Thirty Years of Tax Reform in India

Author(s): Shankar Acharya

Source: Economic and Political Weekly, Vol. 40, No. 20 (May 14-20, 2005), pp. 2061+2063-2070
Published by: Economic and Political Weekly
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 Special articles

Thirt Years of Tax Reform in India

This paper sketches the contours of India's tax reform story from the mid-1970s to the present
and finds that enormousprogress has been made in the last 30 years, judged by the standards
of economic efficiency, equity, built-in revenue elasticity and transparency.However, key issues
for further reform include the plethora of complex exemptionsplaguing customs tariff low
buoyancy of excise, integration of CENVATwith state VATand the broad-basing of direct
taxes. Sustainingprogrammes to deploy IT and modern risk managementmethods in tax
administrationwill be critical, for the dictum 'tax administrationis tax policy' is quite true.
SHANKARACHARYA

n the mid-1970s,by the standardsof modemtax theoryand witnessed an unusually strong wave of tax reforms as most
practice,India'stax systemwas a mess.l Directtaxes were countries of the world (including developing nations) reduced
levied at confiscatory rates, which encouragedrampant their reliance on foreign trade taxes, introduced some form of
evasion. Indirecttaxes on domesticand foreigntradeboasted value added taxation (VAT) in domestic taxes on goods and
innumerable commodity-specificratesandhundredsof end-use services and streamlined income and company taxes, partly in
exemptionsandpreferences,whichmadea mockeryof thepublic response to the imperatives of increasing global economic in-
financecanons of simplicity,economic efficiency and equity. tegration. By the late 1980s there was a substantial consensus
By the year 2005 the tax structure,especially at the centralon the principal desiderata of a national tax system.2
governmentlevel, hadbeen substantiallyreformed.Although Its features included:3
the systemis still farfromperfect,seriousprogresshas clearly(i) A broad-based,consumption VAT, with a primary(preferably
been madein the interveningthreedecades.Such progresswas only) rate in the range of 10 to 20 per cent, with crediting
neithersteadynor uniform.Tax reformcame in bursts,at least provisions and zero rating of exports.4 This was to be the main
untilthe 1990swhenthe reformeffortsweremoresustainedand revenue earner among indirect taxes.
coherent. (ii) For equity, a consumption VAT buttressed by luxury taxes
This papersketchesthe contoursof India'stax reformstory (special or selective excises) at two or three rates on a small
from the mid-1970sto the present.Section I outlinesthe pre- numberof income-elastic luxurygoods, applicableto bothimports
vailingconsensusregardingthe desirableelementsof a modem and domestic products.
nationaltax systemand comparesthis 'model' with the Indian (iii) Low importtariffs (10 per cent or lower) thatwere as uniform
realityof the mid-1970s.Section II summarisesthe first wave as possible, with well-functioning export rebateor duty drawback
( 1974-1984)of reforms,whichfocusedon thedirecttaxstructure.schemes to compensate exporters for duties suffered on inputs.
Section III describesthe salient featuresof the importanttaxThere were to be no export duties.
reformslaunchedby V P Singhduringhis two yearsas finance (iv) Personal income taxes that fell on a broad base, uneroded
minister(1985-87). The next section deals with the reforms by numerous exemptions and tax preferences. A rate structure
implemented duringthe1990sbysuccessiveministers.Manmohan that was moderately progressive with three or four slabs and the
Singh, P Chidambaram and YashwantSinha. Many of these top marginal rate in the range of 30 to 40 per cent to promote
reformswere influencedstronglyby the seminalTax Reforms compliance. Withholding (tax deduction at source) was to be
CommitteeReport(the'ChelliahCommittee'report)of 1991-92. widely prevalenton incomes from wages, interest and dividends.
SectionV summarisesthemaininitiativesundertaken since2000,(v) Company taxation at a single ratecomparableto the maximum
some of which have strayedfrom the vision of the Chelliah personal income tax rate. Exemptions and tax preferences were
Committee.The finalsectionoutlinesthe unfinishedagendafor to be strictly limited.
tax reformsin India. (vi) Tax law and administrationthat were simple and effective,
with strong reliance on moder systems and technology for
information gathering, collation and analysis and transparent
ModelversusReality procedures for penalties and appeals.
Judged by this six-point, received wisdom on tax policy, how
The world over tax reformhas been an ongoing process, did India's tax structure of the mid-1970s fare? In a nutshell,
influencedby economic theory,evolving economic structure, pretty miserably. Take the case of union excise duties, which
exigencies of practicaltax administrationand the lessons of accounted for about half of all central government revenues.
experience. The quarter century between 1965 and 1990 These duties were levied on virtually all manufacturedproducts

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(at the manufacturing stage)at rateswhichvariedfrom2 to 100 prevailing tax ideology of the times from perusing the budget
per cent (not countingthe much higher rates on tobacco and speeches of those years. Thus, Indira Gandhi, presenting the
petroleumproducts).As the justly famous L K Jha Indirect budget for 1970-71, said:
TaxationEnquiryCommitteeReport[Gol 1978] noted, there
Taxation is also a major instrumentin all modem societies to
were at least 24 separaterates into which commoditieswere
achieve greaterequality of incomes and wealth. It is, therefore,
grouped!VAT principleswere notableby theirabsence:inputs proposed to make our direct tax system serve this purpose by
wereroutinelytaxed;yet therewerevirtuallyno creditsfor taxes
increasingincome taxationat higherlevels as well as by substan-
paid on inputs.The resultwas indiscriminate'cascading'and tially enhancingthe presentratesof taxationon wealthandgifts...
unpredictabletax incidence.5There was no question of tax The marginalratesof income taxationwill be increasedprogres-
'neutrality'acrosssectors,commoditiesor uses. Importduties sively on all personal incomes above Rs 40.000'per year. With
displayedsimilar,massivevariance,rangingfromzero to over the additionof the surchargeat 10 per cent, the maximumrate
200 percent.Theireconomicimpactwasmadeevenmoreopaque of 93.5 per cent will now be reachedin the slab over Rs 2 lakhs
by theprevailingregimeof detailedandtightquantitative restric- as against 82.5 per cent in the slab over Rs 2 /2 lakhs at present.
tionson importsthrougha complexsystemof importlicensing. Not to be outdone. the next finance minister.Y B Chavan,raised
The tax structurefor personalincome and wealth was, if the surchargeon income taxes to 15 per cent in 1971-72, thereby
anything.even morebizarre.Incometax rateswereprogressive taking the effective top marginal income tax rate 97.75 per cent.
with a vengeance.In 1973-74therewere 11 differenttax slabs He also upped the rates of capital gains tax. The zeal in raising
withratesrangingfromanentrylevel of 10percentandclimbing tax rates was not matched by income tax revenue collections,
inexorablyto the top marginalrate of 85 per cent. With a which remained stuck at about 1 per cent of GDP (Table 1).
prevailingsurchargeof 15 per cent, the effective top marginal Fortunately.these absurdlevels of income taxation had reached
rate was actually97.75 per cent! Since there were significant their zenith. The Wanchoo Direct Taxes Enquiry Committee
taxeson netwealth,thecombinedmarginalincidenceof income Report [GoI 1971] took a forthright position on the matter. It
and wealthtaxes at the higherincome bracketswas frequently pointed out when "the marginal rate of taxation is as high as
in excess of 100percent.The predictableresultwas widespread 97.75 per cent, the net profit on concealment can be as much
evasionandavoidanceof such taxes.6 Companytax rateswere as 4.300 percent of the aftertax income...We will not be surprised
also high at around60 per cent. with rate differentialsacross that placed in such a situation, it would be difficult for a person
'widely-held'and 'closely-held'companies.Therewere com- to resist the temptation to evade taxes." The committee blamed
plicatedtaxpreferencesfor new industrialventuresin particular the extraordinarilyhigh income tax rates as the principal cause
sectors.This complex tax structurespawnedequally complex of tax evasion and recommended a reduction of the effective top
systemsof tax administration.7 marginal rate to 70 per cent. In the budget for 1974-75 finance
In sum, India'stax system in the mid-1970shad none of the minister Chavan reversed his earlier stance and implemented this
desirablefeaturesof a good nationaltax system noted above. recommendation by reducing the top rate to 70 per cent and the
Tax rateswereextremelyhigh and variedwith no justification. surcharge to 10 per cent.9 Somewhat unfortunately, Chavan
Inputswere taxed indiscriminately.The implicationsfor eco- combined this sensible reduction in income tax rates with another
nomicefficiencywere unequivocallynegative.The systemhad hike in wealth tax rates.
low built-inrevenueelasticitysince it encouragedwidespread The income tax rate-cutting precedent was continued in three
evasion and avoidance.'Equitywas ill-served by the heavy of the budgets in the ensuing decade, although the budgets of
dependenceon indirecttaxeswithopaqueincidence.Taxadmin- the Janata period (1977-80) witnessed setbacks. Buoyed by the
istrationproceduresandpracticeswerecomplexandfrequently strong increase in income tax revenues in 1974-75 and 1975-76.
arbitrary.The system was badly in need of seriousreform. Chavan's successor, C Subramanium, attributed much of it to

