The study attempts to measure the income tax revenue efficiency of 17 major states of India for the period 1989-90 to 2001-02, using a stochastic frontier approach, such that the efficiency varies across both time and states. It is found that inefficiency effects are certainly playing a highly significant role in the income tax revenue collection for various Indian states over the years. The income tax rate and exemption limit have a negative effect over income tax revenue, whereas real personal income and tax base have a positive one on revenue. The determinants of revenue inefficiency have also been found, among which literacy rate and economic crimes appear to play a signicant role. Finally, it has also been checked whether the inefficiency rankings of various states during the time period under analysis show convergence. It is found that the null hypothesis of no association between ranks of different years is decisively rejected implying that the poor performing states are not improving over the years.

The tax on personal income tax constitutes a significant component of overall government revenue of any country (Table 1). But, pervasive with income tax collections is the problem of evasion and under-reporting of taxes. In fact, the problem is more severe in case of developing countries leading to an increased pressure to rely on borrowings and inflation tax increasing the fiscal strain. In India, Income tax collections constitute approximately 50% of overall direct tax collections. All Individuals, Hindu Undivided Families, Companies, Firms, Association of Persons, Body of Individuals, local authority and every articifial judicial person who are required to file their tax returns under Section S-2(31) of Income Tax Act 1961 would come under the income tax bracket.

In India collections from income taxes are especially low, forming about 1.2% of GDP during 1971-90 compared to 3.5% on average for countries with per capita income below $360.¹ Thus, it becomes very important to study from the policy perspective how the revenue across states is affected by various important variables alongwith the determinants of inefficiency of revenue where efficiency implies how best a state is performing in terms of income tax revenue vis-a-vis other states. The presence or absence of a tendency for states to converge with respect to efficiency rankings over time also should be ascertained.

A Frontier Approach to Income Tax Revenue Efficiency in select Indian States, income tax, revenue efficiency, stochastic frontier, efficiency varies,inefficiency effects, income tax revenue,personal income, determinants of revenue.