Goods and Services Tax efficiency across Indian States: panel stochastic frontier analysis
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Goods and Services Tax efficiency across Indian States: panel stochastic frontier analysis Sacchidananda Mukherjee1
© Editorial Office, Indian Economic Review 2020
Abstract In public finance, estimation of tax potential of a government—either federal or provincial—has immense importance to understand future streams of tax revenue. Tax potential depends on tax capacity and tax effort (TE) and, therefore, joint estimation of both the functions is desirable. There are several frameworks to estimate tax capacity and tax efficiency (tax effort); in the present paper, time-variant-truncated panel Stochastic Frontier Approach (SFA) is adopted to estimate the functions jointly for the period 2012–13 to 2019–20. The findings of the study could be useful for policy and especially for the sitting Fifteen Finance Commission. The results of the study show that GST capacity of states depends on size and structural composition of the economy. Introduction of GST has reduced states’ GST capacity and the impact is restricted to scale only. The study has used data from GST Network (GSTN) database for the post-GST period and given all other factors at their levels, GSTN data show lower GST capacity for high-income states and higher capacity for low-income states. The relationship between per capita income (PCI) of states and tax efficiency is non-linear and as PCI rises, TE falls and thereafter it rises. Minor states (special category states and UTs with legislative assembly) have lower tax efficiency. Delhi and Goa have the highest GST gap and on average major states could increase their GST collection by 0.52 percent of GSVA and minor states by 1.15% if they increase their tax efforts. Keywords Tax capacity · Tax efficiency · Goods and services tax (GST) · Value added tax (VAT) · Stochastic frontier approach · Panel data analysis · States of India JEL Classification H21 · H71 · H77 Electronic supplementary material The online version of this article (https://doi.org/10.1007/s4177 5-020-00097-z) contains supplementary material, which is available to authorized users. * Sacchidananda Mukherjee [email protected] 1
National Institute of Public Finance and Policy (NIPFP), 18/2, Satsang Vihar Marg, Special Institutional Area, New Delhi 110 067, India
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S. Mukherjee
1 Introduction A comprehensive multistage value added tax (VAT) system, namely goods and services tax (GST), is introduced in India since 1 July 2017. GST encompasses various taxes from the union and state indirect tax bases, and it is a dual VAT system with concurrent taxation power to the union (federal) and state (provincial or sub-national) governments. The shift from origin-based VAT system to destination-based GST system is expected to reduce horizontal fiscal imbalance among Indian states. It is also expected that states having larger consumption base will gain from GST as compared to states having larger production base. It would be difficult to comment on success of the GST system in terms of revenue mobilization, as the new tax
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