STANDARD
and Poor's Indian subsidiary CRISIL has pitched for structural tax
reforms to ramp up revenues as share of GDP and thus reduce fiscal
deficit.
In a
comprehensive paper released in the run-up to the regular budget for
fiscal 2014-15 to be presented by the new Government, CRISIL observes:
"the task of fiscal consolidation for this government will not be easy.
There is very little scope to cut overall expenditure, as it has already
been trimmed sharply in last two years. The Government must focus on
switching expenditure from unproductive subsidies towards spending on
sectors such as health, education and infrastructure."
The Paper
captioned ‘In Fiscal Correction Quest, the best bet's GST' concludes:
"The only way to reduce fiscal deficit, therefore, is to raise revenues
as a share of GDP. To do so, the government must implement structural
reforms such as GST, improve tax compliance and widen the tax coverage."
Explaining
that tax buoyancy is measured as the percentage increase in tax revenue
for every 1% increase in GDP, it points out that the buoyancy fell
sharply during the crisis years (fiscal 2009 and 2010) and has revived
only partially since then despite roll-back of the tax concessions
offered during the crisis years.
Tax
revenue, as a share of GDP, has fallen to 9.0% in the recent slowdown,
from a peak of 11.7% in fiscal 2008. Revenues have fallen much faster
than GDP in India as the responsiveness of tax collections to increase
in GDP and tax rates has deteriorated significantly in the recent
slowdown.
To
structurally lift tax buoyancy above 1, tax reforms such as GST,
improvement in tax compliance and tax coverage will be keys.
The
rating agency believes that implementation of goods and services tax
(GST) in the current fiscal ending 31 March 2015 is unlikely. In the
next fiscal, GST implementation will facilitate a much-needed correction
in the fiscal deficit.
CRISIL
says: "But despite its myriad advantages, we do not foresee a full-scale
implementation of GST in its current form. Instead, we believe, the
most likely outcome is a partial rollout of GST – one that excludes
petroleum goods – given its large impact on state revenues."
Even with
this, fiscal deficit could correct to 3.3% of GDP by fiscal 2017. On
the downside, a complete failure to implement GST would result in the
fiscal deficit being higher at around 4-4.2% in fiscals 2016-17.
It
believes that fiscal deficit would stay high at 4.3% of GDP in the
current fiscal as upside the tax revenue would be limited without GST.
Moreover, the Government would have to accommodate large rollover of
subsidies from the previous year.
CRISIL
has observed that fiscal consolidation is also critical for lowering the
country's debt-to-GDP ratio. Had Inflation not risen so sharply,
India's debt would have started rising by now.
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