The Hindu : `35 p.c. of State's ST potential not being tapped'

Online edition of India's National Newspaper
Wednesday, Sep 10, 2003

Southern States

Southern States - Kerala-Thiruvananthapuram

`35 p.c. of State's ST potential not being tapped'

By Our Special Correspondent

THIRUVANANTHAPURAM SEPT. 9. Roughly 35 per cent of Kerala's Sales Tax potential still remains untapped and, if not addressed immediately, this would have serious consequences for the sustainability of the State economy in the years to come, a study says.

According to the study, undertaken by the Centre for Development Studies (CDS) here, the resource crunch being experienced by the State Government has its roots as much in the inefficiencies of the tax collection mechanism as in the rising revenue expenditure. The study says that improvement in the system of revenue collection is a sure way to lift the Kerala economy from the deepening fiscal crisis and in reinstating the fiscal sustainability of the State Government.

The study, undertaken at the instance of the Planning Commission, covers three decades from 1972-'73 to 2000-'01, the early seventies being used as the reference point because of the sudden spurt in consumption expenditure in Kerala on account of the `Gulf boom'. Own Tax Revenue (OTR) constitutes 60 per cent of the State Government's total revenue and it finances about 45 per cent of the State's revenue expenditure. According to the study, Kerala's Own Tax Revenue as a percentage of the State Domestic Product declined from 11.01 in 1990-'91 to 8.60 in 2000-'01 and as a percentage of Modified State Income, which also takes into account the flow of foreign remittances into the State economy, it fell from 12 per cent to 7 per cent during the same period.

The trend of Own Tax Revenue to lag behind the Net State Domestic Product and Modified State Income (MSI) began in the mid-1980s indicating the beginning of heavy tax leakage and fiscal laxity of the State Government. The last two decades also saw the State's Own Tax Revenue (OTR) as a percentage share of Total Revenue Expenditure (TRE) falling, the figures being 73.09 in 1980-'81 and 49.42 in 2000-'01.

The study, done by P.B. Rakhe and published as a working paper by the CDS, says that the down trend in Own Tax Revenue is all the more serious because it has happened at a time when the funds transferred from the Centre has been declining at an alarming rate. From 7.01 per cent of the Net State Domestic Product (NSDP) in 1990-'91, the share of Central transfers as a percentage of the NSDP had fallen to 3.23 per cent in 2000-'01. The fall, as a percentage share of Mean State Income, was from 6.51 in 1990-'91 to 2.89 in 1999-2000. As a result, the share of public expenditure financed by Central transfers also showed a declining trend, from 30.22 per cent in 1990-'91 to 18.53 in 2000-'01. This, the study suggests, has contributed to the worsening fiscal deficit of the State Government.

The Own Non-Tax Revenue (ONTR), which is the second source of internal revenue, as a percentage of the State Domestic Product, also fell during the last two decades, from 2.62 in 1980- '81 to 1.87 in 2000-'01. As a percentage of the MSI, the ONTR fell from 1.59 per cent in 1990-'91 to 0.69 per cent in 1999-2000. The ONTR as a percentage share of total revenue expenditure declined from 14.99 in 1980-'81 to 10.73 in 2000-'01. This, the study says, may point to the declining utilisation of public services in Kerala.

The study estimates the tax leakage in rupee terms during 2000-'01 to be Rs. 2,190.23 crores, the actual collection during the year being Rs. 3,971.43 crores against an estimated potential of Rs. 6,161.66 crores. The leakage was the lowest in 1975-'76 when it stood at 18.07 per cent of the tax potential. It had risen subsequently to as much as 43.67 per cent in 1983-'84 to fall to 27.13 per cent in 1996-'97 and rise once again to the current level of 35.55 per cent. "The tax leakage may create problems in the revenue mobilisation side of the State's economy and thus may intensify the financial crunch faced by the State,'' the study says.

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