Since a long clip it has been the consensus that mobilisation of resources is a sine qua non for the planned economic development of a state. Optimum resource mobilisation ensures addition in end product, income and employment in an economic system. Therefore, it has been considered as the agencies to achieve a high and rapid economic growing. The instance of India is no exclusion. The development programs in India have been giving highest precedence to the optimum mobilisation of resources. In India the function of revenue enhancement as a beginning of resource mobilisation is really important. In 1950-51 when the planning procedure was initiated, the ratio of entire revenue enhancement gross to Gross Domestic Product was every bit low as 6.22 % . Since so it has been lifting steadily and it was 19.52 % in the financial twelvemonth 2008-09. For a underdeveloped state like India which started its development attempt with a really low per capita income and has recorded an highly modest rate of growing, this record in call uping revenue enhancement gross is unusually good by any criterion.

In India, revenue enhancement gross refers to the compulsory transportations to the cardinal authorities for public intents. But it excludes certain mandatory transportations such as mulcts, punishments, and most societal security parts. The authorities collects revenue enhancement gross by enforcing both direct and indirect revenue enhancements. Direct revenue enhancements include income revenue enhancement, estate responsibility, wealth revenue enhancement, gift revenue enhancement, land gross, hotel grosss revenue enhancement, and outgo revenue enhancement. Similarly, indirect revenue enhancements include imposts responsibility, brotherhood excise responsibilities, service revenue enhancement, province excise responsibility, value added revenue enhancement, revenue enhancements on vehicles, revenue enhancements on electricity and revenue enhancements on goods and riders.

In 19990s, the gross revenue enhancement grosss as a ratio of Gross Domestic Product remained dead at around 8 to 10 % degree in the face of reforms of the revenue enhancement construction that entailed decrease in indirect revenue enhancements and which was non to the full compensated by the rise in direct revenue enhancements. But in last five old ages stoping 2007-08, the gross revenue enhancement gross grew at an mean one-year rate of 22.4 % which was composed of an one-year mean growing of 16.3 % in indirect revenue enhancements and 29 % in direct revenue enhancements. From 2007-08 onwards there has been increase in direct revenue enhancement aggregations relative to indirect revenue enhancement aggregations. In the category of direct revenue enhancements, the chief part came from corporate income revenue enhancement and within indirect revenue enhancements, while excise grosss remained less floaty, imposts gross grew slightly steadily, and service revenue enhancement emerged as the chief driver of gross growing ( See Table 1 ) . It is really of import that the proportion of gross revenue enhancement gross to entire authorities gross which was 70 % in 2003-04 increased to 81 % in 2007-08 and to 82 % ( about ) in 2008-09.

## Table 1: Beginnings of Tax Revenue in India

# includes revenue enhancements referred in ( a ) & A ; ( B ) and revenue enhancements of Union Territories and “ other ” revenue enhancements

* Refers to gross domestic merchandise at current market monetary values

Beryllium: Budgetary Estimates

Rhenium: Revised Estimates

Beginning: Economic Survey of India, 2008-09

Therefore, revenue enhancements play a major function in coevals of gross and hence, in the economic growing of the state. Insufficient revenue enhancement gross can falsify resource allotment and cut down the economic public assistance and growing. Hence, an ideal floaty revenue enhancement system is indispensable to accomplish a balance between resource allotment and economic growing with stableness. However, it is important to observe that an ideal revenue enhancement system ever has to compromise between the authorities ‘s gross and the economic development of the state. A revenue enhancement system with comparatively higher rates of revenue enhancements would discourage nest eggs and development, while a comparatively lower revenue enhancement rates would take to less gross to the province. A revenue enhancement straight influences the nest eggs of persons and companies ; it is a dual edged blade used to restrict ingestion activity and at the same clip, allows the taxpayer to salvage money in different development activities ( Swami, 1995 ) .

Looking at this critical function of revenue enhancements, World Bank sporadically relates that economic development is straight correlated to the degree of revenue enhancement, more so in developing states where the lower fringy revenue enhancement rates have higher economic growing effects. Besides, the policy shapers in developing states have a dedicated involvement in the snap of economic activity with regard to revenue enhancements, proposing that provinces and parts are interested in pull stringsing their revenue enhancement systems in an effort to pull concern or to further growing ( Wasylenko, 1997 ) .

