On Friday, 15th Finance Commission Chairman NK Singh had stated that ‘There is a need to redo direct and indirect taxes and bring about deep reforms in the revenue system’. NK Singh emphatically had maintained that India’s tax revenue potential was lower by a significant 4 per cent of GDP. Thus, this directly points towards the fact that India effectively needs to bring in deep reforms in its revenue management system.
According to NK Singh, in order to align State and National policies, there is a need for an incentive mechanism for states that needs to be worked out so that state’s policies are aligned the central government’s policies.
NK Singh was speaking at the CSEP-IMF event on “Securing Sustainable Finances and Medium-term Fiscal Frameworks: International Experience and Relevance for India”. At the event, Singh stated that there was a need to redo the direct and indirect tax system and bring about deep reforms in the revenue system.
Singh stated “At least 4 per cent of GDP is a lost potential in terms of India’s revenue and if some part of it could be realized it would help greatly in aligning not only inevitable expenditure needs, pandemic needs, health needs, but find a convergence between sustainable development and medium-term fiscal policy statement…,”.
Additionally, former RBI Deputy Governor Rakesh Mohan, also speaking at the event stated that, “According to finance commission’s calculation we are about 4 percent of GDP (gross domestic product) below our tax potential. That is a lot that is about 25 percent of the total taxes collected by the Centre and states”.
15th Finance Commission report
The tax collection problem was, in February, highlighted in the 15th Finance Commission report. The report that was tabled in Parliament and had highlighted that the actual tax collection by the Centre during the last ten years, on average, was 4 per cent less than what was budgeted.
The report had stated that “The gap between revised estimates and actuals is by no means negligible. This prediction error leads to ad hoc expenditure management, typically in the second half of the financial year, that includes cuts in developmental expenditure creating uncertainties for implementing agencies, reneging on contractual obligations and payments, and significant carry-overs of liabilities. The problem is equally present in States, though it is sharper for some,”.