Fiscal Consolidation refers to the policies undertaken by Governments (national and sub-national levels) to reduce their deficits and accumulation of debt stock. Fiscal Consolidation refers to the treatment of a group of entities as one entity for taxation purposes. Simply put, the parent entity would be accountable for the entire group’s tax liabilities. Thus in simple words, the policies that the Government takes to reduce the debt stock and deficits.
The major motive behind fiscal consolidation is to cut down the administrative costs for government revenue departments coupled with bringing down the costs to manage to run these administrative expenses. The taxable income of every individual entity is arrived at in a manner as if no consolidated returns have been filed and certain items are exempted from the consolidation list. Importantly all entities of the group should follow the same tax year of the parent entity along with the fact that the parent entity would adopt or change the tax year fixation
Following measures from the expenditure side and revenue side are envisaged by the government to achieve fiscal consolidation.
- Improved tax revenue realization: For this, increasing efficiency of tax administration by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance etc. are to be made.
- Enhancing tax GDP ratio by widening the tax base and minimizing tax concessions and exemptions also improves tax revenues.
- Better targeting of government subsidies and extending Direct Benefit Transfer scheme for more subsidies.