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+20632070
Published by: Economic and Political Weekly
Stable URL: http://www.jstor.org/stable/4416644
Accessed: 26-07-2016 08:01 UTC
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
http://about.jstor.org/terms

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted
digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about
JSTOR, please contact [email protected].

Economic and Political Weekly is collaborating with JSTOR to digitize, preserve and extend access to
Economic and Political Weekly

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

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 enormous progress 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 exemptions plaguing customs tariff low
buoyancy of excise, integration of CENVAT with state VAT and the broad-basing of direct
taxes. Sustaining programmes to deploy IT and modern risk management methods in tax
administration will be critical, for the dictum 'tax administration is tax policy' is quite true.
SHANKAR ACHARYA

n the mid-1970s, by the standards of modem tax theory and

practice, India's tax system was a mess.l Direct taxes were

levied at confiscatory rates, which encouraged rampant

evasion. Indirect taxes on domestic and foreign trade boasted
innumerable commodity-specific rates and hundreds of end-use
exemptions and preferences, which made a mockery of the public

finance canons of simplicity, economic efficiency and equity.

By the year 2005 the tax structure, especially at the central
government level, had been substantially reformed. Although

witnessed an unusually strong wave of tax reforms as most

countries of the world (including developing nations) reduced
their reliance on foreign trade taxes, introduced some form of
value added taxation (VAT) in domestic taxes on goods and
services and streamlined income and company taxes, partly in
response to the imperatives of increasing global economic integration. By the late 1980s there was a substantial consensus
on the principal desiderata of a national tax system.2
Its features included:3

the system is still far from perfect, serious progress has clearly

(i) A broad-based, consumption VAT, with a primary (preferably

been made in the intervening three decades. Such progress was

neither steady nor uniform. Tax reform came in bursts, at least

only) rate in the range of 10 to 20 per cent, with crediting

provisions and zero rating of exports.4 This was to be the main
revenue earner among indirect taxes.
(ii) For equity, a consumption VAT buttressed by luxury taxes
(special or selective excises) at two or three rates on a small

until the 1990s when the reform efforts were more sustained and
coherent.

This paper sketches the contours of India's tax reform story

from the mid-1970s to the present. Section I outlines the prevailing consensus regarding the desirable elements of a modem
national tax system and compares this 'model' with the Indian
reality of the mid-1970s. Section II summarises the first wave
( 1974-1984) of reforms, which focused on the direct tax structure.

number of income-elastic luxury goods, applicable to both imports

and domestic products.

(iii) Low import tariffs (10 per cent or lower) that were as uniform

as possible, with well-functioning export rebate or duty drawback

reforms launched by V P Singh during his two years as finance

schemes to compensate exporters for duties suffered on inputs.

There were to be no export duties.
(iv) Personal income taxes that fell on a broad base, uneroded

Section III describes the salient features of the important tax

minister (1985-87). The next section deals with the reforms

by numerous exemptions and tax preferences. A rate structure

implemented during the 1990s by successive ministers. Manmohan

that was moderately progressive with three or four slabs and the

Singh, P Chidambaram and Yashwant Sinha. Many of these

top marginal rate in the range of 30 to 40 per cent to promote

reforms were influenced strongly by the seminal Tax Reforms

Committee Report (the 'Chelliah Committee' report) of 1991-92.
Section V summarises the main initiatives undertaken since 2000,

compliance. Withholding (tax deduction at source) was to be

some of which have strayed from the vision of the Chelliah

Committee. The final section outlines the unfinished agenda for
tax reforms in India.

Model versus Reality

The world over tax reform has been an ongoing process,
influenced by economic theory, evolving economic structure,
exigencies of practical tax administration and the lessons of

experience. The quarter century between 1965 and 1990

widely prevalent on incomes from wages, interest and dividends.

(v) Company taxation at a single rate comparable to the maximum

personal income tax rate. Exemptions and tax preferences were

to be strictly limited.
(vi) Tax law and administration that were simple and effective,

with strong reliance on moder systems and technology for

information gathering, collation and analysis and transparent
procedures for penalties and appeals.
Judged by this six-point, received wisdom on tax policy, how
did India's tax structure of the mid-1970s fare? In a nutshell,
pretty miserably. Take the case of union excise duties, which
accounted for about half of all central government revenues.
These duties were levied on virtually all manufactured products

Economic and Political Weekly May 14. 2005 2061

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

(at the manufacturing stage) at rates which varied from 2 to 100

prevailing tax ideology of the times from perusing the budget

per cent (not counting the much higher rates on tobacco and
petroleum products). As the justly famous L K Jha Indirect
Taxation Enquiry Committee Report [Gol 1978] noted, there
were at least 24 separate rates into which commodities were
grouped! VAT principles were notable by their absence: inputs

speeches of those years. Thus, Indira Gandhi, presenting the

budget for 1970-71, said:

were routinely taxed; yet there were virtually no credits for taxes

paid on inputs. The result was indiscriminate 'cascading' and

unpredictable tax incidence.5 There was no question of tax
'neutrality' across sectors, commodities or uses. Import duties
displayed similar, massive variance, ranging from zero to over
200 per cent. Their economic impact was made even more opaque
by the prevailing regime of detailed and tight quantitative restric-

tions on imports through a complex system of import licensing.

