Abstract:
This paper is an attempt to analyse the tax leakage in the broader
context of fiscal crisis in Kerala, highlighting the relationship between
the two. Tax leakage by causing a revenue drain may adversely affect
the primary account position and thus may indirectly influence the
fiscal sustainability of the state’s economy. This is the main thread of
argument coming out of the paper. We selected the general sales tax for
analysis since it is the major contributor of tax revenue to the state
government. The study covers the period of three decades from 1972-73
to 2000-01 for the analysis since the early seventies marks a sudden
breakthrough in consumption expenditure in Kerala due to the Gulf
boom. We used the Partial Adjustment Model for estimating the tax
leakage in Kerala. Our major finding is that almost thirty five percent of
the total tax potential of general sales tax is not tapped in the state.
Further, this amount of tax leakage is large enough to eliminate the
primary account surplus from the economy. In fact, keeping a primary
account surplus is a preliminary condition for attaining fiscal
sustainability in the economy. Thus, it is clear that the presence of tax
leakage in the economy is destroying even the primary condition for
achieving fiscal sustainability. However, tax leakage is a factor upon
which the state government has a control or in other words, the presence
of tax leakage may be considered as a mirror image of the inefficiency of
tax administration in the state. Clearly, furtherance in the tax
administration may be enough to prevent the proclivity of the deficit
indicators to deteriorate in the economy. Such an action may preclude
the transformation of fiscal crisis into a larger development crisis of the
economy
