Abstract

This paper analyzes the problem of tax evasion by incorporating a simple game theoretic framework wherein an individual is confronted with the decision of declaring income for taxation. The model is a re-formulation of Allingham & Sandmo (1972) and Srinivasan (1973) original single period decision making problem and extends it to a repeated game involving a tax payer and a tax authority. The game theoretic results shows that probability of audit and penalty rate are inversely related and that beyond a threshold penalty rate, the tax payer has no incentive to evade. In an infinitely repeated game setting, first, the threat of audit in all future periods acts as a deterrent to evasion and second, the result provides some intuitive understanding of the role of patience and equilibrium strategies in a long repetitive engagement that supports cooperation and prevents deviations.

Abstract

Telangana, the new State of India, was formed on June 2, 2014 as per Andhra Pradesh Reorganisation Act, 2014. As per the State Reorganization Act, all the outstanding liabilities on account of Public Debt and Public Account of the existing State of Andhra Pradesh needed to be “apportioned on the basis of population ratio” of the successor State Telangana. Given the development agenda of the new state, it is a formidable challenge to adhering to fiscal rules by containing the debt-GSDP ratio at 20 per cent, while maintaining the stipulated economic growth path of the State at 14-15 per cent, and even at the projected 20 per cent in the long run. Laudable the State’s efforts to maintain the high growth trajectory, however the macro-fiscal parameters of the State - especially deficit and debt- are not within the stipulated fiscal threshold ratio. Against this backdrop, Telangana has adopted a new debt strategy to go for elongation of maturity structure of outstanding debt, to over 40 years, to mitigate the roll-over risks and debt servicing costs. This resilient debt strategy of shift towards long term to maturity structure of public debt is particularly relevant when Telangana has ambitious projects like “Rythu Bandhu” scheme (income support to farmers) and the capital infrastructure projects for public irrigation and the comprehensive drinking water programme to all households termed “Mission Bhagiratha”. The tax buoyancy is above unity, though there are revenue uncertainties from GST and the intergovernmental fiscal transfers from Finance Commission. This can affect the State’s macro-fiscal projections. The fiscal marksmanship analysis shows that there are errors in fiscal forecasting, which calls for internal corrections within the Department of Finance in their forecasting models of revenue and expenditure.

The implications of expanding GSHI schemes in India has not been analyzed from a fiscal perspective. This paper analyzes the experiences of some of the early and largest GSHI schemes implemented in Indian States – in Andhra Pradesh, Tamil Nadu and Karnataka to understand the fiscal implications of initiating such schemes. We analyze three aspects: (a) the extent of fiscal burden on account of GSHI schemes and its consequences on other health expenditures, (b) the factors contributing to the extent of fiscal burden and (c) the effectiveness of spending on the schemes in terms of reducing out of pocket expenditure, extent of hospitalization coverage, and improved access to hospitalization services. Results suggest that expansion of GSHI schemes may skew expenditure away from primary and secondary care towards tertiary care, if fiscal space is limited. Although the schemes are largely dependent on private health providers for delivering services, a competitive public health system may help in containing costs and the corresponding fiscal burden. The evidence on effectiveness of public spending through such schemes has been mixed. 

In this paper we focus on how private capital may be channeled into activities that conserve biodiversity. We study three related issues. We evaluate the mechanisms for financing the environment in general. This includes a discussion of the financing through the recognition of risks, as well as direct financing.  We then turn our attention to the current status of financing for biodiversity. This includes a discussion of the instruments as well as the projects that are financed by such instruments. We present the constraints that inhibit financing of biodiversity. Finally we present some suggestions on policy design for improving private financing of biodiversity in India.

High levels of savings and investments are key to India’s sustained and robust long-term growth. While India’s saving rate has declined in recent years, a bigger challenge facing the economy is the intermediation of savings to finance the growing requirements of industry and infrastructure. This paper describes the trajectory of savings and investments in India. The major source of investment in the coming decades is expected to be investment in infrastructure and in micro, small and medium enterprises. The paper highlights the issues in infrastructure and MSME financing and proposes an agenda for reforms. Reduced financial repression, deep and liquid bond markets, improvement in banking regulation, improved access to bank credit to MSMEs should be the agenda for financial sector reforms. A framework for failure resolution of financial firms and a conducive environment for competition in the financial sector should be part of the strategy to promote the rate of savings and capital formation.

