent above the average level. Sales tax contributes +4.20 and electricity duty contributes +3.30 which are the two main contributors in getting a positive result.

All the taxes except excise duty and stamp duty registration fee in Orissa are having a positive signs. Overall, Net contribution made by the Orissa is 17.62 percent above the average level.

In Punjab sales tax has performed worse and this is the major reason behind the negative contribution made by the Punjab. In Punjab positive contributions are made by state excise duty (+6.25), electricity duty (+3.18) and stamp duty registration fees (+3.63).

Rajasthan is utilizing its resources in a better way and has made a 9.18 percent contribution above the average level. Out of six major own taxes of State, four taxes namely electricity duty, sales tax, stamp duty and registration fees and state excise duty are the taxes which are putting positive efforts. Tamil Nadu being a middle income State made contribution of 1.47 percent below the average level. The important positive contributor is state excise duty.

Uttar Pradesh has performed quite better than other high income States. Except two taxes i.e. motor vehicle and passenger goods tax and electricity duty Uttar Pradesh is putting effort above the average level. Overall, Uttar Pradesh's net contribution to State is 19.48 percent above the average level.

West Bengal (Appendix A.5.60) has performed worst in utilizing its potential resources. Out of six selected taxes only electricity duty and land revenue and agricultural income and motor vehicle taxes are positive contributors of West Bengal. West Bengal was unable to utilize its capacity in the major taxes like sales tax and state excise duty.

The chapter sixth includes summary, conclusion and suggestions. On the basis of the objectives of the study some fundamental shortcomings of federal system have been identified. The major deficiencies are:

• A multiplicity of agencies transferring Central resources with overlapping roles, each following its own criteria/formula result in wasteful duplication in functioning.

• Limited scope of Finance Commission transfers, with the exclusion of plan revenue expenditure and so plan grants from their preview.

• The compartmentalize functioning of Planning Commission and Finance Commissions to assess what are essential interdependent and many a time, artificially distinguished plan and non-plan needs of the States have posed difficulties in the clear pursuit of the objectives of these transfers.

• Methodological weaknesses and reliance on gap filling approach by Finance Commissions.

• The Finance Commission have been following the gap filling approach whereby grants-in aid are recommended for States found to be in defects in their revenue budget after taking account of their share of Central taxes under the Finance Commissions devolution formula.

• This creates a moral hazard problem and acts as an incentive for improvident budgeting whereby States showing large deficits in their budget get rewarded while those manage their finance better than other States suffer.

At the end of this chapter some suggestions are also made for undertaking future studies and research. For transfers to operate without creating moral hazard, it is necessary to integrate the revenue side of so that the revenue-gap can be assessed objectively. Therefore, while all revenue transfers should be brought under the purview of the Finance Commission, the Planning Commission should keep its focus on investment planning and developing the physical infrastructure in the economy, as was originally indented (The role of Planning Commission has changed after the formulation of NITI Ayog). No, doubt population factor which has been taken into account by the successive Finance Commissions represents fiscal needs of the States.

But it must be noted that population itself is not a satisfactory index of the need of the States. Therefore, some other factors representing true fiscal needs of the State like economic backwardness and poverty should be taken as in the criteria of devolution of funds to States. Formula for fiscal devolution should maintain proper balance between need, backwardness and fiscal performance. A larger weight to tax effort by States in the devolution formula would improve the tax effort at the State level-thus increasing the amount of resources the States would collect on their and citeris- paribus, increasing the amount of resources to be transferred from the Centre to the States. Also, while using tax-effort as a criterion for inter-se sharing of taxes, Finance Commission should use values such as estimated normative tax effort. Lack of effective co-ordination between Finance Commission and the Planning Commission makes it possible for a State to underplay its resources availability before the Finance Commission but preset a different picture before the Planning Commission to obtain approval for its plan of a size not matched by available funds. It is imperative to better co-ordination between the Finance Commission and the Planning Commission with both institutions having clarity in their roles. It might also be desirable to have uniform devolution rules for Finance Commission and Planning Commission transfers. Over a long period of its operation the federal transfers system, in spite of being progressive, has not been able to make any major impact on inter-State disparities, even though the most of the backward States by and large, have not been found lacking in self-help. The inter-State disparities can be reduced only when federal transfers are in accordance with the relative fiscal capacity of the States. So there is need to restructure federal transfers on the basis of ‘equity with incentives’.

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CONTENTS

Page No.

Preface i - ii Acknowledgements iii - iv List of Text Tables v List of Appendix Tables vi - ix List of Figures x Acronyms xi - xii

Chapter 1: Introduction 1 - 19 1.1 Constitutional Provision for Fiscal Federalism 1.2 Rationale for Fiscal Federalism 1.3 Fiscal Imbalances in Indian Federalism 1.4 Federal Transfers: Principles and Criteria 1.5 Fiscal Responsibility and Budget Management (FRBM) 1.6 Finance and Planning Commission: Issues and Inter-Dependence 1.7 Significance and Scope of the Study 1.8 Objectives of the Study 1.9 Hypothesis 1.10 Data Source and Methodology 1.11 Limitations

Chapter 2: Review of Literature 20 - 43 2.1 Studies on Federal Fiscal Transfers and Finance Commissions 2.2 Studies on Fiscal Capacity and Tax Effort 2.3 Research Gap

Chapter 3: Scenario of Federal Transfers to States 44 - 86 3.1 Fiscal Federalism in India 3.2 Finance Commission and Resource Transfers 3.3 Planning Commission and Resource Transfers Under Gadgil Formula 3.4 Grants-in-Aid and Finance Commissions 3.5 Centrally Sponsored Schemes 3.6 Union Transfers to States 3.7 Revenue Centralization and Fiscal Dependence of States on Centre

Chapter 4: Fiscal Capacity and Tax Effort: Approaches and Issues 87 - 106 4.1 Meaning of Fiscal Capacity and Tax Effort 4.2 Measures of Fiscal Capacity and Tax Effort 4.3 Taxable Capacity , Tax Effort and Finance Commission Devolution

Chapter 5: State Taxes and Estimation of Fiscal Capacity of States 107 - 129 5.1 Own Tax Revenues: Analysis of Inter-State Performance 5.2 Estimation of Fiscal Capacity and Tax Effort of States 5.3 Fiscal Potential and Efforts: An Overall Scenario 5.4 Tax Effort Index and Net Contribution

Chapter 6: Summary and Conclusion 130 - 143

Bibliography 144 - 157

Appendices 158 - 205

LIST OF TEXT TABLES

Table No. Title Page No.

3.1 Classification of Central Taxes 49

3.2 Chronology of Finance Commissions in India 54

3.3 Criteria and Weightage Accorded by Finance Commissions 59

3.4 Relative Weights and Criteria Underlying Planning 67 Commission Transfers: The Gadgil Formula

3.5 Devolution and Transfer of Resources from the Centre to the 73 States: 2013-14 to 2015-16

3.6 Net Devolution and Transfers: 1990-91 to 2015-16 75

3.7 Composition of Devolution of Resource from Centre to 78 States: 1990-91 to 2015-2016

3.8 Finance Commission Transfers and Other Current Transfers: 79 1990-91 to 2015-16

3.9 Trends in Revenue Centralization and Fiscal Dependence of 81 States on Centre in Rs Crore (Pre-Devolution)

3.10 Trends in Revenue Centralization and Fiscal Dependence of 83 States on Centre in Rs. Crore (Post-Devolution)

3.11 Total Transfers 85

5.1 State Finances: Major Fiscal Indicators 109

5.2 Own Tax revenues and Buoyancies: Comparative 111 Performance of States: 2004-2014

5.3 Trend and Structure of Major Own Tax Revenue 114

5.4 Buoyancies of Major Components of Own Tax Revenues 115

5.5 Fiscal Capacities and Tax Efforts, All States 124

5.6 Fiscal Capacity, Tax Efforts and Ranks of States: 2005-2014 126

LIST OF APPENDIX TABLES

Table No. Title Page No.

A.3.1 Taxes within the Jurisdiction of the Union Government as 158 Contained in List-I of the Seventh Scheduled of the Constitution

A.3.2 Taxes within the Jurisdiction of the State Governments as 159 Contained in List-II of the Seventh Scheduled of the Constitution

A.3.3 States’ Share of Central Taxes as Recommended by the 160 Thirteenth and Fourteenth Finance Commissions-(I)

A.3.4 States’ Share of Central Taxes as Recommended by the 161 Thirteenth and Fourteenth Finance Commissions-(II)

A.3.5 Share of States in Total Transfers by Finance 162 Commissions

A.5.1 Stamp Duty and Registration Fees 163

A.5.2 Gross State Domestic Product 164

A.5.3 Urbanization 165

A.5.4 Sales Tax 166

A.5.5 Share of Manufacturing in State Domestic Product 167

A.5.6 Total Annual Household Expenditure 168

A.5.7A Land Revenue and Agricultural Income Tax-(I) 169

A.5.7B Land Revenue and Agricultural Income Tax-(II) 170

A.5.7C Land Revenue and Agricultural Income Tax-(III) 171

A.5.8 GSDP from Agriculture 172

A.5.9A Motor Vehicle Tax and Passenger and Goods Tax-(I) 173

A.5.9B Motor Vehicle Tax and Passenger and Goods Tax-(II) 174

A.5.9C Motor Vehicle Tax and Passenger and Goods Tax-(III) 175

A.5.10 Number of Registered Two Wheelers 176

A.5.11 Number of Registered Three and Four Wheeler Vehicles 177

A.5.12 Number of Registered Buses 178

A.5.13 Number of Registered Trucks, Trailers and Others 179

A.5.14 Total Number of Registered Vehicles 180

A.5.15 Electricity Duty 181

A.5.16 Share of Agriculture in Total Sale of Electricity 182

A.5.17 Share of Industry in Total Sale of Electricity 182

A.5.18 Total Sale of Electricity 183

A.5.19 Total Consumption of Electricity 184

A.5.20 State Excise Duty 185

A.5.21 Stamp Duty and Registration Fees: Taxable Capacity, Tax 186 Efforts and Ranks (2005-06 to 2007-08)

A.5.22 Stamp Duty and Registration Fees: Taxable Capacity,Tax 186 Efforts and Ranks (2008-09 to 2010-11)

A.5.23 Stamp Duty and Registration Fees: Taxable Capacity,Tax 187 Efforts and Ranks (2011-12 to 2013-14)

A.5.24 Stamp Duty and Registration Fees: Overall Taxable 187 Capacity,Tax Efforts and Ranks (2005-06 to 2013-14)

A.5.25 Sales Tax: Taxable Capacity,Tax Efforts and Ranks 188 (2005-06 to 2007-08)

A.5.26 Sales Tax: Taxable Capacity, Tax Efforts and Ranks 188 (2008-09 to 2010-11)

A.5.27 Sales Tax: Taxable Capacity,Tax Efforts and Ranks 189 (2011-12 to 2013-14)

A.5.28 Sales Tax: Overall Taxable Capacity, Tax Efforts and 189 Ranks (2005-06 to 2013-14)

A.5.29 Land Revenue and Agriculture Income Tax: Taxable 190 Capacity, Tax Efforts and Ranks (2005-06 to 2007-08)

A.5.30 Land Revenue and Agriculture Income Tax: Taxable 190 Capacity,Tax Efforts and Ranks (2008-09 to 2010-11)

A.5.31 Land Revenue and Agriculture Income Tax: Taxable 191 Capacity,Tax Efforts and Ranks (2011-12 to 2013-14)

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A.5.32 Land Revenue and Agriculture Income Tax: Overall 191 Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2013-14)

A.5.33 Motor Vehicle Tax and Passenger & Goods Tax: Taxable 192 Capacity, Tax Efforts and Ranks (2005-06 to 2007-08)

A.5.34 Motor Vehicle Tax and Passenger & Goods Tax: Taxable 192 Capacity, Tax Efforts and Ranks (2008-09 to 2010-11)

A.5.35 Motor Vehicle Tax and Passenger & Goods Tax: Taxable 193 Capacity, Tax Efforts and Ranks (2011-12 to 2013-14)

A.5.36 Motor Vehicle Tax and Passenger & Goods Tax: Overall 193 Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2013-14)

A.5.37 Electricity Duty: Taxable Capacity, Tax Efforts and 194 Ranks (2005-06 to 2007-08)

A.5.38 Electricity Duty: Taxable Capacity, Tax Efforts and 195 Ranks (2008-09 to 2010-11)

A.5.39 Electricity Duty: Taxable Capacity, Tax Efforts and 195 Ranks (2011-12 to 2013-14)

A.5.40 Electricity Duty: Overall Taxable Capacity, Tax Efforts 196 and Ranks (2005-06 to 2013-14)

A.5.41 State Excise Duty: Taxable Capacity, Tax Efforts and 196 Ranks (2005-06 to 2007-08)

A.5.42 State Excise Duty: Taxable Capacity, Tax Efforts and 197 Ranks (2008-09 to 2010-11)

A.5.44 State Excise Duty: Overall Taxable Capacity, Tax 197 Effortsand Ranks (2005-06 to 2013-14)

A.5.45 Tax Effort and Net Contribution of Each Tax (Andhra 198 Pradesh)

A.5.46 Tax Effort and Net Contribution of Each Tax(Assam) 198

A.5.47 Tax Effort and Net Contribution of Each Tax(Bihar) 199

A.5.48 Tax Effort and Net Contribution of Each Tax(Goa) 199

A.5.49 Tax Effort and Net Contribution of Each Tax (Gujarat) 200

A.5.50 Tax Effort and Net Contribution of Each Tax(Haryana) 200

A.5.51 Tax Effort and Net Contribution of Each Tax(Karnataka) 201

viii

A.5.52 Tax Effort and Net Contribution of Each Tax(Kerala) 201

A.5.53 Tax Effort and Net Contribution of Each Tax(Madhya 202 Pradesh)

A.5.54 Tax Effort and Net Contribution of Each 202 Tax(Maharashtra)

A.5.55 Tax Effort and Net Contribution of Each Tax(Orissa) 203

A.5.56 Tax Effort and Net Contribution of Each Tax(Punjab) 203

A.5.57 Tax Effort and Net Contribution of Each Tax(Rajasthan) 204

A.5.58 Tax Effort and Net Contribution of Each Tax(Tamil 204 Nadu)

A.5.59 Tax Effort and Net Contribution of Each Tax(Uttar 205 Pradesh)

A.5.60 Tax Effort and Net Contribution of Each Tax(West 205 Bengal)

LIST OF FIGURES

Fig. No. Figure Title Page No.

Fig. 3.1 Trends in Net Devolution and Transfers in Percent 74

Fig. 3.2 Growth Rate Trends of Share in Central Taxes and Grants 76 in Aids to States

Fig. 3.2A Direct Tax (Pre-Devolution) 80

Fig.3.2B Indirect Tax (Pre-Devolution) 82

Fig. 3.2C Total Tax (Direct + Indirect) Pre-Devolution 82

Fig. 3.3A Direct Tax (Post- Devolution) 82

Fig. 3.3B Indirect Tax (Post-Devolution) 84

Fig. 3.3C Total Tax (Direct + Indirect) Post-Devolution 84

Fig. 3.4 Share of States in Total Transfers by Finance 85 Commissions

Fig. 5.1 Major Fiscal Indicators (Percent to GDP) 108

Fig. 5.2A Own Tax Revenue and GDP Ratio (In Percent): 2011-12 110 to 2013-14

Fig. 5.2B Own Tax Buoyancy of States 112

Fig. 5.3 Share of Major Own Taxes in Total Own Taxes of States 113

Fig. 5.4 Index of Tax efforts of States 125

Fig. 5.5 Fiscal Capacity of States 125

ACRONYMS

ACIR Advisory Commission on Intergovernmental Relations

AD Aggregate Disbursements

ADB Asian Development Bank

AER Average Effective Rate

AGR Annual Growth rate

APDRP Accelerated Power Development and Reforms Programme

CSO Central Statistical Office

EFC Eleventh Finance Commission

ER Effective Rate

FC Finance Commission

FCT Finance Commission Transfers

FFC First Finance Commission

FRBM Fiscal Responsibility and Budget Management

GCS General Category States

GDP Gross Domestic Product

GIA Grants in Aids

GLFC Gross Loan From Centre

GSDP Gross State Domestic Product

GST Goods and Services Tax

GST General Sales Tax

HFI Horizontal Fiscal Imbalance

ICRA Indian Credit Ratings Agency

ISC Inter State Council

MCPF Marginal Cost of Public Funds

MTFRP Medium Term Fiscal Restructuring Policy

NDC National Development Council

NDT Net Devolution and Transfers

NEC North Eastern Council

NSSO National Sample Survey Office

OCT Other Current Transfers

OTR Own Tax Revenue

PB Potential Base

PCTR Per Capita Tax Revenue

RBI Reserve Bank of India

RTS Representative Tax System

SAL Structural Adjustment Loans

SCS Special Category States

SCT Share in Central Taxes

SG Statutory Grants

TE Tax Effort

TFC Tenth Finance Commission

THFC Thirteenth Finance Commission

VAT Value Added Tax

VFI Vertical Fiscal Imbalance

xii

Chapter 1

Introduction

Chapter 1

INTRODUCTION

Fiscal federalism helps governmental organization to realize cost efficiency by economies of scale in providing public services which correspond most closely to the preference of the people. From the point of view of the economy, it creates a unified common market which promotes greater economic activity. In this context, it will be useful to undertake a comparative study of the issues and problems of fiscal federalism in India. The problem arises from the extent of decentralization and its relation to the level of development, heterogeneity of the population, harmonization of their preference pattern, allocation of functions and financial sources to different levels of government, arbitration of vertical and horizontal imbalances and the institutional mechanism to conduct inter-governmental relations.

1.1 Constitutional Provision for Fiscal Federalism

The Seventh Schedule (Article 246) delineates 'the subject matter of laws made by the Parliament and by the Legislatures of the States' and indicates the Union List (List I), States List (List II) and the Concurrent List (List III). The list I invests the Union with all functions of national importance such as defence, external affairs, communications, constitution, organization of the Supreme Court and the High Courts, elections, etc. List II invests the States with a number of important functions touching on the life and welfare of the people such as public order, police, local government, public health, agriculture, water, land, etc. List III is the Concurrent List, which includes administration of justice (excluding Supreme Court and High Courts), economic and social planning, trade and commerce, etc. It is of interest to note here that higher education, forests and population control were all added to this list in 1977

during the Emergency when it was felt that the States were not doing justice to these subjects of national importance.

According to Article 246, Seventh Schedule, Parliament has exclusive powers to make laws regarding matters enumerated in List I, notwithstanding the provisions of the other clauses of this article. On the other hand, the Legislature of any State has exclusive power to make laws for that State regarding any of the matters enumerated in List II, subject to the other clauses, With regard to List III, both the Parliament and a State Legislature can make laws but the law made by Parliament will prevail. The residuary functions, that is, those not listed in I or II, vest with the Union. Thus, the Union has supremacy over a wide range of the legislative field. These Lists include the powers of taxation also. The Union List includes, among others, taxes on income other than agricultural income, excise duties, customs, and corporation tax. The State List includes land revenue, excise on alcoholic liquors, tax on agricultural income, estate duty, taxes on sale or purchase of goods, taxes on the vehicle, on professions, on luxury, stamp duties, etc. the concurrent list does not include any important taxes.

Accordingly, there are both mandatory and enabling provisions in the constitution for facilitating a wide-ranging transfer of resources, arranged in a systematic manner, through:

1. Taxes, which are levied, collected and retained by the Central government.

2. Taxes, which are levied and collected by the Central government but wholly, assigned to the States.

3. Taxes which are levied and collected by the Union government but the net proceed is shared with the States. This category of taxes is also known as divisible pool.

4. Taxes, which are levied by the Union but, collected and retained by the States.

5. Those taxes, which are collected, levied and retained by the States.

In a major restructuring of the above scheme, the 80th amendment to the Constitution in 2000 all the Central taxes were made shareable.

Assignments of revenue sources to respective layers of government and their Constitutional responsibilities do not seem to have any correspondence. Amongst the tax sources, where the State governments have the exclusive jurisdiction (from designing the rate structure and administration to utilization) only the tax on sale of goods yield revenue of worth mentioning magnitude. Therefore, the tax sharing constitutes the significant position of State government’s revenue receipts. Besides the shareable pool, the tax mentioned under category 2 and 4 can also be the instruments, which intervene, in the fiscal matters of the States.

In addition to transfers of resources from Union to the States by means of shared tax, Article, 275 of the constitution provides for the grants-in-aid to the State governments in whose case gap between expenditure and revenue is estimated to persist even after the devolution in the form of tax sharing.

In order to determine the quantum of States’ share from the sharable pool and to determine the principle that should govern the distribution of such share amongst the States the Constitution under Article, 280 provided for the Finance Commission. The Commission is appointed every five year by the President of India to assess the States’ and Union government’s revenue and expenditure projection for the next five years and make recommendations on the above mentioned issues and on any other matter which the President may ask for in the ‘terms of reference’ for each Finance Commissions.

Another channel of federal transfer is through Planning Commission. Whereas the Finance Commission decides on tax shares and grants the Planning Commission facilitates the loans and grants, in the ratio of 70:30 for non-special category States for implementing development plans. In fact, the institution of Planning Commission is used to transfer the resources provided in Article, 282 of the constitution.

Yet another source of federal transfers is the Central Ministries that provide finance to their State counterparts in the form of the grants. Such grants are meant for financing the specified projects. These projects may be wholly financed by such grants or may require the States government to share a proportion of cost. The projects that are

3 normally covered under such grants are those that have a considerable amount of inter-State spillover, as also for the provision of merit goods like poverty alleviation program, immunization drives etc. These programs are often guided by the specific local objectives like employment generation etc.

Thus there are, in general, three channels through which federal transfers flow to the States: (a) Finance Commission (b) Planning Commission (c) Central Ministries. In third chapter, these three channels will be discussed separately.

1.2 Rationale for Fiscal Federalism

Economic rationality obviously is favorably inclined towards a federally structured government. A comprehensive possible decentralization of political leadership is best able to ensure that the supply of government services is commensurate with regional needs and that these services are therefore also provided in a regionally appropriate variety. The reason for this is, first of all, that the local government authorities possess better information on the preferences of their residents. Also, the local citizens themselves can better articulate their preferences at the local level.

Regional or State governments constituting a federation have their own rationale. On the one hand they want to fulfill the desire to be under common central government; on the other hand, they want to act independently to meet the needs of their region. One important question is: what division of responsibilities does this give rise to the various regional and local level government levels, and how are relationships among the regional government structured? The theory of fiscal federalism has occupied itself with the question of what division of responsibilities is optimal. The States whose governmental structure has a federal character has put many varieties into practice, ranging from strictly competitive-oriented federalism to the co-operative model, and the experience with these differs widely.

Even in cases where the primary responsibility for the provision of local public services are devolved to sub–national governments, some portion of the required financial resources ought to be made available to these lower-level governments in the form of intergovernmental transfers. Among the justifiable reasons are: (a) to equalize

“vertically” (improve revenue adequacy) and (b) to equalize "horizontally" (inter- jurisdictional redistribution).

In the literature on federal finance, more than vertical fiscal imbalances (VFI), it is the horizontal fiscal imbalances (HFI) that has received a lot of attention. Horizontal fiscal imbalances arise due to the differences in the fiscal capacities and due to varied expenditure needs. Any scheme of federal fiscal transfers pursuing the objective of equalization should recognize the underlying differences in the capacity of the States to raise funds from their tax resources for financing their expenditure and investment programs.

It is widely accepted that decentralization of expenditure responsibilities to lower tier government augments efficiency. This is so because these units are "better informed" and can more readily responds to the needs and preferences of the citizens living in their jurisdictions (Hayek: 1945). Moreover, competition among jurisdictions in providing local public goods enhances efficiencies (Tiebout: 1956). On the other hand, on account of administrative efficiencies, taxation responsibility (generally) tends to be more centralized than the expenditure responsibilities. As long as resources are more centralized than expenditures, there will be an imbalance between resources and needs at different tiers of government (and lower tier governments), with the central government having more resources than it needs and the sub–national governments having less than what they need. The mechanism of fiscal transfers is thus essential to correct vertical and horizontal fiscal imbalances which arise from a mismatch in needs relative to resources at the different level of government.

1.3 Fiscal Imbalances in Indian Federalism

Fiscal Imbalance refers to the mismatch between own revenue raising capacity and expenditure needs at different governmental units. In an abstract sense, this implies the gap between revenue and expenditure when both revenue sources and function are allocated among various units of the government optimally. However, empirical estimates of the fiscal imbalance are difficult to derive on the basis of such definitions, for, estimates of revenue capacity or expenditure needs in an absolute sense will depend heavily on the relevant value judgment made and in practice, it is

difficult to find an allocation of revenue sources and responsibilities which are strictly optimal in any sense. Thus measurement of fiscal imbalances involves, of necessity, actual elements of federalism as opposed to normative ones, although the very concept of fiscal imbalance has a built in normative consideration; the general presumption would be that the less of imbalance there is, the better it is.

Usually, two types of fiscal imbalances are discussed in the literature. The imbalances at different levels of government (inter-governmental) are known as vertical fiscal imbalances, while those at different units of the same level of government (inter- jurisdictional) are known as horizontal fiscal imbalances. Although these two concepts are identifiable by themselves, they are, except under very special circumstances, related. If the distribution of revenue sources and expenditure responsibilities between the Centre and the States is such that the Centre raises more than it spends while the States spend more than they raise, the extent of this vertical fiscal imbalance can affect the horizontal fiscal imbalance (i.e. between different States) through the non-neutral incidence of central revenue and expenditure package. Only when the benefits from the central expenditure (or grant) exactly match the tax (revenue) collections in each State is the incidence of central fiscal policy neutral. It is only under such condition that the vertical and horizontal fiscal imbalances are fully independent. Usually, there is a certain amount of redistribution involved in the fiscal policy of the Centre, and this links vertical imbalances with horizontal imbalances. Also the larger the horizontal imbalances, greater is the need for federal intervention to correct these imbalances. Such intervention can take the form of direct central expenditure, or equalizing transfers. In both the cases, a centralizing tendency in revenue raising becomes inevitable. However, in the latter case, the expenditure responsibilities of the States do not decrease, leading to vertical fiscal imbalance.

1.3.1 Vertical Fiscal Imbalances

Vertical Fiscal Imbalance” is a phrase that comes up almost as frequently in discussions on federal finance as centralization. Vertical fiscal imbalances are the result of initial assignment of powers and functions between the two layers of governments. Which layer of government possesses more power depends upon the centripetal or centrifugal forces prevailing at the time of formation of the federation. In fact the distribution of functions and power depends upon the genesis of the

federation. If the federation is an out come of aggregation of federating units the federating units tend to be more powerful than the federating units of a federation which has emerged out of a process of devolution.In the latter type the Centre tends to be more powerful.

The strength of a particular level under goes changes due to reassignment of power and functions in the succeeding years andthis process not only influence the level of VFI but also the degree of Centralization.

The usual 'fiscal federalism' analysis assigns more revenues than expenditures to the Centre for four reasons: (a) the Centre is presumed to be a more efficient tax collector and sub-national governments are presumed to be more efficient spenders; (b) fiscal redistribution is assumed to be properly a central concern (so progressive taxes should be levied at that level); (c) sub -national governments are likely to distort the common market through fiscal manipulation if given too free a hand (so taxes on corporations and natural resources should also be Central); and (d) in any case the Central government needs excess revenues to conduct its allocative and distributive rules (using intergovernmental transfers both to influence State actions-to achieve incentive-capability-and to achieve horizontal equity throughout the nation.)

There are several ways of bringing down vertical fiscal imbalances. In principle; the gap could be closed in the following ways:

1. Expenditure functions could be moved up to the higher level of government, the one with more money. 2. Taxes could be moved down to the lower level, the one with more need for money.

The first solution has of course occurred to some extent in most countries, but by no means uniformly of exclusively. The second has also occurred occasionally-indeed, perhaps more so in Canada than elsewhere-but has understandably not been very popular either with the central authorities, who have to give up the power their “excess” revenue gives them, or with the State authorities, who have to accept the responsibility for levying their new taxes with no offsetting political bonus points from being able to expand expenditures.

Some other methods to bring down the surpluses of the federal government or to reduce the non-correspondence problem of the federating units are:

1. Bringing down resource surplus of the federal

2. Raising tax revenue and lowering expenditure of States

3. Reallocation of functions

4. Federal fiscal adjustment

It is thus not surprising that as a rule vertical fiscal imbalance is dealt with in federations by fiscal transfers from Central to State (and local) governments, even though the result, is almost invariably to break the nexus between expenditure and revenue responsibility and thus to reduce accountability to some, and often to a considerable, extent. Even in the United States, where there is no revenue-sharing or grant system and where State governments have virtually free hand in levying taxes, federal transfers in the form of conditional grants have accounted one-fifth of State- local expenditures. The fiscal gap in this sense is even larger in other federations, notably Australia and India.

However, there prevails a viewpoint that the only way to achieve a satisfactory degree of political accountability (and also fiscal discipline) in a federal system is, so to speak, by requiring each level of government to finance its own expenditures from its own taxes. In fact, however, such 'tax separation' is not a necessary condition for accountability. All that is required for accountability is that, at the margin, any government that wants to increase its expenditures has to Increase its taxes. This condition requires only that intergovernmental transfers should not be related to the expenditures of recipients, not that there should be no such transfers.

1.3.2 Horizontal Fiscal Imbalances

The horizontal fiscal imbalances mean differences in the revenue raising capacity and fiscal need among the similarly situated States i.e. across the States. Horizontal fiscal imbalance is also inevitable mainly because of diversity in natural resources and disparities in economic structure and socio-economic levels of development of federating units. This determines on the one hand the varying degree of fiscal capacity and on the other hand the fiscal need of the States. Horizontal fiscal imbalance

coupled with the vertical fiscal imbalance increases the need for federal fiscal transfers to the States in any federation.

The difference in fiscal capacity could be due to various factors like differences in per capita income, levels of development, sectoral composition of the economy, poverty level, consumption pattern, and so on. Differences in fiscal need arises due to differences in the cost of providing goods and services, need for providing socio economic infrastructure, due to difference in tastes and priorities of the local people composition of population, area of the State and so on. Thus, the horizontal fiscal imbalances arise due to the differences in the fiscal capacity, and due to varied expenditure need.

There are several motivating factors to form a federation. Apart from having common defence facilities, accessibility to unified common national market and getting best use of the scarce resources of the country, a federation also aims at achieving 'equality of all citizens', i.e., no discrimination is made between different people on the basis of their State of residence.

However, all the federating States are not equal in terms of economic development, social development, natural resource endowments, and fiscal capacity and so on. Because of these and several other factors, there exists a serious regional disparity. Some States are backward, while some are developed. One of the objectives of federal government is to reduce such disparities by helping the backward States in a special way. The very objective of forming a federation necessitates reducing horizontal fiscal imbalances. All citizens, irrespective of their State of residence are expected to make sacrifice by way of taxation uniformly and receive the benefits from public goods equally.

It is believed that if the federal fiscal imbalances tend to operate discriminately between States and the expected hopes and aspirations which initiated the formation of a federation fail to materialize, instability sets in. Instability of a federation manifests itself in economic instability of its constituent States and the consequent dissatisfaction or even frustration with the operation of fiscal federalism. If these symptoms of instability are not recognized early and corrective measures are not taken, the federation may eventually break down.

1.4 Federal Transfers: Principles and Criteria

Federal political organization involves distribution of powers and responsibilities between the federal government and the federating units. When gap between needs and resources appear they are sought to be bridged through federal fiscal transfers. But the size of divisible pool and the criteria for devolution has often given rise to a good deal of controversy. Consequently the basis of federal fiscal transfers has been modified from time to time to suit the needs and objectives of changing complexion of federal polity. The criteria for devolution have also become more refined and sophisticated.

The broad objectives of a federation are:

1. Equity: This objective envisages that the federal fiscal relations would lead to horizontal fiscal balances. The fiscal system should result in equalization of fiscal pressure on similarly situated persons. (This is an individualistic approach to federalism). 2. Equalization: The diversity and disparity factors such as distribution of natural resources, climate, soil and so on and also the availability of raw material, infrastructure, etc. lead to wide difference in the levels of living, standard of services, levels of income etc. among the federating units. One of the objectives of federal finance is to enable the States to attain certain minimum levels of services and hence the federal transfers should strive to equalise the position of each federating units. This is an organismic approach to federalism. 3. Neutrality: Differences in the fiscal pressures exerted by the federal and the State governments, influence the geographical distribution of scarce capital resources and many a times such distribution adversely affect the optimum allocation of resources. Federal finance should strive to neutralize such influences. 4. Growth: This objective is of great relevance, especially in the context of developing federal countries. This requires a specific direction of federal finance toward the goal planned economic development.

1.5 Fiscal Responsibility and Budget Management (FRBM)

The Fiscal Responsibility and Budget Management Act, 2003 and Fiscal Responsibility and Budget Management Rules, 2004 made under Section 8 of the Act came in to force on July 5, 2004. The FRBM Act was enacted in 2003 as rising government borrowing and the resultant government debts have seriously eroded the financial health of the government. High revenue deficit due to higher expenditure on subsidies, salaries, defence etc. compelled the government to make big borrowing from early 1990s onwards. With inadequate revenues, government resorted to high level of borrowing.

The borrowing again produced high interest payments. In this way, interest payments became the largest expenditure item of the government. To arrest this financial weakness in its budget, the government has taken some serious deficit cut targets by introducing a law in the form of the FRBM.

The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by 2008-09. This will be realized with an annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination by 2008-09. Later, the target dates were reset and budget 2016-17 aims to realize the 3% fiscal deficit target by March 2018.

The Act gives slight flexibility to the government regarding the realization of the target as well. It gives the responsibility to the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach. Salient features of the Act are as follows:

1. Rules to be made under the Act to specify the annual target for reduction of fiscal deficit and revenue deficit, contingent liabilities and total liabilities. 2. The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of national security or national calamity or such other exceptional grounds as the central government may specify. 3. Central government shall not borrow from Reserve Bank of India except by way of advances to meet temporary excess of cash disbursement over cash receipts. 4. Reserve Bank of India not to subscribe to the primary issues of Central Government securities from the year 2006-07.

5. Central government to take suitable measures to ensure greater transparency in its fiscal operations. 6. Central government to lay in each financial year before both Houses of Parliament three Statements, viz. Medium-term fiscal Policy Statement, Fiscal Policy Strategy Statement and Macro economic Framework Statement along with Annual Financial Statement and Demands for Grants. 7. Finance Minister to make a quarterly review of trends in receipt and expenditure in relation to the Budget and place the review before both Houses of Parliament.

The process of fiscal consolidation under FRBMA has been continuous. It has yielded rich dividends in terms of creating fiscal space for increased spending on infrastructure and social sectors. The traditional annual budgeting has moved to a more meaningful medium-term fiscal planning framework. FRBMA provides the basic structure around which many fiscal measures have been implemented. Some of the important amongst these include: (a) reducing peak rates of customs duties, (b) rectifying anomalies like inverted duty structure, (c) rationalizing excise duties, (d) relying on voluntary tax compliance, (e) introduction of State level VAT, (f) increasing productivity of expenditure through an outcome budget framework and (g) innovative financing mechanism like creation of special purpose vehicles for infrastructure projects.

Twelfth Finance Commission award contained incentives to promote fiscal reforms. Consequently, many States have undertaken fiscal measures to reform their tax system and expenditure management practices.

The Thirteenth Finance Commission has recommended that FRBM act should specify the nature of shocks that would require a relaxation of FRBM targets in order to ensure timely achievement of targets.

The Fourteenth Finance Commission has given following major recommendation on FRBM:

• The Union Government should consider amending the FRBM Act to reflect the fiscal roadmap, omit the definition of effective revenue deficit and mandate the establishment of an independent fiscal council, which would undertake ex-ante

assessment of fiscal policy implications of budget proposals and their consistency with fiscal policy and rules. • The State Governments may amend their FRBM Acts to provide for the statutory flexible limits on fiscal deficit. Alternatively, existing FRBM Acts may be replaced with a Debt Ceiling and Fiscal Responsibility Legislation, specifically invoking Article 293 (1) for States. • The Union and State Governments may amend their respective FRBM Acts to provide for a statutory ceiling on the sanction of new capital works to an appropriate multiple of the annual budget provision.

1.6 Finance and Planning Commission: Issues and Inter-Dependence

The two main bodies that intermediate between the Centre and the States in the matter of fiscal transfers, viz., the Finance Commission and the Planning Commission follow approaches in a segmented way without any effective co-ordination. Especially important in this context is the impact of dynamic linkage between the two major streams of resource transfers. In fact, the combination of the gap-filling approach followed by the finance commission and provision of loans to the State almost by entitlement along with an emphasis on the size of the plan has led to major inefficiencies resulting in large debt burdens and corresponding burdens of interest payments and salary liabilities for the State governments.

The plan generates three major liabilities for periods beyond the plan: interest payments on fund borrowed for financing the plan, maintenance of assets of created during the plan, and salaries of people employed in plan schemes that remain in government employment after the plan has ended. For these liabilities, after the plan period is over, State governments look to the finance commission for resource transfers. In making an assessment of the needs of State governments on the revenue non-plan account, both interest payments and committed liabilities of the State governments have been taken into account by the Finance Commission. Since the plan is linked to a programme of borrowing, a larger plan is typically linked with a larger borrowing programme and, therefore, leaves relatively larger future liabilities.

Interest liabilities as well as committed expenditure on plan schemes of the past has been taken by the previous finance commissions as first charge in making an

assessment of the expenditure requirements. Given other things, the larger the interest and other committed liabilities, the larger would be the entitlement of a State in the form of tax devolution and grants. It is implicit in this approach that larger plan outlays financed by larger borrowing, creates larger State-specific liabilities which generates (i.e., after five years) larger claims for fiscal transfers.

By mixing grants and loans, the plan assistance mechanism combines two modes of resources transfers, which need to be governed by entirely different sets of principles. Grants should be given in consideration of resource deficiencies, and for projects with large social benefits but limited direct return like primary education and primary health. On the other hand, loans should be given taking into consideration the capacity of a State to absorb and service the loan, and in respect of projects which can give adequate returns, commensurate with the cost of the loans. By mixing the two together, the Centre is burdening States with debt that they cannot service, but cannot afford to forego either, because with it the component of grant will also have to be forgone.

The incentives to increase borrowing as far as possible is inherent in the design of plan transfers. In order to get 30 percent grant component, one has to take 70 percent loan. Further, the Planning Commission actually approves the borrowing programme of the States based on the plan size, and also its borrowing programme. But, while decisions may be taken with a five year perspective, plans create indefinite liabilities

in terms of additional interest payments, salaries and pension which the Finance Commission is supposed to provide resources for after the plan period has ended.

Because of this dynamic linkage, a comprehensive view of the transfer programme should be taken rather than segmented view. It has earlier been argued that the transfers made to the special category States via Planning Commission and subsequently via Finance Commission entail considerable opportunity cost and loss of development opportunities in the rest of the country.

1.7 Significance and Scope of the Study

The political developments have strengthened the need for a review of federal fiscal arrangements. The transition from a period of one party rule at the Central and State levels to that of coalition governments and the emergence of locally dominant regional parties has given rise to the increasing assertion of regional aspirations and element of confrontational politics between the Centre and the States, pulling Centre- State relations in to eye of the storm. The difficult financial position of some State governments has further fuelled this tendency.

Although the federal system provides for divided governmental functions and powers, imbalances often arises between responsibilities and financial resources at different layers of the government. This is so because revenue raising capacities and revenue needs of the various federating units are different. This is a characteristic feature of all federations, particularly of those whose economies are more dynamic.

The mismatch between functions and financial powers occur partly because of changing responsibilities of different tiers of government and partly due to the dominant position of the national government in regard to taxation powers, which is often by design. Therefore, a vertical imbalance of resources and expenditure responsibilities emerges between different levels of the government, calling for transfers of resource from Centre to the States.

In federal finance, the use of quantitative techniques is very important. In fact, policy formulation influenced by the quantitative results pertaining to extent and degree of

vertical and horizontal fiscal imbalances, inter-State disparities in taxable capacity, tax efforts and fiscal needs of federating States.

In spite of the fact that the problem of Centre-State financial relations is quite a wide one, in the present study an attempt has been made to provide an objective assessment of the working of the whole federal system with a view to identifying the exact nature of fiscal transfers. Having provided the relevant theoretical; underpinning of a federal system we limit myself to the quantitative analysis of union transfers especially by Finance Commission and State level performance of major taxes.

1.8 Objectives of the Study

1. To analyze the pattern and components of federal transfers to States of India.

2. To check the progressivity of fiscal transfers to major States.

3. To analyze the State level taxes of major States of India and

4. To measure the fiscal potential and tax efforts of major States in India and differences there in.

1.9 Hypotheses

• H0: There is no change in fiscal autonomy and fiscal dependence of the States during the period of study.

• H1: There is a change in fiscal autonomy and fiscal dependence of the States during the period of study.

• H0: The fiscal capacity of the major States in India has not changed.

• H1: The fiscal capacity of the major States in India has changed.

• H0: The efforts made by the States in utilizing potential base is stagnant.

• H1: The efforts made by the States in utilizing potential base is not stagnant.

1.10 Data Source and Methodology

The data are collected from the Reserve Bank of India (RBI), National Sample Survey Organization (NSSO), Central Statistics Organization (CSO), Ministry of Transport & Highways, Ministry of Power, Planning Commission and from other sources. To employ the data for the analysis following methodology has been applied:

Buoyancy

The basic estimation procedure for tax buoyancies is through a double log specification of the type given in equation below, which yields the buoyancy

coefficient β1.

ln(TRit ) = 1 + β1ln(GSDPt )+ut

Where, ∝

• ln (TRit) = log of ith tax revenue in year t

• ln (GSDPt ) = log of GSDP in year t

• 1 = constant

∝ • β1 = buoyancy estimate

• ut= random term

The present research also aims at estimating the fiscal capacity and tax effort of the States in India. To measure these aspects for the States the study adopts the regression approach for assessing the fiscal capacity of the Indian States. The regression approach has been employed by a number of scholars. The important studies that have adopted regression approach are of Bahl(1971), Chelliah(1971), Reddy(1975) and Purohit(2006). This study confines itself to the estimation of 16 major States of India and data pertaining to years 2005-2006 to 2013-2014. For better comparison of fiscal capacity of States, the nine years study period has been divided into three years period each. To avoid the impact of fluctuations in a particular year three yearly averages for tax revenue, GSDP and all other variables are taken.

Wherever necessary, the test for the presence and removal of hetrocidacity in the cross sectional data is also used during the analysis of data.