Taxation is also a major instrument in all modem societies to

achieve greater equality of incomes and wealth. It is, therefore,
proposed to make our direct tax system serve this purpose by
increasing income taxation at higher levels as well as by substantially enhancing the present rates of taxation on wealth and gifts...

The marginal rates of income taxation will be increased progres-

sively on all personal incomes above Rs 40.000'per year. With

the addition of the surcharge at 10 per cent, the maximum rate
of 93.5 per cent will now be reached in the slab over Rs 2 lakhs
as against 82.5 per cent in the slab over Rs 2 /2 lakhs at present.
Not to be outdone. the next finance minister. Y B Chavan, raised

The tax structure for personal income and wealth was, if

the surcharge on income taxes to 15 per cent in 1971-72, thereby

anything. even more bizarre. Income tax rates were progressive

with a vengeance. In 1973-74 there were 11 different tax slabs

taking the effective top marginal income tax rate 97.75 per cent.

with rates ranging from an entry level of 10 per cent and climbing

He also upped the rates of capital gains tax. The zeal in raising
tax rates was not matched by income tax revenue collections,

inexorably to the top marginal rate of 85 per cent. With a

which remained stuck at about 1 per cent of GDP (Table 1).

prevailing surcharge of 15 per cent, the effective top marginal

rate was actually 97.75 per cent! Since there were significant
taxes on net wealth, the combined marginal incidence of income
and wealth taxes at the higher income brackets was frequently
in excess of 100 per cent. The predictable result was widespread
evasion and avoidance of such taxes.6 Company tax rates were

Fortunately. these absurd levels of income taxation had reached

their zenith. The Wanchoo Direct Taxes Enquiry Committee

Report [GoI 1971] took a forthright position on the matter. It
pointed out when "the marginal rate of taxation is as high as
97.75 per cent, the net profit on concealment can be as much
as 4.300 per cent of the after tax income...We will not be surprised

sectors. This complex tax structure spawned equally complex

that placed in such a situation, it would be difficult for a person

to resist the temptation to evade taxes." The committee blamed
the extraordinarily high income tax rates as the principal cause
of tax evasion and recommended a reduction of the effective top

systems of tax administration.7

In sum, India's tax system in the mid-1970s had none of the

minister Chavan reversed his earlier stance and implemented this

also high at around 60 per cent. with rate differentials across

'widely-held' and 'closely-held' companies. There were complicated tax preferences for new industrial ventures in particular

desirable features of a good national tax system noted above.

Tax rates were extremely high and varied with no justification.
Inputs were taxed indiscriminately. The implications for economic efficiency were unequivocally negative. The system had
low built-in revenue elasticity since it encouraged widespread

evasion and avoidance. 'Equity was ill-served by the heavy

dependence on indirect taxes with opaque incidence. Tax administration procedures and practices were complex and frequently
arbitrary. The system was badly in need of serious reform.

marginal rate to 70 per cent. In the budget for 1974-75 finance

recommendation by reducing the top rate to 70 per cent and the

surcharge to 10 per cent.9 Somewhat unfortunately, Chavan

combined this sensible reduction in income tax rates with another
hike in wealth tax rates.

The income tax rate-cutting precedent was continued in three

of the budgets in the ensuing decade, although the budgets of
the Janata period (1977-80) witnessed setbacks. Buoyed by the
strong increase in income tax revenues in 1974-75 and 1975-76.
Chavan's successor, C Subramanium, attributed much of it to

II

Table 1: Gross Tax Revenues of Central Government

Direct Tax Reforms: The First Wave

(As per cent of GDP at current market prices)

Year Corporation Personal Customs Union Service Others Total

The direct tax structure of 1973-74 was the product' of two

decades of tax policy changes to bring about a 'a socialistic pattern

of society' and raise tax revenues to finance a public investment

led strategy of planned economic development. The Taxation

Enquiry Commission report of 1954 [Gol 1954] emphasised the
need to raise more revenues through highertaxes, including through

greater progressivity of direct taxes. Its recommendations were

largely implemented. This approach gained further impetus from
Kaldor's (1956) prescriptions. which ushered in a set of 'integrated

direct taxes'. including an expenditure tax, a wealth-tax and a

gift tax in addition to the already extant taxes on income, capital

gains and estates. As Thimmaiah (2002) observes, "The system

of direct taxes introduced on the advice of Kaldor encouraged
the emergence of the black money phenomenon in India".8
In ensuing years the scope of these taxes was expanded and
the rates were inexorably raised. One gets a flavour of the

Income Excise

(1) (2) (3) (4) (5) (6) (7)

1969-70 0.83 1.05 0.99 3.57 0.00 0.02 6.46
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
1984-85 1.04 0.79 2.87 4.54 0.00 0.02 9.25
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
1995-96 1.39 1.31 3.01 3.38 0.07 0.05 9.22
1996-97. 1.36 1.33 3.13 3.29 0.08 0.05 9.24
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
1999-2000 1.58 1.32 2.50 3.20 0.11 0.05 8.77
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

2002-03 1.87 1.50 1.82 3.34 0.17 0.05 8.75

2003-04 2.30 1.50 1.76 3.29 0.29 0.04 9.18

2004-05(RE) 2.67 1.64 1.81 3.24 0.46 0.01 9.82

Source: Indian Public Finance Statistics, various issues; Economic Survey
2004-05 and Budget Papers for 2004-05 and 2005-06.

