Measuring Accuracy of Projections of Central Taxes by the Finance Commission

This paper looks at the quality of forecasts/assessments made by some of the recent Finance Commissions for the shareable central taxes and own tax revenues of selected states. The Commissions covered under this analysis are Ninth to Twelfth Finance Commissions. It is observed that while direct taxes are underestimated in general, revenues from indirect taxes partially Union excise duties and custom duties have been over estimated. In respect of states, four selected states viz., Andhra Pradesh, Gujarat, Orissa and Assam are examined. While there is similarity between the approaches of Ninth, Tenth and Twelfth Finance Commissions in regard to middle and high income states, the Eleventh Finance Commission required that they raise tax revenues higher than what they were able to achieve.