RBI urges Tax Reforms for States with over 4% Fiscal Deficit

In a report released by the RBI, it urged the States with over 4% Fiscal Deficit for tax reforms.
RBI - Tax Reforms - Fiscal Deficit - RBI urges Tax Reforms for States with over 4% Fiscal Deficit - RBI urges Tax Reforms - taxscan

The Reserve Bank of India urged to introduce tax reforms for states with over 4% fiscal deficit.

By a report that is released once in a year the RBI raised its concerns regarding the fiscal management of some states, saying they have budgeted for deficits exceeding 4 per cent of Gross State Domestic Product (GSDP) in 2023-24 (FY24). The national average is 3.1 per cent. It was pointed out that these states have debt levels surpassing 35 per cent of GSDP compared to the national average of 27.6 per cent.

The report suggested that if all states revert to OPS from the National Pension System (NPS), the cumulative fiscal burden could balloon to 4.5 times that of NPS with an additional burden of 0.9 per cent of GDP annually by 2060. The reversal could impact the pension obligations of older OPS retirees, extending until the 2060s, marking a significant setback that undermines past reforms and compromises the interests of future generations.

The report also brought forward a strategic approach to bolster fiscal capacity, emphasising uninterrupted and efficient delivery of social, economic, and general services. The implementation of the goods and services tax (GST) has helped in formalising the economy and expanded the tax base without imposing undue burdens and also recommended that enhancing tax administration, incorporating data analytics to curb evasion, and reinforcing the institutional strength of state revenue departments will likely augment fiscal capacity.

The report brought into light the significance of mining as a crucial source of non-tax revenue for mineral-rich states and suggested a robust mechanism to prevent, detect, and curb illegal mining activities. Modern technologies, such as Geographic Information Systems (GIS) and Drone Surveys, are encouraged for effective enforcement, the report said.

“In the medium term, states should enhance transparency and public awareness of their fiscal initiatives by improving information dissemination platforms. They should establish state-specific platforms similar to a press information bureau for releasing policy-related notifications” the report highlighted.

Lstly, the report suggested the disclosure and dissemination of sensitive information about guarantees, off-budget borrowings, total resource transfers to lower tiers, and states’ expenditures on research and development to increase transparency and enhance credibility and confidence in state finances.

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