Macroeconomic performance and tax revenue the case of gujarat state

Abstract

It is hypothesised that the tax revenues of a state economy would be sensitive to the macroeconomic performance of the state economy measured in terms of inflation and the growth of real income. The case of Gujarat state over the period 1980-81 to 1997 to 98 is considered for examining this hypothesis. The time trends of the state s tax revenue, GSDP and implicit deflator are estimated and relatively high instability of the growth of income in the state is brought out. Major limitations of the methodology used by the Tenth Finance Commission to estimate the buoyancy of the tax revenues of the states are pointed out and corrected for Gujarat to get a more realistic, acceptable and analytically usable estimate. The Gujarat data seem to support the hypothesis of the same buoyancy of tax collection for inflation and real income growth. Very low tax buoyancy indicated serious problems with the tax administration and tax system in the state.