Does an Economic and Political Affairs Matter in Determining the Tax Revenue of Jammu and Kashmir State (India): An Approach through VECM Model

The state of Jammu & Kashmir is one of the special category states of India, that faces a severe resource crunch on the one hand and an explosive public expenditure trend on the other hand. The inability of the state government to raise adequate resources of its own cast’s serious doubt about the tax efforts carried out by the government from time to time. Against this background, this paper tries to analyze the major long and short run determinants of tax revenue in the state of Jammu and Kashmir by applying suitable econometric methods such as VECM and by taking a broader set of variables which comprise Economic, Political and demographic sectors. The time series data of last thirty years from 1984 to 2013 has been used to identify the short and long run relationship of variables and to analyze the long term equilibrium adjustment rate by short-term variables. The result shows that all the economic variables, except for the income from of agriculture, income from industry and the unemployment rate, have positive influence on the tax revenue. Regarding political stability variables, some like political crises and law and order are significant, while others like the election cycle were found to be insignificant.