Tax Buoyancy Estimates for Indian States

Indira Rajaraman, Rajan Goyal and Jeevan Khundrakpam

MPRA Paper from University Library of Munich, Germany

Abstract: With the introduction of a destination-based VAT in all but eight states starting April 2005, there is need for a good baseline indicator of tax buoyancies in states in the period immediately preceding. This to provide such a base, with buoyancies estimated over a 23-year span starting in 1980-81. If estimated over a sufficiently long period of time, the buoyancy coefficient essentially estimates the underlying revenue-generating properties of the system with endogenised tax policy. A log linear trend fit over the entire period showed serial correlation, which is eliminated for all but one state, Assam, with the introduction of structural breaks. A third specification, including the log of the per cent share of industry in the domestic product, eliminates serial correlation for Assam, and improves the goodness-of-fit for some other states. In all but six states, the sign of the change in the buoyancy coefficient at the break is positive. Where the buoyancy-enhancing break occurs in the late 1990s, the spurt in tax effort might have been an endogenous response to the expenditure shock from implementation of the higher salary scales recommended by the Fifth Pay Commission.

Keywords: Tax buoyancy; Indian States; Structural Break (search for similar items in EconPapers)
JEL-codes: C52 H21 H71 (search for similar items in EconPapers)
Date: 2006, Revised 2006
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Citations: View citations in EconPapers (7)

Published in Economic and Political Weekly 16.41(2006): pp. 1570-1573

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