Economic and Political Weekly May 14, 2005 2063

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

improved compliance and cut the effective top rate further to

66 per cent (60 per cent plus the 10 per cent surcharge) in his
budget for 1976-77. In contrast to Chavan, he also reduced the
rates of wealth taxation. During the Janata government both H
M Patel and Charan Singh increased the income tax surcharge
and the wealth tax rates. By 1979-80 the effective top marginal
rate of income tax was back up to 72 per cent and the top wealth

from 5 to 2 per cent. He also reduced the number of income

tax slabs from eight to four. Estate duty was abolished. At the
same time he brought down the basic rate of company tax
(for widely held companies) to 50 per cent and unified the
several rates applicable for different categories of closely held
companies at 55 per cent. Taken together, these measures
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.

With the return of the Congress to power, R Venkataraman

reverted the top effective tax rate to 66 per cent by cutting the
surcharge back to 10 per cent and gave some relief on wealth

LTFP in Parliament. For its time it was a remarkable document

for net wealth over Rs 15 lakhs.

tax slabs. His successor, Pranab Mukherjee. displayed some

ambivalence in his first two budgets; indeed, in the second he
raised the surcharge form 10 to 12.5 per cent. However, in his third

andfinal budget, for 1984-85, Mukherjee lowered the top effective

rate to 62 per cent by cutting the top marginal rate to 55 per

cent, while leaving the surcharge unchanged at 12.5 per cent.
This first wave of direct tax reforms brought a semblance of
sanity to top personal income tax rates. But the large number
of slabs and relatively narrow bands continued. Even in 1984-85

A few months later, in December 1985, V P Singh placed the

in many ways. First, it was a completely novel initiative to bring

out a medium-term fiscal policy strategy as a public document

(indeed, nothing similar would happen for almost another 20

years). Second, it embedded tax policy intentions within an

explicit macro fiscal framework. Third, the tax policies proposed
were both comprehensive and specific. In particular, the LTFP
committed the government to sweeping reforms of both central
excise and customs duties. For the former, it recommended the

phased induction of VAT principles (especially crediting of taxes

there were still eight income tax slabs. Furthermore, there were

paid on inputs) in excise taxation and conferred the name

'MODVAT' (short for modified VAT) for the new system. In
effect it was a commitment to implement the 'MANVAT'

no major initiatives in regard to company taxation. As for indirect

(manufacture's VAT) recommended by the Jha Committee eight

taxation, the far-reaching recommendations of the 1978 Jha

years earlier. For customs duties, the LTFP appreciated the

Committee continued to languish on the finance ministry' s shelves.

economic and administrative ideal of a modest uniform tariff

Ill

across all commodities but, bowing to the realities of the day,

it plumped for a three-tier customs duty structure.10

V P Singh's Reforms (1985-87)

Modern tax reform was really launched in India during V P
Singh's two year stewardship of the finance ministry in the Rajiv

Gandhi Congress government. As Acharya (1988) points out,

there were several reasons to support this overall assessment.
First, the reforms addressed both direct and indirect taxes in a
reasonably integrated manner. Second, for the first time, a medium-

term tax reform strategy was explicitly articulated and presented

to Parliament in the form of the Long Term Fiscal Policy (LTFP)

policy paper of December 1985 [GoI 1985]. Third, in formulating

tax policy, serious weight was accorded to issues of resource

allocation efficiency. Fourth, tax policy also recognised the impor-

tance of stability and predictability. Fifth, there was a conscious

and explicit effort to shift the weight of economic management
in favour of non-discretionary, fiscal and financial policies and
away from discretionary physical controls. Finally, there was a
concerted and serious effort to improve tax administration.

In V P Singh's first budget, for 1985-86, the focus was on

direct taxes. Despite the rate reductions of the previous decade,
the combined burden of income and wealth taxes was still very
high for honest tax payers. As the Economic Administration
Reforms Commission's Report No 22 [GoI 1983] pointed out,
if the pre-tax return on wealth was assumed at 10 per cent, then

a person with net wealth of 12 lakhs (and no other income)

suffered a combined marginal tax of 97.5 per cent on his income,

even though the top income tax rate was 62 per cent. And if his
net wealth was 18 lakhs or higher, the combined marginal tax rate
rose effectively to 117.5 per cent! Little wonder that for 1980-81
Acharya and Associates (1986) estimated the scale of tax-evaded
income to be over double the amount actually declared for tax.

