"Under the present tax regime, the services sector is generally under-taxed as it is not effectively brought under the tax base. A rising share of services in the GDP could result in lower growth of revenue to the government unless the indirect tax system is integrated under a single tax system such as the VAT," the reportsaid.

The report has pointed out that a large part of the services output continues to be non-tradable in nature and this along with a shift in employment would point to the need for policy initiatives towards introducing greater competition and efficiency in the services sector for ensuring its sustained contribution to high long-term growth.

"While the rising share of the services sector in GDP is an encouraging sign of greater degree of diversification of the Indian economy, a corresponding decline in the share of industry and agriculture implies that the overall productivity gains in the economy will depend increasingly on what happens in the services sector," the report said.

The report further added that the relatively high growth of the services sector would be generally suggestive of gains in productivity in agricultural and industrial sectors induced by technological progress and other innovations. This results in the employment moving away from the non-services sector to the services producingsector.

"It also indicates a shift of real expenditure from manufacturing to value-added services which is generally associated with the prices of economic development," the RBI added. The RBI report further pointed out that the bulk of the increase in the services sector has taken place in trade, communications and banking and insurance segments. "These are areas where there has been a spurt of technical progress and also increased competition, mainly induced by economic reform. On the other hand, there are other areas like construction, hotel and railways where the shares have moved up in fractional terms," the annual report said.