The fiscal potential and tax effort is computed for the following group of taxes

1. Stamp Duty and Registration Fees 2. Sales Tax and 3. Land Revenue and Agricultural Income Tax 4. Motor Vehicle and Passenger & Goods Tax 5. Electricity Duty 6. State Excise Duty

The following equations are used to estimate the fiscal potential and tax effort of the States:

• Ln(STAMP) = a + b1 Ln(GSDP)+ b2 Ln(URBAN) + u

• Ln(STAX)= a + b1 Ln(TAHE) + b2 Ln(MSDP) + u

• Ln(LR) = a + b Ln(GSDPa) + u

• Ln(MVT) = a + b Ln(TREG) + u

• Ln(EDUTY) = a + b Ln(CONM) + u

• Ln(EXDUTY) = a + b Ln(GSDP) + u

where,

STAMP: Stamp duty and registration fees

GSDP: Gross state domestic product

URBAN: Urbanization as per 2001 census

STAX: Sales tax

TAHE: Total annual household consumption expenditure

MSDP: Share of manufacturing sector in total SDP

LR: Land revenue and agricultural income tax

GSDPa: Gross State domestic product in agricultural sector.

MVT: Motor vehicle and passenger and goods tax

TREG: Number of registered motor vehicles

EDUTY: Electricity duty

CONM: Consumption of electricity

EXDUTY: State excise duty

The tax effort can be derived by dividing actual revenue of a State by the potential revenue

Ei = Ti /T̂ i *100

Where,

Ei is tax effort of a particular State

Ti is actual tax revenue obtained by the each State and

T̂ i is estimated taxable capacity

If Ei> 100, the State is making more than the average effort to raise revenue from its resources. Conversely, Ei< 100, the State is putting less effort than the average effort to raise revenue.

1.11 Limitations

Planning Commission is also one of the major channels of resource transfers to States. The present research deals especially with the Finance Commission transfers to States. The study also undertakes the estimation of buoyancy and fiscal capacity of State own tax revenue not States own non-tax revenue. Due to limited time and data sources, we were unable to give much importance and analyze State own-non tax revenue.

Chapter 2

Review of Literature

Chapter 2

REVIEW OF LITERATURE

The important and the relevant studies both empirical as well as theoretical on fiscal transfers and fiscal capacity are reviewed in this chapter. It is divided into two parts: (i) Studies on federal fiscal transfers and Finance Commissions and (ii) Studies on fiscal capacity and tax effort.

2.1 Studies on Federal Fiscal Transfers and Finance Commission

Sharma, D.N. (1960) talked about the scope of Finance Commission and concluded that the dictates of planned development have severely restricted the scope of the Finance Commission to function as an impartial and high power body to regulate financial relations between the Centre and the States, which was the role assigned to it by the Constitution-makers. Its functions have now been largely taken over by the Planning Commission and a narrow and limited sphere left to it. The Finance Commission's work may equally and efficiently be carried out by a department of the Planning Commission or a Committee of the Rajya Sabha or indeed, by the National Development Council.

Bradford, David F and Wallace E. Oates (1971) using an analytic framework designed to describe models of collective choice, authors have found in this paper that, for a reasonably broad class of processes of collective decision making, revenue sharing is precisely equivalent to a specific set of lump sum grants directly to the individual members of the collectivity. They found, however, that there are also a number of not implausible circumstances under which the equivalence theorem does not hold and for which revenue sharing may allow the realization of outcomes not attainable under any set of grants to individuals. An evaluation of the likelihood of these exceptions to the theorem is a matter of importance for the evaluation of revenue-sharing programs and a particularly a promising area for further research. Finally, they simply point out that, in assessing the empirical plausibility of the equivalence condition, it must be recognized that any actual revenue sharing will take place in a growing system, one in which for a number of reasons State and local budgets are probably going to rise fast

20 enough to call for increases in tax rates (as well as revenues). Equivalence (or approximate equivalence) does not require in this environment that States and localities cut their tax rates as a consequence of revenue sharing; it may imply only that they will not raise them as rapidly as otherwise.

Gaur, Achal Kumar (1985) in his book has done detailed empirical analysis of the federal transfers as based on the recommendations on the Finance Commissions. He concluded that, the crux of the problem is that resource transfers in a federation should be based on need and incentive consideration. The gap filling device stands no anywhere on the sound touch stone of federal finance. He said in past, the trend of statutory transfers has been made on the ‘gap filling’ devices which aggravated the regional economic disparities in the economy. The scheme of resource transfer introduced by eighth Finance Commission has shown no any significant departure from its predecessors. Thus, the problem of rectification of regional economic disparities and attainment of social justice have been left untouched under the scheme of resource transfers of the Eighth Finance Commission, and therefore economically backward Indian States have been ignored this way.

In his book Gaur, Achal Kumar (1988) discusses the emerging trends of Indian fiscal federalism in their proper perspective and suggested alternative solutions for resolving these issues with a view to establishing a harmonious relationship between the Centre and the States, especially in financial affairs. The author observed that the degree of economic disparities among the States has widened over the period 1951-52 to 1984- 85. The analysis also throws light about the total Central transfers to the individual States in per-capita terms. It has been found that the per-capita total Central transfers as well as its components for the backward States of Bihar, M.P., Rajasthan, Orissa and U.P. have been consistently less than the national average from first plan to the sixth plan.

Chakraborty, Pinaki (1998) found that both Central as well as State government expenditure increased in relation to GDP in the last four decades (1955-1956 to1994- 1995), but State government expenditure was higher than that of Central government. To cover increased expenditure States also raised funds through borrowing and that resulted in severe strains on State finances, on an average 26 percent of the total transferred resources went back to the Centre in the form of repayment of Central

loans and interest payment on it. Secondly this paper also pointed out that Revenue /GDP ratio in the same decade of the States was lower than Centre. From the above analysis author concluded that that Centre-State financial relation have failed to reduce vertical imbalance.

The analysis by Rao, M. Govinda and Nirvikar Singh (1998) brings out main concerns with the transfer system developed in India. It is not that the system has failed to offset the fiscal disadvantages of poorer States entirely; rather, the design and the methodology of transfers raise serious doubts about objectivity, simplicity and fairness. Probably there is no system in the world that achieves perfect equalization, even if such a system were to be desired by economists. The degree of equalization achieved in a federation will be determined according to a compromise among contending parties. But, certainly, it should be possible to channel the transfers through a single, permanent, professional agency; it should be possible to have a rule- based system of transfers instead of expanding Central discretion; it should be possible to design the transfer system with appropriate incentives for the center and the States; and it should be possible to minimize regional transfers arising from undesirable policies (such as inter-State sales taxes) or at least identify the effect of these implicit transfers. Criticism of the system of intergovernmental transfers in India should not detract from its achievements. The very fact that the system has survived for over 50 years in a country so diverse in economic, political, linguistic and cultural factors implies the broad acceptability of the basic structure and functioning of the federation. The method of resolving the problems of special category States, the introduction of formula-based transfers in place of discretionary transfers, achieving a measure of equalization through formula-based transfers, and the attempt to reach consensus solutions to many contentious issues are some of the positive features. Our analysis highlights that reform is needed. That reform is possible suggests a degree of optimism on the future of Indian fiscal federalism.

Bajpai, Nirupam and Jeffrey D. Sachs (1999) stated that financial condition of the State governments in India has been a cause of concern. Over the years, the consolidated financial position of the State governments has shown a marked deterioration in some of their major deficit indicators. One of the fundamental weaknesses of State government finances can be attributed to the increases in non- developmental expenditure, particularly the revenue component of the non-

developmental expenditure, and interest payments as a proportion of revenue receipts. Structural imbalances in the form of large revenue deficits, rising interest burden, increasing distortions in the pattern of expenditure, and very slow growing non-tax revenues are major problem areas for State finances. These problems have been aggravated a great deal over the past few years because of a variety of reasons. A growing pressure on State finances has also stemmed from the rising demand for public services. Furthermore, the fiscal situation in the States is likely to come under much greater pressure with the acceptance of the Report of the Fifth Pay Commission by several State governments in India.

The three different methods of intergovernmental fiscal transfers have resulted in an inefficient transfer mechanism that has increased bureaucracy at the State level, accommodated numerous interest groups, and delinked plan requirements of States from actual transfers. Similarly, better fiscal performance is not acknowledged with higher transfers, instead the gap filling approach of the Finance Commission discourages fiscal discipline in the States.

Rao, M. Govinda (2000) in his paper analyzed fiscal decentralization in a three-tier federal framework in India. After a brief discussion on the evolution of Indian federalism and the description of the prevailing system, the paper brought out anomalies in assignments between Center and States and States and local bodies. Critical analysis of intergovernmental transfers brought out the efficiency and equity implications of intergovernmental transfers. The paper has some important findings. The inclusion of the third tier in the analysis brought out the true picture of fiscal deficits. Analysis showed that structural deficits in the country were due to fiscal mismanagement at both Central and State levels. Despite the semblance of a hard budget constraint at the State level, the status has found ways to soften the constraints. Although the transfer system has equalizing impact, it has disincentives for fiscal management. Constitutional sanction has enabled the institution of local governments, but they do not play much role in providing public services, much less in raising resources.

Rao, M. Govinda (2003) stated that there has been a steep deterioration in State finances during the last decade as evidenced by sharp increase in revenue, fiscal and primary deficits, indebtedness and contingent liabilities, and decline in capital and

maintenance expenditures. Low buoyancy of Central transfers and spillover of Central pay revisions have had the most adverse impact on State finances. However, the States’ own fiscal performance has also seen sharp deterioration. On the transfer system, the scheme proposed by the Ministry of Finance attempts to link a portion of transfers to fiscal reforms. There are serious design issues in the scheme. It is not certain whether the scheme will be effective either. The author also identified the areas of reform the States should focus on to impart efficiency and improve revenue productivity of revenues and prioritization and compression of unproductive expenditures. These, however, require a strong political will and administrative competence and involvement of the public in the reform process.

The article of Mukhopadhyay, Hiranya and Kuntal Kumar Das (2003) says that horizontal imbalances persist in India even today mainly due to a host of economic and political factors. Variations in tax base, tax effort, infrastructural facilities-both physical and social-and political uncertainty are found to be the important determinants of horizontal imbalances. The dispersion in horizontal imbalance can only be reduced through all-round development of the poorer States. General-purpose transfers from the Centre are essential for horizontal equity but they cannot ensure a permanent solution.

Rao, M. Govinda (2003) emphasized that sharp deterioration in the fiscal health of the States has been a matter of concern for policy makers. The remedial measures recently taken include the institution of the Medium Term Fiscal Restructuring Policy (MTFRP), stipulating performance requirements for borrowing from the World Bank and the Asian Development Bank (ADB), and the Accelerated Power Development and Reform Program (APDRP). This article evaluated these schemes. The important conclusions are that (1) incentive-linked transfers are too small to make any difference to fiscal performances, (2) multiple schemes create segmented incentives, (3) there are serious problems of design, and (4) the schemes do not address the basic causes of deterioration in the State’s fiscal performance.

Vasishtha, Garima & Nirvikar Singh (2004) in their paper presented that India’s federal system is distinguished by tax and expenditure assignments that result in large vertical fiscal imbalances, and consequent transfers from the Central government to the State governments. Several channels are used for these transfers: the Finance

Commission, the Planning Commission, and Central government ministries. Author used panel data on Center-State transfers to examine how the economic and political importance of the States influences the level and the composition of per-capita transfers to the States, as well as differences in temporal patterns of Planning Commission and Finance Commission transfers. Overall, the results suggest that States with greater bargaining power, as proxied by political variables, tend to receive larger per capita transfers. The positive estimated effects of the demographic size of the States suggest that population may well be an indicator of political influence, solely due to the size of the State and irrespective of its political influence. Authors also found evidence for temporal variation in Planning Commission transfers.

Heredia, Eunice and Mark Rider (2005) found that the high transfer dependency of the States has weakened the accountability and fiscal discipline. The transfer system is also found to be complex and less transparent. Further, the lack of coordination among the institutions responsible for the transfers, produce distorting incentives. To address the problem of perverse incentives structural changes in the system of transfers are required. In the absence of changes the disturbing fiscal trends observed by the study are likely to persist. Although the Twelfth Finance Commission (TFC) has addressed some of the issues related to the intergovernmental fiscal system and soft budget constraint, there is still an urgent need to tackle other issues in the intergovernmental fiscal system that create perverse incentives and soften budget constraints.

Singh, Nirvikar (2006) reviewed the current situation of India’s State government finances, considering various developments that have shaped the States’ current fiscal situation, including the roles of national economic reform, the intergovernmental transfer system, tax reform, and local government reform. The Paper concluded that State finances in India have deteriorated substantially in the past decade, and require urgent attention. In some respects, the problem is worse than that indicated by budget deficits, since the States also have large off-budget liabilities. They have suggested in this paper that the source of the problem lies partially, or even substantially, in governmental institutions that have not kept pace with changes in the functioning of India’s market economy. Thus, tackling the problems of State finances requires broad systemic reforms. States have been subject to common economic and political forces, which have led to deterioration in their finances. Nevertheless, there has been

substantial variation in the performance of different States, not just fiscally, but also in growth and in broader measures of human development. Thus, the quality of leadership and policy making matters.

Rao, M. Govinda and Pinaki Chakraborty (2007) examines the fiscal impact of structural adjustment loans (SAL) in Indian States by analyzing the quantitative and qualitative aspects of SAL-induced fiscal reforms. Econometric analysis of fiscal impact reveals that State specific effect of SAL in terms of fiscal consolidation has been mixed. There is evidence of softening of the budget constraints in some States, but there is also evidence of greater reduction in fiscal imbalances of SAL States than non-SAL States. It is also seen that much of the fiscal gains have occurred through improved revenue productivity of the tax system and not through expenditure restructuring. It is also seen that the poorer States have preferred to reduce their developmental expenditures to deal with fiscal stress and to comply with fiscal correction targets. This, in turn, has had adverse growth implications. The author concludes that the benefits and the acceptability of SAL at the sub-national level in India would critically depend on factors such as the qualitative change in government expenditure in meeting deficient delivery of public services at State level, and the removal of State level social and infrastructural bottlenecks for promotion of growth by releasing government resources through expenditure restructuring and reform.

Roy, Poulomi (2007) provided a theoretical model of determining optimal fiscal policy of the State governments in India. State’s optimum fiscal policy depends on the rules applied by transferring agencies in transferring funds to the sub national governments. Three important criteria namely revenue effort, deficit financing and distance criterion were considered to estimate the weight assigned to these criteria. The comparison of actual State own revenue and expenditure policies with the optimum policy reveals that States are spending more than estimated optimum level and collecting revenues less than the optimum level. The deviation of actual values from the optimum values also give some idea regarding to which direction the State governments should change its existing revenue and expenditure policies. The period of analysis is 1981 to 2001 and States considered are Andhra Pradesh, Karnataka, Orissa, Tamil Nadu and West Bengal.

Rao, M. Govinda, Tapas Kumar Sen & Pratap R. Jena (2008) in their study authors argued that irrespective of the wording of the Terms of Reference (ToR), the Commission would do well to focus on its primary task of recommending transfers to serve the objective of equity and incentives. While it is required to take into account a number of considerations, the focus should be on the transfer system. As an impartial body, the Commission should make a fair assessment of the union as well as State governments, ignoring the asymmetries in the wording of the ToR.

As regards the transfer system itself is concerned, the paper argued that although it may be difficult to make drastic changes in the relative shares of the States, the Commission should give up the gap filling approach. Instead, after recommending the tax devolution, the Commission should recommend grants to fully equalize expenditures on elementary education and basic healthcare. It is also possible to incentivize the transfer system for even those States that have a better record of providing education and healthcare to improve quality of these services. If necessary, the tax devolution percentage can be appropriately adjusted to ensure equalization of social services.

In a combined Srivastava, D.K. and C. Bhujanga Rao (2009) on dependence of States on Central transfers: aggregate and State-wise analysis looked at the pattern of dependence of the States on Central transfers. This analysis is done with respect to the revenue receipts of the States as also their revenue expenditures. They have looked at the pattern of dependence both in terms of the aggregate account of the States and for individual States.

The following observations were made by the authors.

Third Finance Commission: relative to the average for the preceding Commission’s period, States’ dependence on Central taxes increased inspite of a fall in the share of Central taxes in gross Central tax revenues. This is because of a large positive role played by an increase in Centre’s tax-GDP ratio. Sixth Finance Commission: There is a fall in the States’ share in Central taxes relative to States’ revenue receipts. This is almost entirely due to a fall in the share of Central taxes in gross Central tax revenues.

Eighth and Eleventh Finance Commissions: There is a fall in States’ dependence on share in Central taxes relative to the averages for the immediately preceding

commission periods. This is mainly due to a fall in the share of Central taxes in gross Central tax revenue.

Ninth and Tenth Finance Commissions: There is a fall in States’ dependence on share in Central taxes relative to the commission-period average. This is mainly due to a fall in Centre’s tax-GDP ratio. In the case of the Tenth Finance Commission period, there was a fall in States’ revenue effort.

In all other periods, the dependence of the States’ on their share in Central taxes increased and it was due to a combination of both an increase in the share of Central taxes in gross Central tax revenues and an increase in Centre’s tax effort. Throughout this period, except for the period of the Tenth Finance Commission, States’ own revenue effort also increased indicating that the role played by Central taxes increased on a trend basis inspite of the increasing revenue effort of the States’ themselves.

State-wise analysis of the pattern of dependence indicates as to how far the States rely on Central transfers for their revenues and how far their revenue expenditures are financed by Central transfers. Some to the main finding are summarized below.

In case of Goa, the extent of transfer has come down over time from an average of 37 percent during 1990-95 to just about 10 percent during 2000-05; subsequently there is a marginal improvement. For Haryana the share has ranged between 11.9 - 16.4 percent. For Maharashtra it has ranged between 11.4 percent on an average to 21.6 percent. The lowest share was in the EFC period. For Punjab the share has varied between 9.7 and 19.8 percent. Here also the lowest share was during the Eleventh Finance Commission award period. Comparing across Finance Commissions, the high income group States got the lowest shares during Eleventh Finance Commission period, followed by Tenth Finance Commission period. As far as shares of transfers in revenue expenditures for the middle income States are concerned the following are the noticeable points: In case of Kerala and Tamil Nadu, the dependence on transfers for financing revenue expenditure came down close to 20 percent during the Eleventh Finance Commission period, although since then both of these shares increased to a little more than 24 percent for the Twelfth Finance Commission period.

Leaving Chhattisgarh, the highest dependence on transfers among the middle income States for financing revenue expenditures has been that for West Bengal, which has been in the range of 30-39 percent.

The next State in this order is Andhra Pradesh where the dependence on transfers for financing revenue transfers has ranged between 27.7 and 35.2 percent. The range of variation in these ratios across Finance Commission period averages is relatively narrow.

The extent of dependence is far more for the special category States. As percentage of their revenue receipts, the dependence is highest for Jammu and Kashmir, followed by Meghalaya and then Himachal Pradesh. For some the special category States included, author finds that the share of transfers in revenue expenditures is more than 100 percent for some years and some States.

In a scheme of transfers that aims to achieve a suitable degree of equalization, it is to be expected that the share of transfers in revenue receipts and the dependence of the States on transfers for financing their revenue expenditures would in general be larger for the States that have relatively lower fiscal capacities. Any departures from this expected pattern would be due to higher than average tax effort on the part of some States (where the share of transfers in revenue receipts will be less than average) or due to some components of transfers that are not equalizing in nature.

Srivastava, D.K. and C. Bhujanga Rao (2009) in their study on review of trends in fiscal transfers in India have made critical analysis at the decomposition of the transfers from the Centre to the States under the recommendation of the Finance Commissions. This analysis has been done for periods covered by the Ninth, Tenth, Eleventh, and Twelfth Finance Commissions.

For the Ninth and Tenth Finance Commissions, the relative share of vertical transfers was 59 and 57 percent respectively. This share came down to 39 percent for the Eleventh Finance Commission and 48 percent for the Twelfth Finance Commission. Correspondingly, the Eleventh Finance Commission devoted 61 percent of total transfers for meeting the horizontal objectives.

A regression of per capita transfers on per capita nominal GSDP indicates that in all cases relating to the four Finance Commissions reviewed here, one percent increase in

per capita GSDP would lead to a fall in per capita transfer. The elasticity of response varies from (-) 0.36 for the Tenth Finance Commission to (-) 0.73 for the Eleventh Finance Commission.

Per capita transfers are considerably higher for the special category States as compared to the general category States. For the Twelfth Finance Commission these are nearly 6 times as high as those for the general category States.

Chakraborty, Pinaki, Anit N. Mukherjee & H. K. Amar Nath (2009) argued and concluded that the federal transfer system has undergone significant changes over the years, with an overwhelming influence of the transfers going outside the statutory channels. The effect of these changes through multiple channels of transfers is mixed in achieving horizontal equity and it appears that one is in conflict with the other. Author’s econometric result on this seems robust as this has been corroborated by the exploratory data analysis. On top of that when they add the direct Central spending in the States through its own programme in seven selected ministries, the net effect becomes highly regressive. To conclude, authors emphasized that any design of transfers in the context of in Indian federation would remain cosmetic, unless drastic redistribution takes place in the horizontal allocation of resources.

Srivastava, D.K (2010) wrote that for vertical transfers, the THFC has emphasized the objective of stability in the relative shares of the Centre and the States after transfers. For horizontal transfers, the THFC has successfully achieved 90% of the equalization objective. The design could have been even better if it had not introduced an unnecessary modification in the application of the distance formula, which will result in discouraging tax effort, an effect further compounded by dropping the tax effort criterion from the tax devolution scheme. He also mentioned that there are some unnecessary constraints in designing a suitable fiscal transfer methodology in the Indian context. The first is the time lag in information – the use of 1971 population data and dated per capita GSDP data are two basic constraints. Second, no effort is being made to develop a better indicator of fiscal capacity at the macro level than the per capita GSDP of States. As State tax systems move closer to destination-based taxation such as a comprehensive GST, these constraints will become even more serious. It seems pointless to insist on continuing to use 1971 population data as the

UFCs are able to achieve a significant amount of equalization measured with reference to more up to date information.

The report of ICRA Rating Feature (2010) mentions that according to Thirteenth FC’s recommendation the share of States in the divisible pool of Union taxes be increased and that the level of Central grants to the States be raised significantly would boost the States’ revenue receipts over the period 2010-11 to 2014-15. However, in ICRA’s view, renewed buoyancy of Central and State tax revenues, and structural improvements accruing from greater expenditure control would be essential to improve the States’ revenue balances in the medium-to-long term.

In her paper Dholakia, Archana R (2010) concluded that out of the four different criteria used by the Thirteenth Finance Commission for inter-se devolution of taxes, the criteria of fiscal capacity and fiscal discipline, which are given a weightage of about two-third in the formula, are inadequate, inconsistent and subjective. The allocation outcome based on such a formula, along with the discretionary nature of grants neither reflects equalization nor efficiency and hence provides confusing signals to States for their future fiscal behaviour and growth orientation. The author also suggested that the commission could have avoided these shortcomings by devising the horizontal distribution formula with greater care and objectivity. It is always better, both analytically and practically, to separate (i) pure discretion that can be achieved through grants as well as clear equity-oriented weightage in the tax devolution; and (ii) the devolution based on pure objective fiscal performance criteria. With such a formulation States could be incentivized to perform better without sacrificing equity concerns.

Balasubramanian, G. J. Govindadass and Prasant Kumar Panda (2012) examined the fiscal equalization aspect of Finance Commission (FC) transfers in India using the fixed effect panel regression models and it was found that FC transfers are regressive in nature and fails to equalize fiscal capacity of the States.

Bhatt, Antra and Pasquale Scaramozzino (2013) analyzed the relationship between transfers, State domestic product, and fiscal deficit for a panel of States during the period 1990–2010. The paper finds a positive long-run relationship and bi-directional causality between primary/gross fiscal deficits and non-plan transfers. Further, a negative long-run relationship and one-way causality between State domestic product

and transfers is observed, with causality going from State product to transfers. These results are confirmed by multivariate co-integration analysis, which finds a long-run relationship between fiscal transfers, State product per capita and the primary deficit of the States.

K, Nithin and Rathin Roy (2014) in their study explored the normative fiscal assessments of the Finance Commission of India, and realization of fiscal policy with regard to Central finances over the period 1990-2012. Authors employ the Theil’s inequality coefficient to investigate the magnitude of assessment errors and its partitioning in to bias, slope and random components. Furthermore, this paper also evaluates the efficiency, biasedness and persistence of forecast errors. The robustness of the efficiency results are confirmed with the application of maximum entropy bootstrap. The objective of their study is to examine the structural basis on which Finance Commissions make their awards rather than examining the predictability of the forecasts. The story of Finance Commissions assessments reflects an interesting political economy theatre of contention between aspirations and outcomes. The key findings are as follows: Firstly, source of errors for assessments of tax revenue, non- tax revenue, interest payments, defence revenue expenditure, plan revenue expenditure and fiscal deficit is principally due to random component. However the errors in the remaining economic parameters originate due to systemic components i.e. mean and slope errors. Secondly, the expenditure side predictability is lower than the revenue side predictability.

Rao, C. Bhujanga and D. K. Srivastava (2014) in their paper looked at the pattern of dependence of the States on Central transfers. This analysis is done with respect to the revenue receipts of the States. The study concluded that State’s dependence on Central taxes has changed over time for the general category States categorized into high, middle and low income States and special category States into group 1 and group 2. The high income general category States receive the lowest transfers relative to their revenue receipts. Among the middle income States, across States, the lowest dependence on Finance Commission transfers is that of Tamil Nadu and the highest, is that of West Bengal. Among the special category States group 1, dependence is higher than the general category low income States. In the special category States group 2 the dependence is higher than group1.

2.2 Studies on Fiscal Capacity and Tax Effort

Oates, Wallace E., (1977) provided an overview of economics of fiscal federalism. He tried to work out the implications of the basic principle for the efficient functioning of a multilevel public sector. Such approach seems to generate an insight which is useful for the analysis of budgetary policy of the government. But he cautions that it is difficult for such analytical tools to capture all the aspects of fiscal programs like revenue sharing. Moreover the economic logic often militates against social objectives. But despite all its limitations it often reveals certain basic tendencies in the system with which public policy must come to terms irrespective of its goals.

Lucre, Robert B. (1984) discusses the merit of using the Representative Tax System to measure fiscal capacity instead of the traditional measure of per capita income and the author concluded that Representative Tax System provides an alternative measure of fiscal capacity that is of both analytic and policy interest. By providing means of measuring the disparities between States in their tax bases and their relative tax efforts, the RTS tax capacity measure can play a major role in determining the allocation of federal grants, and, by improving the underlying statistical data, that role can be expanded.

Arbab (1987) analyzed tax efficiency in Iran for the period 1973-1985. To examine the achievement or lack of achievement of tax system, different indexes are introduced and considerable indexes were examined in two time periods, 1973-1978 and 1979-1985. The index of annual growth of tax incomes to national income, the index of relate of governmental payments to GDP, the index of relative of government payments to national income, index of receiving taxes to approves taxes, the index of receiving taxes to general incomes of government and index of relative of taxes that is the rate of entire financial incomes that is the relative of the entire tax incomes to domestic gross production, and analyzed indexes in the research. The results showed that industrial sector and commercial subsector of service can pay more tax and it has an impact on tax incomes.

The intention of Sarma, J.V.M. (1991) in his paper is to examine the suitability of different types of panel models for assessing relative tax efforts of States both on a priori grounds as well as on grounds of statistical efficiency. The author’s analysis shows that the constant slope (i.e. fixed effects models and Random effects models)

33 type of panel models are better suited to derive norms out of the States' tax behaviours in India. The tests of structural change also indicate that, by and large, differentials in tax behaviour among the States can be taken care of by means of intercept differences only. Both the fixed effects as well as the random effects models performed better as compared to the varying slope models (i.e. Non-stochastic coefficient models and Random coefficient model) considered. The results of the latter models appear to be not as coherent as those of the former models.

Gramlic, Edward M. H. (1993) in his paper said that public services should be provided by the lowest level of government possible, or the jurisdiction spanning the smallest area over which benefits are distributed. If those outside the jurisdiction receive some of the marginal benefits of these public services, the best cure against under spending is open-ended matching grants, with the matching rate equal to the share of the marginal benefits received by outriders.

He also feels that user fees and local income, land, and property taxes are valuable forms of local finance and should be adapted to the extent possible, hopefully with enough revenue potential that vertical imbalance grants would not be necessary. But local property taxes should not be assessed on mobile industrial capital beyond the level of services received, for such taxes will just drive that capital out of the jurisdiction. Author sees no strong rationale for unconditional grants anywhere in the system. Matching grants are preferred ways of dealing both with benefit spillovers and with disparate abilities to finance human capital distributional programs.

Dahlby and L.S. Wilson (1994) address the question: How should the tax burden in a federation be distributed across the different jurisdictions so that the social cost of providing government services is minimized? Using optimal tax theory, author derives formulas for the optimal equalization grants that equalize the social marginal cost of raising revenue across all provinces. Paper shows how the optimal equalization grants are related to a measure of tax effort based on the marginal cost of public funds and a measure of fiscal capacity that takes into account the elasticity of the tax base and its substitutability with other tax bases.

In this paper authors tried to outline an alternative argument for equalization grants stemming from differences in the fiscal capacities of the provinces that give rise to differences in the social marginal cost of public funds. In order to minimize the social

cost of raising tax revenues, the distributionally weighted (marginal cost of public funds) MCPF must be equalized across all jurisdictions, and this condition can be attained through a system of equalization grants. The welfare gains obtained by the recipients of these grants exceed the losses incurred by the contributors. Thus, the optimal equalization grants do not result in a Pareto improvement but can be justified on a cost-benefit basis. In deriving formulas for the optimal equalization grants, authors have developed measures of tax effort and fiscal capacity that would allow them to rank jurisdictions according to the marginal cost of raising tax revenue and according to their ability to raise revenue at a given marginal cost of public funds.

Nikoo (1996) tried to estimate tax capacity in Hamadan province by using the econometric models. He considered variables of export in the region, productions of province in industry sector, productions of mine industry, productions of agricultural sector, and rate of learning education in the province as influential variables on tax capacity. Models were tested statistically for the period 1981-1995. Among estimated different equations the equation with variables productions of province in industry sector, productions of mine industry, productions of agricultural sector, and rate of learning education were significant and had coefficients 0.176, -5.16, 0.006 and 354.83 respectively.

In a research note Tannenwald, Robert & Jonathan Cowan (1997) mentions, during its lifetime, the U.S. Advisory Commission on Intergovernmental Relations periodically published estimates of each State's relative fiscal capacity. This research note provides new estimates updated to fiscal year 1994, the latest year for which all requisite underlying data are available. Authors find that dispersion in capacity narrowed from 1987 to 1994, largely because the capacities of California and the Northeast States, historically enjoying ample capacity, fell relative to the national average. They also find that these states generally experienced an increase in relative fiscal need, further narrowing inter-State dispersion in fiscal comfort (capacity relative to need). Authors concluded with evidence suggesting that States with low fiscal comfort generally prefer relatively low levels of State and local public services.

In their paper Rajaraman, Indira and Garima Vasishtha (2000) examines the impact of State-local grants on tax effort of rural local governments (panchayats) for Kerala State. The results from data for 1993- 94 show, after controlling for tax capacity, a

greater and more uniform negative impact on own tax revenue of lump sum "untied" grants that are predictable and unvarying than in the case of a more widely defined grants total including components with year-to-year variability. An increase in the untied grant to panchayats by one rupee reduces own tax revenue in twelve out of fourteen districts by more than one rupee, and in eight of these by more than two rupees. The reduction in own tax revenue have been the result of a selective slackening of tax effort since refunds of panchayat-level taxes in proportion to incidence are ruled out. The post-grant pattern of incidence will therefore be less transparent than the nominal pattern, less preserving of voter preferences, and possibly driven by corruption towards greater regressivity. Given also the balanced budget constraint on panchayats, there is a corollary contradiction of the flypaper effect found in other contexts. The two districts for which the general result does not hold are also the most ethnically fragmented. This result has implications dissimilar to those in the received literature on the fiscal effects of ethnic fragmentation.

According to Naganathan, M. and K. Jothi Sivagnanam (2000) Finance Commission transfers have discouraged the revenue efforts of the States. However, the existence of negative implication in itself may not be a cause for concern if there exists an efficient and equitable mechanism of intergovernmental transfers strongly linked to revenue/tax effort criterion to encourage the revenue mobilization efforts of the States. The Eleventh Finance Commission should come out with some bold corrective measures, particularly by assigning considerable weightage for revenue effort factor in its devolution formula.

Coondoo, Dipankor Amita Majumder, Robin Mukherjee and Chiranjib Neogi (2001) examined the relative tax performances, as measured by the Tax-SDP ratio, for some selected States of India over the period 1986-87 to 1996-97. The analysis revealed that States in south and west India display a superior tax performance compared to the remaining States of the country. This may be due to a number of reasons – viz., relatively larger taxable capacity of these States, relatively greater tax effort made by these States or some deep-seated political-economic characteristics that these States may share.

In his paper the author Schneider, Martin (2002) deals with local fiscal equalization in Austria. The system of intergovernmental relations in Austria includes different

regulations in order to equalize differences in the fiscal capacity of the municipalities. This leads to so-called ‘compensation effects’, because additional revenues from a local government’s own tax are (at least partly) compensated by losses from equalization grants. This paper carries out a detailed analysis of these compensation effects. It is shown that they create strong fiscal disincentives for the local governments: on an average, 55 per cent of additional revenues from the communal tax (which is the most important of a local government’s own taxes) are compensated by losses of equalization grants. In extreme cases, local governments can lose up to 144 per cent of the additional tax yields collected. These local governments would be better off if they made no effort to increase their tax base.

Stephen, Barro M (2002) concluded that an ideal, or close-to-ideal, fiscal capacity indicator has not been yet produced. The RTS indicator now used in Canada has serious theoretical flaws, as a result of which the provinces’ fiscal capacity scores undoubtedly are distorted, but to an as-yet unmeasured degree. The macroeconomic approach is better grounded in positive economic indicator found in national income accounts do not reflect, or reflect fully, the varying ability of provinces to export taxes to non-residents.

In his working paper Sobarzo, Horacio (2004) presents the results of an (Representative Tax System) RTS constructed for Mexico that analyzes State tax effort and, more important, State tax potential. The results of analysis lead to some conclusions: First, the distribution of tax responsibilities between federal and State government levels in Mexico is heavily concentrated at the federal government in terms of revenue. Second, the analysis of the results of the RTS reveals the best and the worst tax performances occur in relatively rich States. Third, if the analysis is modified and adjusted by population it shows that State tax efforts are conditioned by their heterogeneity. Fourth, a comparison of State and federal taxes shows that State taxes are close to the national average, whereas the performance of federal taxes is significantly below the national average. Fifth, relative State tax performance is in principle determined by the number of taxes they impose. However, some States showed relatively good tax performance and, at the same time, levied relatively few taxes.

Purohit, Mahesh C. (2006) relates taxable capacity to the average efforts of 16 major States in India and takes into account independent variables that influence the capacity factors of States. The final results of the regressions estimated for each of the taxes indicate that Gujarat ranks first in tax effort. West Bengal and Andhra Pradesh stands second and third respectively. Basically, for those who have a lower rank, actual revenue is lesser than total taxable capacity.

Gupta, Abhijit Sen (2007) contributed to the existing empirical literature on the principal determinants of tax revenue performance across developing countries by using a broad dataset and accounting for some econometric issues that were previously ignored. The results confirmed that structural factors such as per capita GDP, agriculture share in GDP, trade openness and foreign aid significantly affect revenue performance of an economy. Other factors include corruption, political stability, share of direct and indirect taxes etc. The paper also makes use of a revenue performance index, and finds that while several Sub Saharan African countries are performing well above their potential, some Latin American economies fall short of their revenue potential.

In his article Mikesell, John (2007) explained that the American system of fiscal federalism requires that State and local governments finance the bulk of their budgets from own-source revenues, not transfers. This article analyzes State total taxable resources from1981 to 2003 to evaluate how State fiscal capacity has changed in that time and how it has been affected by national recessions, to examine the extent to which fiscal capacity differs among States and whether capacity has converged, and to consider whether States have responded to service demands by changing tax effort and whether tax effort has converged in the face of inter-State competition and other harmonizing forces. Because the capacity measure employed here can be compared across years, something impossible with major alternative indices, the analysis provides insights important to the analysis of fiscal federalism and of the implications of revenue devolution not previously possible.

Bird, Richard M., Jorge Martinez-Vazquez, Benno Torgler (2008) argued that a more legitimate and responsive state is an essential factor for a more adequate level of tax effort in developing countries and high income countries. While at first glance giving such advice to poor countries seeking to increase their tax ratios may not seem more

helpful than telling them to find oil, it is presumably more feasible for people to improve their governing institutions than to rearrange nature’s bounty. Improving corruption, voice and accountability may not take longer nor be necessarily more difficult than changing the opportunities for tax handles and economic structure. The paper also shows that high income countries have also the potential of improving their tax performance through improving their institutions. The key contribution of this paper is to extend the conventional model of tax effort by showing that not only do supply factors matter, but that demand factors such as corruption, voice and accountability also determine tax effort to a significant extent.

In their research paper Dinceccoy, Mark & Mauricio Prado (2009) examines State fiscal capacity and economic performance. The authors perform an econometric analysis of fiscal capacity and economic performance that uses data for 112 sample countries from 1975 to 2004. Their findings indicate that there is a significant relationship between fiscal strength and worker productivity. The cross-sectional results show that a 10 percentage point increase in fiscal capacity leads to a 21 to 44 percent increase in GDP per worker for the average income sample country. The author’s results suggest that small fiscal capacity impedes economic development. If the State cannot achieve predominance over non-State elites, then it cannot raise enough resources to provide basic public goods that improve worker productivity.

Panda, Prasant Kumar (2009) made an attempt to empirically examine the impacts of transfers on States’ revenue efforts including own-tax revenue and non-tax revenue and to see whether incentives to tax effort in terms of weights assigned in the devolution formula are actually captured in the system. Using a panel data set of transfers and taxes and, controlling other key variables like GSDP, non-primary sectoral contributions and revenue expenditure with one period time-lag, authors have alternatively regressed own-tax revenue, own-non-tax revenue and own-revenue on various types of transfers, as well as on overall transfers. The result suggests that these transfers adversely affect the incentives of States to mobilize their own resources. Per capita resource transfers from the Centre are found to be significant and negatively associated with States’ own-revenue, own-tax revenue and own-non-tax revenue in per capita terms, irrespective of choices of models or specifications. This indicates that Central transfers have a dampening effect on States’ revenue efforts. Further, the incentive criterion for tax effort as used both in the Finance

Commissions’ devolutions and in the Gadgil formula used by the Planning Commission is not reflected in the system, and it has failed to induce a desired and positive revenue pattern in States. The control variables like per capita GSDP and the share of non-primary sectoral contribution significantly influence the own-tax revenue of States and the coefficients are found to be positive. More interestingly, revenue expenditure with a one time-period lag is found to be highly significant, and positively affects the various components of States’ revenue in both the specifications. At the disaggregate level, the overall results suggest that statutory transfers per capita and grants for the State plan per-capita are found significant, and negatively associated with States’ own-revenue and its components in per capita terms. Discretionary grants per capita yield a negative coefficient for own-nontax revenue and own-revenue, but a positive coefficient for own-tax revenue. This indicates that all types of transfers including the FCs’ transfers adversely affect the tax effort of States and substitute transfers for States’ own-revenues.

Shanmugam, K.R. and D.K. Srivastava (2009) made an attempt to design an appropriate methodology to determine the transfers from the Centre to the State governments. The author provides a normative approach to fiscal transfers with reference to the principle of equalization as it is consistent with both efficiency and equity. Specifying a tax revenue function this study has estimated the tax revenue potentials of State governments in India and used those revenue potentials along with a benchmark level of public services to derive the fiscal transfers required so that each State can provide the same amount of services to people in the country. The advantages of this approach are as follows: It provides a single measure of transfers instead of complicated gap filling and modified Gadgil formulae etc. It is simple to implement. The bench mark services level can be altered. It takes into account the actual population, same amount of public services to all citizens, and is free from endogeneity bias that arises due to the impact of the past transfers on current transfers. It also provides an incentive for the States to collect their revenues efficiently.

Porter, Tod S. (2010) uses several different approaches to calculate fiscal capacity for school districts in Ohio from 1996 to 2006. The results show that when the measure of revenue-raising capacity is based on assessed value, there is a modest trend towards more equality across districts, but when the measure is based on income, there is a strong trend towards greater inequality. The results also show that adjusting the

measure of fiscal capacity for State and federal subsidies substantially reduces the measured level of inequality. Districts from the Appalachian region of Ohio tend to have relatively low values for fiscal capacity, regardless of the approach used. The rankings of urban districts depend heavily on how economically disadvantaged students are weighted when estimating the needed level of expenditures.

In his article Petchey, Jeffrey D. (2011) made a significant conclusion that the economic efficiency and equity rationales for fiscal capacity equalization in Australia are unclear and not well understood. Given that equalization is at the core of Commonwealth funding of the States and that States provide important services and infrastructure Central to the nation’s future economic growth, this suggests that it is time to reconsider equalization at a deeper level, taking care in the process to set out its goals in a modern open economy. He also stated that the polarization of States into highly and lightly equalized clusters due to trends in revenue bases and expense disabilities gives some urgency to this need.

Javid, Attiya Y. and Umaima Arif (2012) assessed the revenue performance across developing Asian countries over the period 1984 to 2010 and also for the sub periods 1984 to 1990, 1991 to 2000 and 2001 to 2010. The results indicate that per-capita GDP, share of agriculture in GDP and foreign debt are statistically significant and strong determinants of revenue performance in almost all specifications of the model. The trade openness and inflation are also having impact on revenue performance in some specifications. Among the institutional factors, control of corruption and high bureaucracy quality and improved law and order conditions have a significantly positive effect on revenue performance in all model specifications. The results confirm that countries that depend on agriculture value addition tend to have poorer revenue performance. The analysis highlights that revenue performance depends on level of development of country, its institutional and governance quality and to macroeconomic policy and political will for reforms.

In her paper Raju, Swati (2012) seeks to measure the internal fiscal capacity or the potential to create ‘space’ in the seventeen non-special category States of India through a tax effort analysis for Own Tax Revenues over the period 2005-06 to 2009- 10. Estimates indicate a high tax effort index for the middle and lower income States while the high income States exhibit a low tax effort. Consequently, the scope to

augment revenues for the middle and lower income States is limited whereas the high income States enjoy greater latitude for revenue augmentation particularly in Sales Tax.