II Table 1: Gross Tax Revenues of Central Government

DirectTaxReforms:TheFirstWave (As per cent of GDPat currentmarketprices)
Year Personal Customs Union Service Others Total
Corporation
The directtax structureof 1973-74 was the product'of two Income Excise
decadesof taxpolicychangestobringabouta 'asocialisticpattern (1) (2) (3) (4) (5) (6) (7)
of society'andraisetax revenuesto financea publicinvestment 1969-70 0.83 1.05 0.99 3.57 0.00 0.02 6.46
led strategyof plannedeconomic development.The Taxation 1974-75 0.92 1.13 1.72 4.17 0.00 0.01 7.95
1979-80 1.15 1.11 2.42 4.97 0.00 0.02 9.68
EnquiryCommissionreportof 1954 [Gol 1954]emphasisedthe 1984-85 1.04 0.79 2.87 4.54 0.00 0.02 9.25
needtoraisemorerevenuesthroughhighertaxes,includingthrough 1989-90 0.97 1.03 3.71 4.61 0.00 0.05 10.37
1994-95 1.36 1.19 2.65 3.69 0.04 0.06 8.98
greaterprogressivityof directtaxes. Its recommendations were 1995-96 1.39 1.31 3.01 3.38 0.07 0.05 9.22
This
largelyimplemented. approachgained further impetus from 1996-97. 1.36 1.33 3.13 3.29 0.08 0.05 9.24
Kaldor's(1956)prescriptions. whichusheredin a setof 'integrated 1997-98 1.31 1.12 2.64 3.15 0.10 0.06 8.39
1998-99 1.41 1.16 2.34 3.06 0.11 0.06 8.14
directtaxes'. includingan expendituretax, a wealth-taxand a 1999-2000 1.58 1.32 2.50 3.20 0.11 0.05 8.77
gift tax in additionto the alreadyextanttaxeson income,capital 2000-01 1.71 1.52 2.28 3.28 0.13 0.04 8.95
2001-02 1.60 1.40 1.76 3.18 0.14 0.04 8.14
gainsandestates.As Thimmaiah(2002) observes,"Thesystem 2002-03 1.87 1.50 1.82 3.34 0.17 0.05 8.75
of directtaxes introducedon the advice of Kaldorencouraged 2003-04 2.30 1.50 1.76 3.29 0.29 0.04 9.18
the emergenceof the black money phenomenonin India".8 2004-05(RE) 2.67 1.64 1.81 3.24 0.46 0.01 9.82
In ensuingyearsthe scope of these taxes was expandedand Source: IndianPublic Finance Statistics, various issues; EconomicSurvey
the rates were inexorablyraised. One gets a flavour of the 2004-05 and BudgetPapers for2004-05 and 2005-06.

