Does petroleum tax revenue drive sales tax effort of Indian states? A stochastic frontier approach

Abstract

AbstractThis article evaluates the sales tax effort for tax revenues of 18 Indian states from 2011–12 to 2016–17, exclusive and inclusive of petroleum tax revenues, using stochastic frontier analysis. From empirical analysis, it is observed that sales tax revenue is significantly influenced by higher non‐agriculture GSDP, greater supply of bank credit and higher urbanization. The calculation of Sales tax effort is found to be overstated when petroleum tax revenue is included in sales tax. States' sales tax effort tends to become lower when the influence of petroleum tax revenue is factored out. It is found that Assam, Andhra Pradesh, Gujarat, Kerala and Haryana are the top five states with greater sales tax effort, inclusive of petroleum tax revenue, during the said period. The West Bengal, Maharashtra, Bihar, Goa and Madhya Pradesh are the bottom five states. Further, it is observed that only half of the states in India have shown improvement in their tax effort between 2011–12 and 2016–17, indicating no uniform improvement across the states. From the robustness analysis, a regression model exhibit similar results. Therefore, it can be suggested that assessment of the sales tax effort of Indian states should be made after having excluded the petroleum tax revenues from sales tax.