New Delhi : A slowdown in tax revenue growth is emerging as a significant concern for both the Central Government and state governments, with new data indicating that tax collections are no longer keeping pace with the country’s economic expansion. While states have made notable progress in strengthening their own revenue base, declining tax buoyancy suggests that fiscal pressures could intensify if the trend continues.
According to the Comptroller and Auditor General of India (CAG) in its “State Finances 2024-25” report, States’ Own Tax Revenue (OTR) has become an increasingly important source of income, accounting for more than half of total revenue receipts in FY25. However, the pace of growth in these collections has slowed considerably over the past three years.
States Increasingly Rely on Their Own Tax Revenue
The report highlights that the share of Own Tax Revenue (OTR) in the total revenue receipts of states increased from 45.16% in FY17 to 50.13% in FY25.
This marks a significant shift in India’s fiscal landscape, indicating that states are gradually strengthening their ability to generate revenue independently through taxes such as:
- State GST (SGST)
- Excise Duty
- Stamp Duty and Registration Fees
- Motor Vehicle Tax
- Electricity Duty
- Land Revenue
A higher contribution from OTR provides states with greater financial autonomy, reducing dependence on central tax devolution and grants-in-aid.
Tax Growth Losing Momentum
Despite the rising share of OTR, the growth rate of tax collections has weakened substantially.
According to the CAG report:
- FY23: 19.81% growth in OTR
- FY24: 10.66%
- FY25: 8.05%
The steady decline suggests that although tax revenues continue to increase in absolute terms, they are growing at a much slower pace than in previous years.
Economists warn that slower revenue growth could limit the ability of both the Centre and states to finance infrastructure projects, welfare programmes, healthcare, education, and other development initiatives.
Tax Buoyancy Falls Below One
One of the report’s most significant findings is the decline in tax buoyancy, an important indicator of how effectively tax revenues respond to economic growth.
Tax buoyancy measures the percentage increase in tax collections relative to the percentage increase in Gross State Domestic Product (GSDP).
The report shows a continuous decline:
- FY23: 1.43
- FY24: 0.92
- FY25: 0.67
A tax buoyancy above 1 generally indicates that tax revenues are growing faster than the economy, reflecting improved compliance, stronger economic activity, or better tax administration.
However, a ratio below 1, as seen in FY24 and FY25, means that tax collections are expanding more slowly than economic growth, raising concerns about revenue efficiency.
Implications for State Finances
Experts believe the decline in tax buoyancy could have several implications for state finances.
Lower revenue growth may:
- Reduce fiscal flexibility
- Increase dependence on borrowing
- Delay capital expenditure
- Limit spending on social welfare programmes
- Restrict investments in infrastructure and public services
Although states are generating a larger share of their own income than before, slower growth in collections could make it difficult to sustain long-term development plans.
Fiscal Autonomy Depends on Strong Revenue Base
The debate over fiscal centralisation has renewed focus on the financial independence of states.
In India’s federal structure, Own Tax Revenue is widely regarded as the strongest indicator of a state’s fiscal health. A higher OTR enables states to finance development projects without excessive reliance on:
- Central statutory tax devolution
- Finance Commission transfers
- Centrally Sponsored Schemes
- Discretionary grants from the Union Government
Strengthening state-level tax administration and improving compliance are therefore considered critical for enhancing fiscal autonomy.
Need for Better Tax Administration
Policy experts suggest that improving tax collections will require:
- Greater GST compliance
- Expansion of the tax base
- Digitalisation of tax administration
- Improved enforcement against tax evasion
- Data-driven monitoring of revenue collection
States may also need to explore new avenues for revenue generation while maintaining a balance between taxation and economic competitiveness.
Challenges Ahead for Public Finances
The slowdown comes at a time when both the Centre and the states are facing increasing expenditure commitments, including investments in infrastructure, healthcare, education, social welfare, and green energy initiatives.
If tax revenues continue to underperform relative to economic growth, governments may have to rely more heavily on borrowing or rationalise expenditure to maintain fiscal discipline.
Outlook
While the increasing contribution of Own Tax Revenue to state finances is a positive development, the declining growth rate and falling tax buoyancy indicate that revenue mobilisation remains a key challenge.
The findings of the CAG’s State Finances 2024-25 report underscore the need for sustained reforms in tax administration, stronger compliance mechanisms, and broader economic expansion to ensure that tax collections keep pace with India’s growth ambitions. Strengthening revenue generation will be crucial for preserving fiscal stability and supporting long-term economic development at both the state and national levels.