Le, Tuan Minh, Blanca Moreno-Dodson and Nihal Bayraktar (2012) in their study dealt with the concept and empirical estimation of countries’ taxable capacity and tax effort to develop further country tax effort typologies. The paper used a cross-country study from a sample of 110 developing and developed countries during 1994-2009. Several variables are important in determining the level of taxes in a country, but in recent years both the significance and the magnitude of the impact of institutional quality indexes on tax collection have increased strongly. Finding indicated that countries with better institutional quality such as bureaucracy quality or corruption can collect higher taxes. Countries need to consider improving the quality of governance if they want to increase the level of tax revenues. Taxation is considered the best reliable way to finance public expenditures in the long run. Despite this fact, many developing countries experience a chronic gap between the actual and desirable levels of tax revenues. Taxation reforms were needed to close this gap, but such reforms cannot be the same for different countries. Taxable capacity and tax efforts present significant deviations across countries, income groups and regions, as well as overtime. But overall, developing countries seem to have more limitations to expand the scope for taxation, efficiently and equitably, which is determined by their taxable capacity. On the one hand, countries with a low level of actual tax collection and low tax effort may have more room to increase tax revenues to reach their taxable capacity without causing major economic distortions or costs. Finally, low-income countries with a low level of tax collection but high tax effort have less opportunity to increase tax revenues without creating distortions or high compliance costs.

In a combined study Garg, Sandhya, Ashima Goyal, Rupayan Pal (2014) in their research paper attempts to measure the tax capacity and tax effort of 14 major Indian States from 1991-92 to 2010-11 using Stochastic Frontier Analysis. The use of tax capacity frontier helps to identify those States which are operating near their tax capacity and States which are away from tax frontier. The results indicate presence of large variation in tax effort index across States and which seems to be increasing over time. Econometric analysis suggests that economic and structural variables have significant impact on the tax capacity. While per-capita gross State domestic product

42 has positive effect on States' own tax revenue, relative size of agriculture sector of a State has adverse effect on its own tax revenue. The evidence on tax efficiency suggests that the higher inter-governmental transfers tend to reduce tax efficiency. Outstanding liabilities and expenditure on debt repayment also indicate adverse effect on tax efficiency, but the adverse effect of the latter is lesser than the former.

2.3 Research Gap

Many authors have done study on fiscal transfers and few have done research on fiscal capacity of Indian States. In the past some studies have been done on fiscal capacity but with limited time period and data. Even in recent years the research done on fiscal transfers and fiscal capacity in India by the scholars have been done with a very limited data which is not very satisfying. Here in the present study an attempt has been to study the fiscal transfers and fiscal capacity in a very wide perspective.

Chapter 3

Scenario of Federal Transfers to States

Chapter 3

SCENARIO OF FEDERAL TRANSFERS TO STATES

The emergence of financial disequilibrium is an inevitably in almost all federal setup. In any scheme of division of functions and sources of revenue between the federal and federating units, generally States are given more work and less elastic sources of revenue. It is because of this fact; problem of financial disequilibrium generally comes before units forming the union. Moreover, the problem of financial disequilibrium before the federating units becomes more acute and complicated when the States are assigned the task of economic planning and development expenditure.

Under such circumstances, every federal country makes an arrangement for transfers of resources (generally from federal government to the State Governments) to bridge up the gap between resources needs and their availability from assigned sources of revenue to them. India is a federal State comprising the Central Government at the top level and the State and local Government at the lower levels. Our constitution makers foresaw the problems of financial disequilibrium and made Constitutional arrangement to eradicate the same to the greatest extent possible.

The constitution provides for division of functions and sources of revenue between the Federal Government (the Central Government) and the States both. The essence of federal form of government is that the Centre and the State governments should be independent of each other and be provided with sources of raising adequate revenues to discharge the functions entrusted to them. For the successful operation of the federal form of government, financial independence and adequacy form the backbone (Anand, Bagchi and Sen, 2004).

3.1 Fiscal Federalism in India

3.1.1 Distribution of Fiscal Powers in a Federation

The Constitution of India provides for three layers of government; at the Central level, at the level of the States and at the local level. The federal Polity, as prevalent in India, warrants division of Powers and responsibilities between the Centre and the

States on the one hand and States and panchayats/municipalities on the other. It usually brings in its wake problems and conflicts in the pattern of federal relations.

The legislative powers and functions of the Central and State governments have been defined under Article 246 read with Seventh Schedule of the Constitution of India. These powers are defined through precise entries in the three lists of the Seventh Schedule. List-I, also known as the Union List, contains matters on which the Centre has the exclusive powers to legislate. List -II, also called the State List, contains matters on which the States enjoy the powers to legislate, and the List- III, also called the Concurrent List, contains matters on which the Union Parliament as well as State Legislatures has the concurrent powers to enact laws.

Exhaustive and complex arrangements, pertaining to the distribution between the Centre and the States, of taxes, the power of borrowing, and provision for grants-in- aid by the Centre to the States, are enshrined in the Constitution. The underlying philosophy of these arrangements is to place at the disposal of the two tiers of government adequate financial resources to enable them to discharge their respective responsibilities under the Constitution. A brief appraisal of these aspects is called for here.

A. Distribution of Taxation Powers:

The distribution of taxation powers between the Centre and the States is designed to reduce tax problems to the minimal level in a federal set up- such as double taxation, tax rivalry among States, duplicate tax administration and tax evasion. This division of taxation powers is largely based on economic and administrative considerations. Taxes having inter -State base, and those, in the case of which uniformity in the rates is called for, are vested in the Central Government Besides, taxes which the taxpayer can evade by shifting his habitat, or where the place of residence is not a correct guide to the true incidence of the tax, fall within the jurisdiction of the Central Government Taxes which are location -specific and relate to subjects of local consumption are with the States. Broadly speaking, taxes on production, with some exceptions, are levied by the Centre and taxes on sales by the State governments.

It is specifically stipulated vide Article 265 of the Constitution that no taxes shall be imposed or collected except by the authority of law. Taxation powers of the Union

45 government are envisaged from Entries 82 to 92C of List -I in the Seventh Schedule, as shown in Appendix A.3.1. Similarly, the taxation powers of the State governments are specified from Entries 45 to 63 of List -II in the same Schedule and shown in Appendix A.3.2. No heading of taxation is provided to the items enumerated in List - III, also known as the Concurrent List, which shows that the Centre and the States have no concurrent powers of taxation. The rationale behind this avoidance of joint occupancy—both by the Centre as well as the States—of tax fields is designed to ward off duplication in tax administration, and minimize tax rivalry between the Union and the States, and among the States themselves. The residual powers of taxation, like general legislation, are conferred upon the Central Government vide Entry 97 of the List –I in the Seventh Schedule.

There is no provision in the Indian Constitution to allocate any taxation powers to local governments. However, the implied interpretation of Article 276 is construed to mean that the taxes on professions, trades, callings or employment are for the advantage of the State or of a municipality, district board, local board or any other local authority. The States are at liberty to assign, on their own, any of the taxes in the State List to the local bodies. The taxes usually assigned to local governments are property taxes, octroi, and taxes on vehicles. While commenting upon the efficacy of the constitutional provisions with regard to distribution of taxation powers, the Sarkaria Commission observed:

"A well-balanced distribution of heads of taxation based on economic and administrative rationale between the Union and the States and adequate arrangements for sharing .of resources is vital for the proper functioning of the two- tier polity. We are of the firm view that the basic scheme of the Constitution dividing the field of taxation between the Union and the States and incorporating the adequate arrangements for sharing of resources between them is sound and no major modifications in it are called for" (Sarkaria Commission Report, 1988). However, as discussed below, the State's taxation and borrowing powers are effectively limited.

B. Limitations on States' Taxation Powers:

Taxation powers of the States have been subjected to certain restrictions as imposed by the Constitution. Nevertheless, a State legislature enjoys the power of levying any of the taxes mentioned in List -II. However, in the case of certain taxes, this power of

the State legislature is subject to limitations imposed by substantive provisions of the Constitution. This point can be illustrated by some examples. For instance, the State legislature enjoys the power to levy taxes on the sale or purchase of goods other than newspapers as per Entry 54 of List -II. However, Article 286 of the Constitution stipulates that sales taxes levied by the States should not interfere with imports and exports or inter -State trade or commerce, which are matters of national significance. Following restrictions on the powers of the States to levy sales taxation are imposed by Article 286 of the Constitution:

• No law of a State shall impose a tax on the sale or purchase of goods where such sale or purchase takes place (i) outside the State; or (ii) in the course of import into or export out of the territory of India;

• With regard to inter -State trade there are two restrictions (i) the power to tax sales taking place in the course of inter- State trade and commerce belongs to the Union vide Entry 92A of List-I in the Seventh Schedule, and (ii) the sales tax on the inter-State sales of 'declared goods' (i.e., goods of special importance in inter-State trade) is subject to certain restrictions in terms of the nature of the levy and the rate of tax as Parliament may by law specify.

A State legislature is competent to impose a tax on professions, calling or employment, as per Entry 60 of List –II. However the total amount payable in respect of any one person to the State by way of such tax is not to exceed 2,500 per annum [Article 276 (2)]

C. Limitations on States' Borrowing Powers:

Under the Indian Constitution, the Centre's executive power extends to borrowing, under Article 292, either within or outside India, on the security of the Consolidated Fund of India, within such limits, if any, as may be fixed by the Parliament from time to time. However, the borrowing power of a State is subject to a number of restrictions under Article 293 of the Constitution. In the first instance, a State cannot borrow outside India. However, a State is entitled to borrow within the territory of India subject to: (a) limitations as may be imposed by the legislature of that State; (b) consent of the Central Government is required to raise such loan if the Centre has guaranteed an outstanding loan of that State; (c) approval of the Centre is required to

raise fresh loan if a Union loan to the State remains outstanding. Viewed in a broad perspective, almost all the States of the Indian Union are in debt to the Centre, they have to seek Centre's permission to raise loan. The avowed objective of imposing these restrictions is designed to avoid uncontrolled borrowings by the States in order to avert the possibility of any State becoming either a defaulter or insolvent.

3.1.2 Sharing of Union Taxes:

Though the taxation powers conferred upon the Union and the States are mutually exclusive, all the taxes and duties levied by the Union are not meant for the purpose of the Union. Revenues accruing from certain taxes and duties leviable by the Union are totally allocated to or shared with the States to supplement latter's revenues according to their requirements. The architects of the Indian Constitution had realized that the sources of revenue assigned to the States might not prove sufficient in view of the States' growing welfare, maintenance, and development activities. Therefore, specific provisions were incorporated to set apart a portion of Central revenues for the benefit of the States. These provisions denote the flexibility of the Indian Constitution in terms of division of financial resources between different layers of the government. There also exists a distinction between the legislative power to impose a tax and the power to appropriate the proceeds of a tax so levied.

The pattern of distribution of Central tax collection between the Union and the States has undergone a significant change in the aftermath of the Constitution (Eightieth Amendment) Act, 2000. In the wake of this Amendment, the Central taxes can be classified into different categories, as shown in Table 3.1

Table 3.1: Classification of Central Taxes

Provision Explanation

Duties Levied by the Union but collected These inter alia include duties of excise and Appropriated by the States on medicinal and other preparations (Article 268) containing alcohol, and stamp duties on bills of exchange etc., as mentioned in Entries 84, 91 and 92C of the Union List respectively. Taxes Levied and Collected by the Union These are: taxes on the sale or purchase but Assigned to the States of goods other than newspaper, where (Article 269) such sale or purchase takes place in the course of inter-State trade or commerce and taxes on the consignments of goods (whether the consignment is to the person making it or any other person), where such consignment takes place in the course of inter-State trade or commerce. These taxes correspond to Entries 92A and 92B in the Union List. Taxes Levied and Distributed Between All taxes and duties referred to in the the Union and the States Union List shall be levied and collected (Article 270) by the government of India and shall be distributed between the Union and the States with the following exceptions: (a) duties and taxes referred to in Articles 268, 268A and 269, (b) surcharge on taxes and duties referred to in Article 271 and (c) any cess levied for specific purposes under any law made by the parliament. Source: Ministry of Law & Justice

It becomes discernible from Table 3.1 that taxation arrangements under Articles 268 and 269 of the Constitution are of specific significance because they vest in the Central Government the charge of the taxes and duties that have inter-State character and need uniformity in rate structure for the smooth conduct of business and trade activities throughout the length and breadth of the country. These two articles refer to duties that are to be levied by the Union but assigned completely to the States in whose jurisdiction they are leviable.

3.1.3 Mechanism of Federal Fiscal Transfers to the States:

Though a dual polity based on divided governmental powers and functions has been envisaged in the Indian Constitution, this dichotomy is not watertight. The report of the Administrative Reforms Commission, 1968 had succinctly observed in this regard:

"Exact correspondence of resources and functions is not possible to secure in any federal situation but in India the balance is tilted in favour of the Centre and the outstanding feature of the financial relationship between the Centre and the States consequently is that the former is always the giver and the latter the receivers. The favourable position given to the Centre in regard to financial resources reflects the strong-Centre theme running through the Constitution and many feel that this has been an important factor in keeping the country united (Administrative Reforms Commission Report; Part-I, 1968)".

Advent of imbalances between functional responsibilities and financial resources of different layers of government is a distinctive feature of all federations, especially of those whose economies are more dynamic. Even in the older federations like the United States Canada, financial conflicts between the national and sub national governments are still in vogue and their once-for-all solution is difficult to find. The incongruity between functions and taxation powers takes place partly because of changing responsibilities of government at different levels and partly because of the dominant position of federal government in regard to taxation powers, which is often by design. Hence, vertical imbalances in terms of resources and expenditure responsibilities emerge between different levels of government calling for transfer of resources from the Centre to the States. This is the dominant aspect as well as usual problem of federal finance. Thus, intergovernmental transfers are an integral and inherent part of a multi-level fiscal system. Such transfers are justified on horizontal equity considerations also.

The framers of India's Constitution made elaborate, albeit complex, arrangements relating to the flow of funds from the Centre to the States, keeping in view the fact that the financial resources of the States could prove inadequate for undertaking welfare, maintenance and development activities. The disequilibrium between

50 increasing functional responsibilities of the States and their own resources is corrected by Central transfers affected through three main channels:

1. Statutory transfers through the Finance Commission.

2. Plan transfers through the Planning Commission.

3. Discretionary transfers for Centrally Sponsored Schemes, relief from natural

calamities, and relief and rehabilitation of displaced persons.

Apart from these direct transfers, resources also flow to the States indirectly through:

• Establishment/expansion of Central public sector enterprises,

• Subsidized lending by banking and financial institutions,

• Subsidized borrowing by the States from the Central Government and the banking

system.

These are also called invisible transfers or subterranean transfers.

Statutory transfers, also known as 'Assured Transfers', are routed through the Finance Commission. These transfers are made to the States through the divisible taxes and duties (Articles 269, 270, and 273) and grants-in-aid under Article 275 of the Constitution. Plan transfers, also called 'discretionary transfers', are made through the Planning Commission. These consist of loans and grants-in-aid under Article 282 of the Constitution. Critical institutions that intermediate between the Central, State and Local governments are the Central Finance Commission (FC), the Planning Commission, Inter-State Council (ISC), the National Development Council (NDC), and State Finance Commissions (SFCs) one for each State. While the Planning Commission is a permanent body the Central and State level Finance Commissions are set up with a normal periodicity of five years.

It is in this backdrop that a brief analysis of the two main channels of transfer of financial resources from the Centre to the States i.e., Finance Commission and Planning Commission is called for here.

3.2 Finance Commission and Resource Transfers

Transfers channelled via the Finance Commission relate to sharing of certain Central taxes and grants-in-aid of revenues to the States. In other words, although the taxation powers vested in the Centre as well as in the States are mutually exclusive yet all the taxes and duties imposed by the Centre are not meant wholly for the Centre. Moreover, revenues accruing from certain taxes and duties imposed by the Centre are totally allocated to or shared with the States to supplement the revenues of the States according to their requirements.

The framers of the Indian Constitution, while framing various provisions, had perhaps this fact in mind that even with a share in the proceeds of divisible taxes, some States could still require financial assistance. Accordingly, provision for annual grants-in-aid of revenues under Article 275(1) was incorporated for such States as might be in need of assistance. The Centre is also required to provide grants-in-aid to the States for the welfare of Scheduled Tribes and for raising the level of administration in scheduled areas and also separately for Assam. These provisions which set apart a portion of Central revenue for the benefit of States indicate flexibility of the Indian Constitution in terms of division of fiscal resources between the Union and the States.

There is a provision in the Constitution for the Central transfers to the States. However, there is no indication with regard to share of the States in the divisible taxes. Besides, no principle for the division of States' share among the States themselves is prescribed. Keeping in view the probable changes in the realms of taxation and public expenditures the architects of the Constitution, perhaps, ‘consciously avoided introduction of permanent formulae in this regard. Accordingly, the task of exact manner of sharing taxes and the actual determination of grants is left to the deliberations of the Finance Commission which is appointed by the President of India under Article 280 every five years or earlier if so required.

The Finance Commission, comprising a chairman and four members, makes recommendations to the President, inter-alia, regarding the principles of distribution between the Centre and the States of the proceeds of taxes and the allocation among the States of the shares of such proceeds. The President is called upon to place the recommendations of the Finance Commission, along with a Statement of action taken thereon, before both the Houses of the Parliament. Undoubtedly, the President is not

obliged to accept the recommendations of the Finance Commission in toto; they are usually accepted in view of the quasi-judicial nature of the Commission.

Incidentally, the Finance Commissions have conducted their proceedings independently, and some of them, especially the recent ones, have been quite authoritative. Award of a Finance Commission evokes substantial issues having bearing on financial relations between the Centre and the States. Since the promulgation of the Constitution, fourteen Finance Commissions have submitted their reports thus far. Table 3.2 shows the chronology of the Finance Commissions along with their years of establishment, years of reporting, periods of award, and the names of chairmen of various Finance Commissions.

Finance Commission is a unique feature of the Indian Constitution having no parallel in the existing federal constitutions of the world. While commenting in this regard, the Sarkaria Commission observed:

"Unlike the Commonwealth Grants Commission of Australia, the Indian Finance Commission is a constitutional body and the objectivity in its role has been facilitated by keeping it outside the Union executive. Compared with its Australian counterpart, the Indian Finance Commission has a greater scope in as much as it recommends sharing of tax proceeds also, besides the grants-in-aid, and advises on other matters referred to in the interest of sound finance. The absence of clear constitutional provisions of revenue sharing created many problems in other federations and they had to evolve a variety of arrangements to overcome them. For example, in Canada, tax-rental arrangements were resorted to. In Australia, the Commonwealth Grants Commission was set up to consider allocation of grants among the claimant States. Specific purpose grants, with strict enforcement conditions, came into existence in

countries like USA (Sarkaria Commission, 1988).

Table 3.2: Chronology of Finance Commissions in India

Finance Year of Year of Period of Name of the Commissions Establishment Reporting Award Chairman First November, 1951 December, 1952 1952-1957 K.C. Neogy

Second June, 1956 September,1957 1957-1962 K. Santhanam

Third December, 1960 December,1961 1962-1966 A.K. Chanda

Fourth May, 1964 August,1965 1966-1969 P.V. Rajamannar

Fifth Feburary,1968 July,1969 1969-1974 Mahavir Tyagi

Sixth June, 1972 October,1973 1974-1979 K. Brahamananda

Seventh June, 1977 October,1978 1979-1984 J.M. Shelat

Eighth June, 1982 April,1984 1984-1989 Y.B Chavan

Ninth June, 1987 July,1988 and 1989-1990 N.K.P. Salve December,1989 1990-1995 Tenth June,1992 November,1994 1995-2000 K.C. Pant

Eleventh July, 1998 July,2002 2000-2005 A.M. Khusro

Twelfth November,2002 November,2004 2005-2010 C. Rangarajan

Thirteenth November,2007 December,2009 2010-2015 Vijay Kelkar

Fourteenth January,2013 December, 2014 2015-2020 Y. V. Reddy

Source: Finance Commissions Reports *A separate report was submitted for the year 1989-90.

The Australian Commonwealth Grants Commission makes recommendations with regard to special purpose grants to the claimant States, but the general grants are determined primarily on the basis of negotiations at the political level. On the other hand, the Finance Commission in India adopts objective criteria in regard to devolution of resources, thereby replacing the political bargaining and ensuring simultaneously the flexibility in revenue-sharing. As noted by G. Thimmaiah also:

"The Finance Commission in India is a unique constitutional body which has survived for 50 years. We do not find similar constitutional institutions even in the older federations like the U.S., Canada and Australia" (G. Thimmaiah, 2002).

The Finance Commission in India is called upon to evolve a mechanism of transfer of financial resources from the Centre to the States so as to ensure financial equilibrium at the two levels of government during the period of its award. Besides, it undertakes to work out formulae to assign resources so transferred among the States. The main tasks of the Finance Commission inter alia include the following.

• Forecasting resources and expenditure of the Central Government to determine the volume of resources to be transferred to the States during the ensuing five years. • Forecasting own current revenues of the States and non-Plan current expenditures. • Devising formula for distribution of States' share among the States themselves. • Filling the post-devolution projected gaps between the non-Plan current expenditures and current revenues with grants.

The task of a Finance Commission is by no means easy as it has to judge the conflicting claims, needs and resources of the Centre and the States and evolve a scheme of transfers which would balance the needs and resources of the two layers of the government.

Viewed in a broad perspective, the modus operandi adopted by the Finance Commission in discharging its functions is as follow. On the basis of the trends in the finances of Central and the State governments, the Commission prepares estimates of revenue and expenditure for the period of its award. It then decides the total amount of transfers from the Centre to the States so as to maintain the desired equilibrium in the finances of the two tiers of the government. Thereafter, the total amount of transfers is broken down into devolution and grants-in-aid among the States. Transfer of resources from the Centre to the States is designed to correct vertical imbalances while the distribution of resources among the States (with wide differentiation in fiscal capabilities and needs) aims at correcting horizontal imbalances.

Some consider semi-judicial arrangement of the Finance Commission to redress fiscal imbalances with precision and regularity, quite unique (Lakdwala, 1967). In the past, various Finance Commissions have covered several tasks, for example: (i) the States

gave up their power to tax the sale of sugar, textiles and tobacco to the Centre in a 'tax-rental arrangement' in 1956, and appropriate revenue-distribution formulae were devised for them; (ii) the tax on railway passenger fares was repealed and compensatory grants were identified; (iii) distribution of estate duty proceeds (other than on agricultural land) was carried out until repeal of the tax in 1986; (iv) compensatory grants to States were identified after abolition of the wealth tax on agriculture property; (v) recommendations were made for reducing State debt as well as on ways to control State overdrafts with the Central bank; (vi) suggestions were made for provisioning of State expenditures for natural calamities; (vii) attempts were made to identify new revenue-raising measures from unused taxes and duties (Rao and Chelliah, 1991), and (viii) monitorable fiscal reforms programme aimed at reduction of revenue deficit of the State was recommended.

As a Plan-based economic philosophy emerged during the 1960s, Plan expenditures came strictly under the purview of the Planning Commission, and such expenditures were de-emphasized from the purview of the Finance Commission. Broadly speaking, with the Third Finance Commission the focus shifted mainly to revenue expenditures, even though the Constitution does not prohibit grants for capital expenditures. Thus, a self-propelled division between the spheres of influence of the Planning Commission and the Finance Commissions grew over time. Finance Commissions have on the whole adopted a practice of assessing the revenue needs of States and their own sources of revenue, and have attempted to fill the gap between them, while maintaining some comparability among States towards the achievement of fiscal balance. Thus they have varied the distribution of sharable taxes among the States. The States have often expressed dissatisfaction over the Centre's role as collection agency under a tax–rental arrangement (termed additional excise duty) whereby the Centre taxes textiles, sugar and tobacco on behalf of the States and distributes the revenue among them. This is because the States do not perceive the Central Government to have delivered the promised tax revenue from those goods. Any proposed reform in this area has met resistance from selected States however, perhaps reflecting their apprehension that they would not be able to collect the same revenue were they to collect the tax themselves.

Rao and Chelliah (1991) succinctly summarized the main critiques of the approach of the early Finance Commissions, based on Lakdawala (1967), Sastri (1969), Gulati

(1987), Chelliah et al. (1981) and others. Both the terms of reference and methodologies adopted by many Finance Commissions in making recommendations for transfers have varied. While the earlier ones were required in their terms of reference to recommend estate duty devolutions, later ones were absolved from doing so when the duty was repealed, giving rise to a perceptible change of focus in their operations. When the tax on the movement of railway passengers was repealed, subsequent Finance Commissions had to look for compensatory grants. When a separate income tax on corporations was introduced in 1959, revenue from this source disappeared from the divisible pool, thereby, affecting the way income taxes were to be shared.

These differences become all the more apparent for shared taxes where, changing economic indicators have been used for devolution. Until Seventh Finance Commission, the indicators used to devolve the individual income tax differed from those for excise duties. The argument ran that the former had to be compulsorily shared while the latter's distribution depended on Parliamentary approval under Article 272 of the Constitution. Apart from indicators for different taxes, successive Finance Commissions have also used different economic indicators for the same tax. This leads individual States to argue in favour of criterion ostensibly beneficial to them.

Some of the criteria used for tax sharing have been controversial. Although most Finance Commissions have used a 10-20 percent 'contribution' factor for tax sharing, economists have disagreed over whether such a criterion should be used at all. Many have questioned backwardness as a criterion for excise tax sharing, while others have questioned the efficacy of the singular use of population as a factor. Nevertheless, the Seventh Finance Commission handled criticism of lack of progressivity by increasing the weight of the backwardness factor even as the pool of excise revenue to be devolved increased from 20 to 40 percent. The use of particular indices for backwardness has also been controversial.

The Sixth Finance Commission used per capita State GDP as the best possible yardstick for the measurement of level of development. For the first time the first report of the Ninth Finance Commission used the poverty ratio as a criterion for determining the inter-se share of States in Union excise duties and encountered severe

57 criticism (Bagchi, 1988). But the Tenth Finance Commission reverted back to using only the distance criterion that is the gap between a State's per capita GDP and that of the national GDP.

The weightage given to socio-economic indicators by the Eleventh Finance Commission onwards is shown in Table 3.3. It is revealed that the Eleventh Finance Commission (EFC) had allocated weightage of 10.0 percent for population and the subsequent Finance Commissions increased it to 25.0 percent. Income distance had earned an allocation of 62.5 percent from the EFC while the Twelfth and the Thirteenth Finance Commissions reduced it to 50.0 percent and 47.5 percent respectively. Area as a criterion had been allotted 7.5 percent weightage by the EFC while the Twelfth and the Thirteenth Finance Commissions increased it to 10.0 percent. The EFC had allocated 7.5 percent weightage to index of infrastructure and the subsequent Finance Commissions did not include this as a criterion. Tax effort as a criterion, which was earmarked 5.0 percent by the EFC, got raised to 7.5 percent by the Twelfth Finance Commission but is dropped by the Thirteenth Finance Commission. The Twelfth Finance Commission retained the weightage of 7.5 percent for the fiscal discipline as had been recommended by the Eleventh Finance Commission. In order to incentivize States following fiscal prudence the Thirteenth Finance Commission assigned a weight of 17.5 percent to fiscal discipline. The Fourteenth Finance commission has incorporated two new variables: 2011 population and forest cover; and given 10 percent and 7.5 percent respectively. FFC excluded the fiscal discipline variable.

Table 3.3: Criteria and Weightage Accorded by Finance Commissions

Eleventh Twelfth Thirteenth Fourteenth Finance Finance Finance Finance Commission Commission Commission Commission Population 10.0 25.0 25.0 17.5 Population 2011 - - - 10 Fiscal 62.5 50.0 47.5 50 capacity/Income Distance Area 7.5 10.0 10.0 15 Forest Cover - - - 7.5 Index of 7.5 - - - Infrastructure Tax Effort 5.0 7.5 - - Fiscal 7.5 7.5 17.5 0 Discipline Total 100 100 100 100

Source: Various Finance Commission Reports

Finance Commissions have recommended grants to fill the gap in States' non-Plan revenue expenditures and to enable the provision of specific public services (Article 275). Such grants also have encountered criticism, either as general grants or because few links can be deciphered between the allocations and services they are supposed to finance.

It is noteworthy that the objective of unconditional transfers, i.e., ameliorating inter- State fiscal imbalances, has not been met. Filling budgetary gaps with grants has also been subject to criticism of being clearly detrimental to tax effort and not amenable to budgetary improvements or improved public services (because the gaps are usually calculated at a given level of provision). Some economists have pointed out that the cumulative result might very well have been iniquitous since; ultimately, population became the most important scale variable and the emphasis on budgetary needs made it difficult for the poorer States with low expenditure levels to be allocated high levels of grant (Bagchi, 1977). However, Gopalakrishnan and Rangamannar (1996) have shown that the poor States have also been relatively successful in implementing programmes financed by Central transfers than the richer States.

It is worth mentioning here that recent Finance Commissions have endeavoured to address the criticism in specific ways. They have relied upon more comprehensive methods to forecast revenues and expenditures by assuming selective norms, interest rates on government loans, dividends on government investment, etc. It has also been recommended by these Finance Commissions to 'upgrade' grants to equalize public service standards across States for particular services such as primary education, and communications (even though the objective might have existed in the earlier Finance Commissions). The Ninth Finance Commission reverted to linking transfers mainly to fiscal disadvantage, but that concept, based on indices of economic development, tax effort, revenue capacity and fiscal potential, has remained difficult to define and measure, reflecting a degree of arbitrariness in the sub -variables of the indices. It also worked out `fiscal capacity' and 'needs' for the first time, although the emphasis on tax devolution as a principle, and economic backwardness as the focal criterion, continued to prevail.

The work of recent Finance Commissions cannot be said to have been easy. For instance, fiscal projections of the Tenth Finance Commission were off the mark: it had projected a zero-revenue deficit for all States by 1999-2000, the final year of its jurisdiction. The Eleventh Finance Commission seemed to explain this through 'infirmities of the institutional management that underpin the fiscal system'. However, addition of other factors like lack of political will makes it discernible that the projection exercise is riddled with difficulties.

The recent Finance Commissions seem to have been confronted with deeper problems while carrying out their operations. While on the one hand, these Finance Commissions are loaded with increasingly elaborate terms of reference, on the other hand, their recommendations are subjected to deepening scrutiny as States face mounting fiscal problems with the passage of time. The Finance Commissions have thus to walk a fine line between two well-nigh impossible challenges.

Consequent upon the Constitution (Eightieth) Amendment Act, 2000, the net proceeds of Additional Excise Duties (Goods of Special Importance) Act, 1957, could not now be passed on to the States, as Article 272 of the Constitution stands deleted. These now form the part of the tax revenue receipts of the Central Government and are shareable with the States. In view of these changes, the Eleventh Finance Commission

recommended that there was a need for review of the existing arrangements. Pending a review, 1.5 percent of the net proceeds of all Union taxes and duties were to be allocated to the States separately in addition to the 28 percent that was then shared. Indeed, while the Centre's resource needs have not received sufficient attention, the increase in shared percentage of tax collection presumed that the Centre typically collects more than its needs.

Thus, the recommendations of the Eleventh Finance Commission had effectively raised the State's prevailing share to 29.5 percent of the Centre's collection. Inter-se distribution of this additional 1.5 percent of the net proceeds of Union taxes among the States was to be done on the same manner as for the distribution of 28 percent of the net proceeds of Union taxes and duties. It was further envisaged that if any State levies and collects sales tax on sugar, textiles and tobacco, it would not be entitled to any share from this 1.5 percent.

In this regard, the Twelfth Finance Commission raised the share of the States in the net proceeds of sharable Central taxes from existing 29.5 percent to 30.5 percent and further to 32 percent by the Thirteenth Finance Commission. Fourteenth Finance Commission has raised the share significantly from 32 percent of Thirteenth Finance Commission percent to 42 percent.

The terms of references of the Eleventh and the subsequent Finance Commission required the relevant Commissions to not only make recommendations on the distribution between the Centre and the States of shareable taxes and grants, but these Commissions were also asked to recommend measures designed to augment resources of States so that they could supplement the resources of the panchayats and urban local bodies. This, however, is something that can be left to the responsibility of the State Finance Commissions. Only then can States be expected to take responsible action reflecting the direction of the 73rd and 74th Amendments to the Constitution.

In addition, the Eleventh Finance Commission as well as the Twelfth, Thirteenth and Fourteenth Finance Commissions were required to review several matters spanning all levels of government (not necessarily related to only distribution of resources): First, for the Central government, to review its resources for civil administration as well as emoluments and terminal benefits of government employees, and the monitoring mechanisms of capital assets and maintenance expenditure.

Second, for the States, to review their revenue potential, their ability to meet plan and non-plan revenue expenditure, to up-grade non developmental and social sectors, to ensure returns from their irrigation projects, power projects, State transport and commercial undertakings and PSUs, and also to assess State's debt position and their calamity relief funds. And third, for local bodies, wherever a State Finance Commission has failed to make timely recommendations, to fill in and make appropriate recommendations by taking into account the powers of local bodies and necessary provisions for employees of local bodies. These, however, are issues which should be best left to agencies like the Planning Commission, the Ministry of Finance, Fiscal Budget, the Pay Commission and the Auditor-General's office that are better equipped to address them on a sustained basis.

The Eleventh Finance Commission did manage to make some commendable independent recommendations, for example, to link assessment of requirements of the States for plan revenue expenditure with reference to their deficiencies in the basic minimum needs, rather than on the basis of Gadgil Formula, in effect requiring a review of the Gadgil Formula that determined such transfers. The Eleventh Finance Commission also suggested that the Finance Commission should be the sole authority for making certain estimates and projections, such as expenditure and revenue deficits of States which, in turn, determine Centre-to-State grants-in-aid.

However, the item that demands the greatest attention, that of distribution of resources among States has not been given due attention. It has been suggested by many that the other criteria reflective of finer distinctions in the redistribution of the country's resources than those used could have been included in the EFC. These could be the level of education in a State, their ratio of rural to urban population, proportion of the country's poor living in a State, percentage of poor in a State's population or the proportion of the poor living in the urban and in the rural areas or others.

It is noteworthy in this context that the Eleventh Finance Commission reduced the weightage on population that, given the link between heavily populated States and poverty, however in effect de-emphasized the poorer States. The irrefutable fact that the poorer States continue to perform dismally should not be a criterion to dilute the redistributive e nature of the Finance Commission's recommendations.

Nevertheless, the Southern States of the Indian Union have tended to claim that the Eleventh Finance Commission’s (EFC) recommendations have penalized 'performing State's instead of providing the latter with incentives. For example, Chandrababu Naidu, the then Chief Minister of Pradesh, lamented on 4 August 2000, at a meeting of the National Development Council:

The Eleventh Finance Commission report is lopsided. It favours States, which are generating poverty, and gives a raw deal to performing States like Andhra Pradesh. This is very unfair and this anomaly has to be corrected. What is the incentive for the performing States? The EFC has created problems for the States, which work. We are totally crippled. Where will we get the money from to pursue our developmental programmes? It is necessary that such momentous recommendations of the EFC affecting the fate of our fiscal federalism are reviewed through an open national debate and at other appropriate for a, such as the Inter–State Council and the National Development Council, before they are put into action.

Viewed in a broad perspective, Andhra Pradesh did suffer a drop in its share of Plan revenue grants from 12.1 percent in the first year of the Tenth Finance Commission to 2.4 percent in the first year of the Eleventh Finance Commission. While other States such as Rajasthan gained a rise from 0.8 percent to 9.4 percent (Bhusnurmath, 2000).

Herein, lays a built-in dilemma of fiscal federalism. In a static sense it is quite understandable that re-distribution will take place from rich to poor States. However, if over time the recipient States make little progress or their relative positions worsen vis-à-vis the better performing (richer) States, reflecting faulty policies of the recipient (poor) States themselves, then, continuing and enhanced transfers, in effect from rich to poor States is sure to become a serious issue in India.

The new system of sharing Central taxes with the States that came in to being in the aftermath of the enactment of the Constitution (Eightieth Amendment) Act, 2000, is regarded as the most significant development in the domain of Centre-State financial relations. Prior to the said amendment, income tax and Union excise duties were the only taxes shared with the States, apart from the grants given in lieu of the passenger tax, and the collection from additional excise duty in lieu of sales tax on sugar, tobacco, and textiles. Taxes on income and Union excise duties were shared with the States under Articles 270 and 272 respectively.

However, in the aftermath of coming into being of the Constitution (Eightieth Amendment) Act, 2000, the pattern of sharing of Central taxes between the Centre and the States has transformed significantly. The old Article 270 was substituted by a new Article 270 whereas Article 272 was omitted. The newly substituted Article 270 provides for the sharing of the net proceeds of all Union taxes and duties (i.e., corporate taxes and customs duties also) except the duties and taxes referred to in Article 268 and 269 respectively, with the States. However, the surcharge imposed on certain duties and taxes for purpose of the Union, under Article 271, is excluded from the divisible pool. The Finance Commissions since the Eleventh Finance Commission onwards have made recommendations according to the new provisions of the Constitution.

3.3 Planning Commission and Resource Transfer under Gadgil Formula

The resources are transferred to the States on the recommendations of the Planning Commission in two forms- (i) grants and (ii) loans. The Centre or a State can make grants for any public purposes in terms of Article 282. However, these grants which are made available at the discretion of the government differ from the grants made under Article 275. With the establishment of Planning Commission in 1950, the Central invoked Article 282 for making grants to the States for plan purposes.

The Planning Commission, which for all practical purposes is a non-constitutional body, makes an assessment of the existing resources of the individual States and the country as a whole and sets objectives in various fields and formulates plans for economic development in the light of requirements of each State. Ever since the launching of the First Five-Year Plan, these grants have occupied a significant place in Central financial transfers to the States. It is worth mentioning here that under Article 293, the Central Government may grant loans to the States or give guarantees in respect of loans raised by them. The permissive nature of this provision is obvious.

Grants provided under Article 282 are a subject matter of controversy. These grants were intended by the Constitution framers to meet unforeseeable contingencies like droughts, famines, and other natural calamities, and were not envisaged as part of normal Centre-State financial relations. Thus, Central grants to the States to help

settle persons who were displaced as a result of the partition of the country was a typical example of the purpose contemplated by Article 282. These grants meant for emergency purpose, were kept outside the purview of the Finance Commission, which otherwise was entrusted with all major questions of Centre -State financial relations.

According to some experts, the Planning Commission is an 'unintended channel' for transferring resources to the States because the architects of the Constitution envisaged a pre-eminent role for the Finance Commission in dealing with the problems of fiscal federalism. In the wake of the dominant role the Planning Commission, the effectiveness of the Finance Commission has been circumscribed with its role being restricted to non-Plan expenditure of State budgets. It is often suggested that the Finance Commission should decide grants-in-aid to each State under Article 282 of the Constitution while the Planning Commission assists the Finance Commission by drawing up a priority list of their costs, vocational feasibility and other technical matters. It is also necessary that the Finance Commission be transformed from a quinquennial to a permanent body. Such a permanent arrangement will ensure continuity in the work of the Finance Commission and make mid-term adjustments in its recommendations possible.

3.2.1 Gadgil Formula

The first three Five Year Plans and subsequent three Annual Plans witnessed allocation of Central assistance to the States without any clear-cut basis and the Planning Commission exercised its discretion in allocating funds. As a sequel to the demand by many States for the adoption of a well-defined formula, the entire gamut of concerned issues was deliberated upon on the eve of the formulation of the Fourth Five Year Plan (1969-1974). The resultant outcome of these deliberations was discernible in the form of the adoption of a formula which came to be known as Gadgil Formula-named after the then deputy chairman of the Planning Commission, D.R. Gadgil. The formula, approved by the National Development Council (NDC), inter-alia, suggested:

1. Requirements of Special Category States should be met out of the total pool of Central assistance. 2. The balance of assistance should be distributed among the remaining fourteen States on the basis of the following criteria:

• 60 percent on the basis of population, • 10 percent on the basis of per capita State income of those States the per capita income of which is below the national level, • 10 percent on the basis of tax effort, determined on the basis of individual State's per capita tax receipts as percentage of the State's per capita income, • 10 percent on the basis of major irrigation and power projects which were to continue during the Fourth Plan, and • 10 percent for special problems of individual States.

Adherence to the norms of the Gadgil formula resulted in the reduction of the discretion of the Planning Commission and instead envisaged objectivity and transparency in the of Plan assistance to the States.

On the eve of the formulation of the Sixth Plan, modifications in the Gadgil formula were envisaged with a view to make it more progressive for the benefit of economically backward States. The modified formula, approved by the NDC in 1980, and applied for the Sixth and the Seventh Plans, differed from the original formula, as can be seen from Table 3.4. Under the modified formula, the 10 percent weightage given to ongoing irrigation projects in the original formula was dropped. The weightage to per capita income below the national average (backwardness factor) was augmented from the existing 10 percent to 20 percent.

Table 3.4: Relative Weights and Criteria Underlying Planning Commission Transfers: The Gadgil Formula (Modified and Revised) (Weight in percent)

Criteria Modified Gadgil NDC Revised NDC Revised Formula (1980) Formula (1990) Formula (1991) Special Category States 30% share of 10 30% share of 10 30% share of States excluding States including 10 States North Eastern North Eastern excluding Council Council North Eastern Council General Category States Population (1971) 60.0 55.0 60.0 Per Capita Income 20.0 25.0 25.0 Of which According to the `deviation’ 20.0 20.0 20.0 method covering only the States with per capita income below the national average According to the `distance’ - 5.0 5.0 method covering all the fifteen States Performance 10.0 5.0 7.5 Of which i. Tax effort 10.0 - 2.5 ii. Fiscal management # - 5.0 2.5 iii. National objectives - - 2.5 Special problems 10.0 15.0 7.5 Total 100 100 100 #Fiscal management is assessed as the difference between States own total plan resources estimated at the time of finalizing Annual Plans and their actual performance, considering latest five years.

1. A new factor called performance was introduced with 7.5 percent weightage. It comprised tax effort, fiscal management, and national priorities including population, literacy, female welfare programmes, and land reforms. 2. The weightage given to special problems was reduced from 10 percent to 7.5 percent. The element of discretion associated with funds earmarked for special problems was considerably slashed with the identification of the following special problem areas in the revised for coastal areas, special environment issues, flood and drought prone areas, exceptionally sparse or thickly populated areas, special financial difficulties for achieving minimum reasonable Plan size, desert problems, and slums in urban areas.

The National Development Council (NDC) accords approval to Plan transfers by the Planning Commission. These are made under a set of clearly laid out objective criteria and are subject to review, by it. In the light of these facts, Plan transfers cannot be called as discretionary. There exist standardized procedures as recommended by the Seventh Finance Commission onwards even in the case of other transfers like for natural calamities etc. Undoubtedly, the Plan assistance to States is formula-based; it is the Centre that determines the total amount of such assistance to be transferred to the States each year.

As regards the nature of Plan transfers, the Sarkaria Commission in its report, while stating that the controversy regarding statutory versus discretionary transfers was more theoretical than realistic in nature, observed:

"The Plan and other transfers which are labeled discretionary do not amount to subversion of the Constitutional scheme. They cannot be considered either unreasonable or discretionary in a literal sense as their allocation follows predetermined criteria or is tied to meet the specific requirements of the States. The large magnitude of plan transfers should not pose any controversy in this regard as the framers of the Constitution could not anticipate the extent of development resource- needs under the plans of the States. The significant growth of Central assistance to States for planned development is, indeed, a natural response to such needs. Then crux of the matter is that the States' participation in the planning process should be such that the plan transfers are treated by them as part of a commonly agreed

programme for the deployment of the nation's resources" (Sarkaria Commission Report, Part -I, 1988).

