India should prioritize the implementation of a goods and services tax to raise revenue for priority capital and social expenditures, according to the International Monetary Fund (IMF).
India’s revenue-to-GDP ratio remains considerably below its emerging market peers, the Fund said in its 2016 Article IV consultation report for the country.
The long-awaited GST should be implemented, as it would create a single national market, enhance the efficiency of intra-Indian movement of goods and services, and boost gross domestic product (GDP) growth, the report said. It also said that the GST should have minimal exemptions and a moderate single rate.
The IMF noted that the GST is not likely to be implemented by April 2016, as previously planned. It also pointed out that even though the rate structure of the GST is likely to be revenue neutral, the authorities anticipate that a good GST design will support revenue administration improvements by encouraging firms to join the formal economy to take advantage of input tax credits. It said that improved tax administration has the potential to produce large revenue gains.
The Fund also said that it supports the Finance Minister’s plans to lower the corporate income tax rate while eliminating exemptions.
India’s overall fiscal position remains vulnerable, given that, at the general government level, the deficit is expected to remain around 6-7 percent of GDP, the IMF said.