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improved compliance and cut the effective top rate further to from 5 to 2 per cent. He also reduced the number of income
66 per cent (60 per cent plus the 10 per cent surcharge) in his tax slabs from eight to four. Estate duty was abolished. At the
budget for 1976-77. In contrast to Chavan, he also reduced the same time he brought down the basic rate of company tax
rates of wealth taxation. During the Janata government both H (for widely held companies) to 50 per cent and unified the
M Patel and Charan Singh increased the income tax surcharge several rates applicable for different categories of closely held
and the wealth tax rates. By 1979-80 the effective top marginal companies at 55 per cent. Taken together, these measures
rate of income tax was back up to 72 per cent and the top wealth constituted the most comprehensive reform of direct taxes
tax rate was increased to a peak (by Charan Singh) of 5 per cent in India to date.
for net wealth over Rs 15 lakhs. A few months later, in December 1985, V P Singh placed the
With the return of the Congress to power, R Venkataraman LTFP in Parliament. For its time it was a remarkabledocument
reverted the top effective tax rate to 66 per cent by cutting the in many ways. First, it was a completely novel initiative to bring
surcharge back to 10 per cent and gave some relief on wealth out a medium-term fiscal policy strategy as a public document
tax slabs. His successor, Pranab Mukherjee. displayed some (indeed, nothing similar would happen for almost another 20
ambivalence in his first two budgets; indeed, in the second he years). Second, it embedded tax policy intentions within an
raisedthe surchargeform 10 to 12.5 per cent. However, in his third explicit macro fiscal framework.Third, the tax policies proposed
andfinal budget,for 1984-85, Mukherjeelowered the top effective were both comprehensive and specific. In particular,the LTFP
rate to 62 per cent by cutting the top marginal rate to 55 per committed the government to sweeping reforms of both central
cent, while leaving the surcharge unchanged at 12.5 per cent. excise and customs duties. For the former, it recommended the
This first wave of direct tax reforms brought a semblance of phased induction of VAT principles (especially crediting of taxes
sanity to top personal income tax rates. But the large number paid on inputs) in excise taxation and conferred the name
of slabs and relatively narrow bands continued. Even in 1984-85 'MODVAT' (short for modified VAT) for the new system. In
there were still eight income tax slabs. Furthermore,there were effect it was a commitment to implement the 'MANVAT'
no majorinitiatives in regardto company taxation. As for indirect (manufacture'sVAT) recommended by the Jha Committee eight
taxation, the far-reaching recommendations of the 1978 Jha years earlier. For customs duties, the LTFP appreciated the
Committeecontinuedto languishon the finance ministry's shelves. economic and administrative ideal of a modest uniform tariff
across all commodities but, bowing to the realities of the day,
Ill it plumped for a three-tier customs duty structure.10
VP Singh'sReforms(1985-87) In his second budget, for 1986-87, V P Singh delivered on many
of the policy promises of the LTFP. Most importantly,MODVAT
Modern tax reform was really launched in India during V P was implemented in 37 chaptersof the CentralExcise Tariff,with
Singh's two year stewardship of the finance ministry in the Rajiv a clear commitment to extend the system to the remainderof the
Gandhi Congress government. As Acharya (1988) points out, manufacturingsector. This was a huge forward step in the reform
there were several reasons to support this overall assessment. of India's indirect taxes. In the words of the LTFP,
First, the reforms addressed both direct and indirect taxes in a
shifting the effective burdenof excise taxationaway from inputs
reasonablyintegratedmanner.Second, for the firsttime, a medium- and on to final productsis at the heart of the proposedreform.
termtax reform strategy was explicitly articulatedand presented Aside from reducingthe distortionaryeffects on productionand
to Parliamentin the form of the Long Term Fiscal Policy (LTFP) thusincreasingthe competitivenessof Indianindustry,the shifting
policy paperof December 1985 [GoI 1985]. Third, in formulating of excise to final productswill help in tailoringexcise duties in
tax policy, serious weight was accorded to issues of resource such a mannerthatthe well-off beara higherproportionateburden
allocationefficiency. Fourth,tax policy also recognised the impor- than the poor.
tance of stability and predictability. Fifth, there was a conscious Table 2: Gross Tax Revenues of CentralsGovernment
and explicit effort to shift the weight of economic management (As per cent share of total)
in favour of non-discretionary, fiscal and financial policies and
Year CorporationPersonal Customs Union Service Others
away from discretionary physical controls. Finally, there was a Income Excise
concerted and serious effort to improve tax administration. (1) (2) (3) (4) (5) (6)
In V P Singh's first budget, for 1985-86, the focus was on 1969-70 - 12.8 16.2 15.3 55.2 0.0 0.4
direct taxes. Despite the rate reductions of the previous decade, 1974-75 11.5 14.2 21.6 52.5 0.0 - 0.2
the combined burden of income and wealth taxes was still very 1979-80 '11.9 11.5 25.0 51.4 0.0 0.2
1984-85 11.3 8.5 31.0 49.1 0.0 0.2
high for honest tax payers. As the Economic Administration 1989-90 9.4 9.9 35.8 44.4 0.0 0.5
Reforms Commission's Report No 22 [GoI 1983] pointed out, 1994-95 15.2 13.2 29.5 41.1 0.4 0.6
if the pre-tax returnon wealth was assumed at 10 per cent, then 1995-96 15.1 14.2 32.7 36.7 0.8 0.6
1996-97 14.7 14.4 33.9 35.6 0.8 0.5
a person with net wealth of 12 lakhs (and no other income) 1997-98 15.7 13.4 31.5 37.6 1.2 0.7
suffered a combined marginal tax of 97.5 per cent on his income, 1998-99 17.3 14.3 28.7 37.6 1.4 0.7
1999-2000 18.1 15.1 28.5 36.5 1.3 0.6
even though the top income tax rate was 62 per cent. And if his 2000-2001 19.1 17.0 25.4 36.6 1.4 0.5
net wealth was 18 lakhs or higher, the combined marginaltax rate 2001-2002 19.7 17.2 21.7 39.1 1.8 0.5
rose effectively to 117.5 per cent! Little wonder that for 1980-81 2002-2003 21.4 17.1 20.8 38.2 1.9 0.6
2003-2004 25.1 16.3 19.2 35.8 3.1 0.5
Acharya and Associates (1986) estimated the scale of tax-evaded 2004-05(RE) 27.2 16.7 18.4 33.0 4.6 0.1
income to be over double the amount actually declared for tax. 2005-06(BE) 29.9 17.9 14.4 32.9 4.7 0.1
Against this background, V P Singh cut the top marginal Source: IndianPublic Finance Statistics, various issues; EconomicSurvey
income tax rate from 62 to 50 per cent and that for wealth tax 2004-05and BudgetPapersfor2004-05 and 2005-06.

