‘Tax holidays are a major hurdle to boost State’s own tax revenue’

Our Bureau Thiruvananthapuram | Updated on July 23, 2021

Financial status of most States jeopardised, says researcher R Mohan

Tax sops offered by State governments, especially tax holidays, are a major hurdle to enhancing the respective States’ own tax revenue and affects tax collection performance, according to R Mohan, researcher, author, and former commissioner, Income Tax.

Competition for attracting investment — overseas and domestic — also affects tax revenue collection, Mohan said while addressing a webinar organised by the Gulati Institute of Finance and Taxation (GIFT) here on ‘Tax performance of 15 Indian states — 1990-91 to 2018-19’.

He is an Honorary Fellow of GIFT.

Steep rise in expenditure

Mohan also pointed to a drop in tax collection in recent years and steep rise in expenditure, including revenue expenditure, jeopardising the financial status of almost all States.

There is a correlation between the State GDP and State’s own tax revenue. The OTR-GSDP ratio has expanded since 1990-91and until 2018-19. There is a clear trend of convergence in the ratio.

After 2018-19, this ratio has fell for high-income and middle-income States such as Maharashtra, Punjab, Haryana and Kerala. There is a slight increase in the case of low-income States, though.

According to him, most States including Kerala have never used their potential fully to enhancing collection.

Serious developmental issue

Thomas Isaac, former State finance minister, said that the tax revenue and the per capita income of most States including Kerala do not jell. This is a serious development issue that Kerala, in particular, has been confronting for the last couple of decades.

As for Kerala, per capita expenditure might be a better tool than per capita income for purposes of picking a trend in collections, as a major chunk of consumables are being imported here. The State can increase tax collection through an efficient tax collection mechanism, Isaac said.

Tax collections down

This happened during 2006-11 period, he said, when tax collections had increased 18-19 per cent. Later, this had dropped to 10 per cent owing to what he described as ‘a bunch of reasons.’ Still, this is a very serious issue that needs to be addressed effectively for the benefit of the State.

Various tax and financial experts joined Mohan and Isaac to express their views during the webinar. Earlier, KJ Joseph, Director, GIFT, delivered the welcome address.

Published on July 23, 2021

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