IF the IMF latest report is any indication, the Indian Finance Minister may hike the central excise duty in the Budget 2013, to make up economic slow-down related deceleration in tax receipts.

The report, which incorporates the outcome of bilateral consultations between IMF and Indian authorities, has factored in the prospects of increase in excise duty taking into account the delay in introduction of goods and services tax (GST).

The report, issued on 6th February, notes: “India's revenue-to-GDP ratio has fallen below peers'. The GST would be the most important reform, and would boost growth through the creation of a single Indian market. While there are encouraging signs of a possible GST compromise, the needed legislative changes require a qualified majority, and implementation is not feasible even in 2013/14. For this reason, at the end of this fiscal year, if the economy has begun to recover and no agreement is reached, it would be appropriate to raise excise taxes. Approving a new Direct Tax Code with streamlined and smaller deductions will also help.”

The report notes that the attainment of short-term fiscal targets would require revenue to rise to pre-crisis levels, through more efficient taxation and ideally also through the GST. “Though recent initiatives tying India's safety net to the impressive UID Program are encouraging, reorienting spending toward 12th Plan priorities without endangering deficit targets requires comprehensive reform to fuel and fertilizer subsidies,” it adds.

According to the report, the authorities have recently accepted all the major recommendations of an Expert Committee on General Anti-Avoidance Rules (GAAR) for bringing about a greater clarity in the matter of taxation. The implementation of GAAR has been deferred till 2016. Efforts are also afoot to implement the Goods and Services Tax (GST) and Direct Tax Code (DTC) as early as possible. These and several other significant measures will help revert the economy on a high growth trajectory.

Without naming Vodafone capital gains tax case related retrospective changes in Income Tax Act, the report notes: “high profile tax policy decisions announced in the 2012/13 Budget have reduced foreign investors' interest in India.”

It adds: “Observers interpreted these tax measures as bringing certain activities into the tax net that were previously considered offshore, with some retroactive elements. These measures are currently being reassessed.”

The report has voiced concern at the risk of recent relaxations in external commercial borrowings (ECBs) increasing the country's “external vulnerabilities”.