2064 Economic and Political Weekly May 14, 2005

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 The proposed reform of customs duties did not, unfortunately, were implementedfully or exactly as originally envisaged.
find a place in the 1986-87 budget. Indeed, customs duties However,theirbroadthrustanddirectionwerelargelyhonoured
continued to be raised in the next few years, largely for revenue in the budgetsof the decadepresentedby threedifferentfinance
reasons. Given the tight regime of import controls prevailing, ministersof threedifferentgovernments.1
this was not an altogether bad thing, since it effectively trans- Much of the recommendedreforms were carried out by
formed the scarcity premia associated with import controls into ManmohanSinghin his five fullbudgetsbetween1991and1996.
public revenues. As a result, the share of customs duties in central His first budget(for 1991-92),framedin the midst of a fiscal
government revenues continued to increase in the latter half of andbalanceof paymentscrisis,wasa mixedbagfroma taxreform
the 1980s (Table 2). viewpoint.In fact, he raisedthe corporatetax ratesfor different
categoriesof companiesby 5 percentagepoints,thusreversing
IV the most recent reductionby finance ministerDandavatein
TaxReforminthe 1990s 1990-91.However,on importdutieshe initiatedthelongoverdue
reformby reducingall customsdutiesabove 150 percentto this
If the mid- 1980s saw the launch of modem tax reform in India, rate, designatedas a new 'peak'. In retrospect.it may seem
the 1990s witnessed its fruition. Shortly after coming to power somewhatludicrousto dubreductionsdownto sucha highpeak
in mid-1991, the Narasimha Rao/Manmohan Singh Congress as a reform.But the fact remainsthatit was first time in inde-
government made comprehensive tax reform one of its main pendentIndia that a move had been initiatedfor systematic
reform planks. The Tax Reforms Committee (TRC), chaired by reductionof importduties.Furthermore, in his nextfourbudgets,
the country's leading public finance authority,RajaChelliah, was he systematicallyreducedpeakimportduties:to 110 percent in
swiftly established and it quickly gave an Interim Report (De- 1992-93,to 85 per cent in 1993-94,to 65 per cent in 1994-95
cember 1991), followed by a two-partFinal Report (August 1992 andto 50 percentin 1995-96.12Indeed,thesereductions in import
and January 1993). Taken together. these three volumes of the duties,combinedwith concurrentrelaxationof importcontrols
Chelliah Committee Report [Gol 1991-93] constitute the finest and exchange rate depreciation,constituteda sea change in
treatment of tax policy and reform issues in India in the past India's highly restrictedforeign tradeand paymentspolicies,
30 years. The reportprovided an excellent combination of lucid, whichtransformed India'sexternalpaymentssituationandpretty
theoretical analysis, empirical supporting evidence and practical muchbanishedthelongdreaded'foreignexchangeconstraint'.3
policy recommendations.Among its majortax policy recommen- Inhis 1992-93budgetSinghimplementedtheTRCrecommen-
dations were: dationson personalincometaxes,usheringin a three-slabstruc-
(i) A simple three-tierpersonal income tax structure,with an entry tureof 20,30 and40 percent,thoughwiththeslabsmorenarrowly
rate of 20 per cent and a top rate of 40 per cent. defined than by the TRC. He also implementedthe TRC re-
(ii) A phased reduction of the corporate tax rate to 40 per cent, commendationson wealthtax by excludingall financial(pro-
with the abolition of the distinction between widely-held and ductive)assetsfromits purview,raisingthe basic exemptionto
closely-held companies. 15 lakhsandreducingthe rateto 1 percent.The 1993-94budget
(iii) The abolition of wealth tax on all assets except certainclearly markedtime on tax reform.except for furtherreductionsof
specified 'unproductive' assets. customsduties,especiallymachineryandcapitalgoods.Singh's
(iv) A phased reduction of the extraordinarilyhigh import duties budgetfor 1994-95broughtin majortaxreforms.FollowingTRC
(many above 200 per cent in 1991) to a range of 15 to 30 per prescriptions, the distinctionbetweenclosely-heldand widely-
cent for manufactures and 50 per cent for certain agricultural held domesticcompanieswas abolishedand the companytax
items by 1997-98. ratereducedto anuniform40 percent,matchingthetoppersonal
(v) A wholesale restructuring of central excise to cover all incometax rate.Aside from furtherreductionsin peak import
manufactures,reductionof multiple tax rates to three in the range
of 10 to 20 per cent and extension of MODVAT credit to all Table 3: CentralGovernment: Direct vs IndirectTaxes
inputs including machinery. Year As Per Cent of GDP As Per Cent of Total
(vi) Selective excises at higher rates on non-essential (luxury) Direct Indirect Total Direct Indirect
consumption items. (1) (2) (3) (4) (5)
(vii) Systematic elimination of the numerous prevailing exemp- -1969-70 1.9 4.6 6.5 29.1 70.9
tions and tax preferences in both direct and indirect taxes to 1974-75 2.0 5.9 7.9 25.7 74.3
broaden the base of the major taxes. 1979-80 2.3 7.4 9.7 23.4 76.6
1984-85 1.8 7.4 9.3 19.7 80.3
(viii) Far-reachingreforms of the systems of tax administration, 1989-90 2.0 8.4 10.4 19.3 80.7
including the deployment of modern information technology and 1994-95 2.6 6.4 9.0 28.4 71.6
online linkage of new tax identification numbers to a national 1995-96 2.7 6.5 9.2 29.3 70.7
1996-97 2.7 6.5 9.2 29.1 70.9
network.
1997-98 2.4 6.0 8.4 29.1 70.9
The resemblance of these policy prescriptions with the six- 1998-99 2.6 5.6 8.1 31.6 68.4
point 'model' outlined in Section I is quite striking. Perhaps far 1999-2000 2.9 5.9 8.8 33.2 66.8
more heartening, in hindsight, is the extent to which these TRC 2000-2001 3.2 5.7 9.0 36.1 63.9
2001-2002 3.0 5.1 8.1 36.9 63.1
recommendations were actually implemented in the decade of 2002-2003 3.4 5.4 8.8 38.5 61.5
the 1990s. Remarkably,this occurred despite two majorchanges 2003-2004 3.8 5.4 9.2 41.4 58.6
in government, once in 1996 when the United Front (UF) replaced 2004-05(RE) 4.3 5.5 9.8 43.9 56.1
2005-06(BE) 47.9 52.1
Congress and again in 1998, when the National Democratic
Alliance(NDA)cameto power.NotalltheTRCrecommendations Source:Tables 1 and 2.

