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ABSTRACT

This paper examines the tax buoyancy of own tax revenue (OTR) before and after the implementation of state Value Added Tax (VAT) for 14 major Indian states. Further, an attempt is made to find the tax buoyancy of high and low income states before and after the implementation of state VAT separately. As many of the Indian states implemented state VAT in their states from the financial year 2005-06, the period after 2005 is considered as post VAT period. An annual data set for the period of 1993-94 to 2012-13 is used and a double log regression model is employed to calculate buoyancy coefficient. The estimate of own tax buoyancy coefficient are found to be positively significant and more than unity for all major states except (Bihar and West Bengal) evincing the fact that the ratio of own tax revenue to gross state domestic product is increasing with the advancement of the economy. The findings of analysis also suggest that in the post state VAT period, the tax buoyancy coefficient for high income states has slightly decreased and variability among the states has increased while in low income states tax buoyancy coefficient has increased and variability among states has decreased. So, implementation of state VAT rationalizes in tax for the states and this helps more to the low income states to exploit their base, i.e., Gross State Domestic Product (GSDP) to increase revenue collection.

Keywords - Tax Buoyancy, Tax Efforts, State VAT, Impact of State VAT and Fiscal Performance, Elasticity of Tax Revenue

Introduction

For a tax system in a developing country the response of tax revenue to changes in income has often been singled out as a vital parameter in measuring the performance. This response is measured by tax elasticity and tax buoyancy (Charles 1972). Tax buoyancy estimate, measures the percentage change of tax revenue to one percent change in the tax base usually proxied by Gross State Domestic Product (GSDP). A tax is said to be buoyant if the tax revenues increases more than proportionately in response to a rise in national income or GSDP. Tax buoyancy is a crude measure which does not distinguish between discretionary and automatic growth of revenue like tax elasticity. In developing countries, where policy parameter changes...

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