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Mobilizing Non-Tax SourcesA Study of Norms and Desired Recovery Rates

Mahesh C PurohitDirector

Foundation for Public Economics and Policy ResearchDelhi-110052

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Overview of the Study

Introduction: Definition; Classification etc.

Structure of Non-Tax Sources and Its Fiscal Significance in Indian States.Principles of Recovery Rate.Determination of Norms for User Charges. Recovery Rate of Select Non-Tax Services in Indian States. Policy Imperatives.

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Conceptual Background

Focus of the study is on the economics of non-tax revenue (NTR)sources of Indian states.NTR is broadly defined as payments made to the govt that are:– Compulsory and requited,– Voluntary and unrequited, and – Voluntary and requited.

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Conceptual Background (Contd.)

Qualifications to tighten the definition:– Payment made to the govt is requited by future

payment or by transfer of other assets, this is accounted as a capital receipt.

– Legal scope of NTR needs to be clearly specified. Converting departmental undertakings into PSUs is an example.

– Accounting basis has a bearing on the scope. Some of the activities (say tution fee charged from school/universities or out-door patient charges in hospitals) are not reflected in the budget.

– Issue of lotteries- net or gross?– Problem of notional receipts (e.g. in irrigation).

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Conceptual Background (Contd.)Keeping the above constraints in view, this study delineates the scope of NTR by considering only those sources that fall in the category of “voluntary and requited”.Precisely, NTR in this study Includes only – Non-capital (or revenue receipts);– Cash and kind receipts (not accruals) except taxes; and– Excluding notional receipts matched by contra expenditure

on a gross basis.It thus includes goods and services provided by the government that are in the nature of public goods, or merit goods or private goods. Net NTR (Gross NTR –expenditure on commercial activities) concept is also used in this study for commercial activities.

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Objectives of the Study

To analyze the structure of state non-tax sources; andTo suggest a rational structure yielding larger resources

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All-States Own Tax & Non-Tax Revenue (1993-94)

75%

25%

(i) States own tax revenue (ii) States own non-tax revenue

All-States Own Tax & Non-Tax revenue (2003-04)

81%

19%

(i) States own tax revenue (ii) States own non-tax revenue

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NTR in Different Countries

020406080

100120

UgandaSou th Afric

aUnited State s

BelarusUruguay

IndiaIndonesia

Paragu yVenezuela, R

BCongo, R

epKuwa it

C o unt r ies

Share of Non-tax Revenue Share of Tax Revenue

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Scope Defined

The study confines its scope to only those non-tax sources which originate from the administrative departments and departmental undertakings of non-commercial nature. Sources such as interest, profits and dividends arising from the States’ commercial undertakings are beyond its scope.

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Components of Non-tax Sources

Administrative Non-tax Receipts Accounts for 3/4th of the States own NTR. There are over 100 departmental sources of NTR in states classified under three broad components of administrative receipts viz., – A. General Services, – B. Social Services, and – C. Economic Services.

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All-States: Composition of States Own Non-tax revenue

1993-94

2003-04

State's Own Non-Tax Revenue 100 100

(i) Interest Receipts 30.35 22.56

(ii) Dividends and Profits 0.40 1.02

(iii) General services 18.93 24.54

(iv) Social Services 5.86 8.60

(v) Economic Services 44.46 43.27

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Social Services include

(a) Education, sports, arts and culture, (b) Medical and public health, and Family

welfare, (c) Water supply and sanitation,(d) Housing,(e) Urban development,(f) Information and publicity,(g) Labour and employment, and(h) Social security and welfare.

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Share of Components of Social Services (1993-94)

Labour and employment

5%

Water supply and sanitation

0%

Housing 6%

Medical,public health and

family welfare 35%

Education,sports,arts and

culture 24%

Other Social Services

19%

Social security and welfare

8%

Urban development

3%

Education,sports,arts and culture Medical,public health and family welfare Housing Urbal developmentLabour and employment Social security and welfare Water supply and sanitation Other Social Services

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Share of Components of Social Services (2003-04)

Other Social Services

7%Water supply and sanitation

12%

Social security and welfare

6%

Labour and employment

4%

Urbal development

13%

Education,sports,arts and culture 32%

Housing 8%

Medical,public health and

family welfare 18%

Education,sports,arts and culture Medical,public health and family welfare Housing Urbal developmentLabour and employment Social security and welfare Water supply and sanitation Other Social Services

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Economic Services include

Crop husbandry, Animal husbandry, Dairy development, Fisheries, Forestry and wild life, Roads and bridges, Co-operation, TourismOther agricultural and Major and mediumrural programme, irrigation,Special area programme, Minor irrigation,Village and small scale industries, Industries, Non-ferrous mining and

metallurgical industries.

