Addressing a seminar organised by National Institute of Public Finance and Policy (NIPFP), Dr Rangarajan said Indian federal structure must create a large common market and restrictions and impediments must go. Reform of the tax system has become essential, he said.
On the issue of fiscal transfers and distribution of resources, Dr Rangarajan said that a sound transfer system has to establish a fine balance between equity and efficiency. The system should take care of fiscal disadvantage but discourage fiscal imprudence, Dr Rangarajan said.
NIPFP director Prof. M Govinda Rao said the agenda for tax reforms in states needs to be evolving a co-ordinated destination-based VAT. The tax base should be broadened, the rates should be reduced, rate differentiation should be minimised.