Tax Effort of the Indian States from 2001–2002 to 2016–2017: A Stochastic Frontier Approach

Abstract

This article estimates the tax capacity and tax effort of 17 major states of India from 2001–2002 to 2016–2017 using the stochastic frontier panel data model. It is found that per capita income, agriculture activity, infrastructure, labour force and bank credit are the significant determinants of tax capacity, while social sector spending and central transfer to states are significant in determining tax effort. The Goods and Services Tax has reduced the states’ tax powers. Therefore, the states are highly dependent on their limited legislative taxes for revenue mobilization. However, there is little scope for the subnational governments to increase tax revenue as all states have achieved at least 90% of their tax potential.