Schumpeter ( 1942 ) emphasized the function of entrepreneurial activity in bring forthing new thoughts that raise productiveness. The explicit investings made by the enterprisers in the creative activity of new thoughts generate growing. A recent literature argues that the revenue enhancement construction of a state can impact the rate of entrepreneurial activity and the rate of creative activity of new thoughts and so the rate of economic growing. Cullen and Gordon ( 2002 ) shows that there are several possible paths through which revenue enhancements can impact the sum of entrepreneurial risk-taking.

At foremost, there is a revenue enhancement encouragement to being freelance when the effectual revenue enhancement rate on concern income is less than the revenue enhancement rate on pay and salary income. This would happen to the extent that the corporate income revenue enhancement rate is below fringy personal income revenue enhancement rates.

Second, the entrepreneurial risk-taking activities are affected by the revenue enhancement construction to the extent that net incomes and losingss are taxed at different fringy revenue enhancement rates. In peculiar, when personal income revenue enhancement rates are above the corporate income revenue enhancement rate, enterprisers would describe any losingss as non-corporate losingss, and any net incomes as corporate income, thereby confronting a subsidy to risk-taking to the extent that the corporate income revenue enhancement rate is below personal income revenue enhancement rates.

Third, when enterprisers are risk averse, revenue enhancements besides provide risk-sharing with the authorities. If the fiscal markets are non effectual at sharing hazards expeditiously, at least for little houses, so entrepreneurial activity can be an increasing map of overall effectual revenue enhancement rates.

Therefore, revenue enhancements do hold the forces to act upon entrepreneurial activities thereby lending to the economic growing of a state. It is with this background, this paper aims at look intoing the causal relationship between the revenue enhancement gross and the economic growing in India for the period 1950-51 to 2008-09. The remainder of the paper is organised as follows: Section II discusses the information and methodological analysis, Section III make the empirical analysis and Section IV concludes.

## Data and Methodology

The aim of this paper is to analyze the causality between revenue enhancement gross and economic growing in India. The sample period of the survey spans from 1950-51 to 2008-09. The survey uses one-year informations collected from the Economic Survey of India, 2008-09, Indian Public Finance Statistics, 2008-09 published by Ministry of Finance and Handbook of statistics on Indian Economy, 2008-09 published by Reserve Bank of India. The clip series refering Tax Revenue ( TR ) for the sample period is the sum of grosss from direct and indirect revenue enhancements. The Economic Growth ( EG ) of India has been measured by the placeholder, Gross Domestic Product ( GDP ) at factor cost by industry of beginning at changeless monetary values. This placeholder is justified in that the gross from corporate income revenue enhancement dominates the gross revenue enhancement gross in India. All the variables of the survey have been considered in their natural logarithm signifiers for obvious grounds and denoted by LTR and LGDP for natural logarithm of Tax Revenue and GDP severally.

The survey employs the Granger causality trial in the Vector Autoregressive Regression model. This necessitates the empirical analysis to be performed in three stairss: First, the stationarity trial ; 2nd, the Cointegration trial ; third, the Granger causality trial.

## Unit Root Test:

The Granger Causality trial presupposes the stationarity in the information. So the most popular Augmented Dickey-Fuller Unit Root Test as proposed by Dickey and Fuller ( 1981 ) has been used for look intoing stationarity of the clip series.

The ADF unit root trial requires the appraisal of the undermentioned arrested development:

where is the first differences of the, is the intercept, are the coefficients, is the clip or tendency variable, is the figure of lagged footings chosen to guarantee that is the white noise. The optimum slowdown length of is selected by utilizing the Schwarz ‘s information standards ( SIC ) suggested by Schwarz. The hypotheses of this trial are:

: , i.e. , there is a unit root & A ; the clip series is non-stationary.

: , i.e. , there is no unit root & A ; the clip series is stationary.

If the estimated – statistic ( ADF test statistic ) is found to be less than the critical value, the void hypothesis is accepted, otherwise rejected.

If the variables are stationary at degree, they are said to be integrated of order nothing, i.e. , I ( 0 ) . If they are non-stationary at degree, the ADF trial is to be applied at the first difference. In this instance the variables are said to be cointegrated of order one, i.e. , I ( 1 ) , if variables are stationary.