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duties and those on capital goods, there was a major cleaning V
up of end-use exemptions which cluttered the import tariff. In Post-2000Initiatives
excise, MODVAT was extended to capital goods and petroleum
products, the bulk of excise taxation was shifted from specific Taxpolicychangeshavecontinuedin the new millenium.But
to ad valorem rates, the number of excise rates was substantially to some extentthey seem to have lost the unifyingvision and
reduced and special exemption notices were cut by half. The coherenceof the TRC.In partthis may be due to the adventof
budget was also innovative in introducing taxation of an initial new views advocatedin some fresh governmentreviews and
set of services. reportson tax policy.The firstof these,the Shomereportof the
In the two budgets for the UF government. Chidambaram AdvisoryGroupon Tax Policy andTax Administration for the
continued the reductionof excise duty rates and lowered modestly TenthPlan [Gol 2001a], was broadlyin the TRC traditionand
the peak customs duty to 40 per cent. In his second budget, for providedthe very usefulserviceof highlightingthe agendafor
1997-98, he broke away from TRC recommendationsby reducing the future.Shortlythereaftercame the Kelkarreportsof Task
the triple-ratestructureof personal income taxes to 10-20-30 per Forceson DirectandIndirectTaxes [Gol 2002a.2002b].While
cent. lowering the company tax rate to 35 per cent and abolishing they containedmuchgood advice, especiallyon revampingof
dividend.taxationin the recipients' hands. while replacing it with tax administration,they also strucksome discordantnotes. In
a 10 per cent tax at the company stage. However, he followed the
particular. recommendations to doublethe exemptionlimit
TRC recommendations for base broadening by introducing the forpersonalincometaxationandto abolishtaxesonequitycapital
new 2-by-4 criteria requiring filing of income tax returns by gainsanddividends receivedbyindividuals wereseverelycriticised
assessees. Later converted to l-by-6, this programme played a by public finance specialistssuch as Bagchi (2002), Chelliah
significant role in expanding the number of income tax filers (2002) and Acharya(2003). So were the recommendations to
(and thus the'revenue base) since 1998. The combination of low moveto adualratestructure inexciseandcustoms[Mukhopadhya
tax rates and a broader base buttressed the rising share of direct 2002 and Acharya2003]. In any case, the 'consensus'among
taxes in total tax revenues since 1991 (Table 3). 'authorities'hadbeenbreached,makingit easierfor ad hoc-ery
The NDA came into power in 1998 and finance minister to flourish in tax policy. The main new initiatives, not all
Yashwant Sinha presented the next five budgets. His first retrograde,are brieflyreviewedhere.
budget, for 1998-99. broke with the past in raising import duties
through the imposition of a 4 per cent special additional duty Taxation of Dividends
on imports (SAD). Subsequent budgets resumed the reduction
of peak import duties and made very major progress in moving The 'classicalsystem'involvesa separatetaxon totalcompany
the excise tax structuretowards a single ratemanufacturers'VAT. profits,with dividendsdistributedbeing taxed in the handsof
The big breakthroughcame in the budget for 1999-2000. when the shareholderaccordingto his income status.This System
11 excise rates, ranging from 5 to 40 per cent, were clubbed into entailsa notionaldoubletaxationof partof the corporateprofit
just 3 rates (8, 16 and 24 per cent). In addition. two non- stream,once as companyprofits and again as income in the
MODVATable, additional special excise rates (6 and 16 per cent) shareholder'shands.The TRC had consideredvariousalterna-
were levied on a handful of largely luxury consumer goods such tives for 'partialintegration'to mitigatethis problembut, after
as cars and air-conditioners. In the following budget, for 2000- weighingprosandcons,hadrecommended retainingtheclassical
01. Sinha conflated the three excise rates into a single CENVAT systemwithreducedratesof personalandcompanyincometax.
rate of 16 per cent, buttressed by three non-rebatable special In 1997-98,Chidambaram brokeawayfromtheclassicalsystem,
additionalexcises (at 8.16 and24 per cent) for a few commodities, abolisheddividendtax in the handsof the recipientand sub-
mainly consumer luxuries. His budgets also expanded the scope stitutedit with a 10 per cent tax on distributions,levied at the
of service taxationand strengthenedthe 1-by-6 criteriafor income companystage. The administrativeadvantageswere obvious.
tax filing. However,thebasicproblemwiththisapproachwasthatof equity:
Thus, by the year 2000, three different finance ministers of thetaxratewas the sameirrespectiveof whethertheshareholder
three separate governments had largely fulfilled the TRC tax was in a 10 or 30 per cent marginalincome tax bracket.
reform agenda of 1991-92. Personal income tax rates had been This tension contributedto enormousinstabilityin the tax
substantiallylowered, to even below TRC recommendations.The systemin ensuingyears.The rateon distributeddividendswas
tax rate on domestic companies had been unified and reduced. increasedto 20 per cent in Sinha'sbudgetfor 2000-01. It was
again to below the TRC target. Import duties had been brought broughtdown to 10 per cent again in his budgetfor 2001-02.
down. though somewhat slowly after 1996 aid their dispersion In his 2002-03 budget,Sinharevertedto the pre-Chidambaram
in 2000 was still a little wider than TRC recommendations for classical system, only to have the whole thing reversedagain
1997-78. The multiple rate excise structurehad been transformed by JaswantSinghfor2003-04,witha companystagedistribution
into a single rate CENVAT, buttressedby a few selective excises tax set at 12.5 per cent! Whetherstabilityhas been attained
on luxuryconsumer goods. Services taxation had been introduced remainsa moot question.
andexpanded. On the whole, the numberand scope of exemptions
and preferentialrates had been reduced, though by not as much Taxation of Capital Gains from
as the TRC had recommended. However, in the area of tax Securities Transactions
administration,the TRC's recommendations had been observed
The KelkarTask Force on Direct Taxes had recommended
largely in the breach. Taken as a whole and recognising the real
worldconstraints,taxreformin the 1990shaddisplayedremark- abolitionof taxationon long-termcapitalgainsfromlistedequity
able coherenceand continuity. on the groundsthat they representcapitalisationof retained

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earningsalreadytaxed.Chelliah(2002) andothershadcogently on threeservices in 1994 and raisedless than0.5 per cent of
criticisedthisargument.ThisdidnotpreventJaswantSinghfrom centralgovernmentrevenuesthroughthisinstrument in thatyear.
implementingthis recommendationin his 2003-04 budget"to Tenyearslater,in 2004-05, servicestaxationhadbeenextended
give a furtherfillip to the capitalmarkets".Chidambaram took to over70 separateservicesandthe revenueyield accountedfor
the idea furtherin the 2004-05 budgetby abolishingtaxation nearly 5 per cent of gross central revenues (or almost one-
of long-termcapital gains on all securities transactionsand thirdthe amountof gross customs revenues). This sustained
reducingtherateon short-termcapitalgainsto a flat 10 percent. expansion was drivenby consistentsupportfrom successive
Insteadhe introduceda new securitiestransactionstax (STT). governmentsand the growingneed to find alternativerevenue
Froma taxreformviewpointthesechangeswereclearlyretro- sourcesin the face of the decliningrole of customsandexcise
grade.First,they favouredthe rich in a generallypoorsociety revenues(Tables1 and 2).
for no good social reason.Second they went againstthe grain Followingthe recommendations of the 'GovindaRao' Expert
of base broadeningby removingsuch capital gains from the Groupon Taxationof Services[GoI2001], creditfor taxespaid
incomebase.Third,they introducedan unjustifiabledivergence on inputsin serviceactivitieswas graduallyintroduced. Afteran
in thetaxationof stockmarketcapitalgainsversusthoseon other initialexperimentin 2002-03,JaswantSinghextended,in 2003-
assets.Fourth,the recourseto taxationof financialtransactions, 04, the principleof creditfor taxespaidon inputsto all services
generallydeemedinefficient,was particularlyincongruousat a for serviceinputs.At the same he raisedthe rateof servicetax
time when turnovertaxes were being successfullyphasedout from5 to 8 percent. In the next budgetChidambaram took the
in commoditytaxation.The STT could be the harbingerof an nextlogicalstep(asrecommended bytheRaoreport)of extending
unfortunatetrend. Indeed in his next budget Chidambaram the creditof service tax and excise duty across all goods and
proposeda cash withdrawaltax. services.To maintainrevenueneutralityhe furtherincreasedthe
servicetaxrateto 10 percent.Althoughthisfell shortof the Rao
Trends in Excise Taxation report'srecommendation for full integrationbetweenCENVAT
andservicestaxation,seriousprogresshadclearlybeenmade.14
JaswantSingh's2003-04 budgetfocusedon a triplerate(8,16
and24 percent) excise structureand failed to drawthe crucial Customs Duties
distinctionbetweenan uniqueCENVATrate and (additional)
specialexcises. This was at odds with the TRC model(andthe Therewasa similarcontinuityandconsistencyin theapproach
generalityof international practice),whichhadbeen usheredin to customsduties. 'Peak' customsduties stood at 35 per cent
by the Sinhabudgetsfor 1999-2000and 2000-01. Thatmodel in 2000, withthefourmainratesbeing35, 25,15 and5 percent.
(and budgets)clearly articulatedthe importanceof a single In the nextfew budgetsSinha,JaswantSinghandChidambaram
CENVATof 16 percent(forall goodswhicharein a production progressivelyreducedthe peakrateto 15 per cent by 2005-06.
chainwithothergoods) supportedby additionalspecialexcises Because of the growing numberof exceptionsto the 'peak',
on a small numberof luxury(incomeelastic) consumergoods especiallyfor agricultural products,it was formallydescribedas
and 'sin' items such as tobacco.Earlierbudgetshad retained the 'peakrate-for non-agricultural products'in the2005-06budget
intermediaterates of 4, 8 and 12 per cent as temporaryway speech.Althougheffectiveratesof protection(thatis, protection
stationsfor a few commoditiesthatwere to be graduallyraised to value added)remainedquite high in some low value-added
to the full CENVATrateof 16 per cent. In contrast,the 2003- sectorssuchas petroleumrefining,the reductionof peakmanu-
04 budgetviewedthe 8 percent rateas a permanentfeatureand facturingtariffsfromover 200 per cent in 1991, to 15 per cent
wenton to reducethe rateson some itemsfrom 16 to 8 percent. in 2005 was quite a remarkableachievementfor an economy,
By legitimisingthe 8 per cent rate as an integralpartof the which had been notoriouslyprotectedand inwardlooking till
CENVAT system the budget risked continuouspressureand 1991. This is especially so in a context where quantitative
lobbyingfrom all producersof items chargedat higherrates. restrictionson importswere largelyphasedout by 2001.
Ratherunexpectedly,thetwo recentbudgetsby Chidambaram
have also failed to projectthe importantdistinctionbetweena
Progress in Tax Administration
nearuniversal16 percent CENVATrateandadditionalspecial
exciseson a limitedrangeof luxuryconsumerproducts.Without "
MillfaCasanegra(1990) hadfamouslywritten in developing
suchselectiveexcisesonconsumerluxuries,thereis muchgreater countriestaxadministration is taxpolicy"to highlightthecritical
likelihoodof a regressiveindirecttax structure.Furthermore, role of tax administration in ensuringthe effectivenessof tax
recentbudgetshave shown an unfortunatepropensityto grant policy. For manyyearsthis had remainedthe Achilles heel of
outrightexciseexemptionsto variousproducts,thusundermining India'stax system[Das-GuptaandMookherjee1998].Manyof
thebasiclogicof a VATchain.Forexample,computers,bicycles, the problemsand weaknesseshad been well diagnoseda long
tableware,toys, tractors,handtools and mosaictiles have been time ago in variousgovernmentreports,includingthe Chelliah
totally exemptedwithoutgood reason. and Shomereports.As notedin SectionIV. the ideas for a tax
informationnetwork(TIN) and nationalonline computernet-
worksgo backatleastto theChelliahCommitteereport.However,
Expansion of Services Taxation
it wasthesignalcontribution of theKelkarTaskForceson Direct
In contrastto this ambiguousapproachto excise, taxationof andIndirectTaxesof 2002(andthefinanceministry'ssubsequent
serviceswas consistentlyexpandedby successivefinancemin- follow-up)to give a strong,fresh impetusto such initiatives.
istersandinputtax rebateprinciplesweregraduallyintroduced. FollowingtheKelkarTaskForcerecommendaions, theCentral
ManmohanSinghhad introducedservicetaxationat 5 per cent Boardof DirectTaxes(CBDT)establishedthecomputerised TIN