3.4 Grants-in-Aid and Finance Commission

In terms of Article 275 of the Constitution, the Finance Commission has an alternative channel for fiscal transfers to the States in the form of grants-in-aid, besides revenue sharing. These grants-in-aid are usually general purpose unconditional grants. The Finance Commission has two criteria to determine these grants. The first criterion pertains to the assessment of expenditures of each State in the non-revenue account and the second criterion is related to assessment of State's own revenues. Determination of tax devolution to each State leads to devolution of grants-in-aid as a residual, which is the difference between the assessed expenditure and the sum of the projected own revenues, and the projected amounts emanating from their individual shares in Central taxes. In other words, grants-in-aid as recommended by the Finance Commission are designed to engulf the 'gap' which represents expenditure not covered either by own revenues or share in Central taxes.

Viewed in broad perspective, various Finance Commissions in India have followed only the 'gap filling' approach. The Ninth Finance Commission endeavoured to adopt a normative approach, whereas the Tenth and Eleventh Finance Commissions attempted to adopt 'quasi gap-filling' approach. Recommendations made by various Finance Commissions over the years have helped in the evolution of the principles for grants-in- aid to the revenue of the States. Now it has become an accepted fact that the grants-in-aid can be allocated to the States to make up for the assessed deficits on non -Plan revenue account, after devolution of taxes and duties.

The deficits are calculated after taking out any unusual or non-recurrent item of revenue or expenditure with the objective that the expenditure and revenues of the States should be appropriate so that no State is permitted to exploit the situation by overstating its expenditure or understanding its revenues. Besides, the Finance Commission also recommends the grants-in-aid for the up-gradation of the standards of administration of the States. This is in as much as plan grants generally concentrate

only on social and economic services at the expense of up gradation of general administration.

The approach of the Eleventh Finance Commission with regard to grants-in-aid can be construed as 'quasi-normative' in which partial endeavour was made to envisage normative elements in the assessment both of expenditures and revenues. As these assessments of the Eleventh Finance Commission were for a five year period from 2000-01 to 2004-05, two sets of norms were called for. One pertained to normative determination of the base year figures for assessment, and second dealt with growth norms that impact upon the values during the entire period of reference. The growth norms relied upon by the Eleventh Finance Commission had a normative thrust, oriented to the restructuring scheme.

Grants-in-aid are an important component of Finance Commission transfers. The size of the grants has varied from 7.7 per cent of total transfers under Seventh Finance Commission to 26.1 per cent of total transfers under Sixth Finance Commission. Grants recommended by Twelfth Finance Commission amounted to 18.9 per cent of total transfers. The Thirteenth Finance Commission has suggested several categories of grants- in-aid amounting in aggregate to Rs. 2585.80 billion which constitutes 15.2 percent of total transfers. The Fourteenth Finance Commission has recommended that grants of Rs. 5,373.5 billion to be provided by the Centre to the States which constitutes 12.0 percent of total transfers. The FFC’s grant recommendation is more than twice as recommended by the ThFC (excluding the grant of Rs. 500.0 billion that was to be provided to the States for the implementation of GST in accordance with the model recommended by the ThFC and the grants of Rs. 50.0 billion each for renewable energy under the environment related grants, and reduction in the infant mortality rate under the grants for improving outcomes). However, at an absolute level, grants recommended by the FFC for five of the States are lower than the award made by the ThFC in line with the shift in emphasis from grants to tax devolution.

3.5 Centrally Sponsored Schemes

The Plan assistance relating to Centrally Sponsored Schemes is regarded as a controversial issue. These schemes, having nation-wide importance, are launched by

the Centre and implemented by the State governments with Central assistance. The different Centrally Sponsored Schemes are formulated and proposed by various Central Ministries to be submitted to the Planning Commission. Execution of these schemes is carried out by the concerned States under technical guidance and the supervision of the Centre.

The States generally nurse the grouse over their insufficient involvement in the formulation of Centrally sponsored schemes which mainly relate to subjects included in the State List Centre's sponsorship of these schemes is also construed as an intrusion into subjects reserved for States. In this connection, the Administrative Reforms Commission expressed the opinion:

"The intrusion is not, technically, unconstitutional for it is protected by Article 282 but it is a question whether such intrusion is desirable and conducive to the growth of healthy federal relationship" (Administrative Reforms Commission 1968).

The Centrally sponsored schemes have also come in for flak from the States on the ground that the system of matching grants involved in the schemes is more favourable to the richer States because they are better placed to provide matching funds to avail Central assistance. Such schemes induce the States to divert their limited resources to areas which may occupy low priority in the investment scheme of a State.

The tussle between the Centre and the States on this issue was considerably narrowed down when it was decided to transfer 113 sponsored schemes to the States along with allocations being made for these schemes at the December 23-24, 1991, meeting of the National Development Council (NDC). The Central Government also tried to set at rest this controversy when the Union Finance Minister in his 1996-97 budget speech explicitly stated: "...it is our desire that most Centrally-sponsored schemes should be transferred to the control of the State governments, in the meantime, States will be given greater flexibility in the implementation of these programmes. Provisions available under all other schemes will be pooled and the basic entitlement ratio will be worked out for each State. The States will be free to select for implementation, within their annual entitlement, such schemes that are more suited to their needs" (Government of India, Budget Papers, 1996-97).

3.6 Union Transfers to States

There have been claims and counterclaims by the two levels of the government in respect of the magnitude of Central transfers to the States. There have been frequent complaints from the States that resources allocated to them are insufficient to enable them to discharge their functions. They complain against widening gap between their own resources and requirements, a trend indicating their increasing dependence on the Centre for resources. It is argued on behalf of the States that their resources should be compatible with their obligations and responsibilities.

Likewise, the Centre also feels constrained at the yawning gap between its resources and requirements, as reflected in the budgetary deficits. In recent years, the Centre has been running considerable deficit on its revenue account. Centre's commitments towards defence, subsidies, and interest payments take a bulk of its resources.

Table 3.5 shows that while the net transfer of resources from the Centre increased by 60.96 percent over the years 2013-14 and 2014-15, there is only an increase of 8.13 percent in net transfer of resources between 2014-15 and 2015-16. Also the year 2014-15 witnessed a 124.20 percent increase in grants from the Centre and 104.60 percent increase in gross loans from the Centre over the previous year. In 2015-16 there is 11.80 percent decline in Grants from the Centre and only 14.84 percent increase in gross loan from the Centre, while State's share in Central taxes has increased by 32.58 percent over the previous year. There is an increase of 32.58 percent in States share in Central taxes in the year 2015-16 which is two times higher than previous year.

Table 3.5: Devolution and Transfer of Resources from the Centre to the States (2013-14 to 2015-16)

2013-2014 2014-2015 2015-2016 Variation in Variation in Item (Accounts) Revised Budget Percentage percentage Estimates Estimates Col.3 over Col. 4 over Col.2 Col. 3

1 2 3 4 5 6 I. States' Share in Central Taxes 318270 366220 485520 15.07 32.58 II. Grants from the Centre (1 to 5) 205950 461750 407280 124.20 -11.80 1. State Plan Schemes 89970 264420 203240 193.90 -23.14 2. Central Plan Schemes 3430 13550 11900 295.04 -12.18 3. Centrally Sponsored Schemes 45000 88720 87830 97.16 -1.00 4. NEC/Special Plan Schemes 420 790 910 88.10 15.19 5. Non-Plan Grants (a to c) 67130 94280 103410 40.44 9.68 a) Statutory Grants 44190 55810 62910 26.30 12.72 b) Grants for Natural Calamities 6160 6840 7590 11.04 10.96 c) Non-Plan Non- Statutory Grants 16790 31620 32900 88.33 4.05 III. Gross Loans from the Centre (i+ii) 10870 22240 25540 104.60 14.84 i) Plan Loans 10840 21830 23670 101.38 8.43 ii) Non-Plan Loans* 30 400 1870 1233.33 367.50 IV. Gross Transfer (I+II+III) 535100 850200 918340 58.89 8.01 V. Repayment of Loans and Interest Payments Liabilities (a+b) 19130 19730 20380 3.14 3.29 a) Repayment of Loans to the Centre 10270 10440 11060 1.66 5.94 b) Interest Payments on the Loans from the Centre 8860 9290 9320 4.85 0.32 VI. Net Transfer of Resources from the Centre (IV-V) 515970 830480 897960 60.96 8.13 Source: State Finances: A study of Budgets * Include Ways and Means Advances from the Centre. NEC: North Eastern Council

The net devolution and transfer of resources from the Centre to States from 1990-91 onwards is depicted in Table 3.6.

Table 3.6 reveals that there is no continuous upward trend in net devolution and transfer of resources from Centre to States over the period. The minimum growth rate of net devolution and transfer of resources was (-15.4) percent in 1999-00 and the maximum was 56 percent in 2005-06 when net devolution and transfer of resources increased from Rs. 101034 crore in 2004-05 to Rs. 157581 crore in 2005-06. This got reflected itself in an increase in share of net transfer of resources in aggregate disbursements from 18.3 percent in 2004-05 to 28.1 percent in 2005-06. The share of net devolution in GDP is almost same since 1990-91 to 2015-16. The share of NDT in GDP and AD and Annual growth of NDT is also presented in the figure 3.1.

Figure 3.1: Trends in Net Devolution and Transfers (In Percent)

40 NDT/GDP 30 NDT/AD 20 NDT(AGR) 10

-10

-20 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Source: Table 3.6

Table 3.6: Net Devolution and Transfers: 1990-91 to 2015-16

NDT NDT/GDP NDT/AD NDT Year (Rs. Crore) (Percent) (Percent) (AGR) 1990-91 31684 5.6 34.8 26.1 1991-92 34925 5.18 32.4 10.2 1992-93 39431 5.09 33.0 12.9 1993-94 43457 4.88 32.5 10.2 1994-95 49490 4.73 31.1 13.9 1995-96 51034 4.16 29.2 3.1 1996-97 59718 4.21 30.0 17.0 1997-98 69714 4.43 31.1 16.7 1998-99 72792 4.04 27.8 4.4 1999-00 61569 3.06 20.0 -15.4 2000-01 69665 3.21 20.5 13.1 2001-02 77181 3.29 20.9 10.8 2002-03 71712 2.83 17.5 -7.1 2003-04 102983 3.63 20.0 43.6 2004-05 101034 3.12 18.3 -1.9 2005-06 157581 4.27 28.1 56.0 2006-07 192676 4.49 29.3 22.3 2007-08 247299 4.96 32.9 28.3 2008-09 279124 4.96 31.6 12.9 2009-10 303010 4.68 29.8 8.6 2010-11 374960 4.82 32.4 23.7 2011-12 432500 4.90 32.0 15.3 2012-13 472200 4.73 30.8 9.2 2013-14 515970 4.55 30.2 9.3 2014-15(RE) 830480 6.62 36.6 61.0 2015-16 (BE) 897960 - 36.7 8.1 Source: State Finances: A study of Budgets NDT: Net Devolution and Transfers, GDP: Gross Domestic Product, AD: Aggregate Disbursement, AGR: Annual Growth Rate

It is in the fitness of things that in order to have better comprehension of the nature and role of Central transfers to the States through the various channels, it is necessary to examine them from both angles-in their totality and item-wise. The total approach is significant to understand adjustments in vertical financial imbalances while item– wise approach reveals adjustments in horizontal financial imbalances. It is noteworthy that various items included in the aggregate transfers are not alike and therefore have different importance for different States. The discretionary and non-discretionary transfer of resources (gross) from Centre to States can be analyzed through trends in State's share in Central taxes (SCT), grants-in-aid (GIA) and gross loans from the Centre (GLFC).

An analysis of trends in sub-components of transfer of resources as depicted in Table 3.7 reveals the contribution of sub-components in devolution of resources.

It is observed from Table 3.7 that except for the year 1998-99, total devolution of States share in Central taxes (SCT) has moved up. In case of grants-in-aid from the Centre (GIA), analysis of data from 1990-1991 onwards shows an upward trend in general except for the year 1994-95 and 1998-99.

The annual growth rate of share in Central taxes as well as grants-in-aid varies over a wide range in that time period.

Figure 3.2: Growth Rate Trends of Share in Central Taxes and Grants in Aids to States

30 SCT GIA

Percent 20

-10 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Source: Table 3.7

Gross loans from the Centre (GLFC) shows a pattern which is very different from that of SCT and GIA. On one side of the spectrum is the year 1998-99 when GLFC was Rs. 39,367 crore and on the other side is the year 2005-06 when GLFC settled for an amount of Rs. 8097 crore as against 25,878 crore in 2004-05. Another significant point to be noticed is that as a proportion of cross devolution and transfer (GDT), GLFC has declined from 34.2 percent in 990-91 to 2.8 percent in 2015-16 after reaching lowest of 2.0 percent in 2013-14.

Table 3.7: Composition of Devolution of Resource from Centre to States: 1990-91 to 2015-2016

SCT GIA GLFC SCT GIA GLFC/GDT Year Rs. Crore Rs. Crore Rs. Crore (AGR) (AGR) (Percent) 1990-91 14242 12643 13974 8.7 48.7 34.2 1991-92 16848 15226 13069 18.3 20.4 29.0 1992-93 20580 17759 13100 22.2 16.6 25.5 1993-94 22395 21176 14277 8.8 19.2 24.7 1994-95 24885 19911 18742 11.1 -6.0 29.5 1995-96 29048 20873 18804 16.7 4.8 27.4 1996-97 35038 22949 22931 20.6 9.9 28.3 1997-98 40411 23853 29744 15.3 3.9 31.6 1998-99 39421 23480 39367 -2.4 -1.6 38.5 1999-00 44121 30177 21354 11.9 28.5 22.3 2000-01 50734 37289 18707 15.0 23.6 17.5 2001-02 52215 42601 24396 2.9 14.2 20.5 2002-03 56655 45170 26831 8.5 6.0 20.9 2003-04 67080 50834 25871 18.4 12.5 18.0 2004-05 78550 56322 25878 17.1 10.8 16.1 2005-06 94024 76750 8097 19.7 36.3 4.5 2006-07 120293 94451 5717 27.9 23.1 2.6 2007-08 151402 108622 7252 25.9 15.0 2.7 2008-09 161052 129923 7005 6.4 19.6 2.4 2009-10 165010 150970 8110 2.5 16.2 2.5 2010-11 219490 163500 9480 33.0 8.3 2.4 2011-12 255590 186420 9900 16.4 14.0 2.2 2012-13 291530 188680 11200 14.1 1.2 2.3 2013-14 318270 205950 10870 9.2 9.2 2.0 2014-15 366220 461750 22240 15.1 124.2 2.6 2015-16 485520 475110 25540 32.6 2.9 2.8 Source: State Finances: A Study of Budgets

Statutory devolution and non-statutory devolution being the major aspect of devolution and transfers of resources, the trend can be analyzed with the help of Table 3.8.

The point to be noted here that other current transfer (OCT) are same as non-statutory grants, data from year 1990-91 to 2010-11 (BE) indicates that statutory devolution, i.e., total Finance Commission transfer (FCT) has always been higher than non- statutory devolution. Moreover, on an average statutory devolution was 64.16 percent and non–statutory devolution was 35.84 percent per annum of the total devolution. The annual growth rate for FCT and OCT though shows a wide range of variation.

Table 3.8: Finance Commission Transfers and Other Current Transfers: 1990-91 to 2015-16

FC FCT/ OCT/ SCT SG (2+3) OCT Total GDP GDP FCT OCT Year Rs. Rs. Rs. (Crore) (4+5) (Per (Per (AGR) (AGR) Crore Crore Crore cent) cent) 1 2 3 4 5

1990-91 14242 2581 16823 10062 26885 2.87 1.72 15.00 44.20

1991-92 16848 2468 19316 12758 32074 2.87 1.89 14.82 26.79

1992-93 20580 2639 23219 15120 38339 3.00 1.95 20.21 18.51

1993-94 22395 2201 24595 18975 43570 2.76 2.13 5.93 25.50

1994-95 24885 2021 26906 17890 44796 2.57 1.71 9.40 -5.72

1995-96 29048 4255 33303 16618 49921 2.71 1.35 23.78 -7.11

1996-97 35038 4129 39167 18820 57987 2.76 1.33 17.61 13.25

1997-98 40411 2159 42570 21694 64264 2.71 1.38 8.69 15.27

1998-99 39421 2028 41449 21452 62901 2.30 1.19 -2.63 -1.12

1999-00 44121 2101 46222 28076 74298 2.30 1.40 11.52 30.88

2000-01 50734 8542 59276 28747 88023 2.73 1.33 28.24 2.39

2001-02 52215 9854 62069 32747 94816 2.64 1.39 4.71 13.91

2002-03 56655 11436 68091 33735 101826 2.69 1.33 9.70 3.02

2003-04 67080 9324 76404 41509 117913 2.69 1.46 12.21 23.04

2004-05 78550 9804 88354 46518 134872 2.73 1.43 15.64 12.07

2005-06 94024 21321 115345 55430 170775 3.12 1.50 30.55 19.16

2006-07 120293 21320 141613 73130 214743 3.30 1.70 22.77 31.93

2007-08 151402 22430 173832 86200 260032 3.49 1.73 22.75 17.87

2008-09 161052 23390 184442 106540 290982 3.28 1.89 6.10 23.60

2009-10 165010 28490 193500 122480 315980 2.99 1.89 4.91 14.96

2010-11 219490 32880 252370 130610 382980 3.24 1.68 30.42 6.64

2011-12 255590 36690 292280 149730 442010 3.31 1.70 15.81 14.64

2012-13 291530 36870 328400 151820 480220 3.29 1.52 12.36 1.40

2013-14 318270 50350 368620 155610 524230 3.25 1.37 12.25 2.50

2014-15 366220 62650 428870 399090 827960 3.42 3.18 16.34 156.47

2015-16 485520 70500 556020 336780 892800 - - 29.65 -15.61 Source: Compiled from State Finance: A Study of Budgets; RBI. SCT: Share in Central Taxes. SG: Statutory Grants. OCT: Other Current Transfers. FCT: Finance Commission Transfers. AGR: Annual Growth Rate GDP: Gross Domestic Product.

4.7 Revenue Centralization and Fiscal Dependence of States on Centre

Financial autonomy of the States in a federation, by and large can be explained in terms of degree of fiscal Centralization and decentralization. More obviously, higher the degree of fiscal Centralization, lesser would be the fiscal autonomy of the States and lesser the degree of fiscal Centralization, higher would be the fiscal autonomy of the States. Virtually, the huge volume of resources transfers to the States is, on the one hand, an essential feature of the federal setup, but it has added another dimension in the overall gamut of the Centre-State financial relationship. This in fact, enlarges the degree of the States dependency over the Centre in financial affairs and thereby the financial autonomy of States is affected adversely.

To illustrate the measure of Centralization, we have taken data from India public finance statistics from 1950-51 to 2013-14. Table 3.9 and 3.10 represents the trends of Centralization of direct and indirect taxes and combined trends of both the taxes at the command of Centre and States before and after devolution.

Figure3.2A: Direct Tax (Pre-Devolution)

120 100

80 60 Centre Percent 40 States 20 0

Source: Table 3.9

It is evident that a high degree of Centralization in pre-devolution scenario. Centre invariably had larger share in direct taxes at its command than all the States put together.

In 1950-51, Centre command 76.19 percent and the same increased to 97.51 percent 2013-14. Similar trend is visible for the aggregate tax resources. Even in terms of indirect taxes, Centre commanded more resources till 1990-91 than the States and then fell to 40.82 percent in 2013-14.

Table 3.9: Trends in Revenue Centralization and Fiscal Dependence of States on Centre in Rs Crore (Pre-Devolution)

Year Direct Taxes Indirect Taxes Total Taxes (Direct + Indirect) Combined Centre States Combined Centre States Combined Centre States 1950-51 231 176 55 396 229 167 627 405 222 1955-56 259 171 88 509 314 195 768 485 283 1960-61 402 292 110 948 603 345 1350 895 455 1965-66 734 598 136 2188 1463 725 2922 2061 861 1970-71 1009 869 140 3743 2337 1406 4752 3206 1546 1975-76 2493 2205 288 8689 5404 3285 11182 7609 3573 1980-81 3268 2997 271 16576 10182 6394 19844 13179 6665 1985-86 6252 5620 632 37015 23050 13965 43267 28670 14597 1990-91 12260 11030 1230 75462 46547 28915 87722 57577 30145 1995-96 35777 33564 2213 139482 77660 61822 175259 111224 64035 2000-01 71762 68305 3457 233558 120298 113260 305322 188605 116717 2005-06 167635 162337 5298 420053 203814 216239 587688 366151 221537 2010-11 450822 438515 12307 820843 354556 466287 1271666 793072 478594 2011-12 501395 488160 13235 966496 400738 565758 1467891 888898 578993 2012-13 568718 554063 14655 1147400 482172 665228 1716116 1036234 679882 2013-14 646907 630830 16077 1293539 528075 765464 1940447 1158906 781541 Trends in Revenue Centralization and Fiscal Dependence of States on Centre in Percent (Pre-Devolution) 1950-51 100 76.19 23.81 100 57.83 42.17 100 64.59 35.41 1955-56 100 66.02 33.98 100 61.69 38.31 100 63.15 36.85 1960-61 100 72.64 27.36 100 63.61 36.39 100 66.30 33.70 1965-66 100 81.47 18.53 100 66.86 33.14 100 70.53 29.47 1970-71 100 86.12 13.88 100 62.44 37.56 100 67.47 32.53 1975-76 100 88.45 11.55 100 62.19 37.81 100 68.05 31.95 1980-81 100 91.71 8.29 100 61.43 38.57 100 66.41 33.59 1985-86 100 89.89 10.11 100 62.27 37.73 100 66.26 33.74 1990-91 100 89.97 10.03 100 61.68 38.32 100 65.64 34.36 1995-96 100 93.81 6.19 100 55.68 44.32 100 63.46 36.54 2000-01 100 95.18 4.82 100 51.51 48.49 100 61.77 38.23 2005-06 100 96.84 3.16 100 48.52 51.48 100 62.30 37.70 2010-11 100 97.27 2.73 100 43.19 56.81 100 62.36 37.64 2011-12 100 97.36 2.64 100 41.46 58.54 100 60.56 39.44 2012-13 100 97.42 2.58 100 42.02 57.98 100 60.38 39.62 2013-14 100 97.51 2.49 100 40.82 59.18 100 59.72 40.28 Source: Indian Public Finance Statistics 81

Figure 3.2B Indirect Tax (Pre-Devolution)

80 70 60 50 40 Centre

Perecnt 30 20 States 10 0

Source: Table 3.9

Figure 3.2C: Total Tax (Direct + Indirect) Pre-Devolution

80 70 60 50 40 Centre

Percent 30 20 States 10 0

Source: Table 3.9

However, the intensity of fiscal Centralization after devolution of funds to States has been declining gradually over period. As may be seen from the table after devolution, States command over direct taxes improved to from 2.49 percent in 2013-14 to 31.25 percent.

Figure 3.3A: Direct Tax (Post-Devolution)

Percent Centre 20 States

Source: Table 3.10

Table 3.10: Trends in Revenue Centralization and Fiscal Dependence of States on Centre in Rs. Crore (Post-Devolution)

Year Direct Taxes Indirect Taxes Total Taxes (Direct + Indirect) Combined Centre States Combined Centre States Combined Centre States 1950-51 231 128 103 396 229 167 627 357 270 1955-56 259 114 145 509 297 212 768 411 357 1960-61 402 202 200 948 528 420 1350 730 620 1965-66 734 468 266 2188 1317 871 2922 1785 1137 1970-71 1009 504 505 3743 1947 1796 4752 2451 2301 1975-76 2493 1463 1030 8689 4547 4142 11182 6010 5172 1980-81 3268 1983 1285 16576 7405 9171 19844 9388 10456 1985-86 6252 3755 2497 37015 17425 19590 43267 21180 22087 1990-91 12260 6909 5351 75462 36133 39329 87722 43042 44680 1995-96 35777 22290 13487 139482 59649 79833 175259 81939 93320 2000-01 71764 49652 22112 233558 87008 146550 305322 136660 168662 2005-06 167635 117826 49809 420053 152438 267615 587688 270264 317424 2010-11 450822 307121 143701 820843 262747 558096 1271666 569869 701797 2011-12 501395 335890 165505 966495 293596 672899 1467891 629486 838405 2012-13 568718 391990 176728 1147400 349888 797512 1716116 741877 974239 2013-14 646907 444727 202180 1293539 391298 902241 1940447 836026 1104421 Trends in Revenue Centralization and Fiscal Dependence of States on Centre in Percent (Post-Devolution) 1950-51 100 55.41 44.59 100 57.83 42.17 100 56.94 43.06 1955-56 100 44.02 55.98 100 58.35 41.65 100 53.52 46.48 1960-61 100 50.25 49.75 100 55.70 44.30 100 54.07 45.93 1965-66 100 63.76 36.24 100 60.19 39.81 100 61.09 38.91 1970-71 100 49.95 50.05 100 52.02 47.98 100 51.58 48.42 1975-76 100 58.68 41.32 100 52.33 47.67 100 53.75 46.25 1980-81 100 60.68 39.32 100 44.67 55.33 100 47.31 52.69 1985-86 100 60.06 39.94 100 47.08 52.92 100 48.95 51.05 1990-91 100 56.35 43.65 100 47.88 52.12 100 49.07 50.93 1995-96 100 62.30 37.70 100 42.76 57.24 100 46.75 53.25 2000-01 100 69.19 30.81 100 37.25 62.75 100 44.76 55.24 2005-06 100 70.29 29.71 100 36.29 63.71 100 45.99 54.01 2010-11 100 68.12 31.88 100 32.01 67.99 100 44.81 55.19 2011-12 100 66.99 33.01 100 30.38 69.62 100 42.88 57.12 2012-13 100 68.93 31.07 100 30.49 69.51 100 43.23 56.77 2013-14 100 68.75 31.25 100 30.25 69.75 100 43.08 56.92 Source: Indian Public Finance Statistics

In all the years there has been significant transfer of tax resources from the Centre to the States which brought down the Centralization. States which had only 59.18 percent of indirect taxes in 2013-14 before devolution commanded 69.75 percent after devolution.

Figure 3.3B: Indirect Tax (Post-Devolution)

80 70 60 50 40 Centre

Percent 30 20 States 10 0

Source: Table 3.10

Figure 3.3C: Total Tax (Direct + Indirect) Post-Devolution

70 60

50 40 30 Centre Percent 20 States 10 0

Source: Table 3.10

Table 3.11 gives the total transfers recommended by fourteen finance commissions under devolution and grants. The increase in quantum of transfers under Fifth Finance Commission, from 76 percent of total transfers as recommended by Fourth Finance Commission to 87 percent, was due to the inclusion of advance tax collections under income tax and special excise duties under excise in the divisible pool. This was adjusted by the time of the Sixth Finance Commission.

Table 3.11: Total Transfers

Commission Years Devolution Grants Total % Increase Devoluti Grants Transfers of total on as as % transfers % of of total over total transfe previous transfers rs Commission First 5 362 50 412 - 87.86 12.14 Second 5 852 197 1049 154.61 81.22 18.78 Third 4 1067 244 1311 24.98 81.39 18.61 Fourth 3 1323 422 1745 33.10 75.82 24.18 Fifth 5 4605 711 5316 204.64 86.63 13.37 Sixth 5 7099 2510 9609 80.76 73.88 26.12 Seventh 5 19234 1609 20843 116.91 92.28 7.72 Eighth 5 35683 3769 39452 89.28 90.45 9.55 Ninth 6 99668 20031 119699 203.40 83.27 16.73 Tenth 5 206343 20300 226643 89.34 91.04 8.96 Eleventh 5 376317 58587 434904 91.89 86.53 13.47 Twelfth 5 613112 142640 755752 73.77 81.13 18.87 Thirteenth 5 1412100 258580 1670680 121.06 84.52 15.48 Fourteenth 5 3948200 537353 4485553 168.49 88.02 11.98 Source: Finance Commission Reports

There is 168 percent increase in the total transfers of Fourteenth Finance commission from the previous Thirteenth Finance Commission. It was mainly because FFC has radically increased the share of States in Central tax to 42 percent from the previous 32 percent of Thirteenth Finance Commission recommendation.

Fig 3.4: Share of States in Total Transfers by Finance Commission

60.00 50.00 High Income States 40.00 Middle Income States 30.00 20.00 Low Income States 10.00 0.00 10FC 11FC 12FC 13FC 14FC Source: Appendix A.3.5

A detailed analytical appraisal of ThFC and FFC and other relevant share of Union transfers is given in Appendix A.3.3 and A.3.4. Figure 3.4 represents the share of

States in total transfers by Finance Commissions, it is clearly visible that transfers have a more favourable impact on the States that are relatively less developed, which is an indication that they are progressive, that is low income States are likely to receive on average much larger transfers. State wise transfers are presented in Appendix A.3.5.

Chapter 4

Fiscal Capacity and Tax Effort: Approaches and Issues

Chapter 4

FISCAL CAPACITY AND TAX EFFORT: APPROACHES AND ISSUES

Any federal formation is motivated by several factors. In addition to facilitate accessibility to unified common national market, getting best use of the scarce resources of the country and providing common defence facilities, a federation also aims at achieving 'equality of all citizens'. In the presence of regional disparities, inherent or otherwise, the very objective of forming a federation necessitates reducing horizontal fiscal imbalances. Any scheme of federal fiscal transfers pursuing the objective of equalization should recognize the underlying differences in the capacity of the States to raise funds from their tax resources for financing their expenditure and investment programs.

The States with low taxable capacity need special help in terms of more funds for providing the social and economic services. It is for sure that if federal fiscal imbalances tend to operate discriminately between State units, instability of the federation sets in which manifests itself in economic instability of its constituent States and dissatisfaction with the operation of fiscal federation. Failure to recognize these symptoms of instability and absence of corrective measures may lead to dilution and eventually breakdown of the federation.

In addition to 'equalization', another important consideration in a sound federal fiscal transfer scheme .is for 'relative tax effort'. It is also one of the important objectives of a federation to induce federating units to make high resource mobilization efforts as is warranted by their capacity. It is with the same objective that many fiscal federal exponents justify inclusion of tax effort criterion in the distribution of grants. Absence of an efficiency criterion such as ‘tax effort’ increases the tendency of ‘free riding’ by the inefficient States. Further, there would be a tendency among the States to incur huge expenditure without raising resources adequately from their own sources and attract more federal fiscal transfers.

In fact, inclusion of tax effort as a criterion of federal fiscal transfers is not only helpful in reducing the possibilities of rewarding the States with 'lax-effort' and penalizing those which exert adequate 'tax efforts', it also helps the process of

economic development by achieving some major national objectives. A State by improving its tax efforts, relative to its tax potential, helps maintain price stability by reducing spending. Further, more resource mobilization achieved through adequate tax efforts can be utilized for larger development effort under the five year plans. Thus, both taxable capacity and tax efforts are very important criteria in the scheme of federal fiscal transfers aiming at achieving objectives of equity and efficiency. However, the usefulness of these criteria depends entirely upon their accurate measurement. A wrongly construed or arbitrarily measured taxable capacity or effort can defeat the very purpose of inclusion of these criteria in the scheme of devolution. Hence, a clear understanding of the meaning, and alternative quantitative techniques that can be employed to capture the two concepts, is called for here.

4.1 Meaning of Fiscal Capacity and Tax Effort

According to Mathews R.L. and T.A. Sweeney (1977) “A fiscal unit's taxable capacity in particular to a revenue source may be defined as the amount of tax the unit can raise by applying a standard rate schedule to its own revenue base”. Also, they define a fiscal unit's severity of taxation in relation to the revenue source (or its tax effort) as the ratio of the revenue it actually collects from that source, to its taxable capacity.

Advisory Commission on Intergovernmental Relations (ACIR, 1971) says "fiscal capacity is a quantitative measure intended to reflect the resources which a taxing jurisdiction can tax to raise revenue for public purpose". According to this definition, available taxable resources would indicate "the taxable capacity or potential” ACIR further stated that "tax effort is a closely related measure quantifying the extent to which a government actually uses its capacity to raise revenue through taxation". Thus, if two States are having equal fiscal capacity but State "X" collects more tax revenue than State "Y" then the former is said to be making higher tax effort. For the purpose of this definition, it is not important that "X" is able to export a large portion of its tax to other States. All taxes paid to State "X" are counted as part of X's tax effort since they represent utilization of its tax potential.

It is important to make clear that tax capacity is usually related to 'activity variables' such as income or the tax base, so that an increase in the level of activity variable would enhance tax capacity. On the other hand, tax effort refers to the various administrative and legislative efforts to expand the base, rationalization of the tax structure and reduction in the incidence of tax avoidance and evasion. Thus, it is possible for a high income economy to have a high tax capacity but low tax effort if it does not take initiatives to maximize its tax revenue "potential".

Also, it should be noted that the term fiscal effort and tax effort are not the same. The term 'fiscal effort' is more comprehensive than the word 'tax effort' as the former concept refers to the total efforts embracing tax and non-tax efforts. Fiscal effort covers all sources of revenues of the State except the revenues received from the federal government whereas tax effort relates only to the State's own taxes. There have been a number of measures used for the purpose of making comparative study of tax capacity and tax effort. Before laying out the methodology of the present study, a brief outline of the various measures and their relative merits and demerits is presented below.

4.2 Measures of Fiscal Capacity and Tax Efforts

When the federal government transfers resources to the federating units with an objective of equalization, it becomes essential to assess the interstate differentials in fiscal potential. In this context, the problem of measurement of fiscal potential arises and this problem can be broadly addressed to in two different ways:

1. Macroeconomic approach: Income measure of fiscal capacity. 2. Tax yield/revenue approach to measuring fiscal capacity.

The macroeconomic approach essentially recognizes that, ultimately, the ability of local governments to raise revenues is limited by the level of economic activity within the locality (Schroeder, Smoke, 2001). In that case, some measure e.g. gross regional product can be used to approximate that capacity to raise revenues. Further, interstate differentials in fiscal potential can be examined by studying variations in income among States.

A 'micro-oriented' approach to the fiscal capacity issue is often the tax yield approach. The tax yield approach particularly evaluates the taxable resources i.e. it estimates the amount of tax revenue any State would produce when subjected to various levels of taxation, and make inter-state comparisons. The yield approach can further be classified into:

• Regression Analysis Approach. • Representation Tax System Approach.

4.2.1 Income Approach

The income approach measures fiscal capacity in terms of income of the country/state. ACIR states that "most of the taxes are paid out of current income. Unless a community is drawing down its capital stock, Its Income is a measure of its capacity to meet both public private needs". Thus, according to this approach income is broad measure of capacity.

Based on 'Income approach" there are number of measures which have been used for the purpose of comparative study of tax effort. These measures could be put under the following categories:

• Per capita tax ratio as a measure of tax effort (PCTR) • Tax income ratio (T/Y) • Incremental tax income ratio (ΔT/ΔY) • Income elasticity of tax revenue (ΔT/ΔY * T/Y) • Modified T'/Y' ratio to reflect relative taxable capacityand tax efforts.

A. Per-Capita Tax Revenue:

While this measure notactually uses State's income, it falls in the same genre of"income approach" measures and is the simplest indicator of tax effort often used in many studies. In this measure State's total tax revenue is divided by the total population. This measure is in no way related to the fiscal potential of the State, which makes it very crude and unsatisfactory measure. Using this measure, merely because a State is less populated can rank the State high in tax effort even with low tax rates. This measure ignores the efficiency in tax administration and other

structural factors in the economy which may put hurdles in theway of tax efforts by the States.

B. Tax-Income Ratio:

A very commonly used measure of tax effort, this measure relates tax revenue (either absolute or per capita), to State income.

TE = T/Y

Where,TE is the tax effort

T = Actual tax revenue (Absolute or per capita) and Y =GDP or SDP.

In this measure Y is taken as the fiscal potential available to a country/state and 'T' (i.e. Tax yield) is taken as the severity of tax.

Among many studies that have used this measure are those by Bird (1964) and Thimmaiah (1979). Bird used the tax income ratio but with slight, changes and he calls that tax sacrifice index. He makes use of the ratio of tax disposable income percentage to per capita disposable income.

Also, Sastri (1969) while making a comprehensive study of relative tax effort uses the concept of potential ideal tax effort. According to this definition,

Actual total tax revenue of all the states Per Capita income of the state Potential tax effort = x Total Income of all All state average per capita income the states

He further introduces progressively in this measure by defining "progressive potential tax effort".

However, even these modified measures of tax-effort are based on the underlying assumption that state/national income is the only determining factor of measure of fiscal capacity. Variations in tax rates, administrative efficiency etc. is not considered.

C. Incremental Tax -Income Ratio

This measure is generally used in time-series analysis. This is another improved or modified variation of tax-income ratio where an increase in State tax revenue (ΔT) is related to increase in State income (ΔY). This measure conveys to what extent the State government is lending support to national anti-inflationary fiscal policy.

D. Income Elasticity of Tax Revenue

This measure provides a measure of the productivity of taxes. It relates percentage change in State's taxes to percentage change in State's income.

E. Modified Tax-Income Ratio

Another variant of tax effort in income approach is to get the ratio between relative tax effort and relative fiscal capacity. Similarly, relative tax effort is worked out by taking the proportion of per capita revenue for every given unit of income to all State average per capita tax revenue for a given unit of income.

This method was used by R.L. Mathews and T.A. Sweeney (1977) and also by K.V.S. Sastri (1969).

The various measures discussed above are based on “income approach”. The underlying assumption is that state/national income is the measure of fiscal capacity. In circumstances where local governments in many developing countries are not given autonomy in determining the tax base or tax rate, aggregate approach to estimating revenue capacity can be a reasonable indicator of relative fiscal capacity. However, the macro approach has some theoretical and practical problems. Conceptually, even in a “best-case”, gross local product may not reflect the actual differential abilities of local governments to mobilize resources since income may not be received where it originates.

Where owners of factors of production are located outside the locality, the capacity to tax those factors will be overestimated by a gross local product measure. Moreover, the fiscal capacity of a State depends not only on the income but also on inter-State shifting of State and local taxes. Taxable capacity depends not only on income produced but also on income accrued.

Besides, no doubt regional income is one of the major and important determinant of fiscal potential, fiscal capacity is influenced by a number of other factors like structural composition of the economy, level of consumption, price variation, distribution of personal income, wealth of the State and so on, which do not get captured by income measure.

4.2.2 Tax Yield Approach

Under this approach fiscal capacity is defined as the level of taxation that would occur, given certain assumptions, as to the tax bases and the average intensity of use of the bases by all countries/states in the sample. Under this approach allowance has to be made for all major factors apart from income that affect tax yield. This can be done either by adjusting the actual tax ratios for variations in the tax capacity factors by estimating the amount of taxes that could be collected through the use of the potential bases available to the States. The former approach uses regression technique to estimate or measure the influence of capacity factors on the tax ratio. In the later approach, a model or representative tax system is applied to the potential bases to estimate the relative taxable capacity.

A. Regression Analysis Approach

This approach was mainly developed for the purpose of measuring tax effort. The stochastic approach is an improvement over traditional tax effort measure, as it establishes that in addition to aggregate incomes (the denominator in tax ratio) other factors affect a country’s taxable capacity. These factors are called capacity indicators. Under this method, the first step is to deprive the average degree of relationship between the tax ratio and capacity indicators through multiple regression analysis. Since in this regression equation only the tax capacity factors would be included as independent variables, the regression is not intended to and will not explain the total variations in the tax ratio. Hence, the difference between the actual tax ratio in a State, and that estimated for it on the basis of the tax capacity,may be attributed to tax effort. As a second step, tax effort then could be measured in one of the following two ways.

1. Some expression of the residual variance can be taken as the measure of tax effort. Inter-State comparison can then be made according to the value of this expression.

2. Alternatively, the estimated tax ratio can be taken to represent the relative taxable capacity which a State would have had if it had used its capacity to an “average” extent.

Thus, the ratio of actual tax effort to the estimated one would be the index of tax effort-where an index equal to 100 signifies the average tax effort, greater than hundred above and less than hundred below average tax effort.

The regression approach has been employed by a number of scholars. The important studies that have adopted regression approach are of Lotz and Morss (1967), Bahl (1971),Chelliah (1971), Reddy (1975), Dwivedi (1980), Oommen (1987) and Ninth Finance Commission First Report.

The merit of regression analysis in measuring tax effort is that, depending upon the availability of data relating to capacity indicators, it is possible to consider the influence of these independent multivariates on the dependent variables i.e. total or State’s own revenues. Lotz and Morss (1967) developed one such stochastic measure with the objective of making inter-country tax effort comparisons for seventy two developing countries. Their approach was to select a few factors for which they felt allowance should be made while measuring tax effort. “The purpose of the statistical exercise was to establish an empirical basis for weights to be assigned to the factors and thus to provide norms for our appraisal of tax effort” (Lotz and Morss, 1967). Thus, they adopt a normative approach. According to them, in addition to aggregate income, the denominator of tax ratio, other factors, like level of development as measured by pre-capita income and size of the foreign trade sector, also explicitly affect a country's taxable capacity. They used the following formulations firstly; they took account of per capita income by measuring the deviation from a straight line estimate of the relationship between tax ratios and per capita income for a group of Countries. Specifically, by making a least square estimate of the following relationship:

= α1 +b1 Yp 푻 (tax-income풀 ratio) (per capita income)

they estimated an ‘average' tax ratio for any country, given its per capita income. The comparison was drawn between the actual and estimated tax ratios to measure tax efforts of individual countries. Further, they made some allowance to the factor of size of foreign trade sector, as follows.

T/Y = α2 + b2Yp+ C2 푭 Where, = sum of exports (f.o.b) and imports (c.i.f.) as percentage풀 of G.N.P. 퐹 A separate푌 calculation was made for low income and high income countries to make inter country comparison on the basis of above formula. The actual tax ratios and their estimates were then compared and the country whose actual tax ratio exceeded the estimated one by the largest percentage was given the highest tax effort ranking and the country whose actual tax ratio fell short of their estimates by the largest percentage was given the lowest ranking.

While Lotz and Morss (1967) inferred tax effort comparisons from their results, they could not bring out a clear distinction between tax ratio approach and tax effort approach. While tax ratio can be defined as tax yield as function of income, tax effort is the extent to which a country makes use of its taxable capacity. Thus, what Lotz and Morss attempt in their work amounts to some kind of estimated tax revenue ratio, Bahl (1971) pointed out that while Lotz and Morss (1967) were the first to use the statistical results of a tax ratioanalysis for the purpose of making tax effort comparisons, this ratio itself is not a measure of tax effort; rather it is a function of both fiscal capacity and tax effort. While making inter country tax effort comparison for selected developing countries, Bahl draws a clear distinction between these two approaches. Theoretically, the inter country variances in taxratio ( ) may be 2 separated into variation due to taxable capacity ( ) and variations attributable휎푡 to tax 2 effort ( ) such that 휎푐 2 휎푒 = + Keeping this in view, Bahl has attemptedퟐ toퟐ identifyퟐ inter-country differences in tax 흈풕 흈풄 흈풆 effort. A stochastic model of the type

= (X1, X2,……..,Xn, U) 푻 푭 ’ was used where T/F is the tax ratio and Xi s in the equation are defined to reflect only and all the variance in taxable capacity so that

- = ퟐ ퟐ ퟐ 흈풕 흈풄 흈풆 and some expression of the residual (U) becomes a comparative measure of tax effort. This according to them may be termed as tax effort approach.