## Cointegration Trial:

In clip series econometrics, two variables will be cointegrated if they have long-run, or equilibrium relationship between them ( Engle and Granger, 1987 ) . Therefore, in this survey cointegration analysis has been performed to look into long term relationship between gross revenue enhancement gross and the economic growing in India. The intent of the cointegration trial is to find whether a group of non-stationary series are cointegrated or non. We implement VAR-based cointegration trial utilizing the methodological analysis developed by Johansen ( 1991, 1995 ) . The vector autoregressive ( VAR ) theoretical account as considered in this survey is:

Where is a -vector of non-stationary I ( 1 ) endogenous variables, is a -vector of exogenic deterministic variables, are matrices of coefficients to be estimated, and is a vector of inventions that may be contemporaneously correlated but are uncorrelated with their ain lagged values and uncorrelated with all of the right-hand side variables.

Since most of the clip series are non-stationary, the above stated VAR theoretical account is by and large estimated in its first-difference signifier as:

Where,

Granger ‘s representation theorem asserts that if the coefficient matrix has reduced rank, so there be matrices each with rank such that is I ( 0 ) . is the figure of co-integrating dealingss ( the co-integrating rank ) and each column of is the co-integrating vector. is the matrix of mistake rectification parametric quantities that measure the velocity of accommodations in.

The Johansen attack to cointegration trial is based on two trial statistics, viz. , the hint trial statistic, and the maximal eigenvalue trial statistic.

## A. Trace Test Statistic:

The hint trial statistic can be specified as: where is the largest characteristic root of a square matrix of matrix, and T is the figure of observations. In the hint trial, the void hypothesis is that the figure of distinguishable cointegrating vector ( s ) is less than or equal to the figure of cointegration dealingss ( ) .

## B. Maximum Eigenvalue Trial:

The maximal eigenvalue trial examines the void hypothesis of precisely cointegrating dealingss against the option of cointegrating dealingss with the trial statistic: where is the largest squared characteristic root of a square matrix. In the hint trial, the void hypothesis of is tested against the option of cointegrating vectors.

## Granger Causality Test:

This survey uses Granger Causality Test proposed by C. W. J. Granger ( 1969 ) for proving the causality between revenue enhancement gross and economic growing in India. This trial in the VAR model formulates the nothing and alternate hypotheses as:

H0: No causal relation between revenue enhancement gross and economic growing

H1: Causality between revenue enhancement gross and economic growing

These hypotheses are tested in the context of the VAR of the signifier:

where EG is the economic growing of India as measured by Real GDP and TR is the revenue enhancement gross of the authorities of India. As is apparent from the clip series literature, the Granger Causality Test is really sensitive to figure of slowdowns included in the theoretical account. In position of this, the Schwarz Information Criterion ( SIC ) for the choice of appropriate slowdown length has been used.

## Empirical Analysis

At the beginning, we have examined the grade of correlativity between the revenue enhancement gross and existent GDP in India. The Pearson ‘s correlativity coefficient computed is 0.96 with the t-statistic of 25.88 at 57 grades of freedom. Since the computed t-value is greater than the critical t-value at 1 % degree of significance, the Pearson ‘s correlativity coefficient is really important.

## Fig. 1: Co-Movement of Tax Revenue and Real GDP in India

It is clear from the Fig. 1 that the entire revenue enhancement gross and Real GDP moves in the same way. This is the indicant of high grade of positive correlativity between the two and it is besides the indicant of the being of causal relation between them. But the way of causality is really of import. And, to cognize the way of causal relation we have applied Granger causality trial in the VAR theoretical account.

Since VAR theoretical account presumes stationarity of all the variables, we have tested the stationarity and therefore, the order of integrating of the variables utilizing the most popular ADF unit root trial. The descriptive statistics and the ADF unit root trial of the variables are presented in Table 2.

The ADF trial statistics at the first difference degree for both the variables are more negative than the critical values at 1 % degree of significance. This shows that all the variables of the survey, i.e. , revenue enhancement gross and GDP in the log degree signifiers contain unit roots but do non incorporate unit roots at first differences. This implies that the variables are stationary at first differences. Therefore, the variables are integrated of same order, i.e. , I ( 1 ) .

## Table 2: Descriptive Statisticss and Unit Root Test of Variables

## LTR

## LGDP

## No. of Observations

## Mean

## Median

## Maximum

## Minimum

## Standard Deviation

## Lopsidedness

## Kurtosis

## ADF Unit Root Test

## ( First Difference )

59

9.85

9.78

13.85

6.44

2.27

0.06

1.72

-5.69*

59

13.47

13.34

15.09

12.31

0.768

0.363

2.049

-8.59*

*denotes statistical significance of ADF trial at 1 % degree as the critical value is -4.12

As the following measure of Granger causality trial, we have tested the cointegration between the variables of the survey and the consequences of Johansen cointegration trial are reported in Table-3. The Trace trial indicates the being of two cointegrating equations at 5 % degree of significance. And, the maximal eigenvalue trial makes the verification of this consequence. Therefore, the two variables of this survey have long-term equilibrium relationship between them.

