India Plans Tax Reforms to Reduce Debt

Source: The post India Plans Tax Reforms to Reduce Debt has been created, based on the article “Next steps in fiscal management” published in “Business Standard” on 3rd January 2025

UPSC Syllabus Topic: GS Paper3- Economy- mobilisation of resources

Context: The article discusses India’s government plans to manage its finances better by reducing the national debt and fiscal deficit. It mentions expected changes in tax policies and improvements in the goods and services tax system to support these goals. India Plans Tax Reforms to Reduce Debt

For detailed information on India’s debt burden- Explained Pointwise read this article here

What is the status of Fiscal Deficit in India?

1. The fiscal deficit target for India in 2025-26 is set at 4.4% of GDP, aligning with medium-term objectives post-pandemic.
2. This target is crucial as it aims to keep the central government debt on a downward trajectory relative to GDP.
3. Central government debt is projected to fall from 58.1% of GDP in 2023-24 to 56.8% in 2024-25.
4. Despite the reduction, the debt level remains about 17 percentage points higher than the Fiscal Responsibility and Budget Management (FRBM) Review Committee’s recommendation from 2017, indicating ongoing challenges in achieving optimal fiscal health.
5. State government debts also exceed recommendations, with total state debt at 28.5% of GDP in 2023-24, which is over 8 percentage points above the advised level by the FRBM Review Committee.

What Changes Are Expected?

1. The government is currently reviewing the Customs duty structure and the Income Tax Act, which might lead to policy changes soon.
2. The goods and services tax (GST) system might see changes aimed at simplifying it and adjusting rates to achieve a revenue-neutral level of 15-15.5%. The current average GST rate is 11.6%, which is below the optimal level, contributing to revenue shortfalls.
3. The government intends to revisit its disinvestment strategy to help manage fiscal pressures without cutting down on necessary capital expenditures. This could make the fiscal adjustment process smoother.
4. An expert group may be essential to devise a more effective strategy for further reducing the central government’s debt. Similarly, it is imperative for state governments to align with central practices and adopt similar frameworks to effectively manage and reduce their debt levels.

Question for practice:

Examine how the proposed changes in tax policies and improvements in the goods and services tax system are expected to support India’s goals of reducing the national debt and fiscal deficit.