Better Tax Design Can Support Growth Without Cutting Revenue: IMF

Key Details Chapter 1 of the IMF’s October 2026 Fiscal Monitor , “Taxing Better to Boost Growth,” examines how tax rules and their administration affect business and worker decisions. Its estimates come from different country samples and models; they are not forecasts for India . Taxes embedded in production: Across 26 economies studied , unrecovered value-added tax (VAT) added between 2.3% and 8.9% to input costs in the industry groups examined.

A modelled reform removing VAT-related production and consumption distortions produced welfare gains averaging 0.26% of GDP across those economies. Investment: The IMF’s new dataset covers 186 countries . It finds that typical corporate-tax rules raise the pre-tax return a new investment must earn to break even, partly because firms cannot fully recover investment costs for tax purposes.

Work: In 13 country-specific simulations , revenue-neutral changes to taxes and benefits increased modelled employment rates by an average 1.2 percentage points in the emerging and developing economies studied and 0.8 points in advanced economies. India evidence: In West Bengal during 2010–16 , firms’ reported sales clustered just below the threshold at which VAT registration became compulsory.

Administration: Cross-country firm evidence associates clearer rules and better tax administration with lower relative compliance burdens for small and young firms . Raising the Same Revenue Can Still Leave Less Tax in Production Costs The IMF’s central distinction is between how much tax a government raises and how it raises it .

Under a well-functioning VAT, a business can recover tax paid on inputs, leaving the tax on final consumption. Exemptions, incomplete credits or slow refunds can instead make that input tax a business cost. The cost can then pass through suppliers and affect prices and production choices.

The IMF does not propose removing exemptions without regard to households. It argues that distributional protection should be considered alongside tax design: targeted transfers may be more effective than exemptions where governments can deliver them reliably, while some exemptions may remain important where that capacity is weak.

Investment Relief Is Not the Same as a Corporate Tax Rate Cut A lower headline corporate-tax rate reduces tax on both investments that are only just viable and profits well above what was needed to make an investment worthwhile. The IMF instead examines faster recovery of investment costs , which can reduce the tax burden on a new project while preserving taxation of those higher returns.

Its modelled capital-stock gains illustrate the scale of the potential effect, not the expected result of a particular Indian reform . The chapter also favours assessing whether research-and-development tax incentives produce additional research, rather than simply rewarding profits from innovation that has already succeeded.

West Bengal’s Threshold Example Is Historical, but the Mechanism Matters The clustering of firms below West Bengal’s 2010–16 VAT-registration threshold is evidence that a sharp change in tax obligations can influence reported business size. The pattern alone cannot show how much reflected firms limiting expansion, underreporting sales or reorganising their activities.

Crucially, this is pre-GST evidence , not a finding that today’s GST thresholds have produced the same behaviour. Its wider lesson is to examine whether simplified regimes give small firms a manageable path into the regular tax system without making growth disproportionately costly.

Implementation Determines Whether Better Rules Work The chapter treats registration, filing, input-tax refunds, audits and dispute resolution as economic issues, not just administrative ones. Their fixed costs weigh more heavily on smaller firms. Reliable refunds also make it more feasible to reduce exemptions without leaving businesses bearing tax on their inputs.

Better design and better administration must therefore move together. Policy Relevance For India, the chapter offers a way to assess tax reform without assuming that growth requires a general tax cut . Within GST, the pertinent questions concern input-tax credit and refund reliability, the effects of exemptions on supply chains, and how businesses move across registration or simplified-regime thresholds.

The historical West Bengal result provides a reason to investigate these questions under current rules, not an answer about current GST outcomes . For direct taxes, the distinction is between easing the cost of new investment and providing broad relief on profits that firms would have earned anyway.

In both systems, any efficiency gain has to be judged alongside revenue, distributional effects and administrative feasibility — the conditions the IMF says determine a credible country-specific reform. Relevant Question for Policy Stakeholders: Where do India’s current tax rules and procedures create the largest avoidable costs for firms that invest or grow, and which changes could reduce those costs without weakening revenue or household protection?

Follow the Full Report Here: IMF Fiscal Monitor, October 2026: “Taxing Better to Boost Growth