Against this background, V P Singh cut the top marginal

income tax rate from 62 to 50 per cent and that for wealth tax

In his second budget, for 1986-87, V P Singh delivered on many

of the policy promises of the LTFP. Most importantly, MODVAT
was implemented in 37 chapters of the Central Excise Tariff, with
a clear commitment to extend the system to the remainder of the
manufacturing sector. This was a huge forward step in the reform

of India's indirect taxes. In the words of the LTFP,

shifting the effective burden of excise taxation away from inputs

and on to final products is at the heart of the proposed reform.

Aside from reducing the distortionary effects on production and
thus increasing the competitiveness of Indian industry, the shifting

of excise to final products will help in tailoring excise duties in

such a manner that the well-off bear a higher proportionate burden

than the poor.

Table 2: Gross Tax Revenues of CentralsGovernment
(As per cent share of total)

Year Corporation Personal Customs Union Service Others

Income Excise

(1)

(2)

(3)

(4)

(5)

(6)

1969-70 - 12.8 16.2 15.3 55.2 0.0

1974-75 11.5 14.2 21.6 52.5 0.0 1979-80 '11.9 11.5 25.0 51.4 0.0
1984-85 11.3 8.5 31.0 49.1 0.0
1989-90 9.4 9.9 35.8 44.4 0.0
1994-95 15.2 13.2 29.5 41.1 0.4
1995-96 15.1 14.2 32.7 36.7 0.8
1996-97 14.7 14.4 33.9 35.6 0.8
1997-98 15.7 13.4 31.5 37.6 1.2
1998-99 17.3 14.3 28.7 37.6 1.4
1999-2000 18.1 15.1 28.5 36.5 1.3
2000-2001 19.1 17.0 25.4 36.6 1.4
2001-2002 19.7 17.2 21.7 39.1 1.8
2002-2003 21.4 17.1 20.8 38.2 1.9
2003-2004 25.1 16.3 19.2 35.8 3.1

0.4
0.2
0.2
0.2
0.5
0.6
0.6
0.5
0.7
0.7
0.6
0.5
0.5
0.6
0.5

2004-05(RE) 27.2 16.7 18.4 33.0 4.6 0.1

2005-06(BE) 29.9 17.9 14.4 32.9 4.7 0.1
Source: Indian Public Finance Statistics, various issues; Economic Survey
2004-05and Budget Papers for 2004-05 and 2005-06.

2064 Economic and Political Weekly May 14, 2005

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

The proposed reform of customs duties did not, unfortunately,

were implemented fully or exactly as originally envisaged.

find a place in the 1986-87 budget. Indeed, customs duties

However, their broad thrust and direction were largely honoured

continued to be raised in the next few years, largely for revenue

in the budgets of the decade presented by three different finance

ministers of three different governments.1

reasons. Given the tight regime of import controls prevailing,

this was not an altogether bad thing, since it effectively transformed the scarcity premia associated with import controls into
public revenues. As a result, the share of customs duties in central

government revenues continued to increase in the latter half of

the 1980s (Table 2).

IV
Tax Reform in the 1990s
If the mid- 1980s saw the launch of modem tax reform in India,

the 1990s witnessed its fruition. Shortly after coming to power

in mid-1991, the Narasimha Rao/Manmohan Singh Congress

government made comprehensive tax reform one of its main
reform planks. The Tax Reforms Committee (TRC), chaired by
the country's leading public finance authority, Raja Chelliah, was
swiftly established and it quickly gave an Interim Report (December 1991), followed by a two-part Final Report (August 1992
and January 1993). Taken together. these three volumes of the
Chelliah Committee Report [Gol 1991-93] constitute the finest
treatment of tax policy and reform issues in India in the past

30 years. The report provided an excellent combination of lucid,

theoretical analysis, empirical supporting evidence and practical
policy recommendations. Among its major tax policy recommen-

Much of the recommended reforms were carried out by

Manmohan Singh in his five full budgets between 1991 and 1996.
His first budget (for 1991-92), framed in the midst of a fiscal
and balance of payments crisis, was a mixed bag from a tax reform
viewpoint. In fact, he raised the corporate tax rates for different
categories of companies by 5 percentage points, thus reversing

the most recent reduction by finance minister Dandavate in

1990-91. However, on import duties he initiated the long overdue
reform by reducing all customs duties above 150 per cent to this

rate, designated as a new 'peak'. In retrospect. it may seem

somewhat ludicrous to dub reductions down to such a high peak

as a reform. But the fact remains that it was first time in inde-

pendent India that a move had been initiated for systematic

reduction of import duties. Furthermore, in his next four budgets,

he systematically reduced peak import duties: to 110 per cent in

1992-93, to 85 per cent in 1993-94, to 65 per cent in 1994-95

and to 50 per cent in 1995-96.12 Indeed, these reductions in import

duties, combined with concurrent relaxation of import controls

and exchange rate depreciation, constituted a sea change in

India's highly restricted foreign trade and payments policies,
which transformed India's external payments situation and pretty

dations were:

much banished the long dreaded 'foreign exchange constraint'. 3

In his 1992-93 budget Singh implemented the TRC recommendations on personal income taxes, ushering in a three-slab struc-

(i) A simple three-tier personal income tax structure, with an entry

ture of 20,30 and 40 per cent, though with the slabs more narrowly

rate of 20 per cent and a top rate of 40 per cent.

