Economic Survey presented by Finance Minister Arun Jaitly on Wednesday gave an indication as to what kind of Budget could be presented on Thursday.
The Government suggested a three-pronged strategy of containing inflation, pushing tax and expenditure reforms and legal and regulatory frameworks for achieving 7-8 per cent in coming years.“Reviving investment, essential for growth of jobs and income, requires a three-pronged approach” to improve India’s long term growth prospects, said the Economic Survey, tabled by Finance Minister Arun Jaitley in Parliament on Wednesday.
As a first step the Government should work towards achieving low inflation by putting in place a framework for monetary policy, fiscal consolidation and food market reforms, it said.Secondly, the Survey underlined the need for tax and expenditure reform, including implementation of Goods and Service Tax (GST) to ensure a more predictable tax regime and thus place public finances on a sustainable path.
The complex taxation system needs a revamp through new laws, GST and DTC, as “bad taxes” like surcharges, cess and dividend distribution levy need to “eventually go” so as to boost investments as well as GDP growth, Survey said.
Tabled in Parliament a day before the Union Budget, 2014-15, the Survey said the tax/GDP ratio of the Government must be obtained through a burden-sharing mechanism where “low rates apply on a broad swathe of the population” through effective enforcement mechanisms.Also, it said that “taxes clarified as ‘bad’ in public finance theory like cesses, surcharges, transaction taxes, and taxes imposed for ease of collection such as the dividend distribution tax, need to eventually go. Reducing tax related distortions can increase efficiency and fuel GDP growth”.
The Survey pointed out that India’s complex tax system suffers from problems in both structures and administration and the tax regime is used to industrial policy where the state gives exemptions and rebates to certain economic activity.Referring to the Goods and Services Tax, the survey said there is consensus that the GST will be a major milestone for indirect tax reform in India.
“Replacing all existing indirect taxes by the GST will create a national market, eliminate cascading taxes, and align taxation of imports and exports correctly. This will improve the competitiveness of production and export from India,” it added.The implementation of a Central GST (CenGST) could be the first step towards the GST, the survey said.Just as the GST is a transformation of indirect taxes, it said, the Direct Taxes Code (DTC) is required as a clean modern replacement for the existing income tax law.
The key objective must be a simplification with a clean conceptual core, and the removal of a large number of special cesses and exemptions that favour special interest groups.“The tax system must move away from industrial policy, with incentives for one activity or another, towards a simple framework,” the document said.As with the GST, the DTC will yield gains by removing distortions of individual and corporate decision making, reducing compliance cost and litigation, and improving tax collections.
On tax administration, the survey said expert committees have identified problems with the taxation system, including retrospective amendment of laws, frequent amendments, especially after the executive is unable to establish a tax claim in courts, and issues with arbitrary tax claims.“This is coupled with long pendency of disputes and a taxation regime that is unfriendly to foreign investors,” the survey said. The Doing Business Report 2014 ranks India at 158 out of 189 countries under the head ‘paying taxes’.
Expenditure reforms should also focus on public goods and new designs for subsidy programme.India also requires legal and regulatory frameworks for a market economy. “This requires repealing the old legacy laws and creating state capacity to address market failures”.It further suggested that regaining growth momentum requires restoration of domestic macroeconomic balance and enhancing efficiency.
“The emphasis of policy would have to remain on fiscal consolidation and removal of structural constraints. Though some measures have been initiated to this end, reversion to a growth rate of around 7-8 per cent can only occur beyond the ongoing and the next fiscal,” it added.For the current fiscal, it said the growth will improve to 5.4-5.9 per cent, after remaining at sub-5 per cent level for past two years.
The Survey put emphasis on having Fiscal Responsibilty and Budget Management (FRBM) Act with teeth.