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Structural breaks in the central government taxes in India, 1950-1951 to 2013-2014

Structural breaks in the central government taxes in India, 1950-1951 to 2013-2014 The purpose of this paper is to find out the factors contributing to major shifts in the growth of tax revenue through the estimation of structural breaks and analysis of major tax regimes. Recent contributions to optimal tax theory and empirical literature on the Laffer curve effect, based on elasticity of taxable income, challenge the settled understanding on the rate-revenue relationship. In this backdrop, the objective of the paper is to find out the relative significance of changes in tax rate, tax base and administrative reforms in affecting the growth of tax revenue in India. The paper considers tax data spanning a period of six and half decades for five major components of direct and indirect taxes (corporation, personal income, customs, excise and service) of the central government of India.Design/methodology/approachUnknown break point(s) – single and multiple – in the tax structure are identified by using the Quandt-Andrews and Bai-Perron econometric tests. These tests were conducted for two models of growth of taxes (tax revenue and tax-NDP ratio) estimated using semi-log functions. A simulation exercise was conducted to find out the robustness of the results by varying the trimming parameter and number of breaks. An analytical framework is used to understand the factors associated with these breaks.FindingsThere is more than one break identified for every tax component as per the results of Bai–Perron test. The simulation exercise suggests that estimated breakpoints are mostly robust. Economic growth, structural changes in the economy, simplification and rationalization of tax structure, tax competition, policies such as liberalization have contributed to the changing tax regimes. Results of this study suggest that high tax rates have not been, in particular, detrimental to achieving growth in revenue and factors other than changes in tax rates have been more prominent in bringing about the shifts.Originality/valueThis is, perhaps, the first paper exploring the multiple structural breaks in the fiscal variables in India. It offers an understanding of the changing regimes of central government taxes and the underlying factors for the same. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Indian Growth and Development Review Emerald Publishing

Structural breaks in the central government taxes in India, 1950-1951 to 2013-2014

Indian Growth and Development Review , Volume 14 (1): 34 – Mar 12, 2021

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1753-8254
DOI
10.1108/igdr-04-2019-0039
Publisher site
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Abstract

The purpose of this paper is to find out the factors contributing to major shifts in the growth of tax revenue through the estimation of structural breaks and analysis of major tax regimes. Recent contributions to optimal tax theory and empirical literature on the Laffer curve effect, based on elasticity of taxable income, challenge the settled understanding on the rate-revenue relationship. In this backdrop, the objective of the paper is to find out the relative significance of changes in tax rate, tax base and administrative reforms in affecting the growth of tax revenue in India. The paper considers tax data spanning a period of six and half decades for five major components of direct and indirect taxes (corporation, personal income, customs, excise and service) of the central government of India.Design/methodology/approachUnknown break point(s) – single and multiple – in the tax structure are identified by using the Quandt-Andrews and Bai-Perron econometric tests. These tests were conducted for two models of growth of taxes (tax revenue and tax-NDP ratio) estimated using semi-log functions. A simulation exercise was conducted to find out the robustness of the results by varying the trimming parameter and number of breaks. An analytical framework is used to understand the factors associated with these breaks.FindingsThere is more than one break identified for every tax component as per the results of Bai–Perron test. The simulation exercise suggests that estimated breakpoints are mostly robust. Economic growth, structural changes in the economy, simplification and rationalization of tax structure, tax competition, policies such as liberalization have contributed to the changing tax regimes. Results of this study suggest that high tax rates have not been, in particular, detrimental to achieving growth in revenue and factors other than changes in tax rates have been more prominent in bringing about the shifts.Originality/valueThis is, perhaps, the first paper exploring the multiple structural breaks in the fiscal variables in India. It offers an understanding of the changing regimes of central government taxes and the underlying factors for the same.

Journal

Indian Growth and Development ReviewEmerald Publishing

Published: Mar 12, 2021

Keywords: Taxation; Structural breaks; Fiscal policy; Structure and scope of government

References