India’s tax revenue potential is lower by 4 per cent of GDP and the country needs to bring in deep reforms in the revenue management system. Fifteenth Finance Commission Chairman NK Singh said an incentive mechanism for States needs to be worked out so that their policies are aligned to those of the Central government. There is a need to redo direct and indirect taxes and bring about deep reforms in the revenue system.
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 realised 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.
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 liabilitsome.The problem is equally present in States, though it is sharper for some.