Achieving harmonisation in design, structure and administration of taxes on goods and services was the major driving force behind the introduction of goods and services tax (GST) in India. Goods and services tax subsumes many taxes from both union and state tax bases. Achieving tax harmonisation in a federal system curtails fiscal autonomy of both the union and sub-national governments and therefore faces steep resistance. Revenue uncertainty associated with any tax reform is a major cause for concern for all governments and therefore the assurance of revenue protection given by the union government to states helped to achieve broad consensus in favour of GST. On average, state taxes subsumed under the GST used to contribute two-third of own tax revenue and finance one-third of total expenditure for general category states. Unlike the union government, states have limited taxation power (tax handles) to generate additional revenue to cope up with any major revenue shortfall on account of GST collection. Therefore, the revenue protection enshrined under the GST Compensation Act has played an important role behind introduction of GST in India. This has also helped the GST Council to experiment with design, structure and administration of GST during the GST compensation period (first 5 years of GST implementation) to moderate the impact of GST on Indian economy as well as facilitate ease of tax compliance. Given the ongoing shortfall in GST collection, many scholars believe that liberal GST revenue protection granted under the GST Compensation Act to states is unjustifiable. The GST compensation period will be over by June 2022, and thereafter GST collection of individual states is expected to depend on their tax capacity as well as tax effort. It is worthy to investigate whether states have tax capacity to sustain 14 per cent growth rate in tax collection, as projected in the GST Compensation Act. The objective of this article is to estimate tax capacity of the states with reference to major tax revenue subsumed under GST and see whether states could sustain 14 per cent growth in their GST collection during the GST compensation period if they put adequate tax effort. JEL Classification: H21, H68, H71, H77
Tax Capacity and Tax Effort: Extended Cross-Country Analysis from 1994 to 2009
