Competition to lure investment hurting states’ tax revenues: R Mohan, former income tax commissioner

There is a correlation between the state GDP and the state’s own tax revenue

The competition among states to attract investment through tax sops is adversely affecting their tax revenues, according to some experts. “Tax holidays are the major hurdle to enhance states’ tax revenue,” said R Mohan, former income tax commissioner and an honorary fellow of Gulati Institute of Finance and Taxation (GIFT), a think tank based in Thiruvananthapuram.

Delivering a speech at a webinar organised by GIFT, on ‘Tax performance of 15 Indian states – 1990-91 to 2018-19: What do the trends reveal’, he said that not only the drop in tax collection in recent years but steep rise in expenditure, including revenue expenditure, jeopardised the financial status of almost all Indian states.

There is a correlation between the state GDP and the state’s own tax revenue (OTR). The OTR–GSDP ratio had been expanding since 1990-91 and this is the trend till 2018-19, Mohan said. “But since 2018-19 this ratio began to fall in the case of high income and middle-income states like Maharashtra, Punjab, Haryana and Kerala,” he said.

There is a slight increase in the case of low-income states, he added. According to him most of the states including Kerala had never used their potential fully in enhancing the tax collection.

Kerala former finance minister Thomas Isaac said that the tax revenue and the per capita income of most states including Kerala are not in tandem. This is a serious development issue Kerala is confronting for the last couple of decades. For Kerala, per capita expenditure might be a better tool than per capita income as a major chunk of consumables is being imported here, Isaac said.

Kerala can increase tax collection through an efficient tax collection mechanism Issac said noting that the state’s tax collection increased 18-19% during 2006-11. However, tax collections growth dropped to 10% owing to a bunch of reasons, he said.