BackProperty taxes better for Indian states
Property taxes accelerate growth in India’s states, while commodity and service taxes put brakes on it, finds a study
PremiumTaxes are one of the main ways for governments to raise funds for the various services they provide. Different kinds of taxes are collected in India, but do some work better than others? A recent paper finds that while property taxes impact states’ growth positively, others such as commodity, service and income taxes may harm them.
Indian economists Yadawananda Neog and Achal Kumar Gaur use data on 14 Indian states from 1991 to 2016 for their study. They look at how much various tax categories contribute to a state’s tax revenues and link that to how fast the per capita income in that state grows.
The study finds that property taxes—yearly fees paid by property owners, the house tax for example—have a positive effect on states. Like all other taxes, property taxes also ‘distort’ the market by interfering with forces of supply and demand. But the funds raised and the good use these funds are put to by state and municipal governments more than make up for any distortion.
Commodity and service taxes, however, have a negative impact on growth. They are paid by final consumers of goods and services, and now come under the goods and services tax regime introduced in 2017. These taxes tend to have an inflationary effect as they raise prices of goods across the board.
Income taxes have a negative effect too as they impact household savings, and so lower people's ability to spend and invest.
So to accelerate growth in Indian states, policymakers need to change the ‘tax mix’, that is, the weights given to different taxes, and focus more on property taxes and less on commodity and service taxes, the authors conclude.
Also read: “Tax structure and economic growth: a study of selected Indian states"
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