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.
The government of India introduced the Fiscal Responsibility and Budget Management (FRBM) Bill in the parliament.