"The topmost priority of the government in the forthcoming Budget should be to revive investment and increase the revenue base," ratings agency India Ratings said in a note.

Stressing on the need to revive investment, the report noted that though capital expenditure increased by 25.5 percent in FY16 over FY15, as a percentage of GDP, it is still stuck at 1.7 percent and needs to go up to 2 percent.

On the need to increase revenue base, the note said, "Besides enhancing tax compliance and reducing tax disputes, the best way is to implement the direct tax code (DTC) and GST at the earliest."

As the fate of DTC is not known, implementing GST appears to be the only way out for accelerating tax revenue, it said. On taxation, it expects government to reduce corporate tax rate by 100 bps as part of its stated objective to reduce corporate tax rate to 25 per cent by FY20.

It also expects an increase in service tax rate to 16 percent from the present 14 per cent to align it with the proposed GST rate, apart from a schedule for the removal of exemptions available to companies.
The report notes that the only possibility of meeting the 3.5 percent fiscal deficit target is the likely windfall gain in non-tax revenue from spectrum sale, which is expected to bring in over Rs 64,000 crore.

But the report warned that fiscal slippage in FY16 is almost certain due to the lower than anticipated GDP growth. The fiscal deficit is seen at 4.1 percent as percentage of GDP, though the absolute deficit will be close to the target of Rs 5.6 trillion.


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