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withtheactivehelpof theNationalSecuritiesDepository(NSDL). years.Therearethreemajorchallengesfor futurereform.First,
In the initialphasethe focus was on collatingandmatchingtax a plethoraof complexexemptionsstillplaguesthecustomstariff.
deductedatsource(TDS)returnsfromemployerswithcollection As the Shomereportpointedout, "in any standardpublication
detailsfrom banksto ensurethat tax creditsare allowed only of the customstariffstructurecontaining1,150 pages.400 are
againstactualfunds deposited into governmentaccounts.To devoted to exemptions...". There is obviously enormous scope
speed datacollectionand sortingfrom banks.the 'OnlineTax for cleaning up this situation.Second, with non-agricultural
AccountingSystem'(OLTAS)wasoperationalised in July2004. tariffsbunchedbetweenzeroand15percent,thereis a tremendous
An indicationof efficiency gains from sound applicationof opportunityfor quicklyshiftingto an uniform10 percent tariff.
modern technology may be gauged from the following This wouldconflatewidely varyingratesof effectiveprotection
[Chakravarti 2004]: to 10 per cent and thereby enhance economic efficiency. It
- The numberof income tax returnsprocessedon computers would also hugely reducecurrentproblemsof classification,
increasedfrom0.4 millionin 2000-01to 20.4 millionin 2003-04. administration andabuseof discretion,especiallyin thecontext
- Refundsissued doubledfrom 2.6 million in 2001-02 to 5.6 of a growingnumberof preferentialtradingarrangements with
million in 2003-04. other countries.Finally, the presentstructureof agricultural
- The numberof allottedPermanentAccountNumbers(PANs) tariffsneedsto be reviewed.Manyof themareset atunjustifiably
soaredto nearly36 millionby late 2004, greatlyhelpedby the high levels.16
outsourcing of PANallotmentstotheNSDLandtheUTIinvestors.
- In 2004, the softwaregiant, Infosys, uploadedonly one disc Excise Duty Reforms
for filing its employeeTDS returns,the previousyear it hadto
file nearly20,000 separateTDS paperreturns. Onemajorproblemwiththecurrentsystemofexcise/CENVAT
- By one estimate,TIN has eliminatedthe circulationof nearly dutiesis theirlow buoyancy,typicallybelowunityin mostyears
70 million A-4 sheets of paper. sincethemid-1990s.Althoughexcise revenuesremainthesingle
Similardeploymentof infotechsystemsandresourcesis being largestcontributorto gross centralgovernmentrevenues,their
carriedout for indirecttaxesby the CentralBoardof Exciseand sharehas fallen from41 per cent in 1994-95to 33 per cent in
Customs(CBEC).As Chakravarti (2004) pointsout,thecustoms 2004-05. In the early 1990s it was expectedthatthe reduction
department had established the Customs E-commerceGateway in customsrevenues(dueto sharpreductionsin previouslyhigh
(ICEGATE)andthe CustomsElectronicDataInterchangeSys- importduties) would be partiallycompensatedby the rise of
tem(ICES)in the 1990s.Theiradministration hasbeenimproved domestictradetaxes, notablyexcise. This has not happened,
in recentyears. In 2003-04 ICES handledaboutfour million leadingto relativelylow ratiosof tax revenuesto GDP through
declarations inautomatedcustomslocationsaccountingforabout most of the 1990s. The weak revenueperformanceof central
75 percentof India'sinternational trade.Drawingon Canadian excise cannotbe adequatelyexplainedby the reductionin rates.
technicalassistance,the excise departmenthas madesignificant Otherpossibleexplanationsincludeproliferationof exempted
progressin establishingmodernaudit systems, Excise Audit products,the abuse of CENVATtax creditingprovisionsand
2000, based on computerisedrisk assessment. Modern risk widespreadevasion. In either case. -administrative reformof
assessmentandcomputerised samplingproceduresarealsobeing excise mustcommandhighpriority.Inaddition,thereis a strong
used by CBDT in selecting tax returnsfor scrutiny. case forcarefullyreviewingthelargenumberof products.which
Such improvementsin systems and processesof tax admin- enjoy completeexemption.Aside from loss of revenue,such
istrationarestill in the natureof 'workin progress'.Whilereal exemptionsbreachtheCENVATchain,whichprovidesthecore
progressseemsto havebeenmade,thereis hugescopeforfurther valueof VAT-typetaxes.Manyproductsneed to restored(per-
improvement.And even the presentgains could erodewithout haps in stages) to the CENVAT 16 per cent rate.
strong and consistentbacking from the finance ministerand Secondly, there is an equally strong case for resurrecting
senior officials.15 the role of (additional)special excises on a limited number
of luxury consumerproductssuch'as cars, air-conditioners,
VI colourtelevisions(abovea specifiedscreensize), refridgerators
TheUnfinished
Agenda (above a specified capacity) and other high-valueconsumer
durables.The ratesof suchadditionalspecialexcises shouldbe
Tax reformin Indiahas made enormousprogressin the last modest,in therangeof 5 to 15 percent.Asidefromraisingmuch
30 years.The tax structuretodaybearslittleresemblanceto that neededadditionalrevenue,suchtaxeswouldcounterthe regres-
prevailingin the mid-1970s.Almostall the changehas beenfor sive natureof a uniformCENVAT.Finally,the importantini-
thebetter,judgedby the usualstandardsof economicefficiency, tiativesin recentbudgetsto integrateservicetaxationwith the
equity,built-inrevenueelasticityandtransparency.Butthework CENVAT/excisestructureshould be broughtto their logical
of tax reformis neverfinished.This concludingsectionoutlines conclusion.
some key issues for futurereform.
Integrating CENVAT with State VATs
Further Reform of Import Duties
Thebiggestchallengefor futuretaxreformis how to integrate
As describedabove,therehasbeena seachangein thecustoms thecentral,CENVAT/servicestax structurewiththestateVATs
tariffstructuresince 1990. India'scustomsdutieson manufac- (whichhavebeenintroducedin 19statesandtwounionterritories
turesarenow withinstrikingdistanceof the 'east Asianlevels' on April2005 in placeof earliersales taxes)in a mannerwhich
target,indicatedby successivefinanceministersin the last five mostcloselyapproximates theidealofadestination-based,
unified,