As is clear, the tax effort formulation requires a prior justification of the explanatory variables as factors affecting only taxable capacity. Bahl mentions that then in that context, estimated tax collection is taxable capacity and then the ratio of actual tax collection to estimated tax collection would reflect tax effort. Bahl defines taxable capacity as the tax ratio that would result if a country applied to its tax bases a set of average effective rates. In his formulation indicators of taxable capacity are proxy measures of tax base and net regression coefficients of these indicators as rates on those bases. The model developed by Bahl (1971) is based on three general determinations of taxable capacity-stage of development, sectoral composition of income and size of foreign trade sector, measured respectively by the agricultural share of income, the mining share of income and the export share of income.

Bahl’s (1971) approach is an improvement over that of Lotz and Morss (1967). The distinction between tax ratio and tax effort is clearly brought about in Bahl’s study. Moreover, there is a difference in the approach between Lotz and Morss and Bahl study.

While the former adopted a normative approach where regression analysis is used primarily to assign weights to the tax base in the taxable capacity equation, the later adopted a positive approach where the objective of regression analysis is precisely to identify the factors that reflect the constraint on taxable capacity and those components of economic structure where taxable capacity is highest.

In the Indian context, Oommen (1987) established empirically the relative tax efforts of the major Indian States by making an inter-State comparison of the actual tax-SDP ratio of the State with a presumptive ratio estimated by using a multiple regression model as described in the following. Using cross section data from the 16 States under study from 1970–71 to 1981-82, an equation of the following form was run in a step wise fashion.

= a+b1 + b2 +b3 + b4 + RU 푻 풀푨 풀풄ퟏ 풀풄ퟐ 풀 풀 풀 풀 풀 푵 Where, T/Y= State taxes-State income ratio YA = Income from agriculture as a proxy for taxable income from agriculture.

Yc1 = Income from manufacturing

Yc2 Income from hotels, trade and commerce as a proxy for sales tax revenue of a State. Y/N = Per capita State income, N being total population

Being unsure of the empirical relevance of these independent variables Oommen used step wise regression which includes one variable into the regression equation at one instance, allowing most important explanatory variable to enter first. The equation that was employed finally was given the following form.

= a+b1 + b2 +b3 +U 푻 풀풄ퟐ 풀풄ퟏ 풀푨 풀 풀 풀 풀 Finally, by dividing the actual T/Y ratio by the presumptive ratio as estimated above, an index of tax effort with which to compare the effort of one State with that of others was obtained.

As noted earlier, the most important component in the regression method of measuring tax capacity and tax effort is to give a proper specification of the model. This demands identification of determination of taxable capacity of a State and specification of tax function and form of regression to be used (linear, log-linear etc.).

There are various models being developed for this purpose and the notable ones are discussed below:

• Stochastic Model: In this model a cross section data is used to estimate tax yield. Several determinants exclusively determining ‘capacity’ are chosen and tax ratio or per capita tax ratio is regressed upon them. The estimated yield then measures ‘capacity' and the residual of the regression gives a measure of tax effort. However, this method fails to distinguish between residual variations due to factors affecting tax effort from that "due to random disturbances caused by sampling fluctuations".

• Panel Data Model: Also known as covariance approach, it applies pooled time series cross section data and is a better statistical technique. This model helps not only in identifying the common traits in the tax behaviour of the States but also in segregating the effects of State specific factors from that of pure random disturbance factor. Thus, evaluation of the State's tax effort is done in a better way.

For the first time in India, the Ninth Finance (1988) adopted this approach by using a model of the “fixed effect” type in its first report. It estimated a stochastic tax function, where, per capita tax revenue of a State is specified to be determined by per capita SDP, proportion of non primary sector in SDP and Lorenz ratio of private consumption expenditure distribution.

Some studies have adopted another variant of the regression technique, known as Quartile Regression Method. This has been used by Coondoo et al. (1999) in his study of relative tax performance of Indian States for the year. In this method, the time series data on State specific aggregate tax revenue is used, which is obtained by adding up State taxes on income, taxes on property and capital transactions, land revenue, sales tax, State excise duty tax on vehicles, entertainment tax etc for a particular State. The tax SDP ratio (TSR) of each State is obtained by dividing aggregate tax revenue (ATR) by net state domestic product (NSDP). Then the pth quantile regression equation is expressed in the following linear form

TSR p = a + b log (SDPpc)

Where SDPpc is per capita SDP and TSRp represents estimated value of tax-SDP ratio of the State corresponding to the pth quantile.

If the State’s observed TSR value for the year is close to the value of TSR, corresponding to the State's observed SDP value for that year, then the State's relative tax performance is said to be in the ordinal pth quantile group.

In many instances covariance models have certain advantages over conventional models based on single dimension data (either cross section or time series). This is because in the covariance models, the problem of multicollinearity is reduced since the use of panel data neutralizes the tendency of most economic series to move together Further, the quality of parameter estimates might be better as the pooled sample permits the incorporation of specificities of individual group/State in the mode (Sarma, J.V.M., 1989).

B. Representative Tax System (RTS)

A micro-oriented approach to the relative fiscal capacity issue is often the representative tax system. The RTS method defines “tax capacity” as the absolute amount of revenue that each State would raise if it applied an identical set of effective rates to the selected tax base i.e. as the yield of representative tax system. The system is “representative” as national average tax rates are applied in each State to standardized tax bases. Then the estimated tax yields vary only because of differences in the underlying bases. Under RTS approach, the tax capacity measure is not concerned with whether an individual State imposes a low or high tax burden compared to other States. Rather, the capacity measure pertains only to the level of economic resources in any State, which may be said to be potentially taxable, whether or not that particular State actually taxes those resources and regardless of the intensity with which a State utilizes those taxable resources.

To put it in other way, instead of taking proxies for potential tax bases e.g. degree of urbanization, share of foreign trade sector, GSDP, etc, the attempt is to select potential bases of individual taxes. Then for each tax an appropriate base is identified and a representative set of tax rates is generated as the average of the effective rate

(ER) of the tax. The effective rate is the ratio of actual revenue (RA) and potential base (PB) of the tax. Symbolically,

ER=RAij / PBij Where, i =1...., m refers to the numbers of States j=1..., n refers to the number of taxes.

th th Then, RAij refers to actual revenue obtained from the j tax levied in the i State and therefore, average effective rate (AER) is

( ) AERj = ( ) ERij ퟏ 풔 풋 풊=ퟏ 풔 풋 ∑ where, S (j) is the number of States in which the j" tax is being levied.

The average effective rate so obtained is multiplied with the potential base for each tax and the revenue yielding capacity of that tax is divided. The relative taxable capacity (Ti) of each State can then be obtained by summing up the revenue yielding capacity of individual taxes, as follows

Ti = ( ) Rj x (PB)ij ……….(1)

∑풋 푨푬푹 Further, the tax effort (TEi) of a particular State can be derived as the ratio of actual tax revenue obtained by the State (ATi) and its taxable capacity (Ti):

TEi = 푨푻풊 If TEi>100, the State is said to be making more푻풊 than average effort to raise revenue and if TEi<100, the State is said to be putting in less than average effort to raise revenue.

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Applying this method involves several steps:

• Step 01: Select the tax bases: In practice information on some tax bases (e.g., numerous small tax bases) may not be readily available. Then, instead of exhausting all the tax bases, fiscal capacity is measured using several major tax bases e.g. personal income tax, corporate income tax, sales tax or VAT, etc. as a proxy.

• Step 02: Collect date on the selected tax bases: One can use the previous year figures on tax bases. There are also cases where tax bases (e.g. property tax) are assessed every few years since an annual assessment may be costly.

• Step 03: Select the standard tax rates.

According to Jun (1997) there are many different ways to calculate the standard tax rate on a particular tax base. Some alternatives are:

1. The effective rate of the whole country.

2. The arithmetic mean of all regions effective tax rates (this is commonly used).

3. The arithmetic mean of selected regions effective tax rates.

• Step 04: Calculate the fiscal capacities (using equation of the kind of equation number 1).

The important studies that have adopted the representative approach include Advisory Commission on Intergovernmental Relations (1962), Bahl (1972), Thimmiah (1979) and Chelliah and Sinha (1982) and Rao, Hemlata (1993). ACIR (1962) estimates the base of each of the twenty six nationally most often levied State and local taxes. The RTS approach developed by the Advisory Committee on Inter governmental Relations (ACIR, 1971) in the United States of America compares a set of effective tax rates applicable to different components of tax base in a State, with the corresponding allState-average effective tax rates. The difference between the two is then interpreted as a measure of tax effort (Chelliah and Sinha, 1982).

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ACIR, in an effort to make the system representative of current practice in the States, adopted the criteria to include the system of any tax employed by States, where more than half the nation’s population lives. In the case of taxes on selected business activities that are concentrated in a small number of States, the criteria was modified to include any tax in use in enough States to account for more than half of the potential tax base. Further, the tax rate assigned to each tax included in such developed Representative Tax System was derived by dividing its aggregate State and local yield in 1960, by the aggregate base for that tax in all the States. In the algebraic from, this tax rate is determined as follows

퐓퐨퐭퐚퐥 퐓퐚퐱 퐑퐞퐯퐞퐧퐮퐞퐬 퐟퐫퐨퐦 퐁퐚퐬퐞 퐀 퐀퐯퐞퐫퐚퐠퐞 퐭퐚퐱 퐫퐚퐭퐞 퐨퐧 퐁퐚퐬퐞 퐀 퐓퐨퐭퐚퐥 퐓퐚퐱 퐁퐚퐬퐞 퐀 This procedure is equivalent to using the weighted average of tax base in each state in which the weights used are the average revenue derived from each tax base in 1960.

In the vast literature on importance of measurement of fiscal capacity and the related conceptual and empirical difficulties that need to be addressed, Akin (1973) and others have provided a critique of fiscal capacity estimation method of ACIR’s first published report in 1962 and a revised report in 1971 (where essentially identical methodology was used).

The most serious of the pure methodological defects that have been pointed out are as follows:

• Non-interdependence of co-existing bases i.e., the use of a partial analysis frame work which tends to deny the importance of interactions among the various tax bases and rates within a given governmental unit. The ACIR’s average tax rate weighting method assures that simple relationship between single independent variables (tax bases) and the dependent variable (tax revenues from this base) remains unaffected when different mixes of bases and levels of these various bases exist among the various units analyzed. No allowance is made for the fact that the heavy use of one base may preclude the heavy use of another, because of the constraint of income and wealth.

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• The use of a simple weighted (by base) average tax rates: John Akin argues that since regression method estimates a marginal relationship while the use of the average estimates an average relationship, the ACIR's methodology is inferior to the use of simple regression analysis in determination of the relationship between bases and revenues. An examination of the equation used by ACIR for obtaining the tax rate shows that the implicit estimating equation for each tax base is constrained to pass through the origin. Thus, the difference between two methods could be especially important in the case of taxes which exempt certain minimum levels of tax bases from taxation. In fact, Akin (1973) using the actual State fiscal capacity data, upon which the ACIR estimates are based, shows that the ability of the multiple regression derived estimates to explain actual behaviour, is appreciably greater.

In addition to the above mentioned conceptual and empirical issues, sometimes observers of fiscal policy have questioned the ACIR’s arbitrary choice of tax bases. The argue that in the methodology outlined by ACIR, no reasonable attempt is made to explain why the tax bases most used in the nation actually best represent tax collecting capacity.

Thimmaiah (1979) in a study commissioned by Planning Commission, GOI has estimated the revenue potential and revenue efforts of four southern States Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and one union territory Pondicherry for the period of the Fourth Five Year Plan, mainly in terms of the representative tax system approach, by using both ACIR direct method and regression method. This is one of the few studies where both representative and regression techniques have been used. The concurrent use of regression method is actually towards fulfillment of requirement of the study. The ACIR’s direct method gives the average revenue potential and efforts whereas the regression method gives the marginal revenue potential and efforts, which is also of interest to the study.

Thimmaiah et al. (1979) study sponsored by Planning Commission, which is unique in its attempt to bring together the representative and regression technique towards measurement of revenue potential and effort, sums up this problem of data inadequacy and its practical implications, as follows:

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“...we are compelled to use near proxies or only a part of tax/revenue bases given such inadequate data, the ACR direct method does not reveal the true revenue potential of these States. Therefore, multivariate regression method is used as an additional method as it captures the influence of many other determinants of the yield from a particular source"

Further, as Thimmaiah notes in situation of inadequate data availability, multivariate regression method captures the influence of many other determinates of the yield from a particular source. A major contribution of this study is the use of standardized regression coefficients. For estimating the revenue potential through regression method, the estimated regression coefficients have been standardized as follows:

Standardized Marginal Effective Tax Rate = (Regression Coefficient) x Standard Devi. independent variable/Standard Deviation of dependent variables.

Then the revenue potential from that source of revenue has been estimated by applying these standardized regression coefficients to the relevant true or proxy tax base and other determinates of yield form that source of revenue in each State separately. Finally, the results have been added to give the relative potential revenue from that source of revenue. The proportion of the actual tax/revenue yield to the estimated potential yield is then calculated as the revenue effort of the particular State.

In the Indian context, Chelliah and Sinha (1982) have applied the representative tax system method to the measurement of tax effort by the Indian States for the period 1973-74 to 1975-76. The study is based on fifteen major States and twelve taxes levied by these States. A three year average has been used in order to minimize the influence of fortuitous factors and then the effective rate of each tax has been derived as the weighted average for the three year period. However, unlike ACIR approach the average effective rate has been computed as the unweighted average of the effective rates in the States.

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4.3 Taxable Capacity, Tax Effort and Finance Commission Devolution

Before choosing up the methodology that will be adopted in this research to estimate taxable capacities of the states it is mandatory to explore the background of such exercises being under taken by various Finance Commission.

Since the Fifth Finance Commission (except the Sixth Finance Commission) have recognized tax efforts of a State as a factor to be considered in the allocation of the divisible pool of financial resources among the States. Also, the Gadgil formula followed by the Planning Commission in allocation of the Central share of State plan outlay since the fourth plan gives weightage to the tax effort of individual States.

Apparently the Seventh Finance Commission accepted the Planning Commission "measure" as they held that while determining the grants in aid to bridge revenue gap "consideration should be given to the tax effort made by the individual States in relation to the targets for the plan". Such a measure has been found lacking in requirements by many fiscal policy analysts. Also, though the Eighth Finance Commission "specifically" studied the "relative taxable, capacity and tax efforts of Indian States.

It was the Ninth Finance Commission which, for the first time, econometrically estimated the relative taxable fiscal capacities of the states. The methodology employed by the Ninth Finance Commission, is the regression approach and it has pooled time series and cross section observation over the period from 1980-81 to 1984-85 in a covariance model to estimate a combine tax function in a general “fixed effects model”. This way the aggregate regression approach for measuring taxable capacity of the states has been suitably modified so that variation on account of the stochastic error component are separated from those due to tax effort factors.

It was the Tenth Finance Commission which for the first time explicitly included tax effort as determining criteria in the inter se share of states in the shareable proceeds of income tax and union excise duties and the weight assigned to tax effort was ten percent. However, it should be noted that the index of tax effort used by Tenth Finance Commission was based neither on regression method nor on representative tax system approach. Instead the following measure was used

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Index of tax effort of state = Per capita own tax revenue / Square of per capita income of state

The approach of the Eleventh Finance Commission was to evolve a suitable structure of incentives in all mechanism of fiscal transfers. The EFC, while considering the tax effort index as employed by the previous Finance Commission, reduced the weight of inverse of per capita income from 1 to 0.5 and thus reduced the weight given to tax effort calculated in this manner from 10 percent to 5 percent. The Twelfth Finance Commission adopted the same practice, but raised the weight given to the tax effort criterion to 7.5 percent as they felt that need for fiscal consolidation had become more urgent.

The last two Finance Commissions i.e. Thirteenth and Fourteenth Commission excluded the variable tax effort in their criterion of devolution. Thirteenth Finance Commission increased the weight of fiscal discipline from 7.5 to 17.5 percent and neglected tax effort in their criteria. Fourteenth Finance Commission introduced new variables: 2011 population and forest cover; and given 10 percent and 7.5 percent weight respectively and excluded fiscal discipline variable.

Thus, from the above detailed study of different types of methods for estimating fiscal potentials and tax efforts of the states, it can be said that both representative tax and regression approach have their own merits and demerits. Many scholars in India and abroad have employed both the methods to compute the fiscal capacity. Due to the large detailed data requirements on every type of tax base or a close proxy for each and on collection of tax by different tax base categories are required for the RTS approach the present study adopted regression approach.

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Chapter 5

State Taxes and Estimation of Fiscal Capacity of States

Chapter 5

STATE TAXES AND ESTIMATION OF FISCAL CAPACITY OF STATES

Tax assignment in most federations, including India, is such that the Central Government has the assignment of broad based taxes and the sub-national governments have allocation of taxes that are generally confined to a sub-national territory. Consequently, the revenue generated by the Centre is generally more in comparison to its requirements. State governments, on the other hand, have been assigned functions that require far more resources than the tax sources assigned to them. Therefore, it has created vertical imbalance between the Centre and the States. Besides, there is also horizontal imbalance among the States due to differences in the level of development. As a result, less developed States require more resources but they cannot generate them.

To reduce fiscal imbalances, the Central Government shares some of the taxes with the States and distributes the revenue of some other taxes among the States on the basis of the recommendations of the Finance Commission. Since the Fifth Finance Commission, most of the commissions have recognized tax efforts of a State as a factor to be considered in the allocation of the divisible pool of financial resources among the States. Also, the Gadgil formula followed by the Planning Commission in allocation of the central share of State plan outlay since the Fourth Plan gives weightage to the tax effort of individual States. In view of the above, this research seeks to measure the relative tax efforts of 16 major States. These are: Andhra Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Orissa, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal.

In the past, various methods have been employed in estimating efforts in India and abroad. As discussed in previous chapter, in general, there are two major approaches that need special mention. These are the regression approach and the representative tax system approach. But due to data limitations the study adopts regression approach for the computation of fiscal capacity.

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Ideally, the first step in estimating taxable capacity involves an identification of tax bases. However, data limitations prohibit the use of actual tax bases; therefore the resort must be to use measures that reflect inter-country variations in true bases. Necessarily, the choice of these proxies reflects some amount of subjective judgment. Naturally, the tax effort indices derived will vary, depending on the proxy bases chosen. Before estimating the fiscal potential and tax efforts of States a brief analysis and performance of State’s own tax revenue has also been done.

5.1 Own Tax Revenues: Analysis of Inter-State Performance An analysis of tax performance of the States has been done in terms of:

1. Aggregate all-State level performance

2. Comparative inter-State performance; and

3. Performance of selected major own tax revenues of States.

5.1.1 Aggregate All-State Tax Performance

The ratio of own tax revenues to GDP for all States is shown in Table 5.1 and it fell from 5.30 percent to 4.9 percent in 1998-99 and was at 5.1 percent in 1999-00. As a result of introducing the floor rates, there was a substantial improvement in 2000-01. This followed the agreement among States to implement the floor rates in sales tax and to reduce and rationalize various exemptions.

Figure 5.1: Major Fiscal Indicators (Percent to GDP)

7 Own Tax 6 Revenue 5

Own Non-Tax 4 Revenue 3 Percent 2 Finance Commission 1 Transfers 0 Non-Finance Commission Transfers

1994-95 1995-96 1996-97 1997-98 1988-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 Source: Table 5.1

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Table 5.1: State Finances: Major Fiscal Indicators (Percent to GDP) Year Own Tax Own Non- Finance Non- Total Revenue Tax Commission Finance Revenue Revenue Transfers Commission Receipts Transfers 1994-95 5.3 1.6 2.9 1.6 11.3 1995-96 5.2 1.5 2.9 1.3 10.9 1996-97 5.0 1.5 2.9 1.3 10.7 1997-98 5.1 1.4 2.9 1.3 10.8 1988-99 4.9 1.3 2.4 1.2 9.8 1999-00 5.1 1.4 2.5 1.3 10.3 2000-01 5.5 1.4 3.0 1.2 11.0 2001-02 5.3 1.2 2.8 1.3 10.6 2002-03 5.5 1.2 2.8 1.2 10.8 2003-04 5.5 1.3 2.7 1.5 11.0 2004-05 5.6 1.4 2.7 1.4 11.2 2005-06 5.7 1.3 3.1 1.5 11.6 2006-07 5.9 1.6 3.3 1.7 12.4 2007-08 5.8 1.5 3.5 1.7 12.5 2008-09 5.7 1.4 3.3 1.9 12.3 2009-10 5.6 1.4 3.0 1.9 11.7 2010-11 5.9 1.2 3.2 1.7 12.0 2011-12 6.2 1.1 3.3 1.7 12.2 2012-13 6.5 1.2 3.3 1.5 12.4 2013-14 6.6 1.2 3.3 1.4 13.2 Average 1994-95 to 5.12 1.44 2.81 1.33 10.70 1988-99 [1] 1999-2000 to 5.38 1.29 2.77 1.29 10.74 2003-2004 [2] [2]-[1] 0.26 -0.15 -0.04 -0.04 0.04 2004-05 to 5.74 1.44 3.18 1.65 12.00 2008-09 [3] 2009-10 to 6.16 1.22 3.22 1.63 12.30 2013-14 [4] [4]-[3] 0.42 -0.22 0.03 -0.02 0.30 Source: Various Issues State Finance, RBI and Finance Commission Reports

In 2002-2003, the States own tax revenue as percentage of GDP has increased to 5.5 percent. Comparing the 2004-05 to 2008-09 average with that of 2009-10 to 2013-14, there is an improvement of 0.42 percentage points. There is a downward slide in the Own Non-Tax revenue. It fell from 1.6 percent of GDP in 1994-95 to 1.2 Percent in 2013-14. Comparing the averages over 2009-10 to 2013-14 to the average over the period from 2004-05 to 2008-09, there is a fall of 0.22 percentage points in the own non-tax revenue.

In the period under review, the Finance Commission's transfers relative to GDP were the lowest in 1998-99 and 1999-2000 at 2.4 percent and 2.5 percent respectively.

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There has been improvement since then. In case of Non-Finance Commission transfers from the Centre, fell by about 0.02 percentage points comparing the 2009-10 to 2013-14 average with that of 2004-05 to 2008-09.

Total revenue receipts of States relative to GDP were the lowest in 1988-99 and there is significant improvement in averages of 0.30 percentage points in the 2009-10 to 2013-14 with that of averages of 2004-05 to 2008-09.

5.1.2 Comparative Performance of States: Own Tax Revenues

Here, an analysis has been done to know the comparative position of States in the inter-State ladder of Tax-GDP ratio. Table 5.2 shows that the tax-GDP ratio increased considering the period-averages over 2004-05 to 2006-07 and 2011-12 to 2013-14. This applies for both the group of special category and general category States, except States like Sikkim, Uttarakhand, Goa, Haryana and Rajasthan.

The overall increase comparing the 2004-07 average with 2011-14 average for the States as a whole is 0.63 percentage points and 0.61 percentage for the group of special category States. The increase is 0.63 percentage points for the group of general category States relative to their respective group-GDPs.

Figure 5.2A: Own Tax Revenue and GDP Ratio (In Percent) (2011-12 to 2013-14)

10.45 12.00 9.58 10.00 8.80 8.26 8.14 7.88 7.56 8.15 7.96 6.88 7.12 7.07 7.25 8.00 6.27 6.19 6.41 5.89 5.82 5.66 5.50 5.31 4.38 6.00 4.13 3.64 2.87 3.13 4.00 2.47 1.96 2.00 0.00 Goa Bihar Kerala Assam Punjab Odisha Sikkim Gujarat Tripura Haryana Manipur Mizoram Nagaland Himachal… Rajasthan Karnataka Jharkhand Arunachal… Meghalaya Jammu and… Tamil Nadu Uttarakhand Maharashtra Chhattisgarh West Bengal Uttar Pradesh Andhra Pradesh Madhya Pradesh

Tax GDP Ratio

Source: Table 5.2

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Table 5.2: Own Tax Revenues and Buoyancies: Comparative Performance of States (2004-2014)

OTR* OTR*/ OTR* OTR*/ Buoyancy States (2004-07) GDP# (2011-14) GDP# E- C (2004-14) (Rs. Lakh) (In (Rs. Lakh) (In Percent) Percen) A B C D E F G Arunachal Pradesh 63.00 1.67 345.31 2.87 1.20 2.05 Assam 3142.67 5.31 8322.46 5.89 0.58 1.19 Himachal Pradesh 1468.33 5.41 4624.52 6.27 0.86 1.25 Jammu and Kashmir 1664.00 5.52 5342.54 6.88 1.36 1.40 Manipur 99.33 1.75 397.59 3.13 1.38 2.42 Meghalaya 255.33 3.41 800.22 4.13 0.72 1.34 Mizoram 54.33 1.82 210.50 2.47 0.65 1.55 Nagaland 101.00 1.54 309.67 1.96 0.43 1.47 Sikkim 145.67 7.42 385.02 3.64 -3.78 0.37 Tripura 292.67 2.96 1015.56 4.38 1.42 1.84 Uttarakhand 1914.33 6.27 6380.41 5.82 -0.46 0.90 Total(SCS) 9200.67 4.97 28133.81 5.58 0.61 1.19 Andhra Pradesh 19795.67 7.60 61867.14 8.14 0.54 1.11 Bihar 3645.33 4.19 16609.29 5.66 1.47 1.50 Chhattisgarh 4108.67 7.33 13015.58 7.88 0.55 1.11 Goa 1081.67 7.45 3192.32 7.12 -0.33 0.93 Gujarat 15707.00 6.44 50979.27 7.56 1.12 1.27 Haryana 9149.00 8.23 24247.45 7.07 -1.16 0.79 Jharkhand 2806.00 4.49 8428.83 5.50 1.01 1.38 Karnataka 19335.00 9.83 54231.33 10.45 0.62 1.10 Kerala 10228.33 7.49 31000.83 8.80 1.31 1.29 Madhya Pradesh 9120.33 7.17 30312.28 8.26 1.09 1.23 Maharashtra 34748.33 7.01 96067.35 7.25 0.24 1.05 Odisha 5081.33 5.76 15360.62 6.19 0.43 1.12 Punjab 8317.00 7.50 23317.52 8.15 0.65 1.14 Rajasthan 9967.67 6.78 29977.61 6.41 -0.37 0.92 Tamil Nadu 23484.67 8.95 72347.75 9.58 0.63 1.11 Uttar Pradesh 19183 6.46 61759.52 7.96 1.49 1.37 West Bengal 10669 4.57 32510.09 5.31 0.74 1.26 Total(GCS) 206428 7.04 625224.79 7.68 0.63 1.14 All States 215628.6 6.92 653358.60 7.55 0.63 1.14 Source: Various Issues of State Finances, RBI *OTR: Own Tax Revenue, Average of three years, #GSDP: Average of three years.

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Figure 5.2B: Own Tax Buoyancy of States

3.00 2.42 2.50 2.05 2.00 1.84 1.55 1.47 1.50 1.40 1.34 1.38 1.37 1.19 1.25 1.27 1.29 1.23 1.26 1.50 1.11 1.11 1.10 1.05 1.12 1.14 1.11 0.90 0.93 0.92 1.00 0.79 0.37 0.50 0.00 Goa Bihar Kerala Assam Punjab Odisha Sikkim Gujarat Tripura Haryana Manipur Mizoram Nagaland Rajasthan Karnataka Jharkhand Meghalaya Tamil Nadu Uttarakhand Maharashtra Chhattisgarh West Bengal Uttar Pradesh Andhra Pradesh Madhya Pradesh Himachal Pradesh Arunachal Pradesh Jammu and Kashmir

Source: Table 5.2

Table 5.2 also depicts the own tax buoyancy of both the category States i.e. General and Special category States. State with a buoyancy which is more than one will experience over time an increase in the own tax-GSDP ratio as tax revenues grow at a faster rate than the GSDP growth. The tax buoyancy has been estimated over the period 2004-2014. In general Category States Haryana has the lowest buoyancy. Goa and Rajasthan, also have buoyancy which is less than one. It is expected that the States that are starting with a low tax-GSDP ratio may find it easier to show buoyancy which is substantially larger than one. Uttar Pradesh and Bihar have high buoyancy due to better performance in recent years but starting with low tax-GSDP ratio.

5.1.3 Performance of Selected Major Own Tax Revenues of States

We have seen the financial powers which our Constitution provides to the State governments and, therefore, the tax and non-tax revenue which a State can raise. Here, a brief analysis has been done on category wise revenue of States. Table 5.3 depicts the relative share of different sources of tax revenue in States’ total own tax revenue. This analysis has been done at an aggregate level of all States. The trends are given for the period 1990-91 to 2013-14.

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Figure 5.3: Share of Major Own Taxes in Total Own Taxes of States (In Percent)

Land Revenue 70

60 Sales Tax 50

40 State Excise Duty 30

20 Stamp Duty & registration 10 Fees Taxes on 0 vehicles

Taxes on goods 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2013-14 2012-13 & passengers

Source: Table 5.3

The overwhelming contribution of State sales tax is clearly visible. It has gone up from a level of 58.61 percent in 1990-91 to more than 61 percent in 2013-14. The lowest contribution made by the sales tax was 57.17 percent in the total own tax revenue in the year 1998-99. There is, however also some volatility in share of the sales tax.

The other most important tax for the States in terms of its revenue contribution is state excise duties followed by stamp duty and registration fees. The stamp duties and registration fee performed well in the mid-nineties and made highest contribution of 12.76 percent of the total OTR in the year 2007-08. What is more concerning is that the contribution of State excise duties has also come down from 15.92 percent in 1990-91 to 12.59 percent in 2013-14. The decline in State excise duty might be due to the lowering of alcohol consumption, but is more likely due to lack of revision of excise duty rates. Other own taxes in State are land revenue, taxes on vehicles, taxes on goods & passengers and electricity duty. All these taxes show declining trends in the terms of percentage contribution in own tax revenue of States. Except, taxes on vehicles which shows marginal increase in the contribution of revenue.

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Table 5.3: Trend and Structure of Major Own Tax Revenue

Major Own Tax Revenues (Rs. Crore) Major Own Tax Revenues (Percent to total) Year OTR land Sales tax State Stamp Taxes Taxes Electri Others Own Lan Sales State Stamp Taxes Taxe Electr Others rev. excise duty on on city Tax d Tax Excise Duty on s on icity duty & reg. vehi goods Duty Rev Reve Duty & vehi good Duty fee cles & enue nue registr cles s & passen ation pass gers Fees enge rs 1990-91 30145 603 17667 4798 2089 1535 1062 1187 1203 100 2.00 58.61 15.92 6.93 5.09 3.52 3.94 3.99 1991-92 35837 636 21064 5439 2654 1837 1136 1596 1475 100 1.77 58.78 15.18 7.41 5.13 3.17 4.45 4.12 1992-93 39530 617 23349 6265 2978 2194 1278 1748 1101 100 1.56 59.07 15.85 7.53 5.55 3.23 4.42 2.78 1993-94 46219 732 27227 7009 3535 2569 1480 1726 1941 100 1.58 58.91 15.16 7.65 5.56 3.20 3.73 4.20 1994-95 55552 1141 31883 7438 4979 3015 1483 2242 3371 100 2.05 57.39 13.39 8.96 5.43 2.67 4.04 6.07 1995-96 64035 1326 36704 8181 5770 3656 1508 2377 4513 100 2.07 57.32 12.78 9.01 5.71 2.35 3.71 7.05 1996-97 71294 1074 42112 8359 6153 4039 1663 2718 5177 100 1.51 59.07 11.72 8.63 5.67 2.33 3.81 7.26 1997-98 81439 1090 46813 10756 7026 4749 1947 3194 5865 100 1.34 57.48 13.21 8.63 5.83 2.39 3.92 7.20 1998-99 89220 1032 51003 12812 7281 4899 1979 3773 6442 100 1.16 57.17 14.36 8.16 5.49 2.22 4.23 7.22 1999-00 102831 1070 59955 14466 8368 5992 2099 3667 7214 100 1.04 58.30 14.07 8.14 5.83 2.04 3.57 7.02 2000-01 116717 1378 69976 15826 9344 6507 2041 4396 7250 100 1.18 59.95 13.56 8.01 5.57 1.75 3.77 6.21 2001-02 127475 1717 73181 17150 11159 7654 3686 4671 8256 100 1.35 57.41 13.45 8.75 6.00 2.89 3.66 6.48 2002-03 140372 1723 82155 18834 13439 8240 3577 5169 7236 100 1.23 58.53 13.42 9.57 5.87 2.55 3.68 5.15 2003-04 159736 2156 93172 19548 15897 9987 4285 5527 9163 100 1.35 58.33 12.24 9.95 6.25 2.68 3.46 5.74 2004-05 189413 2531 111554 22061 19702 10739 5224 7232 10370 100 1.34 58.89 11.65 10.40 5.67 2.76 3.82 5.47 2005-06 221537 2704 128769 26192 25686 12157 6472 7678 11878 100 1.22 58.13 11.82 11.59 5.49 2.92 3.47 5.36 2006-07 263195 3299 153573 30593 33401 13610 6808 8161 13749 100 1.25 58.35 11.62 12.69 5.17 2.59 3.10 5.22 2007-08 286546 3282 173422 35551 36572 14249 6592 7221 9656 100 1.15 60.52 12.41 12.76 4.97 2.30 2.52 3.37 2008-09 321930 4338 198327 42479 34990 15319 8309 7154 11015 100 1.35 61.61 13.19 10.87 4.76 2.58 2.22 3.42 2009-10 376316 5131 220644 50170 40520 19472 9805 12220 18354 100 1.36 58.63 13.33 10.77 5.17 2.61 3.25 4.88 2010-11 478594 7537 278838 61408 54087 25024 11302 17409 22990 100 1.57 58.26 12.83 11.30 5.23 2.36 3.64 4.80 2011-12 578993 7078 345063 74762 66697 29830 11672 17284 26606 100 1.22 59.60 12.91 11.52 5.15 2.02 2.99 4.60 2012-13 679882 8720 410507 88560 78681 35057 16471 20219 21668 100 1.28 60.38 13.03 11.57 5.16 2.42 2.97 3.19 2013-14 781541 10029 480942 98369 92021 40535 16643 21995 21008 100 1.28 61.54 12.59 11.77 5.19 2.13 2.81 2.69 Source: Various Issues of State Finances, RBI

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Table 5.4 shows the buoyancies of major tax contributor to own tax revenue of States. In the period 1990-98 except stamp duty & registration fees, tax on vehicles, all the taxes including sales tax and state excise duty have buoyancy less than one. Period 2006-2014 is the period in which all the taxes are having buoyancies above or equal to one. Taxes on vehicles and stamp duty registration fee are the two taxes which always have the buoyancy greater than one. But buoyancy of taxes on vehicles have declined 0.04 point from 1990 to 2014.

Table 5.4: Buoyancies of Major Components of Own Tax Revenues

Tax Revenues 1990-98 1998-06 2006-14 1990-14 [D]-[A] [A] [B] [C] [D] Own Tax Revenues 0.99 1.27 1.17 1.09 0.11 Land Revenue 0.79 1.48 1.22 0.97 0.19 Sales Tax 0.96 1.28 1.19 1.11 0.14 State Excise Duty 0.70 0.95 1.23 1.03 0.33 Stamp Duty & Registration Fees 1.23 1.81 1.10 1.28 0.04 Taxes on Vehicles 1.10 1.28 1.21 1.07 -0.04 Taxes on Goods & Passenger 0.54 1.82 1.00 1.00 0.46 Electricity Duty 0.88 1.12 1.28 0.95 0.07 Source: Table 5.3 & computed

5.2 Estimation of Fiscal Capacity and Tax Effort of States

As mentioned earlier, the fiscal capacity and tax efforts of States can be estimated with the help of RTS and regression approach but due to large data requirement for the RTS approach (detailed data on every type of tax base or a close proxy for each, and on collection of tax by different tax base categories are required) the study adopts the regression approach. However, the research do uses a disaggregated approach and estimate separate cross-section regressions for each of the major taxes, or more accurately, groups of taxes. This study confines itself to the estimation of 16 Major States of India and data pertaining to years 2005-2006 to 2013-2014. Here, an attempt has been made to compare the fiscal capacity of three periods i.e. (2005-2006 to 2007- 2008), (2008-2009 to 2010-2011) and (2011-2012 to 2013-2014). To avoid the impact of fluctuations in a particular year three yearly averages for tax revenue, GSDP and all other variables are taken. For the estimation of fiscal capacity of different major

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own-tax revenue of States the study uses the regression approach. Major tax revenues are: Land Revenue and Agricultural Income Tax, Stamp Duty and Registration Fees, Sales Tax, Motor Vehicle Tax & Passengers and Goods Tax, State Excise Duty, and Electricity Duty.

1. Stamp Duty and Registration Fees

A stamp duty and registration fees is paid to the government while transferring or registering various financial instruments or deeds relating to financial transactions. The base of the tax is generally the value of property bought and/or sold in the State. However, due to non-availability of data relating to various categories of property transacted, GSDP, urbanization of population is taken as the factor influencing the potential revenue that can be obtained from this tax.

Ln(STAMP) = a + b1 Ln(GSDP)+ b2 Ln(URBAN)+ u

Where,

STAMP= Stamp duty and registration fees,

GSDP= Gross State domestic product,

URBAN=Urbanization as per 2001 census.

Stamp Duty and Registration Fee Regression Results Year (2005-06)-(2007-08) (2008-09)-(2010-11) (2011-12)-(2013-14) Constant -9.300 -12.831 -10.441 log(GSDP) 1.240 (.000) 1.423(.000) 1.280(.000) log(URBAN) 0.015 (.048) 0.017(.046) 0.021(.037) R-square 0.856 0.868 0.843 Chi2 0.10 1.46 2.26

In the case of stamp duty and registration fee the results are obtained with the help of regression equation, the results are given in appendices A.5.21, 22, 23 and 24 which shows that in the period 2005-2008 Andhra Pradesh (197), Haryana (169) and Punjab (163) are the three States which have done quite well in utilizing their resources in their respective States. The relative position of these States in terms of their fiscal capacity is not satisfactory but their efforts are very good to utilize their potential

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base. The relative fiscal capacity positions of these States are 7, 12 and 10 respectively.

Andhra Pradesh (189), Kerala (171) and Madhya Pradesh (153) in the year 2008-2011 has put highest efforts in utilizing their potential base. In the period 2011-14 Andhra Pradesh (182), Bihar (174), and Uttar Pradesh (153) are the States which have performed well and attained top three positions in terms of tax effort.

In all the three periods the relative position of fiscal potential of Bihar and Uttar Pradesh is more or less static but due to their substantial increase in actual tax revenue their effort index improved and attained 2nd and 3rd position respectively.

Assam, Orissa and High Income State Gujarat have not able to achieve even 70 percent level in utilizing their tax base.

2. Sales Tax

There are two types of sales tax whose proceeds accrue to the States viz., general sales tax and central sales tax. The latter is levied by the Centre and while measuring relative tax-efforts it has to be taken out. Sales tax on petroleum products and purchase tax on sugarcane were also included under general sales tax. Ideally, these taxes should be treated separately. But it is very difficult to do so, as in many States, yield from the latter two taxes are merged with general sales tax (GST)

It is difficult to get data on all the elements of sales tax so, here, it is preferred to take total sales tax (after the introduction of Value Added Tax into Indian taxation system from 1 April 2005. The general sales tax laws were replaced with the Value Added Tax Act (2005) and associated VAT rules) which is levied on all sales and/or purchases in the States. Keeping in view the statistical requirements and theoretical argument for selecting the tax bases finally this study uses total annual house hold consumption expenditure collected from NSSO and Share of Manufacturing sector in total SDP.

Ln(STAX)= a + b1 Ln(TAHE) + b2Ln(MSDP) + u

Where,

STAX: Sales tax minus Central sales tax

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TAHE: Total annual household consumption expenditure

MSDP: Share of manufacturing sector in total SDP.

Sales Tax Regression Results

Year (2005-06)-(2007-08) (2008-09)-(2010-11) (2011-12)-(2013-14) Constant .044 .-1.471 .-2.154 log(TAHE) .757(0.000) .858 (.000) .933 (.000) log(MSDP) .067 (0.010) .066 (.008) .057 (.002) R-square 0.692 .680 .830 Chi2 0.98 0.15 0.12

The bulk of own tax revenue in almost all the States are raised through sales tax and therefore tax effort in this area is most important determinant in overall tax effort of States. The result of regression is presented in Appendices A.5.25, 26, 27 and 28 which indicate in terms of tax effort Andhra Pradesh and Kerala performed very well and low income State Orissa is above the average level and achieved third rank in the year 2011-12 to 2013-14. It can be seen from the table that index of tax effort of Andhra Pradesh declined from 175 to 159 but still maintains first position in tax effort. The relative fiscal capacity of Uttar Pradesh is improving and attains third position in the third reference year from sixth position in the first reference year, but the effort index declines from 139 to 102.

In terms of aggregate in this tax most of the other States are almost at 100 percent level in terms of their tax effort, except Bihar (72) which is worst performing State, Madhya Pradesh (73), West Bengal (74). Punjab (76), Tamil Nadu (89) and Assam (96) are also performing below average.

3. Land Revenue and Agricultural Income Tax

Land revenue includes land tax or the basic land revenue, cesses based on the land revenue, special crop cesses, and surcharge and betterment levy. The amount of tax payable depends on the size of landholdings as well as on the productivity of land.

Both these factors also determine the income generated from agriculture. Thus GSDP originating in the agricultural sector can be regarded as the potential base for land revenue. Agricultural income tax is not levied in many States. However land revenue

118 is levied in all the States. But in this analysis both land revenue and agricultural income tax added together and GSDP from agriculture sector is taken as the potential base for the estimation of tax potential.

Ln(LR) = a + bLn(GSDPa)+ u

Where,

LR: Land revenue and agricultural income tax

GSDPa: Gross domestic product from agriculture sector.

