How good are major states in raising taxes? | Number Theory

HT has analysed the revenue mobilisation performance of India’s major states using a recently released report by the CAG. Two states-- Kerala and Tamil Nadu -- that elected new governments in the latest election cycle have presented White Papers on their fiscal health, or lack thereof. State finances have increasingly emerged as a critical nerve of India’s overall fiscal health. States have lost some fiscal autonomy after the roll-out of the Goods and Services Tax (GST) and they are also rolling out more and more populist schemes to win elections. This has made states’ ability to mobilise revenue more important than ever. HT analysed the revenue mobilisation performance of India’s major states using a recently released report by the Comptroller and Auditor General (CAG), which provides fiscal data from 2015-16 to 2024-25. Here are three key takeaways from the analysis.Representational image. (Unsplash)How good are major states in raising taxes?Two in three states have seen their tax-GSDP ratio fall between 2015-16 and 2024-25 This is the most interesting and damning finding from the CAG report. Twelve out of 18 large states saw their State Own Tax Revenue (SOTR) to Gross State Domestic Product (GSDP) ratio decline between 2015-16 and 2024-25. Bihar recorded the steepest fall, followed by Tamil Nadu. Bihar’s deterioration is largely self-inflicted because it imposed prohibition in 2016, which wiped out excise revenues. This means that the recent Tamil Nadu White Paper has a point in criticising its predecessor for allowing the SOTR-GSDP ratio to fall under its watch.Revenue raising capacity varies across taxes for states The tax powers available to states differ significantly from those of the Union government, which taxes income, corporate profits, imports and collects GST before sharing proceeds. While GST and VAT on petroleum products account for a large share of state revenues, states also raise money stamp duty, motor vehicle taxes and excise duties on alcohol. Outside GST, states retain greater policy autonomy. This makes it interesting to look at ratio of GSDP with individual taxes. Once again, the results are interesting.