Poverty Measures and Their Relevance for Tax Devolution

Poverty Measures and Their Relevance for Tax Devolution G Thimmaiah AMARESH BAGCHI AND UMA DUTTA ROY CHOUDHURY in their paper (April 15, pp 831-836), have argued that the poverty ratio as well as other indices of backwardness have no relevance for inter se distribution of tax devolution. In support of their argument they have maintained that since the main objective of financial devolution in a federation is to reduce wide disparities in the levels of public services, the Ninth Finance Commission (NFC) should formulate its scheme of tax devolution with a view to equalising the revenue raising capacity, of the states. There are two issues involved in their contention. First, whether poverty or any other measure of backwardness can be used as an indicator of the relative revenue raising capacity of the states, and second, whether the poverty ratio as it is presently estimated can be used by the NFC inter se distribution of tax devolution. Their answers to both the questions are negative. While their arguments against the use of poverty ratio as a supplementary criterion for tax devolution is only partially convincing, their contention that it cannot be used lor measuring the relative disparities in revenue raising capacity of the states is not convincing. It is possible to use the poverty ratio as an indicator of revenue raising capacity. But it is not advisable to use it because: (i) per capita SDP and poverty ratio are to some extent positively associated and therefore, better-off states (judged in terms of per capita SDP) which can finance their expenditure needs to a large extent from their own revenues tend to receive more tax devolution, and (ii) the poverty ratio as it is presently estimated involves many deficiencies. Therefore, it is advisable to use a composite index of development for inter se distribution of tax shares.