(ii) A phased reduction of the corporate tax rate to 40 per cent,
with the abolition of the distinction between widely-held and
closely-held companies.

defined than by the TRC. He also implemented the TRC recommendations on wealth tax by excluding all financial (productive) assets from its purview, raising the basic exemption to

specified 'unproductive' assets.

15 lakhs and reducing the rate to 1 per cent. The 1993-94 budget
marked time on tax reform. except for further reductions of
customs duties, especially machinery and capital goods. Singh's

(iv) A phased reduction of the extraordinarily high import duties

budget for 1994-95 brought in major tax reforms. Following TRC

(many above 200 per cent in 1991) to a range of 15 to 30 per

cent for manufactures and 50 per cent for certain agricultural
items by 1997-98.
(v) A wholesale restructuring of central excise to cover all

prescriptions, the distinction between closely-held and widely-

(iii) The abolition of wealth tax on all assets except certain clearly

held domestic companies was abolished and the company tax

rate reduced to an uniform 40 per cent, matching the top personal

income tax rate. Aside from further reductions in peak import

manufactures, reduction of multiple tax rates to three in the range

of 10 to 20 per cent and extension of MODVAT credit to all

inputs including machinery.
(vi) Selective excises at higher rates on non-essential (luxury)
consumption items.
(vii) Systematic elimination of the numerous prevailing exemptions and tax preferences in both direct and indirect taxes to
broaden the base of the major taxes.

Table 3: Central Government: Direct vs Indirect Taxes

Year As Per Cent of GDP As Per Cent of Total
Direct Indirect Total Direct Indirect

(1)
-1969-70

Congress and again in 1998, when the National Democratic

Alliance (NDA) came to power. Not all the TRC recommendations

(5)
70.9
74.3

5.9

7.9

25.7

2.3

7.4

9.7

23.4

76.6

1984-85

1.8

7.4

9.3

19.7

80.3

1994-95

in government, once in 1996 when the United Front (UF) replaced

(4)

29.1

2.0

1989-90

The resemblance of these policy prescriptions with the sixpoint 'model' outlined in Section I is quite striking. Perhaps far
more heartening, in hindsight, is the extent to which these TRC
recommendations were actually implemented in the decade of
the 1990s. Remarkably, this occurred despite two major changes

6.5

1979-80

including the deployment of modern information technology and

online linkage of new tax identification numbers to a national

(3)

4.6

1974-75

(viii) Far-reaching reforms of the systems of tax administration,

network.

(2)

1.9

2.0
2.6

8.4
6.4

10.4
9.0

19.3

80.7

28.4

71.6

1995-96

2.7

6.5

9.2

29.3

70.7

1996-97

2.7

6.5

9.2

29.1

70.9

1997-98

2.4

6.0

8.4

29.1

70.9

1998-99

2.6

5.6

8.1

31.6

68.4

1999-2000

2.9

5.9

8.8

33.2

2000-2001

3.2

5.7

9.0

36.1

66.8
63.9

2001-2002

3.0

5.1

8.1

36.9

63.1

2002-2003

3.4

5.4

8.8

38.5

61.5

2003-2004

3.8

5.4

9.2

41.4

58.6

2004-05(RE) 4.3 5.5 9.8 43.9 56.1

2005-06(BE) 47.9 52.1
Source: Tables 1 and 2.

Economic and Political Weekly May 14, 2005 2065

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

duties and those on capital goods, there was a major cleaning

up of end-use exemptions which cluttered the import tariff. In
excise, MODVAT was extended to capital goods and petroleum
products, the bulk of excise taxation was shifted from specific
to ad valorem rates, the number of excise rates was substantially

reduced and special exemption notices were cut by half. The

budget was also innovative in introducing taxation of an initial
set of services.

Post-2000 Initiatives
Tax policy changes have continued in the new millenium. But
to some extent they seem to have lost the unifying vision and
coherence of the TRC. In part this may be due to the advent of

new views advocated in some fresh government reviews and

reports on tax policy. The first of these, the Shome report of the

In the two budgets for the UF government. Chidambaram

continued the reduction of excise duty rates and lowered modestly

the peak customs duty to 40 per cent. In his second budget, for
1997-98, he broke away from TRC recommendations by reducing
the triple-rate structure of personal income taxes to 10-20-30 per
cent. lowering the company tax rate to 35 per cent and abolishing

dividend.taxation in the recipients' hands. while replacing it with

a 10 per cent tax at the company stage. However, he followed

TRC recommendations for base broadening by introducing the
new 2-by-4 criteria requiring filing of income tax returns by
assessees. Later converted to l-by-6, this programme played a
significant role in expanding the number of income tax filers
(and thus the'revenue base) since 1998. The combination of low

Advisory Group on Tax Policy and Tax Administration for the

Tenth Plan [Gol 2001a], was broadly in the TRC tradition and
provided the very useful service of highlighting the agenda for
the future. Shortly thereafter came the Kelkar reports of Task
Forces on Direct and Indirect Taxes [Gol 2002a. 2002b]. While
they contained much good advice, especially on revamping of
tax administration, they also struck some discordant notes. In
particular. the recommendations to double the exemption limit
for personal income taxation and to abolish taxes on equity capital
gains anddividends received by individuals were severely criticised

by public finance specialists such as Bagchi (2002), Chelliah

(2002) and Acharya (2003). So were the recommendations to
move to adual rate structure in excise and customs [Mukhopadhya

tax rates and a broader base buttressed the rising share of direct
taxes in total tax revenues since 1991 (Table 3).

