India's tax revenue below potential by about 4% of GDP: NK Singh

New Delhi: 15th Finance Commission Chairman NK Singh on Friday said India’s tax revenue potential is lower by 4% of GDP and the country needs to bring in deep reforms in the revenue management system.

He also said an incentive mechanism for states needs to be worked out so that their policies are aligned to those of the central government.

Speaking at the CSEP-IMF event on “Securing Sustainable Finances and Medium-term Fiscal Frameworks: International Experience and Relevance for India”, Singh said there is a need to redo direct and indirect taxes and bring about deep reforms in the revenue system.

“At least 4% 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…,” Singh said.

Speaking at the event, former RBI Deputy Governor Rakesh Mohan said, “According to finance commission’s calculation we are about 4% of GDP (gross domestic product) below our tax potential. That is a lot that is about 25% of the total taxes collected Centre and states”.

The 15th Finance Commission report, tabled in Parliament in February, had highlighted that the actual tax collections by the Centre during the last ten years, on average, was 4% less than what was budgeted.

“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 liabilities. The problem is equally present in States, though it is sharper for some,” the report had said.