IMF Urges India To Widen Tax Base

by Lorys Charalmabous, Tax-News.com, Cyprus

15 June 2004

The International Monetary Fund has warned that India’s high fiscal deficit is “not sustainable” and has urged the government to widen the tax base and reform the system of administration in order to make the tax structure more efficient.

“Tackling the fiscal deficit has to be an important priority. The biggest single obstacle to tackling this problem in India’s case has been complacency,” commented IMF Acting Managing Director Ann Kruger whilst delivering a keynote speech to the Stanford India Conference recently.

Kruger’s recipe to rectify the widening budget deficit, which currently stands at a level of 10% of GDP, includes:

“More efficient revenue collection and tax administration; a wider tax base; a more streamlined civil service; more carefully targeted transfer payments and the reduction of subsidies that benefit the middle class: these can all help improve the fiscal position while at the same time creating opportunities for growth elsewhere in the economy.”

The IMF's Acting MD also observed that foreign direct investment into India was disproportionately small, and noted that India accounts for less than one half of one per cent of global foreign investment, a statistic she interpreted as “an amazingly low figure given both its geographical size and its natural resources.”

Kruger recommended that the government put in place measures to attract more foreign investment, arguing that "regulation and red tape discourage foreign investors, many of whom still regard India as not worth the bother more than a decade after the ending of license raj.”

Recommended