Implementation of goods and services (GST) tax could help government raise tax revenues and reduce fiscal deficit, which has been around 4.5 per cent in the last three years, a CRISIL report said.
Fiscal deficit, the gap between government's expenditure and revenue, stood at 4.5 per cent in FY14, lower than 4.9 per cent in FY13.
"To sustainably reduce fiscal deficit from current levels, the government will have to rely on raising revenues as a share of GDP," the report said.
"The government has to implement structural tax reforms such as the goods and services tax (GST), which will lift the government's tax revenues, lower the cost of doing business and boost growth," it said.
By eliminating the cascading effect of multiple central and state taxes, GST would reduce the cost of doing business and increase profitability, which in turn, would attract investments and ultimately help GDP growth, the report said.
However, the agency felt that implementation of GST during this financial year is unlikely and therefore forecasts fiscal deficit to stay high at 4.3 per cent of the GDP.
The government would have to accommodate large rollover of subsidies from the last fiscal which is estimated at Rs 650 billion or 25 per cent of the recognised subsidies in FY14, as well as raise capital expenditure or spend productively to bolster growth, it added.
The agency said that a below normal monsoon could lead to lower GDP growth of 5.5 per cent in FY15 than its base case estimate of 6 per cent, but it would not change its FY15 fiscal deficit forecast.
CRISIL said that during the next financial year, GST implementation would facilitate a much-needed correction in the fiscal deficit.
But despite its advantages, it does not foresee a full-scale implementation of the GST in its current form.
"We believe, the most likely outcome is a partial rollout of the GST -- one that excludes petroleum goods – given its large impact on state revenues," the report said.
Even so, fiscal deficit is forecast to correct to 3.3 per cent of the GDP by 2017.
On the downside, a failure to implement GST is expected to crank up the fiscal deficit to 4-4.2 per cent in 2016 and 2017, the report said.
CRISIL said that fiscal consolidation is critical to lower the country's debt-to-GDP ratio.
The government's internal debt has stabilised at 48 per cent of the GDP during the last two years after declining steadily since fiscal 2005, when it peaked at 60 per cent of the GDP.
The declining trend of the Centre's debt ratio after fiscal 2009 has been driven more by high inflation rather than lower fiscal deficit or faster GDP growth.
"With inflation expected to moderate and upside to growth limited, a strong commitment to fiscal consolidation is an imperative to lower the country's debt-to-GDP ratio," the report said.
With a partial GST implementation, CRISIL forecasts debt-to-GDP ratio (internal liabilities as a per cent of GDP) to decline to 45 per cent by FY17.