Bangalore currently contributes to about 60% of tax revenues

C. Shivkumar

Worksheet

GSDP for current year is expected to be Rs 1.68 lakh crore
Internal tax revenues for next FY could be Rs 22,533.79 crore

Bangalore, March 24

Karnataka has achieved tax coverage of close to 12 per cent of the gross state domestic product (GSDP) for the current fiscal year.

Expanding the tax to GDP ratio was part of the fiscal correction objectives, State Government officials said. However, sources said the increase in revenue this year was Bangalore-centric, which currently contributes to about 60 per cent of the tax revenues. This included both sales tax and excise from liquor.

Revenue collection was achieved partly on account of a buoyant economy in the State driven largely by information technology sector, that is currently providing boost to consumption, sources said. As a result, the GSDP for the current year is expected to be Rs 1.68 lakh crore.

For the next fiscal year, the target is to push the tax to SDP ratio close to 12.5 per cent, the sources said. For increasing the revenue, the sources said the State Government was targeting a nominal GSDP growth of close to 11 per cent. This is based on the fiscal deficit target mentioned for the next financial year at 2.82 per cent of the SDP. It is based on the GSDP estimate that Karnataka's internal revenue growth of 20.83 per cent has been fixed.

The internal tax revenue fixed for the next financial year is Rs 22,533.79 crore or 16 per cent over the current year. Inclusive of non-tax revenues, the internal revenue estimate for the next fiscal is Rs 27,142 crore.

In fact, the sources said the tax revenues would have actually been lower this year due to the Rs 1,100 crore shortfall in VAT receipts. But the Centre's compensation for VAT shortfalls has been factored as revenue receipts. The State Government expects full compensation for the VAT revenue shortfall this year. This, along with the higher than estimated receipts in excise, were one of the major reasons for pushing up the tax to GSDP ratio this year, the sources said.

However, despite the fiscal correction, the State Government's tax buoyancy continued to be among the lowest in the country at 1.16. Tax buoyancy captures the incremental increase in tax collection for every per cent rise in the GSDP. In fact, the tax buoyancy of Karnataka has undergone little change since the beginning of this decade.

Consequently the sources said, that unless this issue was addressed, the sustainability of the fiscal correction would become difficult. High tax buoyancy would indicate greater tax compliance and wider base. In fact, the sources said the conditions that helped improve revenue collections this year could not be relied on for the long term.

This was especially since the Centre was in the process of progressively reducing the compensation to the states for VAT shortfalls.

(This article was published in the Business Line print edition dated March 25, 2006)
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