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retaillevel consumptionVAT for the country.The challengeis which empowered the centre to tax "all services, including the
enormousand poses seriousconceptual,constitutional,admin- services of trading and retailing of goods". This is an unsettled
istrativeand economic issues. legal issue. More importantis the willingness of states to constrict
For a start,the ongoing transitionfrom sales tax to VAT in their autonomy to the extent required in the 'grand bargain'. In
the majorityof statesis itself a mammothenterprise,bedeviled any case, given the current preoccupation of state governments
by the non-participation of nine states, basic design problems with the transition from sales tax to VAT, forward movement
withtheformof VATchosen(suchas theexcessivegapbetween on the KTF vision is unlikely to be imminent. Howveverits
the two main ratesof 12.5 and 4 per cent and the slottingof economic and tax policy appeal is very considerable. The pro-
too manygoodsintotheconcessionalrate),theuncertainty about posals merit serious consideration and.debate.
the reformtrajectoryfor the centralsales tax (CST),17apparent
lackof preparation andtraining,thedisparityacrossthereforming
statesin commitmentand capacityto implementthe transition Broadening the Base Gf Direct Taxes
andcontinuingpoliticaloppositionin manyquarters.Since this Successive official reports, including TRC, the Shome report
majortransitionis likely to takeat least a yearor two to settle, and the recent KTF report have favoured phasing out the many
the importantissue of integratingcentraltaxationof goods and exemptions which today reduce the base for both company and
serviceswithstateVATscanonlybe a medium-term objective.18 personal income taxes. For companies, these include incentives
In 1992,theTRChadrecommendedextensionof thereformed for exports. foreign trade zones, technology parks, infrastructure
centralexcise (laterdubbedCENVAT)to the wholesalestage and backward area development. Typically such tax preferences
(with the active cooperationof sales tax departments)and the lead to significant revenue loss and economic distortions without
conversionof state sales taxes to retail-stageVATs on manu- commensurate promotion of the desired objectives. Nevertheless
factures.Inhis 1993budgetspeechManmohanSinghhadstated such tax incentives have proved resilient. not least because of
"ourlong termaim shouldbe to move to a Value AddedTax the influence of vested interests. The case for phasing them out
System".Recognisingthata nationalVAT raisedmany issues has now become stronger with the further reduction of the
and requiredcooperationbetweenthe centreand the states,he company tax rate to 30 per cent in the budget for 2005-06. For
askedtheNationalInstituteof PublicFinanceandPolicytodesign individuals, the recent budget, which effectively reduced rates
a possibleblueprint.The resultingreportby Bagchiet al (1994) substantially (by raising and widening the tax brackets), has
wasa classicstudyof India'sdomestictradetaxesandthefeasible attempted some rationalisation of savings incentives and an-
options.It becamea key documentfor the decade-longeffort nounced another expert group to refine them further.
to harmoniseandreformsales taxes,culminatingin theongoing The currentexclusion of both dividends and long-term capital
transitionto stateVATs. On the issue of integratingcentraland gains on security transactions from the base of personal income
statetaxeson domestictrade,it concludedpresciently"theonly tax is hard to justify in a poor country, straining to increase tax
feasibleoptionseemsto be a dualsystemin whichVATis levied revenues. The contrast between taxation of labour incomes and
bythetwolevelsof governmentindependently withintheexisting exemption of returns from equity capital is stark. Some reform
constitutional framework. This would be possible if the is in order,but it has to be carefully calibratedto minimise market
MODVAT...is madeintoa full-fledgedmanufacturers' VATand disruptions.
the statesalso adopta destination-based harmonisedsystemof
VAT in place of the chaotic sales taxes operatingnow". Tax Administration
This is the currenttrajectory,with the importantadditionthat
taxationof servicesis beingsuccessfullyintegrated withCENVAT The last two decades have seen many initiatives to improve
at the centrallevel. A far more radicalvision was offeredlast tax administrationto make the systems friendly and transparent
yearby the KelkarTaskForce(KTF)on Implementation of the for honest assessees, while providing real deterrents to evaders.
Fiscal Responsibilityand BudgetManagementAct 2003 [Gol Too often such efforts have come in sporadic bursts, which have
2004].KTFproposeda farmoreunifiedandcomprehensiveVAT not been sustained. As noted earlier, since 2000 there have been
(dubbedthe goods and services tax (GST)), to be levied con- concerted programmes to deploy information technology and
currentlyby the centre and states on (almost) all goods and modem risk assessment methods to both direct and indirect
services.In theirtriple-rateGST, the main 'standard'rateof 20 taxation. The task ahead is to sustain these programmes with
per cent wouldbe constitutedof 12 per cent by the Centreand requisite resources and ministerial backing. The dictum 'tax
8 percent by states.Both levels of governmentwouldagreeon administration is tax policy' is really quite true. 13
commonlists (for rateapplication),exemptions.thresholdsand
so forth.The taxationof importsand exports would be fully Email: [email protected]
integratedintotheproposeddual-GSTsystem.As partof a 'grand
bargain',stateswouldgain access to servicesandimportsas tax Notes
basesin returnfor giving up autonomyover GST rates,exemp-
tions,thresholdsandprocedures.The nationwouldbenefitfrom [The views expressed in this paper are personal.]
a unified.destination-based. consumptionVAT, which would 1 This paper is largely confined to the central government tax system.
replaceall inferior,cascadingtype taxes such as CST,sales tax, 2 See, for example, Gillis (1989), Bird and Oldman (1990), Gillis et al
(1990) and World Bank (1991).
stampduties and octroi. 3 This is, of course, a summaryand simple list of the main desiderata,
KTFbelievedthatthekey legalimpedimenthithertoconfining which omits many issues of tax policy and practice.
centralexcise taxationto the manufacturingstage had been 4 Interestingly,the rich theoreticalliteratureon optimal taxationof goods
overcomeby the 88thamendmentto the Constitution(in 2003), and services associated with Daimond and Mirrlees (1971) and others

