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Estimation of tax leakage and its impact on fiscal health in Kerala


  • P.B. Rakhe

    (Centre for Development Studies)


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.

Suggested Citation

  • P.B. Rakhe, 2003. "Estimation of tax leakage and its impact on fiscal health in Kerala," Centre for Development Studies, Trivendrum Working Papers 347, Centre for Development Studies, Trivendrum, India.
  • Handle: RePEc:ind:cdswpp:347

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    References listed on IDEAS

    1. Timothy Cason & Daniel Friedman, 1999. "Learning in a Laboratory Market with Random Supply and Demand," Experimental Economics, Springer;Economic Science Association, vol. 2(1), pages 77-98, August.
    2. Wallace E. Oates, 1999. "An Essay on Fiscal Federalism," Journal of Economic Literature, American Economic Association, vol. 37(3), pages 1120-1149, September.
    3. Rajaraman, Indira & Vasishtha, Garima, 2000. "Impact of grants on tax effort of local government," Working Papers 00/1, National Institute of Public Finance and Policy.
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    Cited by:

    1. R. Mohan, 2010. "Taxing Powers and Developmental Role of the Indian States: A Study with Reference to Kerala," Working Papers id:2997, eSocialSciences.
    2. K P, Kannan & Pillai N., Vijayamohanan, 2007. "Evolution of Social Security in the Lap of Public Action: Recounting the Experience of Kerala," MPRA Paper 9691, University Library of Munich, Germany.
    3. T.M. Thomas Issac & R. Mohan, 2016. "Sustainable Consolidation: Suggesting the Way Ahead for Kerala," Working Papers id:10789, eSocialSciences.
    4. R. Mohan & D. Shyjan, 2005. "Taxing powers and developmental role of the Indian states: A study with reference to Kerala," Centre for Development Studies, Trivendrum Working Papers 375, Centre for Development Studies, Trivendrum, India.

    More about this item


    Kerala Economy; Tax Leakage; General Sale Tax; Fiscal Sustainability;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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