Land Revenue and Agriculture Income Tax Regression Results

Year (2005-06)-(2007-08) (2008-09)-(2010-11) (2011-12)-(2013-14) Constant -3.549 -2.860 4.896

Log(GSDPa) 0.861(.000) 0.824(.000) 0.334(0.104) R-square .417 .342 .075 Chi2 0.71 0.50 0.43

The results of land and agricultural income tax are given in Appendices A.5.29, 30, 31 and 32. The results of the regression are estimated for the three periods i.e. from 2005-2006 to 2007-2008, 2008-2009 to 2010-2011 and 2011-2012 to 2013-2014 by using three year averages for all the variables. Results of the regression in the table indicate that West Bengal holds first rank in the first and second period and having tax effort index of (583) and (741) respectively. In case of West Bengal, the soaring tax effort index is probably due to cesses on tea plantation and coal mines included in the land revenue and unique to the States, which garner a large amount of revenue.

Top three States with highest fiscal capacity are Uttar Pradesh, Maharashtra and West Bengal. Gujarat attains third position in fiscal potential in the period 2011-2012 to 2013-2014. Inspite of first position in all the three periods Uttar Pradesh is putting less efforts in utilizing their resources.

In the second reference period the highest tax effort index is observed for Gujarat at 477. In all the three different periods Maharashtra, Assam, Goa, Madhya Pradesh, Uttar Pradesh and Orissa have made substantial efforts in utilizing their State

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resources. Haryana and Punjab are the two States which have not been able to attain the ten percent level in the tax effort.

4. Motor Vehicles Tax and Passengers and Goods Tax

Motor vehicles tax is levied under the Indian Motor Vehicles Act, 1939. Tax rates for motor vehicles tax vary from one State to another depending upon the type of vehicle. Passengers and goods tax is a levy on the movement of goods and persons from one place to another. In view of this, in this study the fiscal capacity is estimated for the two taxes together. Here, in this tax total registered vehicle are taken as a base. An attempt has also been made by taking alternative potential base, but unfortunately the fit was not good. For Motor vehicle tax following equation has been tried for

estimating fiscal capacity Ln(MVT) = a + b1 Ln(NTW) + b2 Ln(NTF) +b3 Ln(NBUS)

+ b4 Ln(NTTO) + u, where, MVT- Motor Vehicle and Passenger tax, NTW- number of registered two wheelers, NTF- number of registered three and four wheelers, NBUS-number of registered buses, NTTO-number of registered trucks, trailers and others. For getting significant results the study uses the total number of registered vehicles as a proxy for computing fiscal potential of different States.

Ln(MVT) = a + bLn(TREG)+ u

Where,

MVT: Motor vehicles tax and passengers and goods tax

TREG: Total number of registered vehicles.

Motor Vehicles Tax and Passengers and Goods Tax Regression Results

Year (2005-06)-(2007-08) (2008-09)-(2010-11) (2011-12)-(2013-14) Constant 8.714 9.242 9.272 Log(TREG) 0.737(.000) 0.661(.000) 0.739(0.104) R-square 0.696 0.603 0.729 Chi2 0.92 0.36 0.05

In case of motor vehicles tax and passengers and goods tax number of registered motor vehicles are taken as a potential base for estimating the fiscal capacity of different States. The results of this tax are given in Appendices A.5.33, 34, 35 and 36 for three periods. Bihar, Karnataka and Orissa stand first, second and third rank,

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respectively in all the reference periods for their better performance except Karnataka which has made maximum efforts in the second study period. Punjab, Gujarat and Haryana made least efforts in utilizing potential base. These three least performing States do not even cross the 80 percent level in their efforts index to utilize the resources at their disposal. Punjab in the first study period is almost near cent percent level.

5. Electricity Duty

This duty refers to the tax imposed by the State governments on the consumption of electricity. The consumers are divided into different categories (such as industrial consumers, commercial consumers etc.) This study takes total consumption of electricity by all types of consumers (leaving aside the consumption on street lighting, traction, etc., which is for public consumption) as the potential tax base. An attempt was also made to fit the equation separately for electricity duty. Unfortunately, the fit was not good. For electricity duty the following equation has been attempted:

Ln(EDUTY) = a + b1 Ln(TSALE) + b2 Ln(SAGR) + b3 Ln(SIND) + u. where, EDUTY= Electricity duty, TSALE = Total sale of electricity, SAGR= Share of agriculture in total sale of electricity and SIND = share of industry in total sale of electricity.

For significant result total consumption has been taken as a potential base. For this purpose, the State wise electricity consumptions have been obtained from the reports on energy sources, Ministry of Power. Goa has been excluded from the study due to non availability of data on revenue receipts from electricity. The equation for

estimating fiscal capacity and tax effort is as follows:

Ln(EDUTY) = a + bLn(CONM) + u

Where,

EDUTY: Electricity duty

CONM: Consumption of Electricity

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Electricity Duty Regression results

Year (2005-06)-(2007-08) (2008-09)-(2010-11) (2011-12)-(2013-14) Constant -5.478 -6.114 -8.112 Log(CONM) 1.224 (.001) 1.291(.000) 1.456(0.104) R-square 0.607 0.637 0.650 Chi2 0.17 0.21 0.01

The tax effort in the case of electricity duty is reflection of tax efforts as well as the timeliness of the remittance of revenue collected by the State Electricity Boards (SEBs) to their respective governments. It can be seen from the appendices A.5.37. 38, 39 and 40 that top three States which stand out in terms of tax effort with respect to this tax in 2005-08 are: Gujarat (308), Bihar (252) and Madhya Pradesh (246). Gujarat and Bihar slipped to third and fifth rank respectively in the third reference year. Madhya Pradesh achieved first rank in second period and then again fell to second rank. In terms of aggregate effort in this tax the worst performers are: Andhra Pradesh (23), Kerala (24) and Uttar Pradesh (38)

6. State Excise Duty

It is levied on all kinds of alcoholic liquor, opium, hemp and other narcotics. For this duty, either the total value of consumption of liquor and narcotics or the total quantities of consumption of various goods subject to state excise duty could be taken as the potential base. Due to non-availability of complete data we have chosen GSDP as a proxy base for this duty and the equation is as follows:

Ln(EXDUTY) = a + bLn(GSDP)+ u

Where,

EXDUTY: State excise duty

GSDP: Gross state domestic product

State Excise Duty Regression results

Year (2005-06)-(2007-08) (2008-09)-(2010-11) (2011-12)-(2013-14) Constant -6.406 -6.493 -5.127 Log(GSDP) 1.076(.002) 1.082(.003) 1.009(.006) R-square .369 .336 .301 Chi2 2.55 2.60 3.09

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The results of excise duty are given in the Appendices A.5.41, 42, 43, and 44 indicate that Andhra Pradesh exhibits the best tax effort with a tax effort index of 324 and 388 in the first two periods, Karnataka ranked first in the third period. Gujarat exhibits the lowest tax effort index of only 3,2, and 2 in the three periods respectively, which is mainly due to ban on consumption of alcohol in the State. Other States with relatively high tax effort in the aggregate period includes Karnataka (310), Tamil Nadu (223), Madhya Pradesh (201), Punjab (180) and Uttar Pradesh (175). While the laggards include Assam (53), West Bengal (58),Goa (72) and Orissa (86)

5.3 Fiscal Potential and Efforts: An Overall Scenario

Here, in Table 5.5 the total fiscal capacity and tax efforts of all the 16 States with their respective ranks has been computed for three different study periods. In all the 16 States Andhra Pradesh is the only State which ranks first in tax effort in all the three periods. Though Andhra Pradesh is putting highest effort in relation to other States but the tax effort of this State is declining. The efforts made by Andhra Pradesh are: 175, 174, and 160 respectively in all the three different periods. Andhra Pradesh got sixth rank in terms of revenue potential except for the first study period in which it is ranked seventh. Maharashtra is having highest fiscal capacity of Rs. 3740764 lakh but put less effort in mobilizing the resources of the State. Despite being the first in rank in terms of fiscal potential Maharashtra is putting very less efforts which are as follows: 102, 121 and 101 respectively in all the reference year. In the third study period Maharashtra is performing very poor and achieved eleventh rank in index of tax effort. Goa is having least fiscal potential and ranked sixteenth in all the three different periods not only in fiscal potential but it is also least ranked in terms of tax effort and having tax effort in the three periods- 89 , 80 and 97 respectively.

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Table 5.5 Fiscal Capacities and Tax Efforts, All States

2005-06 to 2007-08 2008-09 to 2010-11 2011-12 to 2013-14 States Fiscal Capacity Tax Effort Fiscal Capacity Tax Effort Fiscal Capacity Tax Effort (Rs Lakh) Rank Index Rank (Rs Lakh) Rank Index Rank (Rs Lakh) Rank Index Rank Andhra 1342057 7 175 1 2133903 6 174 1 3794164 6 160 1 Pradesh Assam 378916.4 15 89 12 529254.2 15 92 11 929599.1 15 87 15 Bihar 530347.4 13 78 15 838931.8n 13 96 10 1684476 13 99 12 Goa 41425.98 16 89 13 64404.06 16 80 15 120324.3 16 97 13 Gujarat 1863427 3 98 10 2694575 4 105 9 4519469 4 115 4 Haryana 802202.7 12 131 4 1272649 12 109 8 2256119 12 104 10 Karnataka 1501374 6 146 2 2255612 5 138 3 4009005 5 131 3 Kerala 900932.6 11 130 5 1283031 11 142 2 2258089 11 133 2 Madhya 989085.2 9 105 8 1925197 8 89 13 2619536 9 112 7 Pradesh Maharashtra 3740764 1 102 9 4898237 1 121 6 9616819 1 101 11 Orissa 497680.3 14 118 6 751859.9 14 123 5 1307391 14 115 5 Punjab 1085730 8 86 14 1504284 10 89 14 2427179 10 93 14 Rajasthan 974955.4 10 118 7 1516408 9 113 7 2870191 8 104 9 Tamil Nadu 2778632 2 96 11 4326258 2 90 12 7076533 2 104 8 Uttar Pradesh 1674616 4 132 3 2744639 3 125 4 5295680 3 112 6 West Bengal 1585701 5 70 16 2104084 7 79 16 3760627 7 83 16 Source: Computed

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Figure 5.4: Index of Tax Efforts of States

200.00 180.00 160.00

140.00 120.00 100.00 80.00 2005-08 60.00

Index(In Percent) 2008-11 40.00 2011-14 20.00 0.00

Figure 5.5: Fiscal Capacity of States

1200.00

1000.00

800.00

600.00

Billion 2005-08 400.00 2008-11 200.00 2011-14 0.00

For getting overall performance picture of tax potential and effort the Table 5.6 has been constructed for the total period 2005-2006 to 2013-2014. Taxable capacity for all taxes: To estimate the taxable capacityof all taxes for a particular State, the study adds up the revenue of each and its independent variables. For example, for estimating the tax revenue of Andhra Pradesh, the study adds up the revenues of each tax levied by the State. It then adds up all the taxable capacity variables concerning each of the taxes levied by the State. A similar exercise has been done for each of the

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State. The tax effort varies from 167 percent to 79 percent. From the total 16 States, six States are not putting their cent percent effort in exploiting the potential base. These six States are; Assam, Bihar Goa, Punjab, Tamil Nadu and West Bengal. Here also middle income State Andhra Pradesh ranks first but West Bengal ranks 16 in tax effort. High Income States such as Goa and Punjab were unable to achieve even hundred percent level and below the average degree of exploitation.

Table 5.6: Fiscal Capacity, Tax Efforts and Ranks of States: 2005-2014

Tax Revenue Fiscal Capacity Index of States Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 12141614 7270123 167 1

Assam 1636392 1837770 89 15

Bihar 2878305 3053755 94 12

Goa 205079.7 226154.3 91 13

Gujarat 9851496 9077470 109 8

Haryana 4783250 4330971 110 6

Karnataka 10549690 7765990 136 2

Kerala 6007988 4442052 135 3

Madhya Pradesh 5691647 5533818 103 10

Maharashtra 19422671 18255819 106 9

Orissa 3007455 2556931 118 5

Punjab 4517892 5017193 90 14

Rajasthan 5853531 5361555 109 7

Tamil Nadu 13972637 14181423 99 11

Uttar Pradesh 11607304 9714935 119 4

West Bengal 5921292 7450411 79 16

Source: Computed

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5.4 Tax Effort Index and Net Contribution

In Appendix A.5.45 the performance of Andhra Pradesh is given and it is contributing 67.01 percent above the average. The major contributors for this makeable performance have been made by sales tax (+44.97), stamp duty & registration fee (+7.12) and State excise duty (+18.07). Next State is Assam whose performance is depicted in Appendix A.5.46. The net contribution made by the Assam is below the average. Assam performance is 10.96 percent below average. Taxes like motor vehicle (-0.87), state excise duty (-4.75), and stamp duty & registration fees (-3.22) are the taxes that have made significant negative contribution. Land revenue and agricultural income tax is the only tax which has made positive contribution in the State Assam.

Appendix A.5.47 and A.5.48 shows the contribution made by Bihar and Goa. Bihar comes under the category of low income State and making negative (-5.75) contribution to State. Sales tax is the major negative contributor which is effecting the overall contribution of Bihar. The net contribution of motor vehicle tax is +8.13. Surprisingly, Goa is the high income State and its performance is 9.32 percent below the average performance. Here, in the motor vehicle tax is the major negative contributor in Goa.

Gujarat and Haryana both States are doing well in putting their efforts. The performance of both the States is depicted in the appendix A.5.49 and A.5.50. Gujarat is contributing 8.53 percent and Haryana 10.44 percent above the average level performance. In both the States, sales tax is contributing more and is major force for getting positive contribution. The major negative contributor in Gujarat is state excise duty (-10.01)

Karnataka and Kerala have also performed very well in terms of net contribution made to the State (Appendix A.5.51 and A.5.52). Karnataka has made 35.84 percent contribution above the average level and performance of Kerala is 35.25 percent above the average level. The main positive contributor to Karnataka is excise duty and

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for Kerala is sales tax. As Kerala is prohibiting alcohol consumption in a phased manner since 2014, and thus contributing only 0.15 percent above average level. Both the States are making negative contribution in electricity duty and land revenue and agricultural income tax.

Low income State Madhya Pradesh (Appendix A.5.53) is also putting effort above average level in utilizing its potential base but its near average level. The vital taxes which help Madhya Pradesh in getting positive contribution are electricity duty (+4.25), motor vehicle tax (+4.20) and State excise duty (+8.71). Sale tax contribution is not significant in Madhya Pradesh; rather it is 18 percent below the average.

The performance of Maharashtra (Appendix A.5.54) is better than Madhya Pradesh and is contributing 6 percent above the average level. Sales tax contributes +4.20 and electricity duty contributes +3.30, these are the two main contributors getting positive result.

All the taxes except state excise duty and stamp duty registration fee in Orissa (Appendix A.5.55) are having positive sign. Overall, net contribution made by the Orissa is 17.62 percent above the average level.

In Punjab (Appendix A.5.56) sales tax is performing worse and this is the major reason behind the negative contribution made by the Punjab. In Punjab positive contribution are made by state excise duty (+6.25), electricity duty (+3.18) and stamp duty registration fee (+3.63).

The contribution made by Rajasthan ad Tamil Nadu is given in Appendix A.5.57 and A.5.58. Rajasthan is utilizing its resources in a better way and made +9.18 contribution above the average level. Out of six major own taxes of State, four taxes namely electricity duty, sales tax, stamp duty & registration fees and State excise duty are the taxes which are putting positive efforts. Tamil being a middle income State made contribution of 1.47 percent below the average level. The important positive contributor is state excise duty.

Uttar Pradesh (Appendix A.5.59) is performing quite better than other high income States. Except two taxes i.e. motor vehicle & passenger goods tax and electricity duty Uttar Pradesh is putting effort above the average level. Overall, Uttar Pradesh's net contribution to State is 19.48 percent above the average level.

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West Bengal (Appendix A.5.60) is performing worst in utilizing its potential resources. Out of six selected tax only electricity duty and land revenue and agriculture income and motor vehicle tax are positive contributor of West Bengal. West Bengal is unable to utilize its capacity in the major tax like sale tax and State excise duty.

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Chapter 6

Summary and Conclusion

Chapter 6

SUMMARY AND CONCLUSION

Inter-governmental transfers are one of the most visible and widely discussed aspects of federal finance. The design of inter-governmental transfers ought to depend on the objectives they are required to subserve. In a federation, inter-governmental financial transfers cannot be settled once for all. There are problems of tax-sharing and grants which require changes with the changes in national objectives.

The problem of inter-state economic inequalities in some form or the other exists in almost all federations. An economic or functional approach to equitable distribution of national funds among the States should be guided mainly by the consideration of each according to its needs. States do not have equal fiscal capacities; therefore, the transfer of financial resources has to be deliberately and consciously far greater to backward fiscal disadvantaged States, keeping in mind of course the tax- efforts of the different States and economy achieved in their expenditure by them. India is a developing federation and wastage of financial resources is a luxury which it cannot afford. Therefore, it is of utmost importance that all States put in the maximum efforts to raise and conserve scarce financial resources. If the financial transfer scheme is based solely on equalization of general needs of the States and neglects the resource mobilization efforts of the States, some of the backward States might enjoy the benefits of federal transfers without making any efforts of their own. Such States would live like parasites on the other States which are exploiting their financial capacities to go in for self help. They must get incentives for doing so by the Finance Commission. At the same time States with a perpetual begging bowl must be discouraged. No Finance Commission should subsidize inefficiency.

There are differences in the Constitutional sanction for the different forms of transfers. Taxes are shared among the States according to Articles 268, 269, 270 and 272 of the Constitution, whereas grants are affected under Article 275 and 282. Loans are granted under Article 293.

While transfers by way of tax sharing are affected solely by the Finance Commission, grants are disbursed by all the three agencies such as the Planning Commission,

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different ministries of the Government of India and the Finance Commission. Loans are sanctioned by the Planning Commission and the Ministry of Finance.

An analysis of the instruments of financial transfers from the union government to the States assumes importance not primarily because of the differences in Constitutional sanction, as stated in the previous chapters, or because of the different types of agencies through which they flow, but due to the impact of each form of transfers on the State budgets at a large stages’ economy and reduction in inter-state disparities.

An examination of federal transfers through Planning Commission and mainly through Finance Commission has been undertaken under the present research. The net transfer of resources from the Centre increased by 60.96 percent over the years 2013- 14 and 2014-15, there is only an increase of 8.13 percent in net transfer of resources between 2014-15 and 2015-16. Also the year 2014-15 witnessed a 124.20 percent increase in grants from the Centre and 104.60 percent increase in gross loans from the Centre over the previous year. In 2015-16 there is 11.80 percent decline in grants from the Centre and only 14.84 percent increase in gross loan from the Centre, while State's share in Central taxes has increased by 32.58 percent over the previous year. There is an increase of 32.58 percent in States share in Central taxes in the year 2015- 16 which is two times higher than the previous year.

There is no continuous upward trend in net devolution and transfer of resources from Centre to States over the period. The minimum growth rate of net devolution and transfer of resources was (-15.4) percent in 1999-00 and the maximum was 56 percent in 2005-06 when net devolution and transfer of resources increased from Rs. 101034 crore in 2004-05 to Rs. 157581 crore in 2005-06. This got reflected itself in an increase in the share of net transfer of resources in aggregate disbursements from 18.3 percent in 2004-05 to 28.1 percent in 2005-06. The share of net devolution in GDP is almost same since 1990-91 to 2015-16.

In order to have a better comprehension of the nature and role of Central transfers to the States through the various channels, it is necessary to examine them from both angles-in their totality and item-wise. The total approach is significant to understand adjustments in vertical financial imbalances while item-wise approach reveals adjustments in horizontal financial imbalances. It is noteworthy that various items included in the aggregate transfers are not alike and therefore have different

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importance for different States. An analysis of trends in sub-components of transfer of resources reveals the contribution of sub-components in the devolution of resources.

It is observed that except for the year 1998-99, total devolution of States share in Central taxes (SCT) has moved up. In the case of grants-in-aid from the Centre (GIA), analysis of data from 1990-1991 onwards shows an upward trend in general, except for the year 1994-95 and 1998-99. The annual growth rate of share in Central taxes, as well as grants-in-aid, varies over a wide range in that time period.

Gross loans from the Centre (GLFC) shows a pattern which is very different from that of SCT and GIA. On one side of the spectrum is the year 1998-99 when GLFC was Rs. 39,367 crore and on the other side is the year 2005-06 when GLFC settled for an amount of Rs. 8097 crore as against Rs. 25,878 crore in 2004-05. Another significant point to be noticed is that as a proportion of cross devolution and transfer (GDT), GLFC has declined from 34.2 percent in 1990-91 to 2.8 percent in 2015-16 after reaching lowest of 2.0 percent in 2013-14.

Financial autonomy of the States in a federation, by and large, can be explained in terms of degree of fiscal Centralization. There is a high degree of Centralization in pre-devolution scenario. Centre invariably had a larger share in direct taxes at its command than all the States put together. In 1950-51, Centre command 76.19 percent and the same increased to 97.51 percent in 2013-14. After devolution from the Finance Commission, States command over direct taxes improved to from 2.49 percent in 2013-14 to 31.25 percent. In all the years there has been a significant transfer of tax resources from the Centre to the States which brought down the Centralization. States which had only 59.18 percent of indirect taxes in 2013-14 before devolution commanded 69.75 percent after devolution. The intensity of fiscal Centralization after post-devolution of funds to the States has however declined gradually over the time. The share of States in taxes (Central as well as States) after devolution of funds was 43.06 percent in 1950-51, while it was recorded at 56.92 percent during 2013-2014.

Till now fourteen Finance Commissions have recommended transfers to each State and it is seen that the increase in quantum of transfers under Fifth Finance Commission, from 76 percent of total transfers as recommended by Fourth Finance Commission to 87 percent, was due to the inclusion of advance tax collections under

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income tax and special excise duties under excise in the divisible pool. This was adjusted by the time of the Sixth Finance Commission.

There is 168 percent increase in the total transfers of Fourteenth Finance Commission from the previous Thirteenth Finance Commission. It was mainly because FFC has radically increased the share of States in Central tax to 42 percent from the previous 32 percent of Thirteenth Finance Commission recommendation.

Some fundamental shortcomings of the federal system have been identified. The major deficiencies are:

• A multiplicity of agencies transferring Central resources with overlapping roles, each following its own criteria/formula result in wasteful duplication in functioning.

• The limited scope of Finance Commission transfers, with the exclusion of plan revenue expenditure and so plan grants from their preview.

• The compartmentalize functioning of Planning Commission and Finance Commissions to assess what is essential interdependent and many a time, artificially distinguished plan and non-plan needs of the States have posed difficulties in the clear pursuit of the objectives of these transfers.

• Methodological weaknesses and reliance on gap filling approach by Finance Commissions.

• The Finance Commission have been following the gap filling approach whereby grants-in aids are recommended for States found to be in defects in their revenue budget after taking account of their share of Central taxes under the Finance Commissions devolution formula.

The problems of vertical and horizontal imbalances are sought to be corrected through various types of grants. In India grants-in-aid revenue under Article 275(1) is one such provision aiming at achieving equalization of revenue. In fact, the Finance

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Commissions have endeavoured to use both tax-devolution and grants-in-aid to correct these imbalances and to bridge the resource gap at the State level. Considering the need for including the States to mobilize more resources on their own, the ‘self- help’ factor is also considered important. Thus, keeping in view the perspectives of a dynamic fiscal federalism, along with the objective of achieving equalization, objective of promoting continuous process whereby the States at various levels of development keep continuously progressing with disparities among them getting narrowed down progressively with their own self help, is also given importance. The study brought out the importance of the two criteria viz. taxable capacity and tax effort in the scheme of federal transfers. Before the estimation of tax potential and tax effort, the study also undertakes the analysis of State level taxes and their performance.

In the aggregate all-State performance of State own tax revenue, it has been found that the ratio of own tax revenues to GDP for all the States fell from 5.30 percent to 4.9 percent in 1998-99 and was at 5.1 percent in 1999-00. As a result of introducing the floor rates, there was a substantial improvement in 2000-01. This followed the agreement among States to implement the floor rates in sales tax and to reduce and rationalize various exemptions. There is a downward slide in the own non-tax revenue. It fell from 1.6 percent of GDP in 1994-95 to 1.2 percent in 2013-14. Comparing the averages over 2009-10 to 2013-14 to the average over the period from 2004-05 to 2008-09, there is a fall of 0.22 percentage points in the own non-tax revenue.

In the period under review, the Finance Commission’s transfers relative to GDP were the lowest in 1998-99 and 1999-2000 at 2.4 percent and 2.5 percent respectively. There has been an improvement since. In the case of Non-Finance Commission transfers from the Centre, they fell by about 0.02 percentage points comparing the 2009-10 to 2013-14 average with that of 2004-05 to 2008-09.

Total revenue receipts of States relative to GDP were the lowest in 1988-99 and there is a significant improvement in averages of 0.30 percentage points in 2009-10 to 2013-14 with that of averages 2004-05 to 2008-09.

An analysis of the comparative position of States in the inter-State ladder of tax-GDP ratio shows that the tax-GDP ratio increased considering the period-averages over

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2004-05 to 2006-07 and 2011-12 to 2013-14. This applies for the both the groups of special category and general category States, except States like Sikkim, Uttarakhand, Goa, Haryana and Rajasthan.

The overall increase comparing the 2004-07 average with 2011-14 average for the States as a whole is 0.63 percentage points and 0.61 percentage points for the group of special category States. The increase is 0.63 percentage points for the group of general category States relative to their respective group-GDPs.

Computation of own tax buoyancy of both the category States i.e. general and special category States has been undertaken and important results have been found. The State with a buoyancy which is more than one will experience over time an increase in the own tax-GSDP ratio as tax revenues grow at a faster rate than the GSDP growth. The tax buoyancy has been estimated over the period 2004-2014. In the general category States Haryana has the lowest buoyancy. Goa and Rajasthan, also have buoyancy which is less than one. It is expected that the States that are starting with a low tax- GSDP ratio may find it easier to show buoyancy which is substantially larger than one. Uttar Pradesh and Bihar have high buoyancy due to better performance in recent years but starting with the low tax-GSDP ratio.

This research examines the relative share of different sources of tax revenue in States’ total own tax revenue at an aggregate level of all States. The trends are given for the period 1990-91 to 2013-14. The overwhelming contribution of State sales tax is clearly visible. It has gone up from a level of 58.61 percent in 1990-91 to more than 61 percent in 2013-14. The lowest contribution made by the sales tax was 57.17 in the total own tax revenue in the year 1998-99. There is however also some volatility in share of the sales tax. The other most important tax in terms of its revenue contribution is state excise duties followed by stamp duty and registration fees. The stamp duties and registration fee performed well in the mid-nineties and made the highest contribution of 12.76 percent of the total OTR in the year 2007-08. What is more concern is that the contribution of state excise duties has also come down from 15.92 percent in 1990-91 to 12.59 percent in 2013-14. The decline in State excise duty might be due to the lowering of alcohol consumption but is more likely due to lack of revision of excise duty rates. Other own taxes in State are land revenue, taxes on vehicles, taxes on goods & passengers and electricity duty. All these taxes show

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declining trends in the terms of percentage contribution to own tax revenue of States. Except taxes on vehicles shows a marginal increase in the contribution of revenue.

An examination of buoyancies of major tax contributor to own tax revenue of States shows that in the period 1990-98 except stamp duty & registration fee and tax on vehicles, all the taxes including sales tax and State excise duty have buoyancy less than one. Period 2006-2014 is the period in which all the taxes are having buoyancies above or equal to one. Taxes on vehicles and stamp duty registration fee are the two taxes which are always having buoyancy greater than one. But buoyancy of taxes on the vehicles has declined 0.04 percentage points from 1990 to 2014.

The two criteria i.e. taxable capacity and tax efforts which are discussed in the previous chapter needs suitable measures. The States with low taxable capacity need special help in terms of more funds for providing the social and economic services. It is for sure that if federal fiscal imbalances tend to operate discriminately between State units, instability of the federation sets in which manifests itself in economic instability of its constituent States and dissatisfaction with the operation of the fiscal federation. Failure to recognize these symptoms of instability and absence of corrective measures may lead to dilution and eventually breakdown of the federation.

In the study, various measures have been discussed. Broadly two approaches have been developed in the empirical literature, first is representative tax system developed by ACIR and the second is regression approach used by several authors and institutions. On account of conceptual and practical issues that arise in implementing representative tax system (RTS) especially in India and other developing countries, regression method has been adopted in estimating the fiscal capacity.

The first tax which the study has undertaken for the estimation of fiscal potential and effort in chapter 5 is stamp duty and registration fee. Urbanization of population and GSDP are taken as the factor influencing the potential revenue that can be obtained from this tax.

The tax stamp duty and registration fee in the period 2005-2008 Andhra Pradesh (197), Haryana (169) and Punjab (163) are the three States which have done quite well in utilizing their resources in their respective States. The relative position of these States in terms of their fiscal capacity is not satisfactory but their efforts are

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very good to utilize their potential base. The relative fiscal capacity positions of these States are 7, 12 and 10 respectively. Andhra Pradesh (189), Kerala (171) and Madhya Pradesh (153) in the year 2008-2011 put highest efforts in utilizing their potential base. In the period 2011-14 Andhra Pradesh (182), Bihar (174), and Uttar Pradesh (153) were the States who performed well and attained top three positions in terms of tax effort.

In all the three periods the relative position of the fiscal potential of Bihar and Uttar Pradesh is more or less static but due to their substantial increase in actual tax revenue their effort index improved and attained 2nd and 3rd position respectively. Assam, Orissa and High Income State Gujarat have not been able to achieve even 70 percent level in utilizing their tax base.

The second tax is sales tax which is the most important tax in States’ own revenue list. It is difficult to get data on all the elements of sales tax so, here, it is preferred to take total sales tax which is levied on all sales and/or purchases in the States. This study uses total annual house hold consumption expenditure collected from National Sample Survey Organization (NSSO) and share of the manufacturing sector in total SDP. In terms of tax effort Andhra Pradesh and Kerala performed very well and low income State Orissa is above the average level and achieved the third rank in the year 2011-12 to 2013-14. Index of tax effort of Andhra Pradesh declined from 175 to 159 but still maintains the first position in tax effort. The relative fiscal capacity of Uttar Pradesh is improving and attained the third position in the third reference year from the sixth position in the first reference year, but the effort index declined from 139 to 102.

Third tax in the sequence is land revenue and agricultural income tax. GSDP originating in the agricultural sector is regarded as the potential base for land revenue. The result of the regression indicates that West Bengal holds the first rank in the first and second period and having tax effort index of (583) and (741) respectively. In case of West Bengal, the soaring tax effort index is probably due to cesses on tea plantation and coal mines included in the land revenue and unique to the States, which garner a large amount of revenue.

Top three States with highest fiscal capacity are Uttar Pradesh, Maharashtra and West Bengal. Gujarat attains the third position in fiscal potential in the period 2011-2012 to

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2013-2014. Inspite of the first position in all the three periods Uttar Pradesh is putting less effort in utilizing their resources.

In the second reference period, the highest tax effort index is observed for Gujarat at 477. In all the three different periods Maharashtra, Assam, Goa, Madhya Pradesh, Uttar Pradesh and Orissa have made a substantial effort in utilizing their State resources.

Motor vehicle tax is the fourth tax which the present research has under taken for estimating fiscal capacity and tax efforts. For getting significant result the study uses the total number of registered vehicle as a proxy for computing fiscal potential of different States. As mentioned in chapter 5 that an attempt has also been made by taking alternative potential bases, but unfortunately the fit was not good. The results of this tax are given in Appendices A.5.33, 34, 35 and 36 for three periods. Bihar, Karnataka and Orissa stand first, second and third rank, respectively in all the reference periods for their better performance except Karnataka which has made the maximum effort in the second study period. Punjab, Gujarat and Haryana made least efforts in utilizing potential base.

The second last tax is electricity duty here; in this tax an attempt was also made with different potential bases to fit the equation separately for electricity duty. Unfortunately, the fit was not good. For significant result total consumption has been taken as a potential base. For this purpose, the State-wise electricity consumptions have been obtained from the reports on energy sources, Ministry of Power.

The tax effort in the case of electricity duty is reflection of tax efforts as well as the timeliness of the remittance of revenue collected by the State Electricity Boards (SEBs) to their respective governments. It can be seen from the appendices A.5.37. 38, 39 and 40 that top three States stand out in terms of tax effort with respect to this tax in 2005-08 are: Gujarat (308), Bihar (252) and Madhya Pradesh (246). Gujarat and Bihar slipped to third and fifth rank respectively in the third reference year. Madhya Pradesh achieved the first rank in the second period and then again fell to the second rank. In terms of aggregate effort in this tax the worst performers are: Andhra Pradesh (23), Kerala (24) and Uttar Pradesh (38).

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State excise duty is the last tax for which the fiscal capacity and effort has been estimated for 16 major States. For this duty, either the total value of consumption of liquor and narcotics or the total quantities of consumption of various goods subject to state excise duty could be taken as the potential base. Due to non-availability of complete data GSDP is chosen as a proxy base for this duty. The results of excise duty as given in the appendices A.5.41, 42, 43, and 44 indicate that Andhra Pradesh exhibits the best tax effort with a tax effort index of 324 and 388 in the first two periods, Karnataka ranked first in the third period. Gujarat exhibits the lowest tax effort index of only 3,2, and 2 in the three periods respectively, which is mainly due to ban on consumption of alcohol in the State. The Other States with relatively high tax effort in the aggregate period includes Karnataka (310), Tamil Nadu (223), Madhya Pradesh (201), Punjab (180) and Uttar Pradesh (175). While, the laggards include: Assam (53), West Bengal (58), Goa (72) and Orissa (86).

The total fiscal capacity and tax efforts of all the 16 States with their respective ranks have been computed for three different study periods. It has been found that in all the 16 States Andhra Pradesh is the only State which ranks first in tax effort in all the three periods and having rank sixth in terms of revenue potential except for the first study period in which it is ranked seventh. Maharashtra is having a highest fiscal capacity of Rs. 3740764 lakh but put less effort in mobilizing the resources of the State. In the third study period, Maharashtra has performed very poor and achieved the eleventh rank in the index of tax effort. Goa is having least fiscal potential and ranked sixteenth in all the three different periods not only in fiscal potential but Goa is also ranked least in terms of tax effort and having tax effort in the three periods- 89, 80 and 97 respectively.

West Bengal is the State which is putting least effort in utilizing their resources inspite of having good fiscal capacity. High income States like Goa and Gujarat are also not giving their best in terms of putting efforts in these different reference years.

For getting overall performance picture of tax potential and effort for the period: 2005-2006 to 2013-2014. To estimate the taxable capacity of all taxes for a particular State, the study adds up the revenue of each and its independent variables. The tax effort varies from 167 percent to 79 percent. From the total 16 States, six States are not putting their cent percent effort in exploiting the potential base. Here also middle

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Income State Andhra Pradesh ranks first but West Bengal ranks 16th in tax effort. High Income State such as Goa and Punjab unable to achieve even hundred percent level and they are below the average degree of exploitation.

Tax effort index and net contribution for each tax to total tax effort in all the different States are also computed. From net contribution one can easily know the extent of positive or negative contribution by each State.

Gujarat and Haryana both States are doing well in putting their efforts. Gujarat is contributing 8.53 percent and Haryana 10.44 percent above the average level performance.

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All the taxes except excise duty and stamp duty registration fee in Orissa are having a positive signs. Overall, Net contribution made by the Orissa is 17.62 percent above the average level.

Ranks obtained by the States on fiscal capacity and tax effort index, recorded marginal changes, by one or two places in the three different study periods, except for

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few States whose ranks are declined and increased substantially. The States are also ranked according to their estimated taxable capacity and tax effort. It may be seen from the study that in the year 2005-08, Uttar Pradesh, and Madhya Pradesh emerges as a State having highest taxable capacity and making highest tax effort. But during 2008-2014 Karnataka and Uttar Pradesh has put more tax effort with high fiscal potential. Again, it’s been observed that West Bengal, Tamil Nadu and Maharashtra are the States having high capacity but made low efforts in mobilizing their resources. In the first reference year Haryana and Orissa has made high tax effort inspite of low fiscal capacity. But in the third and fourth study period Orissa and Kerala are making more efforts. Bihar, Assam and Goa are the three States which made low tax efforts and have low fiscal capacity. The present research also computed net contribution by each State to total tax effort in different States. Ten States are having positive contribution to the States. Six States has made negative contribution. West Bengal is the State with significantly below average performance. It is seen that its performance is 22.41 percent below average. Andhra Pradesh is the best performer in all the State in terms of net contribution and its performance is 72.10 percent above the average performance.

In the final concluding remark it can be said that over the years transfers from Finance Commissions are increased year after year but the tax effort made by the States except few States is more or less static. The fiscal capacity of the States is increasing over the years but States are not utilizing their potential base and thus making less tax efforts. The States who have lower rank their revenue is less than fiscal capacity. Therefore, if the States want to enhance actual revenue they should put more efforts in utilizing their resources as compared to other States.

Suggestions

For transfers to operate without creating moral hazard, it is necessary to integrate the revenue side so that the revenue-gap can be assessed objectively. Therefore, while all revenue transfers should be brought under the purview of the Finance Commission, the Planning Commission should keep its focus on investment planning and developing the physical infrastructure in the economy, as was originally indented (The role of Planning Commission has changed after the formulation of NITI Ayog).

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No, doubt population factor which has been taken into account by the successive Finance Commissions represents fiscal needs of the States. But it must be noted that population itself is not a satisfactory index of the need for the States. Therefore, some other factors representing true fiscal needs of the State like economic backwardness and poverty should be taken as the criteria of devolution of funds to States. The formula for fiscal devolution should maintain a proper balance between need, backwardness and fiscal performance. A larger weight to tax effort by States in the devolution formula would improve the tax effort at the State level-thus increasing the amount of resources the States would collect on their and citeris-paribus, increasing the amount of resources to be transferred from the Centre to the States. Also, while using tax-effort as a criterion for inter-se sharing of taxes, Finance Commission should use values such as estimated normative tax effort. Lack of effective co- ordination between Finance Commission and the Planning Commission makes it possible for a State to underplay its resources availability before the Finance Commission but preset a different picture before the Planning Commission to obtain approval for its plan of a size not matched by available funds. It is imperative to better co-ordination between the Finance Commission and the Planning Commission with both institutions having clarity in their roles. It might also be desirable to have uniform devolution rules for Finance Commission and Planning Commission transfers. Over a long period of its operations the federal transfer system, in spite of being progressive, has not been able to make any major impact on inter-State disparities, even though the most of the backward States by and large, have not been found lacking in self-help. The inter-State disparities can be reduced only when federal transfers are in accordance with the relative fiscal capacity of the States. So there is need to restructure federal transfers on the basis of ‘equity with incentives’.

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157

Appendices Appendix Tables A.3.1: Taxes within the Jurisdiction of the Union Government as Contained in List-I of the Seventh Scheduled of the Constitution

S. No. Entry No. Description of the Tax/Duty in List-I 1. 82 Taxes on income other than agricultural income. 2. 83 Duties of customs including export duties. 3. 84# Duties of excise on tobacco and other goods manufactured or produced in India 4. 85 Corporation tax. 5. 86 Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies. 6. 87 Estate duty in respect of property other than agricultural land. 7. 88 Duties in respect of succession to property other than agricultural land. 8. 89 Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freights. 9. 90 Taxes other than stamp duties on transactions in stock exchanges and futures markets. 10. 91 Rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts. 11. 92 Taxes on the sale or purchase of newspapers and on advertisements published therein. 12. 92A* Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter- State trade or commerce. 13. 92B** Taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce. 14. 92C*** Taxes on services. 15. 97 Any tax not enumerated in the List-II or List-III of the Seventh Schedule Source: Government of India, Constitution of India, Ministry of Law. # except alcoholic liquors for human consumption; (b) opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry. *Inserted by the Constitution (Sixth Amendment) Act, 1956, **Inserted by the Constitution (Sixth Amendment) Act, 1956, ***Inserted by the Constitution (Sixth Amendment) Act, 1956.

158

A.3.2: Taxes within the Jurisdiction of the State Governments as Contained in List-II of the Seventh Scheduled of the Constitution

S. No. Entry No. Description of the Tax/Duty in List-I 1. 45 Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for revenue purposes and records of rights and alienation of revenues. 2. 46 Taxes on agricultural income. 3. 47 Duties in respect of succession to agricultural land. 4. 48 Estate duty in respect of agricultural land. 5. 49 Taxes on lands and buildings. 6. 50 Taxes on mineral rights subject to any limitations imposed by Parliament by law relating to mineral development. 7. 51 Duties of excise on alcoholic liquors and narcotics manufactured or processed in the State but not including medicinal and toilet preparations containing alcohol. 8. 52 Taxes on the entry of goods into a local area for consumption, use or sale therein. 9. 53 Taxes on the consumption or sale of electricity. 10. 54* Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I 11. 55** Taxes on advertisements other than advertisements published in the newspapers and advertisements broadcast by radio or television. 12. 56 Taxes on goods and passengers carried by road or on in land waterways. 13. 57 Taxes on vehicles, whether mechanically propelled or not, suitable for use on roads, including tramcars subject to the provisions of entry 35 of List III. 14. 58 Taxes on animals and boats. 15. 59 Tolls. 16. 60*** Taxes on professions, trades, callings and employments. 17. 61 Capitation taxes. 18. 62 Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling. 19. 63 Rates of stamp duty in respect of documents other than those specified in the provisions of List I with regard to rates of stamp duty. Source: Government of India, Constitution of India, Ministry of Law. *Substituted by the constitution (sixth amendment), Act, 1956. **The words ‘and advertisements broadcast by radio or television’ inserted by the constitution (forty-second Amendment) Act, 1976 ***The scope of these taxes is spelt out in Article 276, the clause (2) of which fixes the amount payable by a person on account of these taxes.