Economic and Political Weekly May 14, 2005 2069

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 (such as Newbery and Ster 1987) finds little reflection in the spread Bird, RichardM and Oliver Oldman (eds) (1990): Taxationin Developing
of VAT as the key instrumentfor indirect taxation. This has been Countries, 4th ed, Johns Hopkins Press, Baltimore.
attributedto the impracticality of the theoretical prescriptions (see. Casanegrade Jantscher,Milka (1990): 'Administeringthe VAT' in Gillis,
for example. the Interim Report of the 'Chelliah Committee' Shoup and Sicat (eds) (1990).
[Gol 1991-93]). Chakravarti,Shamit (2002): 'Reform of Tax Administrationin India: A
5 See ChelliahandLal (1981) andAhmadandStern(1983) for earlystudies Quiet Revolution' in ADB India Economic Bulletin. October 2004,
of indirect tax incidence in India. New Delhi.
6 Many of the investmentcompanies which figure prominentlyin today's Chelliah, R J (2002): 'Task Force Recommendationson Direct Taxes',
battlesforcorporatecontrolowe theiroriginto theconfiscatorytaxregime Economic and Political Weekly, December 14.
of the 1970s. Chelliah, R J and R N Lal (1981): Incidenceof IndirectTaxationin India.
7 See the detailed assessnients of the Wanchoo Committee [GoI 19711, National Insititute of Public Finance and Policy, New Delhi.
the VenkatappiahCommittee [Gol 1974] and the Jha Committee [Gol Das-Gupta,Arindam(2002): 'CentralTax and AdministrationReform in
19781. the 1990s' in M Govinda Rao (ed), Development,Poverty and Fiscal
8 For a comprehensivetreatmentof the problem and dimensions of the Policy, Oxford University Press, New Delhi.
'black economy' in the early 1980s see Acharyaand Associates (1986). Das-Gupta. Arindam and Dilip Mookherjee (1998): Incentives and
9 Significantly,in the meantime,the chief economic adviserhad changed Institutional Reform in Tax Enforcement, Oxford University Press,
from the ideologically dogmatic Ashok Mitra to the more pragmatic New Delhi.
Manmohan Singh. Diamond, P A and J A Mirrlees (1971): 'Optimal Taxation and Public
10 It is indeed quite interesting to find the LTFP arguing the case for a Production',American Economic Review, March-June.
uniformcustoms tariff20 years ago. The relevantparagraph(6.26) reads, Gillis, Malcolm,CarlS Shoup and GerardoSicat (eds) (1990): ValueAdded
"Ideally,in the long run, there is a strong case for subjectingall capital Taxation in Developing Countries, World Bank, Washington, DC.
goods, raw materials,components and other intermediateproducts to Gillis, Malcolm (ed) (1989): Tax Reform in Developing Countries, Duke
the same nominaltariff.This system, if it could be implemented,would University Press, Durham.
have several importantadvantages.First, the substitutionof the present Gol (1954): Report of the Taxation Enquiry Commission, Ministry of
nominal tariff rates by a single rate would constitute an enormous Finance, Governmentof India. New Delhi.
- (1971): Report of the Direct Taxes Enquiry Committee, Ministry of
simplification for both trade and industry as well as for the customs
administration. Second, this would vastly reduce incentives for Finance, Governmentof India. New Delhi.
misclassificationof importsto evade taxes. Third.a single nominalrate - (1974): Report of the Central Excise (Self Removal Procedure),
of importduty would assure a uniformrate of effective protection(that Review Committee, Ministry of Finance, Government of India,
is, protection of value added) at different stages of production of New Delhi.
intermediateand capital goods. This would encourage the economy to - (1978): Reportof the Indirect TaxationEnquiryCommittee.Ministryof
specialisein those activitesin which it has comparativestrength."Sounds Finance, Governmentof India, New Delhi.
- (1983): Reportson TaxAdministration,1981-83, EconomicAdministration
quitecontemporary,except for a certaincoyness in mentioningconsumer
Reforms Commission. Ministryof Finance, Governmentof India, New
goods.
11 The continuity in policy was probably helped by the continuity in top Delhi.
finance ministryofficials assembledby ManmohanSingh [see Acharya - (1985): Long-TermFiscal Policy, Ministry of Finance, Governmentof
2002a]. India, New Delhi.
12 The reductionof importduties was generally sharperfor machineryand - (1991-93):Reportsofthe TaxReformCommittee(InterimReport.December
1991; Final Report Part I. August 1992; Final Report Part II, January
capital goods and key intermediatessuch as metals and chemicals.
13 Foran assessmentof India'stradeliberalisationin the 1990s see Acharya 1993), Ministry of Finance, Governmentof India, New Delhi.
(2002b) and Panagariya(2004). -(2001 a):ReportoftheAdvisoryGroupon TaxPolicyand TdxAdministration
14 The Rao report'srecommendationof a comprehensiveservice tax with for the TenthPlan, PlanningCommission, Governmentof India. New
a negative list, if necessary, has also not been acted upon. Delhi.
15 For a somewhat sceptical view of the commitment to revamping tax - (2001b): Report of the Expert Group on Taxationof Services, Ministry
administration,see Das-Gupta (2002). of Finance, Governmentof India, New Delhi.
- (2002a): Reportof the Task Force on Direct Taxes. Ministryof Finance,
16 Similar views are expressed by Virmani (2005).
17 Rao (2003) analyses the difficult issues involved in phasing out CST. Governmentof India, New Delhi.
18 Rao (2005) offers a preliminaryassessnient. - (2002b): Reportof the TaskForce on IndirectTaxes,Ministryof Finance,
Governmentof India, New Delhi.
- (2004): Report of the Task Force on Implementationof the Fiscal
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