2002 and Acharya 2003]. In any case, the 'consensus' among

The NDA came into power in 1998 and finance minister

Yashwant Sinha presented the next five budgets. His first

to flourish in tax policy. The main new initiatives, not all

'authorities' had been breached, making it easier for ad hoc-ery

retrograde, are briefly reviewed here.

budget, for 1998-99. broke with the past in raising import duties

through the imposition of a 4 per cent special additional duty

on imports (SAD). Subsequent budgets resumed the reduction
of peak import duties and made very major progress in moving
the excise tax structure towards a single rate manufacturers' VAT.

Taxation of Dividends
The 'classical system' involves a separate tax on total company
profits, with dividends distributed being taxed in the hands of

The big breakthrough came in the budget for 1999-2000. when

the shareholder according to his income status. This System

11 excise rates, ranging from 5 to 40 per cent, were clubbed into

entails a notional double taxation of part of the corporate profit

just 3 rates (8, 16 and 24 per cent). In addition. two non-

stream, once as company profits and again as income in the

MODVATable, additional special excise rates (6 and 16 per cent)

were levied on a handful of largely luxury consumer goods such
as cars and air-conditioners. In the following budget, for 200001. Sinha conflated the three excise rates into a single CENVAT
rate of 16 per cent, buttressed by three non-rebatable special

tives for 'partial integration' to mitigate this problem but, after

weighing pros and cons, had recommended retaining the classical
system with reduced rates of personal and company income tax.
In 1997-98, Chidambaram broke away from the classical system,

shareholder's hands. The TRC had considered various alterna-

of service taxation and strengthened the 1 -by-6 criteria for income

abolished dividend tax in the hands of the recipient and substituted it with a 10 per cent tax on distributions, levied at the
company stage. The administrative advantages were obvious.

tax filing.
Thus, by the year 2000, three different finance ministers of

the tax rate was the same irrespective of whether the shareholder

additional excises (at 8.16 and 24 per cent) for a few commodities,

mainly consumer luxuries. His budgets also expanded the scope

However, the basic problem with this approach was that of equity:

three separate governments had largely fulfilled the TRC tax

reform agenda of 1991-92. Personal income tax rates had been
substantially lowered, to even below TRC recommendations. The
tax rate on domestic companies had been unified and reduced.
again to below the TRC target. Import duties had been brought
down. though somewhat slowly after 1996 aid their dispersion

was in a 10 or 30 per cent marginal income tax bracket.

This tension contributed to enormous instability in the tax
system in ensuing years. The rate on distributed dividends was
increased to 20 per cent in Sinha's budget for 2000-01. It was
brought down to 10 per cent again in his budget for 2001-02.
In his 2002-03 budget, Sinha reverted to the pre-Chidambaram
classical system, only to have the whole thing reversed again

1997-78. The multiple rate excise structure had been transformed

into a single rate CENVAT, buttressed by a few selective excises
on luxury consumer goods. Services taxation had been introduced
and expanded. On the whole, the number and scope of exemptions
and preferential rates had been reduced, though by not as much
as the TRC had recommended. However, in the area of tax

by Jaswant Singh for 2003-04, with a company stage distribution

in 2000 was still a little wider than TRC recommendations for

administration, the TRC's recommendations had been observed

tax set at 12.5 per cent! Whether stability has been attained
remains a moot question.

Taxation of Capital Gains from

Securities Transactions

The Kelkar Task Force on Direct Taxes had recommended

largely in the breach. Taken as a whole and recognising the real

world constraints, tax reform in the 1990s had displayed remark-

abolition of taxation on long-term capital gains from listed equity

able coherence and continuity.

on the grounds that they represent capitalisation of retained

2066 Economic and Political Weekly May 14, 2005

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

earnings already taxed. Chelliah (2002) and others had cogently

on three services in 1994 and raised less than 0.5 per cent of

criticised this argument. This did not prevent Jaswant Singh from

central government revenues through this instrument in that year.

implementing this recommendation in his 2003-04 budget "to

give a further fillip to the capital markets". Chidambaram took
the idea further in the 2004-05 budget by abolishing taxation
of long-term capital gains on all securities transactions and

Ten years later, in 2004-05, services taxation had been extended

reducing the rate on short-term capital gains to a flat 10 per cent.

Instead he introduced a new securities transactions tax (STT).

