India has to make its tax regime more liberal, phase out exemptions and switch over to a goods and services tax (GST), the prime minister said on Monday.

Manmohan Singh added the cash-strapped government needed to maintain fiscal discipline while taking steps to promote growth.

India aims to cut its fiscal deficit to 3.8 per cent of gross domestic product in the year to March 2007, and then to 3 per cent by 2008/09, through tax reforms and squeezing out wasteful spending. The deficit was 4.1 per cent in 2005/06.

"Our tax regime should be liberal, but equitable. It should be transparent and not subject to administrative discretion," Singh told industry representatives at a conference.

Expressing satisfaction at the introduction of a value-added tax in most of the country's states, he said: "We will now move towards a common GST."

In the long run, he said, the tax regime should not have too many exemptions, which make tax administration an unnecessarily complex exercise vulnerable to misuse.

Only about 3 percent of India's billion-plus population pay taxes, many put off by the complex process of filing returns and complying with a plethora of tax laws. Others earn less than the minimum income liable for tax, or simply refuse to pay.