We develop a measure of business cycle conditions at a quarterly frequency – the coincident indicator – that better utilises the limited data resources available in India. The new indicator has a historical time series from 1999 onwards. The methods used here feature numerous improvements upon previous work in the field.

This paper analyses the cyclical nature of fiscal policy in South Asian economies. Drawing on the recent literature, we assess whether these economies have graduated to a counter-cyclical fiscal policy in the recent period. We find that fiscal policy is procyclical in most of the South Asian economies. Our analysis shows that the evidence of graduation to a counter-cyclical fiscal policy is weak for South Asian economies. Our findings are robust to alternative methods of extracting the cyclical component. This has implications for macro stabilisation policies in these countries and warrants a rethink of the fiscal policy framework.

India’s financial landscape has changed dramatically over the last decade. While India’s financial needs are growing, the current regulatory arrangements inhibit growth. This paper discusses the limitations of the present financial regulatory system. The evolving discourse on financial regulatory reforms recognises that the motivation for state intervention in finance must be guided by an understanding of the sources of market failure. This paper summarises the sources of market failure and identifies areas of state intervention in finance. Drawing on this approach, the Government backed Financial Sector Legislative Reforms Commission (FSLRC) prepared a single unified law- the Indian Financial Code (IFC) that seeks to modernise the Indian financial system by transforming the laws, the regulatory architecture and the working of the regulators. This paper discusses the components of the draft Indian Financial Code and describes the state of progress in implementing the IFC framework.

The mechanism to calculate how much reserves the RBI transfers to the Central Government has been at the forefront of debate amongst experts and policy makers. The present legal framework allows the RBI to choose what proportion of reserves it transfers to the Government. As a consequence, it has built up reserves that are higher than most other central banks hold. This paper presents the logic for why central banks might hold reserves. Drawing on cross country practices, it presents a discussion of the possible arrangements for transfer of reserves to the Government. Any institutional arrangement to determine a framework for reserves transfer must consider these options.

This paper compares the additional gains from higher tax devolution in the post 14th FC period, with the additional burden due to the withdrawal of certain central schemes and the changes in the sharing pattern of major Centrally Sponsored Schemes calling for greater contribution from the states. Average burden of the general category states due to CSS is 0.69 percent of combined GSDP of these states, whereas gains in tax devolution is 0.71 percent of combined GSDP of these states for the year 2015-16. In the following year, the difference is even less. This paper questions the rhetoric of greater autonomy for the states, which claims that the states have got additional money in the form of tax devolution and are therefore free to decide the priorities.  The paper also discusses declining priority for social sector and child budgeting in the post 14th FC years, 2015-16 and 2016-17.  

A comprehensive multistage Value Added Tax (VAT) system, viz., Goods and Services Tax (GST), is introduced in India since 1 July 2017. GST encompasses various taxes from Union and State indirect tax bases and it is a dual VAT system with concurrent taxation power to Union and State governments. It was envisaged that removal cascading of taxes and enshrining destination based consumption tax system under GST will encourage investment and improve ease-of-doing business in India. Though it is not right time to comment on success or failure of Indian GST system unless the tax system stabilizes, so far revenue mobilization from GST is not encouraging. The shortfall in GST collection has been acknowledged in the ‘Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement’ of the Union Budget 2019-20. The genesis of revenue shortfall may be design and structural in nature and/or compliance and tax administration related. However, the uncertainty surrounding GST revenue collection is an issue which needs an in-depth assessment for fiscal management of Union and State governments. The impact of revenue uncertainty will not be restricted to Union finances alone; it will spill over to state finances through inter-governmental fiscal transfers. Therefore, depending on seriousness of the uncertainties associated with GST revenue collection, devising an inter-governmental fiscal transfer framework may be a challenging task for the Fifteenth Finance Commission. Given the information available in the public domain, this paper attempts to explore possible causes of revenue shortfall and assess possible impacts of revenue shortfall on Union and State finances.

Key Words: Revenue Uncertainty, Inter-Governmental Fiscal Transfers, Goods and Services Tax (GST), State Finances, India.