From a tax reform viewpoint these changes were clearly retro-

grade. First, they favoured the rich in a generally poor society

for no good social reason. Second they went against the grain

of base broadening by removing such capital gains from the

income base. Third, they introduced an unjustifiable divergence
in the taxation of stock market capital gains versus those on other
assets. Fourth, the recourse to taxation of financial transactions,

generally deemed inefficient, was particularly incongruous at a

time when turnover taxes were being successfully phased out
in commodity taxation. The STT could be the harbinger of an

unfortunate trend. Indeed in his next budget Chidambaram

proposed a cash withdrawal tax.

to over 70 separate services and the revenue yield accounted for

nearly 5 per cent of gross central revenues (or almost onethird the amount of gross customs revenues). This sustained
expansion was driven by consistent support from successive
governments and the growing need to find alternative revenue
sources in the face of the declining role of customs and excise
revenues (Tables 1 and 2).
Following the recommendations of the 'Govinda Rao' Expert
Group on Taxation of Services [GoI 2001], credit for taxes paid
on inputs in service activities was gradually introduced. After an
initial experiment in 2002-03, Jaswant Singh extended, in 200304, the principle of credit for taxes paid on inputs to all services
for service inputs. At the same he raised the rate of service tax
from 5 to 8 per cent. In the next budget Chidambaram took the
next logical step (as recommended by the Rao report) of extending

the credit of service tax and excise duty across all goods and
services. To maintain revenue neutrality he further increased the
service tax rate to 10 per cent. Although this fell short of the Rao

Trends in Excise Taxation

Jaswant Singh's 2003-04 budget focused on a triple rate (8,16
and 24 per cent) excise structure and failed to draw the crucial

report's recommendation for full integration between CENVAT

and services taxation, serious progress had clearly been made.14

Customs Duties

distinction between an unique CENVAT rate and (additional)

special excises. This was at odds with the TRC model (and the

There was a similar continuity and consistency in the approach

generality of international practice), which had been ushered in

to customs duties. 'Peak' customs duties stood at 35 per cent

by the Sinha budgets for 1999-2000 and 2000-01. That model

(and budgets) clearly articulated the importance of a single
CENVAT of 16 per cent (for all goods which are in a production
chain with other goods) supported by additional special excises
on a small number of luxury (income elastic) consumer goods
and 'sin' items such as tobacco. Earlier budgets had retained
intermediate rates of 4, 8 and 12 per cent as temporary way

in 2000, with the four main rates being 35, 25,15 and 5 per cent.

stations for a few commodities that were to be gradually raised

to the full CENVAT rate of 16 per cent. In contrast, the 200304 budget viewed the 8 per cent rate as a permanent feature and
went on to reduce the rates on some items from 16 to 8 per cent.

By legitimising the 8 per cent rate as an integral part of the

CENVAT system the budget risked continuous pressure and
lobbying from all producers of items charged at higher rates.
Rather unexpectedly, the two recent budgets by Chidambaram
have also failed to project the important distinction between a
near universal 16 per cent CENVAT rate and additional special
excises on a limited range of luxury consumer products. Without

In the next few budgets Sinha, Jaswant Singh and Chidambaram

progressively reduced the peak rate to 15 per cent by 2005-06.

Because of the growing number of exceptions to the 'peak',

especially for agricultural products, it was formally described as
the 'peak rate-for non-agricultural products' in the 2005-06 budget
speech. Although effective rates of protection (that is, protection

to value added) remained quite high in some low value-added

sectors such as petroleum refining, the reduction of peak manufacturing tariffs from over 200 per cent in 1991, to 15 per cent

in 2005 was quite a remarkable achievement for an economy,

which had been notoriously protected and inward looking till
1991. This is especially so in a context where quantitative
restrictions on imports were largely phased out by 2001.

Progress in Tax Administration

Millfa Casanegra (1990) had famously written " in developing

such selective excises on consumer luxuries, there is much greater

countries tax administration is tax policy" to highlight the critical

likelihood of a regressive indirect tax structure. Furthermore,

recent budgets have shown an unfortunate propensity to grant

role of tax administration in ensuring the effectiveness of tax

policy. For many years this had remained the Achilles heel of
India's tax system [Das-Gupta and Mookherjee 1998]. Many of
the problems and weaknesses had been well diagnosed a long
time ago in various government reports, including the Chelliah
and Shome reports. As noted in Section IV. the ideas for a tax
information network (TIN) and national online computer net-

outright excise exemptions to various products, thus undermining

the basic logic of a VAT chain. For example, computers, bicycles,

tableware, toys, tractors, hand tools and mosaic tiles have been

totally exempted without good reason.

Expansion of Services Taxation

In contrast to this ambiguous approach to excise, taxation of
services was consistently expanded by successive finance ministers and input tax rebate principles were gradually introduced.
Manmohan Singh had introduced service taxation at 5 per cent

works go back at least to the Chelliah Committee report. However,

it was the signal contribution of the Kelkar Task Forces on Direct
and Indirect Taxes of 2002 (and the finance ministry's subsequent

follow-up) to give a strong, fresh impetus to such initiatives.

