POVERTY REDUCTION STRATEGY TN

Table 3.3 shows the performance of own tax revenues in Tamil Nadu relative to
GSDP in terms of major tax revenue sources. It also gives annual buoyancy and growth
rates of major taxes. GSDP is taken as the 1999-00 base series. By far the sales taxes are
the most important source of own tax revenue in Tamil Nadu, followed by state excise
duties and stamp and registration duties. The slightly lower budgeted figure for own tax
revenue relative to GSDP in 2009-10 reflects consensus of the revenue impact of
introduction to VAT which the state has recently implemented.
The introduction of state value added tax (VAT) has implied some changes in the
tax-GSDP ratio. The current practices in implementation imply restrictions on the taxrates
that a state may have. For the states in general, the tax rates of 4, and 12.5 have
been prescribed by the Empowered Committee of Finance Ministers. An indicative list of
goods to be placed in different categories has also been provided. Tamil Nadu has
historically been a highly taxed state. The shift to VAT essentially means that its tax rates
will be in line with other states although there is some flexibility in the selection of goods
that are placed in the exempted and lower rate category. As a result in 2007-08, the
growth rate of sales tax fell drastically. The sales tax buoyancy has recovered since than
but is still below one. As discussed earlier, the share of services in GSDP will continue to
increase. But states are not able to tax the services since it has been placed in the union
list. The fastest growth sector in Tamil Nadu is the services sector, taxation of which is
reserved for the central Government. Much will depend on how the proposed goods and
services tax (GST) takes shape.
In BE 2009-10, as shown in Table 3.3, growth rates have fallen for most of the
taxes. Sales tax revenue has fallen showing the impact of introduction of VAT.
Appendix Table 3.1 shows the sequence in which states have introduced VAT in the
country. However, as petroleum prices have increased substantially in 2008-09, and since
special rates apply for petroleum grant products, it is expected that tax revenue
buoyancy will remain high even in the case of State VAT.
d. Non-tax Revenue: Untapped Potential
Revenue collection in Tamil Nadu relies primarily on the state’s own tax system (about 70
percent). Another 15 percent of revenue comes from shared central taxes devolved to
Tamil Nadu. Only 7 percent of total revenue is from non-tax revenue. Tamil Nadu ranks
low in non-tax revenue relative to 14 major Indian states. Part of the reason is that some
user charges (such as bus fares) do not go directly to the state’s treasury but are
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