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All-States: Composition of Economic Services

1993-94 2003-04

Economic Services (i to xvii) 100 100(i) Crop Husbandry 2.30 2.40(ii) Animal Husbandry 0.53 0.41(iii) Fisheries 0.37 0.39(iv) Forestry and Wildlife 21.58 11.67(v) Plantations 0.05 0.01(vi) Co-operation 1.69 1.38(vii) Other Agricultural Programme 0.54 0.29(viii) Major and Medium Irrigation projects 6.81 6.30(ix) Minor Irrigations 1.14 0.76(x) Power 3.89 7.13(xi) Petroleum 3.65 4.39(xii) Village and Small Industries 0.80 0.44(xiii) Industries 36.25 43.67(xiv) Ports and Light Houses 0.15 0.48(xv) Road Transport 6.21 6.28(xvi) Tourism 0.21 0.16(xvii) Others 13.83 13.84

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Selection of Services for study of Selection of Services for study of Recovery RatesRecovery Rates

Public works,Education, sports, art & culture,Medical and health,Water supply and sanitation,Forestry and wild life,Major and medium irrigation,Minor irrigation,Industries,Mines and minerals, and Roads and bridges.

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Data Base for Trend, Composition Data Base for Trend, Composition and Buoyancy for all NTRand Buoyancy for all NTR

Data for States’ own revenue (tax+non tax), NTR, and major components of NTR for individual states (29) as well as for ‘all-states’ collected from State Finance Study of RBI for the period 1993-04 to 2003-04. GSDP and its components, other variables for estimating norms collected from CSO, Bureau of Econ and Stat (states).

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Data Base from the State Budget Data Base from the State Budget DocumentsDocuments

For detailed study major 15 states have been selected.Classification of NTR in state budgets analysed (Annexure I, pp 55-56, circulated).Data collected for:– select 10 services;– from state budgets for 15 states;– two time-periods (1993-94 to 1995-96 and 2001-02 to

2003-04);– NTR, rev exp and cap exp, state-wise for each service.

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Norms for Pricing of Public Norms for Pricing of Public GoodsGoods

To determine norms for pricing of NTR sources, three methods followed:– Estimated norms through regression

technique;– All-states’ average norm; and – Best practice state’s norm

Based on the norms so compared, policy recommendations are finalized.

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Norms for Pricing of Public Norms for Pricing of Public Goods (Contd.)Goods (Contd.)

Public Works Department = f{PCSDP,SDPCONS}Education, Sports, Art and Culture = f(PCSDP,URBN}Medical and Public Health = f{PCSDP,HBEDS}Water Supply and Sanitation = f{PCSDP,URBN}

Where

PCSDP= Per Capita Income;SDPCON=State Domestic Product for Construction;HBEDS =Availability of Medical Facilities;URBN =Urbanisation ;

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Norms for Pricing of Public Norms for Pricing of Public Goods (contd.)Goods (contd.)

Forestry = f{PCSDP,FORAREA}Major and Medium Irrigation = f{PCSDP,SDPAGR}Minor Irrigation = f{PCSDP, SDPAGR}Mines and Minerals = f{PCSDP,SDPMIN}Industries = f{PCSDP,SDPAGR}Road and Bridges = f{PCSDP,SDPTRANS)

Where FORAREA = Area under Forests; SDPAGR= State Domestic Product for Agriculture;SDPMIN= State Domestic Product for Minerals; andSDPTRANS = State Domestic Product for Transports.

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Norms for Pricing of Public Norms for Pricing of Public Goods (contd.)Goods (contd.)

The regression results are given in Tables 1 to 11.

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Source Actual recovery ratio

State’s estim. (regrn)

Norm1

All-Stateaverage estim.ratioNorm2

Best-Prac State’s estim.Norm3

Recommended norm

1.Public Works Department 2.Education, Sports Art and Culture3. Medical and Public Health 4. Water Supply and Sanitation 5. Forestry 6. Major and Medium Irrigation 7. Minor Irrigation 8. Mines and Minerals 9. Industries 10. Road and Bridges

Actual and Desired Cost Recovery of Different Services

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Thanks.