Relationship with revenue growth: According to an analysis of income tax and Gross Domestic Product (GDP) of Indian states from 2012 to 2018, a 1% economic growth results in nearly 2% growth in income tax revenues.
Ease of Doing Business (EoDB): States with a business-friendly environment that allow businesses to function without wasting their time on cumbersome regulations benefit hugely.
India ranks at a low indicator 121 (on the payment of taxes) in the World Bank’s EoDB rankings for 2019, resulting in poor overall 63rd rank in 2019.
Analysis of states performance:
Gross state domestic product (GSDP): For the country as a whole, this stood at 7.1%; after excluding the North-East, it varied from 10% in Gujarat to 5.1% in Puducherry.
Rising Income-Tax revenues: Tax buoyancy across states is generally very high (revenue growth is on an average about twice the rate of economic growth).
Haryana carved out of Punjab, and Uttarakhand out of Uttar Pradesh, have recorded impressive annual income-tax growth rates of 14.77% and 15.09% (national average: 13.19%).
Maharashtra as the highest revenue generator: In 2017-18, largely because of Mumbai, Maharashtra raised 2.81 times the revenue of Delhi, as compared to 2.59 times in 2011-12.
In contrast, West Bengal (despite having Kolkata as a premier centre of business once) has slid to 7th position; its GSDP (5.3%) and revenue growth rates (11.5%) lower than the national average.
Poor performance by Punjab: Due to poorly directed subsidies to farmers by way of free power and water strained the state’s finances and harmed agricultural land.
Way forward:
Focus on the economic growth: which lead to generation of more revenue for the states and central government. (since the tax buoyancy on the states is already high)
Reduced discretionary controls: will lead to healthy economic and revenue growth as states. E.g. as seen in the states of Madhya Pradesh, Telangana and Gujarat.
Promoting voluntary compliance: and reducing punishment for the procedural lapses of ordinary taxpayers; It should not focus on negative things—penalties, prosecution, surveys to raise revenues.
Policymaking sensitive to local conditions: since, in a land of subcontinental proportions, making policies and setting targets top-down for the country as a whole is bound to result in distortions.