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A.3.3: States’ Share of Central Taxes as Recommended by the Thirteenth and Fourteenth Finance Commissions-(I)

Inter Se Share in Shareable Taxes other than States’ Share in Shareable Union Taxes (%) Estimated Devolution of States Service tax(%) Central Taxes*(Rs. Billion) ThFC FFC Variation ThFC FFC Variation Rank of F FFC (2014-15 to 2019-20) (A) (B) (C)=(B-A) (D) (E) (F)=(E-D) (G) (H) Andhra Pradesh 4.044 4.305 0.261 1.294 1.808 0.514 7 1700 Arunachal Pradesh 0.328 1.370 1.042 0.105 0.575 0.470 9 541 Assam 3.628 3.311 -0.317 1.161 1.391 0.230 16 1307 Bihar 10.917 9.665 -1.252 3.493 4.059 0.566 6 3816 Chhattisgarh 2.470 3.080 0.610 0.790 1.294 0.503 8 1216 Goa 0.266 0.378 0.112 0.085 0.159 0.074 28 149 Gujarat 3.041 3.084 0.043 0.973 1.295 0.322 13 1218 Haryana 1.048 1.084 0.036 0.335 0.455 0.120 19 428 Himachal Pradesh 0.781 0.713 -0.068 0.250 0.299 0.050 29 282 Jammu & Kashmir 1.551 1.854 0.303 0.496 0.779 0.282 15 732 Jharkhand 2.802 3.139 0.337 0.897 1.318 0.422 11 1239 Karnataka 4.328 4.713 0.385 1.385 1.979 0.595 5 1861 Kerala 2.341 2.500 0.159 0.749 1.050 0.301 14 987 Madhya Pradesh 7.120 7.548 0.428 2.278 3.170 0.892 2 2980 Maharashtra 5.199 5.521 0.322 1.664 2.319 0.655 4 2180 Manipur 0.451 0.617 0.166 0.144 0.259 0.115 20 244 Meghalaya 0.408 0.642 0.234 0.131 0.270 0.139 18 253 Mizoram 0.269 0.460 0.191 0.086 0.193 0.107 22 182 Nagaland 0.314 0.498 0.184 0.100 0.209 0.109 21 197 Orissa 4.779 4.642 -0.137 1.529 1.950 0.420 12 1833 Punjab 1.389 1.577 0.188 0.444 0.662 0.218 17 623 Rajasthan 5.853 5.495 -0.358 1.873 2.308 0.435 10 2170 Sikkim 0.239 0.367 0.128 0.076 0.154 0.078 27 145 Tamil Nadu 4.969 4.023 -0.946 1.590 1.690 0.100 24 1588 Telangana 2.893 2.437 -0.456 0.926 1.024 0.098 25 962 Tripura 0.511 0.642 0.131 0.164 0.270 0.106 23 253 Uttar Pradesh 19.677 17.959 -1.718 6.297 7.543 1.246 1 7091 Uttarakhand 1.120 1.052 -0.068 0.358 0.442 0.083 26 415 West Bengal 7.264 7.324 0.060 2.324 3.076 0.752 3 2892 Total States 100.0 100.0 0.0 32.0 42.0 10.0 39482 Source: Finance Commission Reports

160

A.3.4: States’ Share of Central Taxes as Recommended by the Thirteenth and Fourteenth Finance Commissions-(II)

States Grants Central Tax devolution Total Transfers % of Total Growth over ThFC (Rs. Billion) (Rs. Billion) (Rs. Billion) FFC Transfers ThFC FFC ThFC FFC ThFC FFC Andhra Pradesh + 135.32^ 467.16 981.67 2,661.87 1116.99 3129.03 7.0% 180% Telangana^ Arunachal Pradesh 43.48 13.23 46.39 540.90 89.87 554.13 1.2% 517% Assam 52.12 120.52 513.40 1307.24 565.52 1427.76 3.2% 152% Bihar 146.03 260.26 1544.87 3815.92 1,690.90 4,076.18 9.1% 141% Chhattisgarh 61.76 80.28 349.53 1216.04 411.29 1296.32 2.9% 215% Goa 5.16 3.72 37.64 149.24 42.80 152.96 0.3% 257% Gujarat 96.83 185.46 430.34 1,217.62 527.17 1,403.08 3.1% 166% Haryana 42.71 74.92 148.29 427.98 191.00 502.90 1.1% 163% Himachal Pradesh 103.64 438.09 110.51 281.51 214.15 719.60 1.6% 236% Jammu & Kashmir 202.56 657.03 189.42 731.99 391.98 1,389.02 3.1% 254% Jharkhand 72.38 97.70 396.51 1,239.34 468.89 1,337.04 3.0% 185% Karnataka 116.02 165.20 612.47 1,860.78 728.49 2,025.98 4.5% 178% Kerala 63.72 181.20 331.28 987.05 395.00 1,168.25 2.6% 196% Madhya Pradesh 133.25 230.97 1007.55 2,980.09 1,140.80 3,211.06 7.2% 181% Maharashtra 163.03 348.25 735.72 2,179.79 898.75 2,528.04 5.6% 181% Manipur 70.26 107.01 63.82 243.60 134.08 350.61 0.8% 161% Meghalaya 39.24 19.23 57.75 253.47 96.99 272.70 0.6% 181% Mizoram 49.04 123.87 38.06 181.62 87.10 305.49 0.7% 251% Nagaland 91.91 186.52 44.42 196.62 136.33 383.14 0.9% 181% Orissa 96.59 143.41 676.29 1,832.75 772.88 1976.16 4.4% 156% Punjab 55.40 84.82 196.56 622.63 251.96 707.45 1.6% 181% Rajasthan 129.50 236.31 828.26 2,169.53 957.76 2,405.84 5.4% 151% Sikkim 10.59 3.52 33.83 144.90 44.42 148.42 0.3% 234% Tamil Nadu 113.67 203.87 703.16 1,588.36 816.83 1,792.23 4.0% 119% Tripura 57.16 58.17 72.31 253.47 129.47 311.64 0.7% 141% Uttar Pradesh 267.43 493.82 2784.51 7,090.55 3,051.94 7584.37 16.9% 149% Uttarakhand 40.63 37.41 158.50 415.35 199.13 452.76 1.0% 127% West Bengal 126.39 351.60 1027.94 2,891.65 1,154.33 3,243.25 7.2% 181% All States 2,585.80 5,373.53 14,121.00 39,482 16,706.80 44,855.39 100% 168% Source: Finance Commission reports^ Computed jointly, since Telangana did not receive separate grants under the ThFC. Telangana has, however, received its share in Central tax devolution as per 2014-15 RE

161

A.3.5: Share of States in Total Transfers by Finance Commissions

Rs Crore States 10 FC 11 FC 12 FC 13 FC 14 FC 10 FC 11 FC 12 FC 13 FC 14 FC Andhra Pradesh 18081.5 30443.28 49879.63 111699 312903 7.98 7.00 6.60 6.69 6.98 Assam 8328.1 13047.12 24184.06 56552 142776 3.67 3.00 3.20 3.38 3.18 Bihar 24655.6 55667.71 76330.95 169090 407618 10.88 12.80 10.10 10.12 9.09 Goa 622.2 869.808 1511.504 4280 15296 0.27 0.20 0.20 0.26 0.34 Gujarat 8875.6 11742.41 25695.57 52717 140308 3.92 2.70 3.40 3.16 3.13 Haryana 2793.1 4349.04 8313.272 19100 50290 1.23 1.00 1.10 1.14 1.12 Karnataka 10520.8 19570.68 31741.58 72849 202598 4.64 4.50 4.20 4.36 4.52 Kerala 7721.8 12177.31 19649.55 39500 116825 3.41 2.80 2.60 2.36 2.60 Madhya Pradesh 16094 34357.42 46856.62 114080 321106 7.10 7.90 6.20 6.83 7.16 Maharashtra 13709.1 19135.78 36276.1 89875 252804 6.05 4.40 4.80 5.38 5.64 Orissa 9706.5 20440.49 37031.85 77288 197616 4.28 4.70 4.90 4.63 4.41 Punjab 3589.5 5653.752 12847.78 25196 70745 1.58 1.30 1.70 1.51 1.58 Rajasthan 11400.9 23484.82 39299.1 95776 240584 5.03 5.40 5.20 5.73 5.36 Tamil Nadu 13360.5 21310.3 37031.85 81683 179223 5.89 4.90 4.90 4.89 4.00 Uttar Pradesh 36158.9 76978.01 133768.1 305194 758437 15.95 17.70 17.70 18.27 16.91 West Bengal 14980.5 35227.22 51391.14 115433 324325 6.61 8.10 6.80 6.91 7.23 Arunachal Pradesh 1768.4 2609.424 3778.76 8987 55413 0.78 0.60 0.50 0.54 1.24 Chhattisgarh 0 0 18138.05 41129 129632 0.00 0.00 2.40 2.46 2.89 Himachal Pradesh 4761.7 2609.424 13603.54 21415 71960 2.10 0.60 1.80 1.28 1.60 Jammu & Kashmir 7322.1 10437.7 20405.3 39198 138902 3.23 2.40 2.70 2.35 3.10 Jharkhand 0 0 23428.31 46889 133704 0.00 0.00 3.10 2.81 2.98 Manipur 2136.6 14786.74 6801.768 13408 35061 0.94 3.40 0.90 0.80 0.78 Meghalaya 1888.9 3479.232 4534.512 9699 27270 0.83 0.80 0.60 0.58 0.61 Mizoram 1802 2609.424 4534.512 8710 30549 0.80 0.60 0.60 0.52 0.68 Nagaland 2793 3044.328 6801.768 13633 38314 1.23 0.70 0.90 0.82 0.85 Sikkim 698.9 4783.944 1511.504 4442 14842 0.31 1.10 0.20 0.27 0.33 Tripura 2873.2 3044.328 8313.272 12947 31164 1.27 0.70 1.10 0.77 0.69 Uttarakhand 0 3044.328 12092.03 19913 45276 0.00 0.70 1.60 1.19 1.01 Total 226643 434904 755752 1670682 4485541 100.00 100.00 100.00 100.00 100.00 Source: Finance Commission Reports

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A.5.1: Stamp Duty and Registration Fees Rs. Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 201345 286539 308606 265496.7 293099 263863 383357 313439.7 438525 511524 641440 530496.3 Pradesh Assam 50529 9732 10991 23750.67 11116 10845 12284 11415 17515 25229 28509 23751 Bihar 31280 45502 65415 47399 71619 99790 109868 93759 148007 217302 320000 228436.3 Goa 6049 11592 11759 9800 11537 11125 15179 12613.67 18379 52442 54736 41852.33 Gujarat 115316 142503 201843 153220.7 172850 255672 366624 265048.7 467027 442693 500000 469906.7 Haryana 133973 176498 176328 162266.3 132639 129357 231928 164641.3 279300 332625 342500 318141.7 Karnataka 221220 320580 340883 294227.7 292672 262757 353108 302845.7 462320 522502 650000 544940.7 Kerala 110142 151993 202797 154977.3 200299 189641 255249 215063 298656 293837 317327 303273.3 Madhya 100948 125110 153154 126404 147929 178315 251427 192557 328441 394424 400000 374288.3 Pradesh Maharashtra 526586 641572 854957 674371.7 828763 1077365 1351599 1085909 1440749 1754825 1885000 1693525 Orissa 23606 26049 40476 30043.67 49566 35996 41582 42381.33 49815 54488 62000 55434.33 Punjab 167050 180394 156784 168076 173029 155094 231846 186656.3 307913 292049 251000 283654 Rajasthan 103180 129368 154435 128994.3 135663 136294 194105 155354 265138 333487 335000 311208.3 Tamil Nadu 208486 299746 380474 296235.3 379368 366216 465059 403547.7 658079 764540 922198 781605.7 Uttar Pradesh 299678 451367 397668 382904.3 413827 456223 597466 489172 769440 874217 1006525 883394 West Bengal 117759 125857 141696 128437.3 150949 181422 226521 186297.3 273168 435723 449906 386265.7 Source: Various Issues of State Finances, RBI

163

A.5.2: Gross State Domestic Product Rs. Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 14760600 17406400 21236100 17801033 23738300 27332700 31986400 27685800 36224500 41006800 46418400 41216567 Pradesh Assam 5938500 6469200 7107600 6505100 8107400 9597500 11268800 9657900 12590300 13840100 15946000 14125467 Bihar 8249000 10073700 11368000 9896900 14227900 16292300 20355500 16958567 24326900 29361600 34366300 29351600 Goa 1432700 1652300 1956500 1680500 2541400 2912600 3360500 2938166.7 4325500 4240700 4889700 4485300 Gujarat 24473600 28369300 32928500 28590467 36791200 43126200 52151900 44023100 59878600 65854000 76563800 67432133 Haryana 10888500 12873200 15159600 12973767 18252200 22360000 26062100 22224767 29868800 34135100 38891700 34298533 Karnataka 19590400 22723700 27062900 23125667 31031200 33755900 41070300 35285800 45521200 51910900 58275400 51902500 Kerala 13684200 15378500 17514100 15525600 20278300 23199900 26377300 23285167 31267700 34784100 39628200 35226667 Madhya 12427600 14457700 16147900 14344400 19727600 22755700 26339600 22940967 30515800 36127000 43473000 36705267 Pradesh Maharashtra 48676600 58449800 68481700 58536033 75396900 85575100 104915000 88629000 117541900 132376800 147623300 132514000 Orissa 8509600 10183900 12927400 10540300 14849100 16294600 19753000 16965567 22058900 25122000 27298000 24826300 Punjab 10863700 12712300 15224500 12933500 17403900 19750000 22620400 19924767 25637400 28516500 31705400 28619767 Rajasthan 14223600 17104300 19482200 16936700 23094900 26582500 33834800 27837400 41417900 47017800 51761500 46732400 Tamil Nadu 25783300 31052600 35081900 30639267 40133600 47973300 58489600 48865500 66720200 74485900 85423800 75543300 Uttar 29317200 33631700 38302600 33750500 44468500 52339400 60028600 52278833 68549600 78039900 86274600 77621367 Pradesh West 23024500 26168200 29948300 26380333 34194200 39888000 46095900 40059367 52831600 60331100 70656100 61272933 Bengal Source: Data Book for Planning Commission

164

A.5.3: Urbanization Rs. Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 219.35 222.05 224.7 222.03 227.3 229.86 232.38 229.85 234.87 237.32 239.73 237.31 Pradesh Assam 38.71 39.83 40.97 39.84 42.13 43.3 44.49 43.31 45.71 46.96 48.22 46.96 Bihar 93.59 95.2 96.78 95.19 98.33 99.85 101.34 99.84 102.8 104.23 105.62 104.22 Goa 7.72 8.08 8.48 8.09 8.93 9.41 9.89 9.41 10.34 10.79 11.24 10.79 Gujarat 208.64 213.51 218.39 213.51 223.28 228.18 233.1 228.19 238.03 242.98 247.94 242.98 Haryana 70.39 72.81 75.27 72.82 77.78 80.34 82.93 80.35 85.56 88.23 90.94 88.24 Karnataka 195.99 200.12 204.26 200.12 208.42 212.59 216.77 212.59 220.98 225.2 229.44 225.21 Kerala 85.08 85.65 86.21 85.65 86.75 87.27 87.78 87.27 88.26 88.72 89.17 88.72 Madhya 175.67 179.69 183.7 179.69 187.72 191.75 195.79 191.75 199.86 203.93 208.02 203.94 Pradesh Maharashtra 453.59 464.56 475.65 464.60 486.88 498.21 509.6 498.23 521 532.44 543.95 532.46 Orissa 60.35 61.66 62.98 61.66 64.3 65.63 66.96 65.63 68.32 69.68 71.05 69.68 Punjab 91.98 94.39 96.83 94.40 99.3 101.8 104.3 101.80 106.81 109.32 111.85 109.33 Rajasthan 144.23 147.25 150.25 147.24 153.26 156.25 159.22 156.24 162.15 165.05 167.92 165.04 Tamil Nadu 311.4 320.63 329.88 320.64 339.18 348.5 357.8 348.49 367.08 376.34 385.6 376.34 Uttar Pradesh 381.98 391.46 401.06 391.50 410.8 420.66 430.6 420.69 440.6 450.68 460.86 450.71 West Bengal 237.44 240.52 243.52 240.49 246.42 249.26 252.07 249.25 254.89 257.69 260.45 257.68 Source: National Commission on Population

165

A.5.4: Sales Tax Rs. Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra Pradesh 1254161 1546708 1902649 1567839 2185166 2364022 2914485 2487891 3491001 4071467 5250000 4270823 Assam 256841 278324 269144 268103 311057 353526 431860 365481 569396 622313 683505 625071.3 Bihar 173359 208148 253479 211662 301647 383929 455718 380431.3 747636 867079 1232404 949039.7 Goa 74331 84482 87928 82247 113164 114213 138005 121794 165292 157747 176600 166546.3 Gujarat 1056134 1281746 1510454 1282778 1681065 1819979 2489346 1996797 3120231 3946467 4530000 3865566 Haryana 560445 685324 772098 672622.3 815473 903237 1108201 942303.7 1338369 1537658 1740000 1538676 Karnataka 986954 1176172 1389399 1184175 1462273 1583267 2023469 1689670 2502002 2841444 3284981 2876142 Kerala 703797 856331 937176 832434.7 1137713 1277089 1583311 1332704 1893883 2251109 2666367 2270453 Madhya Pradesh 450842 526141 604507 527163.3 684299 772382 1025676 827452.3 1251673 1485630 1650000 1462434 Maharashtra 1967674 2413073 2675280 2352009 3068053 3267602 4248272 3527976 5059636 6007972 6392250 5819953 Orissa 301172 376482 411843 363165.7 480334 540876 680680 567296.7 819685 968468 1109500 965884.3 Punjab 462688 482902 534249 493279.7 643562 757749 1001691 801000.7 1117167 1321793 1674960 1371307 Rajasthan 559364 672071 775074 668836.3 890450 1016353 1262959 1056587 1576643 1857465 2175000 1869703 Tamil Nadu 1555469 1772716 1815636 1714607 2067470 2266152 2861423 2398348 3628890 4404113 5868992 4633998 Uttar Pradesh 1128467 1327882 1502310 1319553 1748205 2082518 2483652 2104792 3310734 3487016 4189917 3662556 West Bengal 610877 707902 806046 708275 895509 1050964 1327577 1091350 1588841 1855476 2344265 1929527 Source: Various Issues of State Finances, RBI

166

A.5.5: Share of Manufacturing in State Domestic Product Rs Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra Pradesh 1599791 1819059 2227295 1882048 2472022 2648972 2957768 2692921 3943522 3877944 4157083 3992850 Assam 565727 616758 609499 597328 608148 772464 1021453 800688.3 1061466 1062523 1131625 1085205 Bihar 425587 485581 642928 518032 836347 828093 1104579 923006.3 1081805 1175089 1275006 1177300 Goa 417966 462785 507109 462620 626249 716616 759297 700720.7 1373266 1478958 1555677 1469300 Gujarat 6953800 8072600 9049800 8025400 10004300 12693700 13502831 12066944 15320228 16995530 18236120 16850626 Haryana 2285997 2585538 2918529 2596688 3348017 4275333 4878675 4167342 5212784 5721845 6044695 5659775 Karnataka 3338519 4367417 4845468 4183801 5776686 5529466 6262942 5856365 7000882 7462699 7853302 7438961 Kerala 1092095 1229466 1508223 1276595 1735690 1756980 2047096 1846589 2242856 2407915 2604175 2418315 Madhya Pradesh 1391309 1890980 2106421 1796237 2642026 2877484 3022513 2847341 3376921 3643319 3812125 3610788 Maharashtra 11302552 14007920 16234158 13848210 16718398 17995944 22084042 18932795 22833874 24208342 24678356 23906857 Orissa 987853 1324602 1848687 1387047 2227942 2130547 2463985 2274158 2722663 2782878 2874230 2793257 Punjab 1661075 2215474 2833615 2236721 2989412 3439324 3959501 3462746 4207755 4487033 4724749 4473179 Rajasthan 1827344 2417988 2619139 2288157 3097853 3594075 3643540 3445156 5608175 5963513 5884610 5818766 Tamil Nadu 5137870 6455923 6832916 6142236 7169544 9481731 11276889 9309388 12271929 13126060 14125854 13174614 Uttar Pradesh 3834666 4882888 5598851 4772135 5492587 6538726 7523203 6518172 7989038 8545868 8942911 8492606 West Bengal 2351385 2802339 3332666 2828797 3619888 4115393 4634805 4123362 4867283 5249741 5804235 5307086 Source: Data Book for Planning Commission

167

A.5.6: Total Annual Household Expenditure Rs Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 19449526 20432409 23385142 21089026 NA 34982761 NA 34982761 42292500 NA NA 42292500 Pradesh Assam 6802824 7287364 8969598 7686595 NA 9992013 NA 9992013 11686664 NA NA 11686664

Bihar 12513757 15560543 21112144 16395481 NA 23341560 NA 23341560 28126354 NA NA 28126354

Gujarat 11802364 14857474 15941487 14200442 NA 21096289 NA 21096289 28005129 NA NA 28005129

Haryana 5311871 6692164 7721242 6575092 NA 11502194 NA 11502194 16357143 NA NA 16357143

Karnataka 11663431 12322597 17173150 13719726 NA 21684563 NA 21684563 30930485 NA NA 30930485

Kerala 10463306 11798270 13510849 11924142 NA 17493434 NA 17493434 22550652 NA NA 22550652 Madhya 11707452 12297261 15042763 13015825 NA 34255457 NA 34255457 25228781 NA NA 25228781 Pradesh Maharashtra 25638664 31271994 33389132 30099930 NA 30608340 NA 30608340 60055532 NA NA 60055532

Orissa 6348785 7214326 9504352 7689154 NA 11467245 NA 11467245 13491204 NA NA 13491204

Punjab 7911106 8890463 9316732 8706100 NA 12341873 NA 12341873 16383860 NA NA 16383860

Rajasthan 12742716 14853375 16001825 14532638 NA 22764420 NA 22764420 30196769 NA NA 30196769

Tamil Nadu 14526799 15404203 17800389 15910463 NA 24992796 NA 24992796 33428251 NA NA 33428251

Uttar Pradesh 32496119 36967629 41124544 36862764 NA 58542142 NA 58542142 73902062 NA NA 73902062

West Bengal 39928497 20681575 22482605 27697559 NA 31037697 NA 31037697 39668544 NA NA 39668544 Source: NSSO

168

A.5.7 (A): Land Revenue and Agricultural Income Tax-(I) Rs. Lakhs Land Revenue Agricultural Income Tax Land Revenue and Agricultural Income Tax States/Year 2005-06 2006-07 2007-08 2005-06 2006-07 2007-08 2005-06 2006-07 2007-08 Average Andhra 6875 11350 14439 NA NA NA 6875 11350 14439 10888 Pradesh Assam 7465 7415 7976 702 252 314 8167 7667 8290 8041.33 Bihar 5502 7465 8210 NA NA NA 5502 7465 8210 7059 Goa 508 623 719 NA NA NA 508 623 719 616.67 Gujarat 38023 49871 68309 NA NA NA 38023 49871 68309 52067.67 Haryana 1312 1299 938 NA NA NA 1312 1299 938 1183.00 Karnataka 11650 14531 162 NA 304 11812 0 14835 8882.33

Kerala 4388 4701 4721 615 963 2205 5003 5664 6926 5864.33 Madhya 7716 13221 12915 NA NA NA 7716 13221 12915 11284 Pradesh Maharashtra 42897 48417 51222 NA NA NA 42897 48417 51222 47512 Orissa 6962 22638 27615 NA NA NA 6962 22638 27615 19071.67 Punjab 1629 1527 1731 NA NA NA 1629 1527 1731 1629 Rajasthan 8430 11671 15529 NA NA NA 8430 11671 15529 11876.67 Tamil Nadu 17948 12068 7803 13 7 11 17961 12075 7814 12616.67 Uttar 10869 18752 39253 NA NA NA 10869 18752 39253 22958 Pradesh West Bengal 91711 95269 103958 150 107 -260 91861 95376 103698 96978.33 Source: Various Issues of State Finances, RBI

169

A.5.7 (B): Land Revenue and Agricultural Income Tax-(II) Rs. Lakhs Land Revenue Agricultural Income Tax Land Revenue and Agricultural Income Tax States/Year 2008-09 2009-10 2010-11 2008-09 2009-10 2010-11 2008-09 2009-10 2010-11 Average Andhra 13035 22156 17074 NA NA NA 13035 22156 17074 17421.66 Pradesh Assam 11336 11691 14187 1818 7834 10120 13154 19525 24307 18995.33 Bihar 10174 12396 13902 NA NA NA 10174 12396 13902 12157.33 Goa 939 1061 832 NA NA NA 939 1061 832 944 Gujarat 54350 116120 178879 NA NA NA 54350 116120 178879 116449.67 Haryana 858 943 1002 NA NA NA 858 943 1002 934.33 Karnataka 25565 12788 17753 928 870 933 26493 13658 18686 19612.33 Kerala 4756 5393 5597 1197 2773 4697 5953 8166 10294 8137.67 Madhya 33884 18003 36081 NA NA NA 33884 18003 36081 29322.67 Pradesh Maharashtra 54622 71404 109498 NA NA NA 54622 71404 109498 78508 Orissa 34879 29217 39066 NA NA NA 34879 29217 39066 34387.33 Punjab 1544 1531 1924 NA NA NA 1544 1531 1924 1666.33 Rajasthan 16252 14766 22217 NA NA NA 16252 14766 22217 17745 Tamil Nadu 20773 11666 11328 1 NA 1 20774 11666 11329 14589.67 Uttar 54928 66314 113416 NA NA NA 54928 66314 113416 78219.33 Pradesh West Bengal 98378 92892 125366 351 886 1585 98729 93778 126951 106486 Source: Various Issues of State Finances, RBI

170

A.5.7 (C): Land Revenue and Agricultural Income Tax-(III) Rs Lakhs Land Revenue Agricultural Income Tax Land Revenue and Agricultural Income Tax States/Year 2011-12 2012-13 2013-14 2011-12 2012-13 2013-14 2011-12 2012-13 2013-14 Average Andhra 14056 6178 4986 NA NA NA 14056 6178 4986 8406.67 Pradesh Assam 13971 14591 13899 8327 8233 8644 22298 22824 22543 22555 Bihar 16749 20545 20500 NA NA NA 16749 20545 20500 19264.67 Goa 838 1113 38843 NA NA NA 838 1113 38843 13598 Gujarat 147718 220785 204120 NA NA NA 147718 220785 204120 190874.33 Haryana 1095 1298 1300 NA NA NA 1095 1298 1300 1231 Karnataka 21493 20492 19160 1504 2226 2500 22997 22718 21660 22458.33 Kerala 6075 12158 14356 4286 1892 2234 10361 14050 16590 13667 Madhya 27906 44359 57200 NA NA NA 27906 44359 57200 43155 Pradesh Maharashtra 96381 107402 122777 NA NA NA 96381 107402 122777 108853.33 Orissa 52147 42021 40000 NA NA NA 52147 42021 40000 44722.67 Punjab 2465 3713 5000 NA NA NA 2465 3713 5000 3726 Rajasthan 20901 30456 36576 NA NA NA 20901 30456 36576 29311 Tamil Nadu 8721 13131 16337 -40 NA -249 8681 13131 16088 12633.33 Uttar 49068 80464 76097 NA NA NA 49068 80464 76097 68543 Pradesh West Bengal 187223 202372 269440 1088 1220 1300 188311 203592 270740 220881 Source: Various Issues of State Finances, RBI 171

A.5.8: GSDP from Agriculture Rs Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra Pradesh 3280413 3633146 4799822 3904460 5349301 6661466 7395672 6468813 7927319 9562978 10711198 9400498 Assam 1427998 1434835 1557501 1473444 1752517 2127696 2455091 2111768 2536624 2670510 3148299 2785144 Bihar 2082723 2714782 2704872 2500792 3665967 3547540 4741478 3984995 5798081 7140334 7253667 6730694 Goa 84062 76244 84486 81597 90531 94924 103919 96458 125698 136116 158676 140163 Gujarat 3532300 4207500 5107700 4282500 5108800 5870700 9401448 6793649 11094668 10150280 14214101 11819683 Haryana 2175379 2735729 3219437 2710181 4013723 4444567 5165501 4541264 5907442 6427406 7400608 6578485 Karnataka 3258811 3326756 3902162 3495909 4061267 4679203 6244015 4994828 6198503 6652655 6491849 6447669 Kerala 1894914 2082101 2221633 2066216 2492744 2574835 3401238 2822939 4037910 4028847 4309647 4125468 Madhya Pradesh 3058330 3415396 3593132 3355619 4400691 5300467 5919124 5206761 7132014 9523032 13521893 10058980 Maharashtra 3989710 5097125 6471248 5186027 5919787 6867883 10713458 7833709 11297616 11550478 13001663 11949919 Orissa 1570754 1781141 2644483 1998792 2655703 2908391 3158708 2907601 3105738 4342308 4218848 3888965 Punjab 3299203 3778380 4565784 3881122 5243076 5740201 6328862 5770713 7019317 7612211 8060158 7563895 Rajasthan 2912790 3519674 4232949 3555137 4773855 5041357 8109082 5974765 10618310 11739986 13026034 11794777 Tamil Nadu 2521885 3137477 3574703 3078021 3993740 5432279 6866431 5430817 7778598 7467449 8720310 7988786 Uttar Pradesh 7660367 8232034 9262309 8384903 11789780 13517556 15203248 13503528 18025758 20988346 22241872 20418659 West Bengal 4446464 4736330 5609876 4930890 6036140 7624138 8625434 7428571 9446215 11088402 13262435 11265684 Source: Data Book for Planning Commission

172

A.5.9 (A): Motor Vehicle Tax and Passenger and Goods Tax-(I) Rs. Lakhs MVT Goods & Passenger Total of MVT & Goods State/Year 2005-06 2006-07 2007-08 2005-06 2006-07 2007-08 2005-06 2006-07 2007-08 Average Andhra Pradesh 135574 136474 160380 5035 4125 8029 140609 140599 168409 149872.3 Assam 15591 15115 13862 6152 7015 1239 21743 22130 15101 19658 Bihar 30244 18138 27321 61338 78301 93787 91582 96439 121108 103043 Goa 6384 7456 8196 13080 13802 11272 19464 21258 19468 20063.33 Gujarat 115397 119115 131009 15630 596 15162 131027 119711 146171 132303 Haryana 17212 22366 23379 75760 73841 37939 92972 96207 61318 83499 Karnataka 110545 137450 165013 104145 114720 83734 214690 252170 248747 238535.7 Kerala 62851 70774 85317 0 0 0 62851 70774 85317 72980.67 Madhya Pradesh 55602 63430 70262 57858 74460 91644 113460 137890 161906 137752 Maharashtra 130911 184106 214310 50463 22448 38827 181374 206554 253137 213688.3 Orissa 40586 42654 45942 46334 57400 62690 86920 100054 108632 98535.33 Punjab 43119 46805 49945 0 0 0 43119 46805 49945 46623 Rajasthan 90818 102361 116440 23671 24760 16061 114489 127121 132501 124703.7 Tamil Nadu 112493 126088 148321 98494 124350 109747 210987 250438 258068 239831 Uttar Pradesh 96520 101760 114584 10519 10871 10965 107039 112631 125549 115073 West Bengal 53756 50897 53207 63 103 107 53819 51000 53314 52711 Source: Various Issues of State Finances, RBI

173

A.5.9 (B): Motor Vehicle Tax and Passenger and Goods Tax-(II) Rs. Lakhs MVT Goods & Passenger Total of MVT & Goods State/Year 2008-09 2009-10 2010-11 2008-09 2009-10 2010-11 2008-09 2009-10 2010-11 Average Andhra Pradesh 180062 199530 262675 1588 1028 948 181650 200558 263623 215277 Assam 14521 17726 23199 28467 54541 47810 42988 72267 71009 62088 Bihar 29774 34513 45543 127941 161316 200632 157715 195829 246175 199906.3 Goa 9015 10512 13040 15745 16073 17198 24760 26585 30238 27194.33 Gujarat 138166 154264 200368 16935 691 638 155101 154955 201006 170354 Haryana 23930 27707 45736 37029 39145 38714 60959 66852 84450 70753.67 Karnataka 168116 196160 255002 108502 129113 152555 276618 325273 407557 336482.7 Kerala 93745 113110 133137 0 0 0 93745 113110 133137 113330.7 Madhya Pradesh 77256 91901 119838 1,33,257 133288 174620 210513 225189 294458 243386.7 Maharashtra 222022 268230 353290 89195 97660 59988 311217 365890 413278 363461.7 Orissa 52443 61123 72758 63832 81525 111137 116275 142648 183895 147606 Punjab 52409 55474 65391 0 0 0 52409 55474 65391 57758 Rajasthan 121356 137287 161225 18986 17610 23069 140342 154897 184294 159844.3 Tamil Nadu 170957 202464 266005 97874 109192 162580 268831 311656 428585 336357.3 Uttar Pradesh 112466 140350 181689 26649 27105 24168 139115 167455 205857 170809 West Bengal 60801 77434 93601 0 0 0 60801 77434 93601 77278.67 Source: Various Issues of State Finances, RBI

174

A.5.9 (C): Motor Vehicle Tax and Passenger and Goods Tax-(III) Rs. Lakhs MVT Goods & Passenger Total of MVT & Goods State/Year 2011-12 2012-13 2013-14 2011-12 2012-13 2013-14 2011-12 2012-13 2013-14 Average Andhra Pradesh 298641 335660 435199 1206 1173 1319 299847 336833 436518 357732.66 Assam 29370 32808 37074 53639 36910 47819 83009 69718 84893 79206.66 Bihar 56913 67339 80000 82830 193212 119275 139743 260551 199275 199856.33 Goa 14045 14834 14838 21009 25750 28511 35054 40584 43349 39662.33 Gujarat 225103 227626 220000 20834 21058 10816 245937 248684 230816 241812.33 Haryana 74015 88730 105000 42932 47076 57500 116947 135806 162500 138417.66 Karnataka 295672 382952 380000 169017 382952 252500 464689 765904 632500 621031 Kerala 158713 192462 227105 0 0 0 158713 192462 227105 192760 Madhya Pradesh 135712 153125 165000 204746 239503 264000 340458 392628 429000 387362 Maharashtra 413742 502742 490000 57425 69074 122500 471167 571816 612500 551827.66 Orissa 78799 74619 90000 131236 134254 150000 210035 208873 240000 219636 Punjab 85006 99472 132000 0 0 0 85006 99472 132000 105492.66 Rajasthan 192705 228313 255000 22013 24857 30000 214718 253170 285000 250962.66 Tamil Nadu 310109 392843 458302 212334 225159 279627 522443 618002 737929 626124.66 Uttar Pradesh 237586 299292 354072 481 104 0 238067 299396 354072 297178.33 West Bengal 100723 122155 138997 0 128372 143591 100723 250527 282588 211279.33 Source: Various Issues of State Finances, RBI

175

A.5.10: Number of Registered Two Wheelers In Numbers 2013- State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 Average 14 Andhra 5707383 4686543 5262086 5218671 5851893 6514593 7488771 6618419 9291132 9592270 NA 9441701 Pradesh Assam 541275 610529 667788 606530.7 740420 830836 958935 843397 1101265 1230895 NA 1166080 Bihar 964594 1077579 1197875 1080016 1364757 1606613 1899017 1623462 2230069 2592137 NA 2411103 Goa 375571 408269 436662 406834 467827 502042 541934 503934.3 589377 639594 NA 614485.5 Gujarat 6352109 7003860 7579457 6978475 8087416 8716981 9507556 8770651 10512304 11500292 NA 11006298 Haryana 1881174 2172669 2463672 2172505 2768197 2975418 3370426 3038014 3755349 4146906 NA 3951128 Karnataka 4512910 3755719 4230864 4166498 4796587 6404905 7033045 6078179 7737366 8575104 NA 8156235 Kerala 2099652 2056472 2367602 2174575 2612341 2900238 3294953 2935844 3811343 4464849 NA 4138096 Madhya 3526416 3895557 4292649 3904874 4691218 5165023 5783120 5213120 6411155 6877681 NA 6644418 Pradesh Maharashtra 7691856 8573679 9394869 8553468 10212360 11181762 12429011 11274378 13921763 15457123 NA 14689443 Orissa 1530295 1701981 1874644 1702307 2052980 2302694 2614980 2323551 2946118 4729594 NA 3837856 Punjab 2975198 3173433 3385088 3177906 3581837 3956279 3956279 3831465 4729594 7465863 NA 6097729 Rajasthan 3393916 3833746 4261695 3829786 4715835 5230454 5859719 5268669 6629743 3808 NA 3316776 Tamil Nadu 7936778 8689876 9446469 8691041 10223233 11156048 12393788 11257690 13846378 4701734 NA 9274056 Uttar Pradesh 6083655 7138789 7737237 6986560 8521198 9493677 10563850 9526242 12410064 13724495 NA 13067280 West Bengal 1833820 2081355 1748253 1887809 2017198 1864861 2260657 2047572 2717713 4257670 NA 3487692 Source: Various Road Transport Year Book

176

A.5.11: Number of Registered Three and Four Wheeler Vehicles In Numbers State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 85112 131782 165918 127604 194746 219332 257147 223741.7 302124 301439 NA 301781.5 Pradesh Assam 19371 22587 25451 22469.67 29703 32473 35788 32654.67 47296 67167 NA 57231.5

Bihar 0 48123 54153 34092 62576 # # 62576 # 13457 NA 13457

Goa $ 4220 6316 5268 7260 8218 9402 8293.333 11447 13486 NA 12466.5

Gujarat 253340 285858 314388 284528.7 338826 367113 402514 369484.3 448958 499277 NA 474117.5

Haryana 74494 83921 90793 83069.33 96558 102541 114384 104494.3 124897 137511 NA 131204

Karnataka 65581 130685 145809 114025 161100 177179 198378 178885.7 221160 258701 NA 239930.5

Kerala $ 247799 271763 259781 291514 251471 288447 277144 323891 364323 NA 344107 Madhya 39943 46754 55057 47251.33 62984 72029 82673 72562 95702 111713 NA 103707.5 Pradesh Maharashtra 334741 383854 436725 385106.7 478975 521692 583847 528171.3 656407 739725 NA 698066

Orissa 47843 56534 66429 56935.33 78370 86729 100546 88548.33 109719 132625 NA 121172

Punjab 59566 20186 20186 33312.67 20186 20186 20186 20186 75860 75860 NA 75860

Rajasthan 22966 116861 127937 89254.67 138487 148892 162837 150072 69509 76396 NA 72952.5

Tamil Nadu 231491 243904 254321 243238.7 261800 280388 311084 284424 353883 404244 NA 379063.5

Uttar Pradesh 77668 85906 100273 87949 117913 131181 156388 135160.7 176164 213657 NA 194910.5

West Bengal 22966 $ $ 22966 $ 23972 $ 23972 $ 242896 NA 242896 Source: Various Road Transport Year Book, #: not reported, $: included in others 177

A.5.12: Number of Registered Buses In Numbers State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 18368 45359 49480 37735.67 53820 56664 60622 57035.33 70075 73787 NA 71931 Pradesh Assam 11378 11936 12570 11961.33 13257 13859 14741 13952.33 15787 18982 NA 17384.5

Bihar 16271 17192 18533 17332 19654 21209 22703 21188.67 24097 25992 NA 25044.5

Goa 5689 6376 6770 6278.33 7644 8332 8907 8294.333 9513 9956 NA 9734.5

Gujarat 54446 54214 56214 54958 58253 60023 62386 60220.67 67546 70615 NA 69080.5

Haryana 19986 22101 26906 22997.67 29516 33520 35646 32894 39153 42800 NA 40976.5

Karnataka 40819 45211 49586 45205.33 44308 53874 58012 52064.67 62501 69718 NA 66109.5

Kerala 127574 396980 414678 313077.3 430162 383229 390430 401273.7 396826 404153 NA 400489.5 Madhya 27997 29177 30516 29230 31520 35105 36647 34424 40551 40633 NA 40592 Pradesh Maharashtra 66754 71187 77042 71661 79073 83816 89861 84250 100097 110121 NA 105109

Orissa 15996 16951 17694 16880.33 18464 19335 20616 19471.67 21917 23004 NA 22460.5

Punjab 21136 22373 24457 22655.33 25682 27146 27146 26658 30160 30160 NA 30160

Rajasthan 60979 63320 65605 63301.33 69298 73257 77980 73511.67 83345 88616 NA 85980.5

Tamil Nadu 89991 97396 105897 97761.33 114671 123999 134887 124519 144251 156470 NA 150360.5

Uttar Pradesh 26549 25134 25339 25674 26331 28124 31922 28792.33 34428 40501 NA 37464.5

West Bengal 43599 42737 35924 40753.33 35023 31996 34184 33734.33 35603 51660 NA 43631.5 Source: Various Road Transport Year Book 178

A.5.13: Number of Registered Trucks, Trailers and Others In Numbers State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 1407332 1503172 1730462 1546989 1958489 2132550 2382807 2157949 2760997 2720207 NA 2740602 Pradesh Assam 341999 375984 410613 376198.7 451371 506553 572664 510196 642772 560478 NA 601625

Bihar 451478 434489 468579 451515.3 512566 729164 751489 664406.3 858714 985641 NA 922177.5

Goa 147759 159886 174211 160618.7 191178 208450 229832 209820 255272 275336 NA 265304

Gujarat 1962395 2153405 2338997 2151599 2514156 2728456 3020679 2754430 3384909 3702269 NA 3543589

Haryana 1111372 1249606 1391913 1250964 1530950 1680346 1856547 1689281 2058711 2272377 NA 2165544

Karnataka 1601060 1554441 1791116 1648872 1950556 2408018 2641048 2333207 2888574 3160163 NA 3024369

Kerala 1459052 1256041 1376186 1363760 1525901 1862714 2098189 1828935 2361254 2624497 NA 2492876 Madhya 1014271 1075605 1145236 1078371 1224969 1318419 1453262 1332217 1596751 1730012 NA 1663382 Pradesh Maharashtra 2873083 3142271 3426725 3147360 3680500 3981151 4331380 3997677 4754094 5181183 NA 4967639

Orissa 337861 372848 411665 374124.7 457547 523074 601896 527505.7 680776 1377716 NA 1029246

Punjab 979260 1077864 1142848 1066657 1203826 1270643 1270643 1248371 1427325 2500062 NA 1963694

Rajasthan 1276166 1322196 1447252 1348538 1565944 1713059 1885729 1721577 2202881 669149 NA 1436015

Tamil Nadu 1795653 1949492 2122856 1956000 2291293 2501098 2798486 2530292 3067736 1114029 NA 2090883

Uttar Pradesh 1801262 1835870 1963282 1866805 2113370 2335367 2535072 2327936 2824618 3069531 NA 2947075

West Bengal 994380 1074210 977707 1015432 991398 850281 965783 935820.7 1107425 1558508 NA 1332967 Source: Various Road Transport Year Book 179

A.5.14: Total Number of Registered Vehicles In Numbers State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 6458000 7218000 6367000 6681000 7208000 8059000 8923000 8063333 10189000 12424000 12688000 11767000 Pradesh Assam 815000 914000 1021000 916666.7 1116000 1235000 1384000 1245000 1582000 1807000 1878000 1755667

Bihar 1352000 1432000 1577000 1453667 1739000 1960000 2357000 2018667 2673000 3113000 3617000 3134333

Goa 482000 529000 579000 530000 624000 674000 727000 675000 790000 866000 938000 864666.7

Gujarat 7817000 8622000 9497000 8645333 10289000 10999000 11873000 11053667 12993000 14414000 15772000 14393000

Haryana 2854000 3087000 3528000 3156333 3973000 4425000 4792000 4396667 5377000 5978000 6600000 5985000

Karnataka 5436000 6220000 5486000 5714000 6217000 6953000 9044000 7404667 9930000 10910000 12064000 10968000

Kerala 3122000 3559000 3957000 3546000 4430000 4860000 5398000 4896000 6072000 6893000 7858000 6941000 Madhya 4188000 4609000 5047000 4614667 5523000 6011000 6591000 6041667 7356000 8144000 8760000 8086667 Pradesh Maharashtra 9936000 10966000 12171000 11024333 13335000 14451000 15768000 14518000 17434000 19432000 21488000 19451333

