India needs to raise tax revenue collection at the federal and state levels from 16.6% of gross domestic product (GDP) to 20% by broadening the taxpayer base and removing exemptions so that more resources are available for basic economic and social infrastructure, Economic Advisory Council to the Prime Minister has said in its outlook for 2013-14.

The council, which noted that containing fiscal deficit for the year 2013-14 to the budgeted 4.8% of GDP could be a challenge, also said that attempts at raising tax revenue should not be through higher tax rates or through new taxes which could undermine economic growth.

The panel, led by C Rangarajan, attributed the difficulty in meeting fiscal deficit target this year to a significantly lower tax and other revenue collection while total expenditure remained substantially above a five-year moving average.

“As a result, the fiscal deficit during the first four months of the current financial year has already reached 62.8% and expenditure on major subsidies was 51.3% of the budgetary provision for the full financial year,” the council said.

It also recommended that discretionary spending should be cut and subsidies restructured in the remaining months of this fiscal in a growth-friendly manner.
Rangarajan recommended rationalisation of direct and indirect taxes and taxing of more services to find resources for welfare measures. “It is important that the final version (of the Direct Taxes Code) retains its original objective of low rates and minimum exemptions so that the tax base is broadened and its buoyancy to GDP improved,” the panel said.

The council said that new financial instruments and fiscal incentives should be given to encourage household savings in financial instruments, which could reduce the appetite for gold as an investment.