Finance Ministry releases the Report of the Task Force on Implementation of Fiscal Responsibility and Budget Management (FRBM) Act
The Report of the Task Force on Implementation of the Fiscal Responsibility and Budget Management (FRBM) Act is released by the Finance Ministry today. The report outlines the fiscal strategy needed to meet the objectives of the FRBM. The key requirements of the Act and the associated Rules are that the Central revenue deficit be eliminated, and that the fiscal deficit fall to below 3 percent of GDP by 2008-09.
The proposals of the Task Force emcompass a wide range of reforms across direct taxes, indirect taxes and government expenditure, in order to achieve these goals while simultaneously furthering the core development goals of the country.
The Task Force headed by Vijay Kelkar, Adviser to Finance Minister, was constituted on 18th February 2004 with the mandate of drawing up the medium term framework of fiscal policies, to achieve the objectives laid down in the FRBM Act. The Task Force included D. C. Gupta, Finance Secretary; Vineeta Rai, Revenue Secretary; N. S. Sisodia, Secretary (Financial Sector); D. Swarup, Expenditure Secretary and Ashok Lahiri, Chief Economic Adviser.
The Task Force report reflects medium term fiscal planning, which shows numerical values for all years from 2005-06 till 2008-09, and offers a policy path that can achieve the FRBM requirements.
An analysis of present trends shows that without major steps to reform the system, the FRBM requirements will not be met. Under present trends, the revenue deficit is likely to reach 1.66 percent of GDP, and the fiscal deficit 3.98 percent of GDP, by 2008-09. Hence, new policy proposals are required, that close these gaps over the next five years. The path of fiscal adjustment proposed by the Task Force is a 'front loaded' path, where decisions are made in 2005-06. The impact of these reforms will be fully felt from 2005-06 till 2007-08.
The focus of the reforms proposed by the Task Force are on the revenue side. The Task Force has proposed an expansion of the tax base with fewer and lower rates. A major thrust of the report is towards simplification, removal of exemptions, and reducing costs of compliance. The central goal of the report is higher GDP growth, along with a tax system that incentivises compliance, which will raise tax revenue.
The proposal for a GST - The Goods and Services Tax - is the most important proposal of the Task Force. The GST is a single countrywide VAT on almost all goods and services. The 88th amendment of the constitution sets the framework for the Centre to levy taxes on services, and share the proceeds with the States. The Task Force report outlines the details of how this may be done. It proposes that a single national VAT on goods and services be levied, replacing excise, CENVAT and service taxes currently being levied by the Centre, and the sales tax and octroi levied by the States. This will make the Indian tax administration comparable to the best in the world. The recommendations can be a part of a "grand bargain" between the Centre and the States. The proposals of the Task Force are expected to greatly improve State finances. A standard central tax rate of 12 percent is proposed to replace the CENVAT of 16 percent. This is proposed to be supplemented by a standard State GST of 8 percent. The 20 percent total VAT is comparable to OECD standards. The cooperative effort proposed in the report, between Centre and States, for the GST would ease complexities of tax administration as seen by companies and by State governments.
The proposals of the task force on personal income tax include simplification of the tax structure and removal of a number of exemptions. However, existing treatment of housing loans and senior citizens would remain. To eliminate the impact of these changes on household tax obligations, the report proposes changes in income tax rates that bring down the tax burden of all households. The proposed schedule is that income upto Rs 1,00,000 will be fully exempt from tax. Income from Rs 1 lakh to Rs 4 lakh will face a tax of 20 percent and income above Rs 4 lakh will face a rate of 30 percent. All categories of tax payers will pay a lower tax under the proposed structure.
The implementation of these proposals is likely to create the fiscal space through which the government can undertake important expenditures in order to address social concerns, including larger transfers to the States, and larger expenditures on health and education.
The report shows the results of a fiscal planning effort for the next four years, including a full set of fiscal projections that are likely to be obtained by implementing the recommendations. The implementation of proposals would lead to substantially higher GDP growth and employment, harnessing a virtuous cycle of growth and fiscal consolidation. This will enable India to take a commanding position in the global economy. The report is being made available on the Ministry’s website.
(Release ID :2766)