Now, the Granger causality trial has been performed to find the way of causing between the two variables of the survey in the environment of VAR. This VAR theoretical account uses the slowdown length up to 3 as determined by Akaike Information Criteria ( AIC ) . The consequences of the Granger Causality Test are shown in the Table 4.

## Table 3: Cointegration Test of Variables

Sample: 1950-51 to 2008-09

Sample ( adjusted ) : 1952-1953 2008-09

Included observations: 57 after accommodations

Trend premise: Linear deterministic tendency ( Restricted )

Seriess: LTR and LGDPA

Lags interval ( in first differences ) : 1 to 1

## Unrestricted Cointegration Rank Test ( Trace )

Hypothesized

Trace

0.05

No. of CE ( s )

Eigenvalue

Statistic

Critical Value

Prob. **

None *

A 0.443019

A 51.61477

A 25.87211

A 0.0000

At most 1 *

A 0.274068

A 18.25704

A 12.51798

A 0.0049

## A Trace trial indicates 2 cointegrating eqn ( s ) at the 0.05 degree

A * denotes rejection of the hypothesis at the 0.05 degree

A **MacKinnon-Haug-Michelis ( 1999 ) p-values

## Unrestricted Cointegration Rank Test ( Maximum Eigenvalue )

Hypothesized

Max-Eigen

0.05

No. of CE ( s )

Eigenvalue

Statistic

Critical Value

Prob. **

None *

A 0.443019

A 33.35773

A 19.38704

A 0.0003

At most 1 *

A 0.274068

A 18.25704

A 12.51798

A 0.0049

## A Max-eigenvalue trial indicates 2 cointegrating eqn ( s ) at the 0.05 degree

A * denotes rejection of the hypothesis at the 0.05 degree

A **MacKinnon-Haug-Michelis ( 1999 ) p-values

## Table 4: Consequences of Granger Causality Test

## Null Hypothesis

## Lag Length ( AIC )

## Degrees of Freedom

## F-Statistic

## Probability

## Decision

## LGDP does non Granger-cause LTR

3

100

2.7514*

0.0466

Cull

## LTR does non Granger-cause LGDP

3

100

3.1873*

0.0270

Cull

*The critical values of F for ( 3, 100 ) grades of freedom at 1 % , 5 % and 10 % degrees of significance are 3.9836, 2.6955 and 2.1393 severally.

Since the computed F-statistics is greater than the critical F-value at 5 % degree of significance, both the nothing hypotheses are rejected. This indicates that the economic growing in India as measured by Real GDP causes revenue enhancement gross and besides revenue enhancement gross causes economic growing in India. Thus, the reported consequences provide the grounds of the being of feedback or bilateral causality between revenue enhancement gross and economic growing in India. This feedback causality may intend that the addition in existent GDP increases entire revenue enhancement gross in India. On the other manus, such a relation may be interpreted as the efficient mobilization of revenue enhancement gross for the economic growing of the state.

## Decision

This paper examined the causality between the gross revenue enhancement gross and economic growing in India over the period 1950-51 to 2008-09. As an indispensable pre-requisite of the causality trial, both the clip series of the survey have been tested for the stationarity by the ADF unit root trial and found that the variables stationary at their log foremost difference signifiers. Then the Johansen ‘s cointegration trial has been performed to look into the long tally equilibrium relationship between the variables and found that there exist two cointegrating equations thereby bespeaking the presence of long tally equilibrium relationship. Finally, the Granger causality trial has been performed in the vector autoregressive theoretical account and the trial reported the being of feedback causality between the entire revenue enhancement gross and the economic growing in India. Therefore, the mentality may be that the economic experts and policy shapers should take all the necessary stairss to do the Indian revenue enhancement system ideal, efficient and floaty so that a higher economic growing may be achieved in the long-run. However, an ideal revenue enhancement system is non the lone macro-economic variable act uponing the economic growing of the state. Hence, to do the empirical survey more robust, other of import macro-economic parametric quantities such as rate of rising prices, rate of capital formation, leaning to devour, and leaning to salvage etc. should be incorporated in the analysis.