Orissa 1715000 1932000 2148000 1931667 2370000 2607000 2932000 2636333 3338000 3759000 4216000 3771000

Punjab 3876000 4035000 4294000 4068333 4573000 4832000 5274000 4893000 5274000 6263000 6263000 5933333

Rajasthan 4261000 4754000 5336000 4783667 5902000 6490000 7166000 6519333 7986000 8985000 10072000 9014333

Tamil Nadu 9257000 10054000 10981000 10097333 11930000 12891000 14062000 12961000 15638000 17412000 19232000 17427333 Uttar 7344000 7989000 9086000 8139667 9826000 10779000 11988000 10864333 13287000 15445000 17048000 15260000 Pradesh West Bengal 2681000 2872000 3198000 2917000 2762000 3044000 2747000 2851000 3261000 3861000 6111000 4411000 Source: Various Road Transport Year Book 180

A.5.15: Electricity Duty Rs. Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 15196 15105 19536 16612.33 21854 15926 28588 22123 30495 30896 33541 31644 Pradesh Assam 1329 1590 462 1127 2236 2707 4158 3033.7 3667 4182 4656 4168.3 Bihar 1806 6284 6405 4831.667 6762 6663 6522 6649 5469 10255 6617 7447 Goa NA NA NA NA NA NA NA NA NA NA NA NA Gujarat 189968 208777 204652 201132.3 236991 264365 326264 275873 365455 440660 450000 418705 Haryana 6153 9828 10745 8908.667 10631 11958 13027 11872 16643 19197 21110 18983.3 Karnataka 27709 38857 44950 37172 37059 67869 66349 57092 65424 92880 82500 80268 Kerala 3152 3178 3904 3411.333 5600 2478 2071 3383 2128 2471 2883 2494 Madhya 84227 71455 62608 72763.33 34306 214649 147632 132196 177332 147771 170000 165034.3 Pradesh Maharashtra 166087 157719 268787 197531 239486 328932 473026 347148 483109 589568 610776 561151 Orissa 35313 28258 32746 32105.67 36503 45996 45806 42768 55165 59048 64000 59404.33 Punjab 66941 52758 60380 60026.33 63133 23013 142290 76145 92828 203531 169400 155253 Rajasthan 47135 51588 58423 52382 65404 69999 90581 75328 109448 157006 140663 135705.7 Tamil Nadu 9522 26640 3722 13294.67 35569 3706 174543 71273 104020 76888 160814 113907.3 Uttar Pradesh 18227 19392 20665 19428 21672 27216 35701 28196 45820 48491 85000 59770.33 West Bengal 38246 52635 50669 47183.33 58752 66457 76909 67373 40819 183715 133686 119406.7 Source: Various Issues of State Finances, RBI

181

A.5.16: Share of Agriculture in Total Sale of Electricity In Percent

State/Year 05-06 06-07 07-08 AVG 08-09 09-10 10-11 AVG 11-12 12-13 13-14 AVG Andhra Pradesh 35.72 NA 30.06 32.89 30.49 30.53 26.75 29.26 28.48 31.58 27.09 29.05

Assam 1.09 NA 0.57 0.83 0.72 0.84 0.78 0.78 0.78 0.84 0.73 0.78

Bihar 28.68 NA 13.59 21.14 14.59 13.09 6.33 11.34 5.42 6.07 6.11 5.87

Gujarat 28.63 NA 27.28 27.96 27.30 27.97 26.52 27.26 25.41 25.12 24.71 25.08

Haryana 41.8 NA 40.21 41.01 37.22 38.96 32.40 36.19 31.96 25.90 22.55 26.80

Karnataka 34.08 NA 36.04 35.06 35.81 35.18 34.83 35.27 37.46 37.51 37.05 37.34

Kerala 1.87 NA 1.72 1.80 1.75 1.83 1.58 1.72 1.79 1.71 1.61 1.70

Madhya Pradesh 33.24 NA 30.06 31.65 29.12 29.96 30.62 29.90 31.44 35.30 33.68 33.47

Maharashtra 18.89 NA 22.14 20.52 21.89 21.78 22.71 22.13 26.97 24.63 27.02 26.21

Orissa 2.21 NA 1.22 1.72 1.24 1.23 1.36 1.28 1.25 NA NA 1.25

Punjab 30.15 NA 31.22 30.69 28.65 32.50 30.32 30.49 29.27 30.29 30.14 29.90

Rajasthan 31.22 NA 34.43 32.83 36.75 38.52 38.26 37.84 39.80 39.87 40.32 40.00

Tamil Nadu 22.3 NA 21.04 21.67 21.48 21.51 16.02 19.67 16.54 15.67 12.83 15.01

Uttar Pradesh 17.56 NA 16.68 17.12 17.01 17.39 17.26 17.22 17.31 17.16 16.29 16.92

West Bengal 4.36 NA 6.99 5.68 4.80 6.72 8.35 6.62 5.84 5.05 6.47 5.79 Source: Annual Report on Working of State Electricity Boards and Electricity Departments

A.5.17: Share of Industry in Total Sale of Electricity In Percent

State/Year 05-06 06-07 07-08 AVG 08-09 09-10 10-11 AVG 11-12 12-13 13-14 AVG Andhra Pradesh 24.51 NA 30.54 27.53 29.94 29.44 31.40 30.26 31.93 28.59 30.96 30.49

Assam 26.69 NA 24.50 25.60 27.60 33.21 30.31 30.37 31.45 33.07 28.95 31.16

Bihar 16.66 NA 22.74 19.70 26.82 27.48 28.13 27.48 24.99 27.96 28.15 27.03

Gujarat 27.81 NA 36.85 32.33 37.00 37.90 38.89 37.93 41.83 43.05 43.84 42.91

Haryana 18.75 NA 27.47 23.11 27.78 25.90 26.32 26.67 25.88 26.97 26.28 26.38

Karnataka 21.45 NA 23.02 22.24 22.55 22.22 22.71 22.49 21.73 22.01 22.37 22.04

Kerala 27.55 NA 30.78 29.17 31.08 31.90 31.45 31.48 30.83 30.47 29.75 30.35

Madhya Pradesh 23.32 NA 24.41 23.87 25.34 25.07 26.28 25.56 25.65 24.08 20.50 23.41

Maharashtra 33.53 NA 45.45 39.49 45.63 41.84 40.38 42.62 38.03 37.72 36.71 37.49

Orissa 43.86 NA 56.60 50.23 56.76 52.70 51.58 53.68 49.95 NA NA 49.95

Punjab 30.48 NA 34.40 32.44 33.86 34.02 33.25 33.71 33.39 33.40 32.27 33.02

Rajasthan 23.54 NA 30.73 27.14 28.92 25.76 27.19 27.29 26.34 25.53 25.22 25.70

Tamil Nadu 28.14 NA 37.89 33.02 33.86 31.93 35.85 33.88 35.88 31.23 31.92 33.01

Uttar Pradesh 15.87 NA 22.37 19.12 23.74 20.88 22.46 22.36 23.41 24.44 24.23 24.03

West Bengal 37.12 NA 32.68 34.90 32.14 29.09 29.27 30.17 31.68 27.58 30.76 30.01 Source: Annual Report on Working of State Electricity Boards and Electricity Departments

182

A.5.18: Total Sale of Electricity Rs Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 39828.58 NA 49345 44586.79 53825 59964 64743 59510.67 70901 69660 87636 76065.67 Pradesh Assam 2203 NA 3402 2802.5 3383 3416 3963 3587.333 4115 4435 5476 4675.33

Bihar 4022.33 NA 4852 4437.16 5325 6067 6139 5843.667 6695 7903 10063 8220.33

Gujarat 37092.15 NA 41066 39079.08 42957 45856 50079 46297.33 54881 57470 62931 58427.33

Haryana 15426.11 NA 18258 16842.06 19760 23558 25551 22956.33 28974 31808 40207 33663

Karnataka 25701.71 NA 29988 27844.86 32225 33810 37215 34416.67 42451 46678 51185 46771.33

Kerala 10190.1 NA 13397 11793.55 12878 14048 14678 13868 15981 17181 18428 17196.67 Madhya 19371.41 NA 21629 20500.21 21610 22551 25359 23173.33 28447 33942 48095 36828 Pradesh Maharashtra 58732.34 NA 55716 57224.17 58171 63941 71279 64463.67 80133 89556 96462 88717

Orissa 8103.57 NA 10762 9432.78 11731 12228 13099 12352.67 13054 NA NA 13054

Punjab 24261.27 NA 32122 28191.64 32627 32697 33481 32935 35045 37821 39911 37592.33

Rajasthan 18013.81 NA 23658 20835.91 26641 31342 34552 30845 37904 42377 47460 42580.33

Tamil Nadu 44515.78 NA 52831 48673.39 53065 57775 58861 56567 61227 57146 72550 63641 Uttar 30374.19 NA 37097 33735.6 40258 42074 45234 42522 50593 56955 63683 57077 Pradesh West 20957.06 NA 15887 18422.03 17577 19677 21600 19618 22201 28160 27908 26089.67 Bengal Source: Annual Report on Working of State Electricity Boards and Electricity Departments

183

A.5.19: Total Consumption of Electricity Lakh Kwh State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average

Andhra Pradesh 577409.8 647616.9 715375.4 646800.7 764571.8 843208.7 894602.8 834127.8 980384 970237.35 NA 975310.65

Assam 48247.87 50189.55 54227.42 50888.28 58619.8 62373.87 67283.66 62759.11 76420 74354.64 NA 75387.32

Bihar 37277.84 42920.15 46358.54 42185.51 52078.61 57921.16 63349.65 57783.14 67857.6 74574.28 NA 71215.94

Gujarat 695033.1 731671.5 833353 753352.5 825205 895154.8 878220.1 866193.3 981502.6 1074181.42 NA 1027842.01

Haryana 249513.9 281682.1 307635.7 279610.6 309110.8 366832.3 371564.5 349169.2 414146.9 445283.44 NA 429715.18

Karnataka 400537.5 453158.2 474865.8 442853.8 491678.4 507949.2 543948.8 514525.5 642319.4 677747.56 NA 660033.47

Kerala 139916.2 146622.1 148845.1 145127.8 150080.9 182843.4 189018 173980.8 205304.2 219276.96 NA 212290.59

Madhya Pradesh 378393.3 386210.5 421049.5 395217.8 401252.2 432033.4 479218 437501.2 485184 552089.62 NA 518636.81

Maharashtra 964500 1022290 1090893 1025894 1046681 1154798 1217842 1139774 1356426 1415116.56 NA 1385771.48

Orissa 243999.7 258474.1 294511.1 265661.6 307389.7 335229.4 432303.7 358307.6 466995 497045.77 NA 482020.38

Punjab 369599.9 392521.5 425908.5 396010 414990 449810.9 474974.4 446591.8 497927.2 492767.79 NA 495347.50

Rajasthan 349820.2 367858.1 439354 385677.4 482114.2 532500.3 563203.1 525939.2 628784.1 676416.10 NA 652600.10

Tamil Nadu 631243.9 703418.9 743176.2 692613 749959.3 805987.8 825929.6 793958.9 861259.9 832164.56 NA 846712.22

Uttar Pradesh 560727.2 624075.2 645593.4 610131.9 707535.6 749727.2 812638.2 756633.6 903438 919084.15 NA 911261.07

West Bengal 320766.7 338128.6 375918.4 344937.9 384909.4 452441.1 476906.2 438085.6 504774.4 536374.35 NA 520574.35 Source: Annual Report on Working of State Electricity Boards and Electricity Departments

184

A.5.20: State Excise Duty Rs. Lakhs State/Year 2005-06 2006-07 2007-08 Average 2008-09 2009-10 2010-11 Average 2011-12 2012-13 2013-14 Average Andhra 268457 343663 404069 338729.7 575261 584859 826467 662195.7 961236 912941 750000 874725.7 Pradesh Assam 16039 17488 18871 17466 19868 23919 32312 25366.33 50335 56811 64197 57114.33 Bihar 31859 38193 52542 40864.67 67914 108168 152335 109472.3 198098 242982 330000 257026.7 Goa 5535 5723 7594 6284 8870 10446 13916 11077.33 18203 21290 24628 21373.67 Gujarat 4806 4194 4720 4573.333 4871 6594 6297 5920.667 7211 8491 8640 8114 Haryana 110686 121710 137881 123425.7 141853 205902 236581 194778.7 283189 323648 385000 330612.3 Karnataka 339679 449548 476657 421961.3 574957 694632 828474 699354.3 977544 1106973 1260000 1114839 Kerala 84100 95307 116925 98777.33 139764 151481 169954 153733 188318 231395 271917 230543.3 Madhya 137038 154668 185383 159029.7 230195 295194 360342 295243.7 431649 507806 575000 504818.3 Pradesh Maharashtra 282385 330070 396305 336253.3 443376 505663 596185 515074.7 860547 929711 1053500 947919.3 Orissa 38933 43007 52493 44811 66007 84905 109426 86779.33 137900 149864 172500 153421.3 Punjab 156816 136778 186152 159915.3 180995 210092 237308 209465 275460 333196 400000 336218.7 Rajasthan 152180 159109 180512 163933.7 216989 230048 286141 244392.7 328705 398784 462500 396663 Tamil Nadu 317665 398642 476406 397571 575552 674068 811594 687071.3 997521 1212568 1446987 1219025 Uttar Pradesh 308854 355125 394840 352939.7 472001 566606 672349 570318.7 813920 978249 1152330 981499.7 West Bengal 74346 81736 93547 83209.67 108294 144381 178334 143669.7 211704 262143 320202 264683 Source: Various Issues of State Finances, RBI

185

A.5.21: Stamp Duty and Registration Fees: Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2007-08)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 265496.67 134581.59 197 1 Assam 23750.67 31537.43 75 13 Bihar 47399.00 50435.78 94 9 Goa 9800.00 10528.65 93 10 Gujarat 153220.67 285774.99 54 15 Haryana 162266.33 95735.50 169 2 Karnataka 294227.67 209717.34 140 5 Kerala 154977.33 110749.34 140 6 Madhya Pradesh 126404.00 101998.83 124 7 Maharashtra 674371.67 753624.12 89 11 Orissa 30043.67 59113.14 51 16 Punjab 168076.00 102946.45 163 3 Rajasthan 128994.33 119148.56 108 8 Tamil Nadu 296235.33 365041.27 81 12 Uttar Pradesh 382904.33 270823.34 141 4 West Bengal 128437.33 221504.89 58 14 Source: Computed

A.5.22: Stamp Duty and Registration Fees: Taxable Capacity, Tax Efforts and Ranks (2008-09 to 2010-11)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 313439.67 165965.17 189 1 Assam 11415.00 29713.86 38 16 Bihar 93759.00 61921.34 151 5 Goa 12613.67 10900.51 116 8 Gujarat 265048.67 392509.78 68 13 Haryana 164641.33 131592.04 125 7 Karnataka 302845.67 272101.68 111 9 Kerala 215063.00 125511.26 171 2 Madhya Pradesh 192557.00 126176.09 153 3 Maharashtra 1085909.00 1169578.62 93 11 Orissa 42381.33 68425.22 62 15 Punjab 186656.33 122817.77 152 4 Rajasthan 155354.00 156353.34 99 10 Tamil Nadu 403547.67 566232.75 71 12 Uttar Pradesh 489172.00 369993.57 132 6 West Bengal 186297.33 284284.32 66 14 Source: Computed

186

A.5.23: Stamp Duty and Registration Fees: Taxable Capacity, Tax Efforts and Ranks (2011-12 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 530496.33 290957.78 182 1 Assam 23751.00 56792.83 42 16 Bihar 228436.33 131487.27 174 2 Goa 41852.33 32136.88 130 6 Gujarat 469906.67 711822.16 66 14 Haryana 318141.67 261274.89 122 8 Karnataka 544940.67 478392.94 114 9 Kerala 303273.33 227245.39 133 5 Madhya Pradesh 374288.33 250096.18 150 4 Maharashtra 1693524.67 1913299.38 89 11 Orissa 55434.33 121432.73 46 15 Punjab 283654.00 230508.96 123 7 Rajasthan 311208.33 314683.74 99 10 Tamil Nadu 781605.67 1128354.72 69 13 Uttar Pradesh 883394.00 578873.40 153 3 West Bengal 386265.67 491067.77 79 12 Source: Computed

A.5.24: Stamp Duty and Registration Fees: Overall Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 1109432.67 591504.54 188 1 Assam 58916.67 118044.12 50 16 Bihar 369594.33 243844.39 152 2 Goa 64266.00 53566.04 120 8 Gujarat 888176.01 1390106.93 64 14 Haryana 645049.33 488602.43 132 7 Karnataka 1142014.01 960211.96 119 9 Kerala 673313.66 463505.99 145 3 Madhya Pradesh 693249.33 478271.10 145 4 Maharashtra 3453805.34 3836502.12 90 11 Orissa 127859.33 248971.09 51 15 Punjab 638386.33 456273.18 140 6 Rajasthan 595556.66 590185.64 101 10 Tamil Nadu 1481388.67 2059628.74 72 12 Uttar Pradesh 1755470.33 1219690.31 144 5 West Bengal 701000.33 996856.98 70 13 Source: Computed

187

A.5.25: Sales Tax: Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2007-08)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 1567839.33 896787.93 175 1 Assam 268103.00 270046.76 99 10 Bihar 211662.00 366513.37 58 15 Gujarat 1282778.00 1149407.47 112 7 Haryana 672622.33 518577.26 130 4 Karnataka 1184175.00 982621.89 121 6 Kerala 832434.67 591381.30 141 2 Madhya Pradesh 527163.33 652890.14 81 12 Maharashtra 2352009.00 2288774.29 103 9 Orissa 363165.67 294799.75 123 5 Punjab 493279.67 768050.28 64 14 Rajasthan 668836.33 601346.08 111 8 Tamil Nadu 1714607.00 1961734.57 87 11 Uttar Pradesh 1319553.00 951666.21 139 3 West Bengal 708275.00 1089188.60 65 13 Source: Computed

A.5.26: Sales Tax: Taxable Capacity, Tax Efforts and Ranks (2008-09 to 2010-11)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 2487891.00 1479506.09 168 1 Assam 365481.00 374879.42 97 10 Bihar 380431.33 577421.88 66 14 Gujarat 1996796.67 1654339.58 121 6 Haryana 942303.67 826188.45 114 7 Karnataka 1689669.67 1497911.81 113 8 Kerala 1332704.33 850170.66 157 2 Madhya Pradesh 827452.33 1436359.70 58 15 Maharashtra 3527975.67 2666240.18 132 3 Orissa 567296.67 444052.82 128 4 Punjab 801000.67 1057607.46 76 13 Rajasthan 1056587.33 942284.98 112 9 Tamil Nadu 2398348.33 3065891.69 78 11 Uttar Pradesh 2104791.67 1666999.86 126 5 West Bengal 1091350.00 1401828.96 78 12 Source: Computed

188

A.5.27: Sales Tax: Taxable Capacity, Tax Efforts and Ranks (2011-12 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 4270822.67 2681150.39 159 1 Assam 625071.33 666967.88 94 11 Bihar 949039.67 1193189.73 80 14 Gujarat 3865566.00 2733176.92 141 3 Haryana 1538675.67 1473802.64 104 6 Karnataka 2876142.33 2725657.44 106 5 Kerala 2270453.00 1515869.29 150 2 Madhya Pradesh 1462434.33 1758316.66 83 12 Maharashtra 5819952.67 5977550.69 97 9 Orissa 965884.33 788192.41 123 4 Punjab 1371306.67 1700694.86 81 13 Rajasthan 1869702.67 1829204.58 102 8 Tamil Nadu 4633998.33 4802172.66 97 10 Uttar Pradesh 3662555.67 3577474.94 102 7 West Bengal 1929527.33 2600258.03 74 15 Source: Computed

A.5.28: Sales Tax: Overall Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 8326553 5057444.41 165 1 Assam 1258655 1311894.06 96 10 Bihar 1541133 2137124.97 72 15 Gujarat 7145141 5536923.96 129 3 Haryana 3153602 2818568.34 112 6 Karnataka 5749987 5206191.13 110 7 Kerala 4435592 2957421.25 150 2 Madhya Pradesh 2817050 3847566.5 73 14 Maharashtra 11699937 10932565.2 107 8 Orissa 1896347 1527044.97 124 4 Punjab 2665587 3526352.59 76 12 Rajasthan 3595126 3372835.64 107 9 Tamil Nadu 8746954 9829798.91 89 11 Uttar Pradesh 7086900 6196141.01 114 5 West Bengal 3729152 5091275.59 74 13 Source: Computed

189

A.5.29: Land Revenue and Agriculture Income Tax: Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2007-08)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 10888 13615.17 80 11 Assam 8041.33 5883.34 137 5 Bihar 7059.00 9277.56 76 12 Goa 616.67 487.13 127 6 Gujarat 52067.67 14742.81 353 2 Haryana 1183.00 9942.61 12 16 Karnataka 8882.33 12379.25 72 14 Kerala 5864.33 7871.46 75 13 Madhya Pradesh 11284.00 11950.31 94 9 Maharashtra 47512.00 17384.48 273 3 Orissa 19071.67 7649.80 249 4 Punjab 1629.00 13545.07 12 15 Rajasthan 11876.67 12559.61 95 8 Tamil Nadu 12616.67 11094.07 114 7 Uttar Pradesh 22958.00 26291.82 87 10 West Bengal 96978.33 16645.53 583 1 Source: Computed

A.5.30: Land Revenue and Agriculture Income Tax: Taxable Capacity, Tax Efforts and Ranks (2008-09 to 2010-11)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 17421.67 23444.30 74 12 Assam 18995.33 9320.22 204 5 Bihar 12157.33 15727.88 77 11 Goa 944.00 732.85 129 8 Gujarat 116449.67 24410.17 477 1 Haryana 934.33 17515.86 5 16 Karnataka 19612.33 18945.18 104 9 Kerala 8137.67 11838.48 69 14 Madhya Pradesh 29322.67 19605.12 150 7 Maharashtra 78508.00 27450.29 286 3 Orissa 34387.33 12130.27 283 4 Punjab 1666.33 21338.84 8 15 Rajasthan 17745.00 21958.67 81 10 Tamil Nadu 14589.67 20297.69 72 13 Uttar Pradesh 78219.33 42993.85 182 6 West Bengal 106486.00 26275.06 405 2 Source: Computed

190

A.5.31: Land Revenue and Agriculture Income Tax: Taxable Capacity, Tax Efforts and Ranks (2011-12 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 8406.67 28077.93 30 14 Assam 22555.00 18725.79 120 8 Bihar 19264.67 25121.74 77 11 Goa 13598.00 6920.46 196 5 Gujarat 190874.33 30302.85 630 2 Haryana 1231.00 24931.12 5 16 Karnataka 22458.33 24764.92 91 10 Kerala 13667.00 21343.14 64 12 Madhya Pradesh 43155.00 28718.14 150 7 Maharashtra 108853.33 30413.63 358 3 Orissa 44722.67 20927.65 214 4 Punjab 3726.00 26117.29 14 15 Rajasthan 29311.00 30281.58 97 9 Tamil Nadu 12633.33 26596.95 47 13 Uttar Pradesh 68543.00 36353.38 189 6 West Bengal 220881.00 29822.29 741 1 Source: Computed

A.5.32: Land Revenue and Agriculture Income Tax: Overall Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 36716.34 65137.40 56 14 Assam 49591.66 33929.35 146 7 Bihar 38481.00 50127.18 77 11 Goa 15158.67 8140.44 186 5 Gujarat 359391.67 69455.83 517 2 Haryana 3348.33 52389.59 6 16 Karnataka 50952.99 56089.35 91 10 Kerala 27669.00 41053.08 67 13 Madhya Pradesh 83761.67 60273.57 139 8 Maharashtra 234873.33 75248.40 312 3 Orissa 98181.67 40707.72 241 4 Punjab 7021.33 61001.20 12 15 Rajasthan 58932.67 64799.86 91 9 Tamil Nadu 39839.67 57988.71 69 12 Uttar Pradesh 169720.33 105639.05 161 6 West Bengal 424345.33 72742.88 583 1 Source: Computed

191

A.5.33: Motor Vehicle Tax and Passenger & Goods Tax: Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2007-08)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 149872.33 138391.25 108 7 Assam 19658.00 33642.49 58 15 Bihar 103043.00 46606.93 221 1 Goa 20063.33 22159.68 91 10 Gujarat 132303.00 174179.57 76 12 Haryana 83499.00 84160.82 99 9 Karnataka 238535.67 124045.71 192 2 Kerala 72980.67 91986.22 79 11 Madhya Pradesh 137752.00 109744.74 126 4 Maharashtra 213688.33 209399.12 102 8 Orissa 98535.33 58409.84 169 3 Punjab 46623.00 97352.69 48 16 Rajasthan 124703.67 114049.37 109 6 Tamil Nadu 239831.00 194357.08 123 5 Uttar Pradesh 115073.00 167317.99 69 14 West Bengal 52711.00 73628.97 72 13 Source: Computed

A.5.34: Motor Vehicle Tax and Passenger & Goods Tax: Taxable Capacity, Tax Efforts and Ranks (2008-09 to 2010-11)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 215277.00 196617.20 109 7 Assam 62088.00 57212.57 109 8 Bihar 199906.33 80217.90 249 1 Goa 27194.33 37684.33 72 12 Gujarat 170354.00 238721.94 71 14 Haryana 70753.67 130961.89 54 15 Karnataka 336482.67 192254.05 175 2 Kerala 113330.67 140942.58 80 11 Madhya Pradesh 243386.67 161254.77 151 4 Maharashtra 363461.67 287328.64 126 5 Orissa 147606.00 93915.68 157 3 Punjab 57758.00 139300.06 41 16 Rajasthan 159844.33 170176.84 94 9 Tamil Nadu 336357.33 266391.91 126 6 Uttar Pradesh 170809.00 238775.13 72 13 West Bengal 77278.67 94405.07 82 10 Source: Computed

192

A.5.35: Motor Vehicle Tax and Passenger & Goods Tax: Taxable Capacity, Tax Efforts and Ranks (2011-12 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 357732.67 350104.38 102 8 Assam 79206.67 86111.99 92 9 Bihar 199856.33 127855.63 156 2 Goa 39662.33 50715.60 78 12 Gujarat 241812.33 403547.99 60 15 Haryana 138417.67 210428.11 66 14 Karnataka 621031.00 329597.55 188 1 Kerala 192760.00 232094.26 83 11 Madhya Pradesh 387362.00 264831.42 146 4 Maharashtra 551827.67 502409.57 110 7 Orissa 219636.00 148676.39 148 3 Punjab 105492.67 212916.48 50 16 Rajasthan 250962.67 283194.69 89 10 Tamil Nadu 626124.67 463436.00 135 6 Uttar Pradesh 297178.33 417883.56 71 13 West Bengal 211279.33 149060.13 142 5 Source: Computed

A.5.36: Motor Vehicle Tax and Passenger & Goods Tax: Overall Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 722882.00 685112.83 106 8 Assam 160952.67 176967.05 91 10 Bihar 502805.66 254680.46 197 1 Goa 86919.99 110559.61 79 12 Gujarat 544469.33 816449.50 67 15 Haryana 292670.34 425550.82 69 14 Karnataka 1196049.34 645897.31 185 2 Kerala 379071.34 465023.06 82 11 Madhya Pradesh 768500.67 535830.93 143 4 Maharashtra 1128977.67 999137.33 113 6 Orissa 465777.33 301001.91 155 3 Punjab 209873.67 449569.23 47 16 Rajasthan 535510.67 567420.90 94 9 Tamil Nadu 1202313.00 924184.99 130 5 Uttar Pradesh 583060.33 823976.68 71 13 West Bengal 341269.00 317094.17 108 7 Source: Computed

193

A.5.37: Electricity Duty: Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2007-08)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 16612.33 54115.03 31 14 Assam 1127.00 2408.99 47 10 Bihar 4831.67 1914.85 252 2 Gujarat 201132.33 65219.98 308 1 Haryana 8908.67 19387.26 46 11 Karnataka 37172.00 34037.49 109 9 Kerala 3411.33 8687.96 39 12 Madhya Pradesh 72763.33 29611.65 246 3 Maharashtra 197531.00 95175.32 208 4 Orissa 32105.67 18210.14 176 8 Punjab 60026.33 29684.32 202 5 Rajasthan 52382.00 28739.11 182 7 Tamil Nadu 13294.67 58843.08 23 15 Uttar Pradesh 19428.00 50384.10 39 13 West Bengal 47183.33 25068.58 188 6 Source: Computed

A.5.38: Electricity Duty: Taxable Capacity, Tax Efforts and Ranks (2008-09 to 2010-11)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 22122.67 97506.78 23 15 Assam 3033.67 3455.61 88 10 Bihar 6649.00 3106.05 214 4 Gujarat 275873.33 102372.73 269 2 Haryana 11872.00 31679.84 37 12 Karnataka 57092.33 52257.64 109 9 Kerala 3383.00 12888.74 26 14 Madhya Pradesh 132195.67 42386.52 312 1 Maharashtra 347148.00 145907.08 238 3 Orissa 42768.33 32754.28 131 8 Punjab 76145.33 43526.95 175 5 Rajasthan 75328.00 53759.02 140 7 Tamil Nadu 71272.67 91487.72 78 11 Uttar Pradesh 28196.33 85973.56 33 13 West Bengal 67372.67 42459.62 159 6 Source: Computed

194

A.5.39: Electricity Duty: Taxable Capacity, Tax Efforts and Ranks (2011-12 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 31644.00 157469.09 20 14 Assam 4168.33 3787.47 110 8 Bihar 7447.00 3486.23 214 5 Gujarat 418705.00 169968.31 246 3 Haryana 18983.33 47743.50 40 13 Karnataka 80268.00 89184.87 90 10 Kerala 2494.00 17100.72 15 15 Madhya Pradesh 165034.33 62783.31 263 2 Maharashtra 561151.00 262606.92 214 4 Orissa 59404.33 56434.72 105 9 Punjab 155253.00 58720.82 264 1 Rajasthan 135705.67 87726.22 155 7 Tamil Nadu 113907.33 128170.04 89 11 Uttar Pradesh 59770.33 142640.58 42 12 West Bengal 119406.67 63125.10 189 6 Source: Computed

A.5.40: Electricity Duty: Overall Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 70379 309091 23 15 Assam 8329 9652 86 10 Bihar 18928 8507 222 3 Gujarat 895711 337561 265 2 Haryana 39764 98811 40 12 Karnataka 174532 175480 99 9 Kerala 9288 38677 24 14 Madhya Pradesh 369993 134781 275 1 Maharashtra 1105830 503689 220 5 Orissa 134278 107399 125 8 Punjab 291425 131932 221 4 Rajasthan 263416 170224 155 7 Tamil Nadu 198475 278501 71 11 Uttar Pradesh 107395 278998 38 13 West Bengal 233963 130653 179 6 Source: Computed

195

A.5.41: State Excise Duty: Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2007-08)

Tax Revenue Fiscal Capacity Index of States Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 338729.67 104565.54 324 1 Assam 17466.00 35397.36 49 15 Bihar 40864.67 55598.96 73 13 Goa 6284.00 8250.52 76 11 Gujarat 4573.33 174101.94 3 16 Haryana 123425.67 74399.27 166 7 Karnataka 421961.33 138571.84 305 2 Kerala 98777.33 90256.32 109 9 Madhya Pradesh 159029.67 82889.55 192 5 Maharashtra 336253.33 376406.41 89 10 Orissa 44811.00 59497.59 75 12 Punjab 159915.33 74150.83 216 3 Rajasthan 163933.67 99112.71 165 8 Tamil Nadu 397571.00 187562.09 212 4 Uttar Pradesh 352939.67 208132.10 170 6 West Bengal 83209.67 159664.05 52 14 Source: Computed

A.5.42: State Excise Duty: Taxable Capacity, Tax Efforts and Ranks (2008-09 to 2010-11)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 662195.67 170863.02 388 1 Assam 25366.33 54672.51 46 15 Bihar 109472.33 100536.78 109 9 Goa 11077.33 15086.37 73 13 Gujarat 5920.67 282220.37 2 16 Haryana 194778.67 134711.23 145 7 Karnataka 699354.33 222141.19 315 2 Kerala 153733.00 141679.10 109 10 Madhya Pradesh 295243.67 139414.45 212 4 Maharashtra 515074.67 601731.85 86 12 Orissa 86779.33 100581.68 86 11 Punjab 209465.00 119693.18 175 5 Rajasthan 244392.67 171875.57 142 8 Tamil Nadu 687071.33 315955.90 217 3 Uttar Pradesh 570318.67 339902.64 168 6 West Bengal 143669.67 254830.70 56 14 Source: Computed

196

A.5.43: State Excise Duty: Taxable Capacity, Tax Efforts and Ranks (2011-12 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 874725.67 286404.38 305 2 Assam 57114.33 97213.15 59 15 Bihar 257026.67 203335.24 126 8 Goa 21373.67 30551.31 70 13 Gujarat 8114.00 470650.90 2 16 Haryana 330612.33 237938.77 139 7 Karnataka 1114839.00 361407.50 308 1 Kerala 230543.33 244436.23 94 11 Madhya Pradesh 504818.33 254790.44 198 4 Maharashtra 947919.33 930538.42 102 10 Orissa 153421.33 171726.93 89 12 Punjab 336218.67 198220.37 170 6 Rajasthan 396663.00 325099.90 122 9 Tamil Nadu 1219025.33 527803.06 231 3 Uttar Pradesh 981499.67 542454.49 181 5 West Bengal 264683.00 427293.49 62 14 Source: Computed

A.5.44: State Excise Duty: Overall Taxable Capacity, Tax Efforts and Ranks (2005-06 to 2013-14)

States Tax Revenue Fiscal Capacity Index of Rank (Rs lakh) (Rs lakh) Tax effort Andhra Pradesh 1875651.01 561832.94 334 1 Assam 99946.66 187283.02 53 15 Bihar 407363.67 359470.98 113 9 Goa 38735.00 53888.20 72 13 Gujarat 18608.00 926973.21 2 16 Haryana 648816.67 447049.27 145 7 Karnataka 2236154.66 722120.53 310 2 Kerala 483053.66 476371.65 101 10 Madhya Pradesh 959091.67 477094.44 201 4 Maharashtra 1799247.33 1908676.68 94 11 Orissa 285011.66 331806.20 86 12 Punjab 705599.00 392064.38 180 5 Rajasthan 804989.34 596088.18 135 8 Tamil Nadu 2303667.66 1031321.05 223 3 Uttar Pradesh 1904758.01 1090489.23 175 6 West Bengal 491562.34 841788.24 58 14 Source: Computed

197

A.5.45: Tax Effort and Net Contribution of Each Tax (Andhra Pradesh) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 70379 309091 23 -3.28 Land Revenue& Agriculture Income Tax 36716 65137 56 -0.39 Motor Vehicle Tax and Passenger & Goods Tax 722882 685112 106 +0.52 Sales Tax 8326553 5057444 165 +44.97 Stamp Duty &Registration Fees 1109432 591504 188 +7.12 State Excise Duty 1875651 561833 334 +18.07 Total 12141613 7270121 167 +67.01 Source: Computed

A.5.46: Tax Effort and Net Contribution of Each Tax (Assam) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 8329 9652 93 -0.07 Land Revenue& Agriculture Income Tax 49592 33929 146 +0.85 Motor Vehicle Tax and Passenger & Goods Tax 160953 176967 91 -0.87 Sales Tax 1258655 1311894 96 -2.90 Stamp Duty &Registration Fees 58917 118044 50 -3.22 State Excise Duty 99947 187283 53 -4.75 Total 1636393 1837769 89 -10.96 Source: Computed 198

A.5.47: Tax Effort and Net Contribution of Each Tax (Bihar) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 18928 8507 222 +0.34 Land Revenue& Agriculture Income Tax 38481 50127 77 -0.38 Motor Vehicle Tax and Passenger & Goods Tax 502806 254680 197 +8.13 Sales Tax 1541133 2137125 72 -19.52 Stamp Duty &Registration Fees 369594 243844 152 +4.12 State Excise Duty 407364 359471 113 +1.57 Total 2878306 3053754 94 -5.75 Source: Computed

A.5.48: Tax Effort and Net Contribution of Each Tax (Goa) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty NA NA NA NA Land Revenue& Agriculture Income Tax 15159 8140 186 3.10 Motor Vehicle Tax and Passenger & Goods Tax 86920 110560 79 -10.45 Sales Tax NA NA NA NA Stamp Duty &Registration Fees 64266 53566 120 4.73 State Excise Duty 38735 53888 72 -6.70 Total 205080 226154 91 -9.32 Source: Computed 199

A.5.49: Tax Effort and Net Contribution of Each Tax (Gujarat) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 895711 337561 265 +6.15 Land Revenue& Agriculture Income Tax 359392 69456 517 +3.19 Motor Vehicle Tax and Passenger & Goods Tax 544469 816450 67 -3.00 Sales Tax 7145141 5536924 129 +17.72 Stamp Duty &Registration Fees 888176 1390107 64 -5.53 State Excise Duty 18608 926973 2 -10.01 Total 9851496 9077471 109 +8.53 Source: Computed

A.5.50: Tax Effort and Net Contribution of Each Tax (Haryana) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 39764 98811 40 -1.36 Land Revenue& Agriculture Income Tax 3348 52390 6 -1.13 Motor Vehicle Tax and Passenger & Goods Tax 292670 425551 69 -3.07 Sales Tax 3153602 2818568 112 +7.74 Stamp Duty &Registration Fees 645049 488602 132 +3.61 State Excise Duty 648817 447049 145 +4.66 Total 4783250 4330971 110 +10.44 Source: Computed 200

A.5.51: Tax Effort and Net Contribution of Each Tax (Karnataka) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 174532 175480 99 -0.01 Land Revenue& Agriculture Income Tax 50953 56089 91 -0.07 Motor Vehicle Tax and Passenger & Goods Tax 1196049 645897 185 +7.08 Sales Tax 5749987 5206191 110 +7.00 Stamp Duty &Registration Fees 1142014 960212 119 +2.34 State Excise Duty 2236155 722121 310 +19.50 Total 10549690 7765990 136 +35.84 Source: Computed

A.5.52: Tax Effort and Net Contribution of Each Tax (Kerala) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 9288 38677 24 -0.66 Land Revenue& Agriculture Income Tax 27669 41053 67 -0.30 Motor Vehicle Tax and Passenger & Goods Tax 379071 465023 82 -1.93 Sales Tax 4435592 2957421 150 +33.28 Stamp Duty &Registration Fees 673314 463506 145 +4.72 State Excise Duty 483054 476372 101 +0.15 Total 6007988 4442053 135 +35.25 Source: Computed 201

A.5.53: Tax Effort and Net Contribution of Each Tax (Madhya Pradesh) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 369993 134781 275 +4.25 Land Revenue& Agriculture Income Tax 83762 60274 139 +0.42 Motor Vehicle Tax and Passenger & Goods Tax 768501 535831 143 +4.20 Sales Tax 2817050 3847566 73 -18.62 Stamp Duty &Registration Fees 693249 478271 145 +3.88 State Excise Duty 959092 477094 201 +8.71 Total 5691647 5533818 103 +2.85 Source: Computed

A.5.54: Tax Effort and Net Contribution of Each Tax (Maharashtra) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 1105830 503689 220 +3.30 Land Revenue& Agriculture Income Tax 234873 75248 312 +0.87 Motor Vehicle Tax and Passenger & Goods Tax 1128978 999137 113 +0.71 Sales Tax 11699937 10932565 107 +4.20 Stamp Duty &Registration Fees 3453805 3836502 90 -2.10 State Excise Duty 1799247 1908677 94 -0.60 Total 19422670 18255818 106 +6.39 Source: Computed 202

A.5.55: Tax Effort and Net Contribution of Each Tax (Orissa) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 134278 107399 125 +1.05 Land Revenue& Agriculture Income Tax 98182 40708 241 +2.25 Motor Vehicle Tax and Passenger & Goods Tax 465777 301002 155 +6.44 Sales Tax 1896347 1527045 124 +14.44 Stamp Duty &Registration Fees 127859 248971 51 -4.74 State Excise Duty 285012 331806 86 -1.83 Total 3007455 2556931 118 +17.62 Source: Computed

A.5.56: Tax Effort and Net Contribution of Each Tax (Punjab) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 291425 131932 221 +3.18 Land Revenue& Agriculture Income Tax 7021 61001 12 -1.08 Motor Vehicle Tax and Passenger & Goods Tax 209874 449569 47 -4.78 Sales Tax 2665587 3526353 76 -17.16 Stamp Duty &Registration Fees 638386 456273 140 +3.63 State Excise Duty 705599 392064 180 +6.25 Total 4517892 5017192 90 -9.95 Source: Computed 203

A.5.57: Tax Effort and Net Contribution of Each Tax (Rajasthan) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 263416 170224 155 +1.74 Land Revenue& Agriculture Income Tax 58933 64800 91 -0.11 Motor Vehicle Tax and Passenger & Goods Tax 535511 567421 94 -0.60 Sales Tax 3595126 3372836 107 +4.15 Stamp Duty &Registration Fees 595557 590186 101 +0.10 State Excise Duty 804989 596088 135 +3.90 Total 5853532 5361555 109 +9.18 Source: Computed

A.5.58: Tax Effort and Net Contribution of Each Tax (Tamil Nadu) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 198475 278501 71 -0.56 Land Revenue& Agriculture Income Tax 39840 57989 69 -0.13 Motor Vehicle Tax and Passenger & Goods Tax 1202313 924185 130 +1.96 Sales Tax 8746954 9829799 89 -7.64 Stamp Duty &Registration Fees 1481389 2059629 72 -4.08 State Excise Duty 2303668 1031321 223 +8.97 Total 13972638 14181424 99 -1.47 Source: Computed 204

A.5.59: Tax Effort and Net Contribution of Each Tax (Uttar Pradesh) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 107395 278998 38 -1.77 Land Revenue& Agriculture Income Tax 169720 105639 161 +0.66 Motor Vehicle Tax and Passenger & Goods Tax 583060 823977 71 -2.48 Sales Tax 7086900 6196141 114 +9.17 Stamp Duty &Registration Fees 1755470 1219690 144 +5.52 State Excise Duty 1904758 1090489 175 +8.38 Total 11607303 9714934 119 +19.48 Source: Computed

A.5.60: Tax Effort and Net Contribution of Each Tax (West Bengal) Tax Tax Revenue Fiscal Capacity Index of Net Contribution to (Rs Lakh) (Rs Lakh) Tax Effort Above or Below Average Performance Electricity Duty 233963 130653 179 +1.39 Land Revenue& Agriculture Income Tax 424345 72743 583 +4.72 Motor Vehicle Tax and Passenger & Goods Tax 341269 317094 108 +0.32 Sales Tax 3729152 5091276 73 -18.28 Stamp Duty &Registration Fees 701000 996857 70 -3.97 State Excise Duty 491562 841788 58 -4.70 Total 5921291 7450411 79 -20.52 Source: Computed 205