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Own tax revenue of states can be categorized as direct taxes and indirect taxes. Direct taxes include taxes on income and property whereas indirect taxes include taxes on commodities and services. Key sources of direct taxes for states are: (i) taxes on agricultural income, (ii) land revenue, and (iii) stamp duty and registration fees. Currently, agricultural income tax is exempted from income tax, irrespective of the level of income, except those on plantations levied by states like Assam. 5 Key indirect taxes include: (i) state goods and services tax (SGST), (ii) sales tax/value added tax (VAT) on alcohol and petroleum products, (iii) state excise duty on alcohol, (iv) taxes on vehicles, and (v) taxes and duties on electricity. More than 75% of own tax revenue of the states come from indirect taxes.

SGST: In 2019-20, SGST is estimated to be the largest source of own tax revenue of states (43%) (Figure 16). With the introduction of GST, many indirect taxes levied by the states have been replaced. While these taxes were completely under the control of each state, GST rates are now decided by the GST Council. This implies that states have limited flexibility in making decisions regarding tax rates on goods and services. Consequently, states have limited autonomy on a large part of its own tax revenue as the receipts from SGST depend on tax rates decided by the GST Council. States such as Jammu and Kashmir, Mizoram, and Tripura are estimated to receive more than 50% of their own tax revenue from SGST in 2019-20.

After SGST, the sales tax/VAT (23%), and the state’s excise duty (13%) are among the largest sources of revenue for the states. Sales tax/VAT and excise duty mainly come from these taxes on petroleum products and alcohol (these two products are not part of the GST system). Share of sales tax/VAT in own tax revenue of states such as Kerala, Tamil Nadu, and Andhra Pradesh is higher than the average. Some states have been considering alcohol prohibition which may lead to loss of tax revenue from the state’s excise duty. For instance, Bihar enforced alcohol prohibition from April 1, 2016. During the previous year, i.e., 2015-16, state’s excise duty contributed 12.3% of the total own tax revenue of Bihar (Rs 3,142 crore), which came down to nearly zero in the following years.

Stamp duty and registration fee applicable on transfer or sale of property is another major source of revenue for states, which is estimated to contribute 10% to the own tax revenue in 2019-20. The revenue from this source depends on the tax rates and the valuation of the property on which these rates are applied. The valuation of a property, in turn, depends on the land rates approved by states from time to time. In 2019-20, RBI observed that the approved land rates in most states are not market-determined. 5 Independent and market-related valuation of properties can help states in increasing revenue from this source. 5

Taxes on vehicles (6%), and electricity (3%) are among other important sources of own tax revenue. Contribution of taxes and duties on electricity is estimated to be higher than average in states such as Chhattisgarh (9%), Gujarat (9%), and Odisha (8%). Contribution of taxes on vehicles for most states is estimated to be between 5%-7%.