Tax Reforms

Tax reforms constituted an important element of economic reforms introduced in India. The focus has been on simplifying the structure and in bringing down the rates.

The government has from time to time appointed committees to look into problems of Indian tax structure and suggest ways to improve the revenue productivity of taxes in an efficient manner.

The major recommendations of two of the major committees with regards to direct taxes are:

a) Chelliah Committee

In 1991, the Government of India appointed the Tax Reforms Committee under the Chairmanship of well-known economist Raja Chelliah. The committee was in favour of a moderately progressive tax structure, which when combined with strong enforcement would improve compliance.

The specific recommendations of the committee regarding direct taxes were as follows:

1) To lower the rates of income taxation and to narrow the spread between the rate in the lowest tax bracket and the maximum marginal rate.

Exemption Limit and Marginal Tax rate for the highest income bracket for Personal Income Tax in India

Source: Constructed from Table A 1 in Das Gupta, A. 2005. ‘Recent Individual Income Tax Reform,’ Economic and Political Weekly, 2 April: 1397–1417.

Marginal tax rate is the rate on the last unit of income earned. It is different from the average tax rate, which is the share of total taxes in total income.

Marginal Tax Rate = ∆Tax Liability / ∆Taxable Income

Average Tax Rate = Total Tax Liability / Total Income

2) Tax incentives should be kept at the minimum.

3) Corporate tax rate should be lowered to 40 per cent. The spread between the tax rates applicable to foreign companies and that to domestic companies should be around 7.5 per cent. In no case should it exceed 10 per cent.

4) For levying wealth tax, distinction should be made between productive assets and non-productive assets and the former should be exempted.

b) Kelkar Task Force on Direct Taxes

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