Following the Kelkar Task Force recommendaions, the Central
Board of Direct Taxes (CBDT) established the computerised TIN

Economic and Political Weekly May 14, 2005 2067

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

with the active help of the National Securities Depository (NSDL).

years. There are three major challenges for future reform. First,

In the initial phase the focus was on collating and matching tax
deducted at source (TDS) returns from employers with collection
details from banks to ensure that tax credits are allowed only

a plethora of complex exemptions still plagues the customs tariff.

against actual funds deposited into government accounts. To

speed data collection and sorting from banks. the 'Online Tax
Accounting System' (OLTAS) was operationalised in July 2004.
An indication of efficiency gains from sound application of

devoted to exemptions...". There is obviously enormous scope

for cleaning up this situation. Second, with non-agricultural

modern technology may be gauged from the following

[Chakravarti 2004]:

- The number of income tax returns processed on computers

increased from 0.4 million in 2000-01 to 20.4 million in 2003-04.

- Refunds issued doubled from 2.6 million in 2001-02 to 5.6

million in 2003-04.

- The number of allotted Permanent Account Numbers (PANs)

soared to nearly 36 million by late 2004, greatly helped by the

As the Shome report pointed out, "in any standard publication

of the customs tariff structure containing 1,150 pages. 400 are

tariffs bunched between zero and 15 per cent, there is a tremendous

opportunity for quickly shifting to an uniform 10 per cent tariff.

This would conflate widely varying rates of effective protection

to 10 per cent and thereby enhance economic efficiency. It

would also hugely reduce current problems of classification,
administration and abuse of discretion, especially in the context
of a growing number of preferential trading arrangements with
other countries. Finally, the present structure of agricultural
tariffs needs to be reviewed. Many of them are set at unjustifiably

high levels.16

outsourcing of PAN allotments to the NSDL and the UTI investors.

- In 2004, the software giant, Infosys, uploaded only one disc

for filing its employee TDS returns, the previous year it had to
file nearly 20,000 separate TDS paper returns.
- By one estimate, TIN has eliminated the circulation of nearly
70 million A-4 sheets of paper.
Similar deployment of infotech systems and resources is being
carried out for indirect taxes by the Central Board of Excise and
Customs (CBEC). As Chakravarti (2004) points out, the customs

department had established the Customs E-commerce Gateway

(ICEGATE) and the Customs Electronic Data Interchange System (ICES) in the 1990s. Their administration has been improved
in recent years. In 2003-04 ICES handled about four million
declarations in automated customs locations accounting for about
75 per cent of India's international trade. Drawing on Canadian
technical assistance, the excise department has made significant
progress in establishing modern audit systems, Excise Audit
2000, based on computerised risk assessment. Modern risk
assessment and computerised sampling procedures are also being
used by CBDT in selecting tax returns for scrutiny.
Such improvements in systems and processes of tax administration are still in the nature of 'work in progress'. While real
progress seems to have been made, there is huge scope for further

improvement. And even the present gains could erode without

strong and consistent backing from the finance minister and
senior officials.15

VI

The Unfinished Agenda

Excise Duty Reforms

One major problem with the current system ofexcise/CENVAT
duties is their low buoyancy, typically below unity in most years

since the mid-1990s. Although excise revenues remain the single

largest contributor to gross central government revenues, their

share has fallen from 41 per cent in 1994-95 to 33 per cent in

2004-05. In the early 1990s it was expected that the reduction
in customs revenues (due to sharp reductions in previously high

import duties) would be partially compensated by the rise of

domestic trade taxes, notably excise. This has not happened,
leading to relatively low ratios of tax revenues to GDP through
most of the 1990s. The weak revenue performance of central
excise cannot be adequately explained by the reduction in rates.
Other possible explanations include proliferation of exempted
products, the abuse of CENVAT tax crediting provisions and
widespread evasion. In either case. -administrative reform of
excise must command high priority. In addition, there is a strong
case for carefully reviewing the large number of products. which

enjoy complete exemption. Aside from loss of revenue, such

exemptions breach the CENVAT chain, which provides the core
value of VAT-type taxes. Many products need to restored (per-

haps in stages) to the CENVAT 16 per cent rate.

Secondly, there is an equally strong case for resurrecting
the role of (additional) special excises on a limited number
of luxury consumer products such' as cars, air-conditioners,
colour televisions (above a specified screen size), refridgerators
(above a specified capacity) and other high-value consumer
durables. The rates of such additional special excises should be

Tax reform in India has made enormous progress in the last

modest, in the range of 5 to 15 per cent. Aside from raising much

30 years. The tax structure today bears little resemblance to that

needed additional revenue, such taxes would counter the regressive nature of a uniform CENVAT. Finally, the important initiatives in recent budgets to integrate service taxation with the

prevailing in the mid-1970s. Almost all the change has been for
the better, judged by the usual standards of economic efficiency,
equity, built-in revenue elasticity and transparency. But the work

of tax reform is never finished. This concluding section outlines

some key issues for future reform.

Further Reform of Import Duties

As described above, there has been a sea change in the customs
tariff structure since 1990. India's customs duties on manufac-

tures are now within striking distance of the 'east Asian levels'
target, indicated by successive finance ministers in the last five

CENVAT/excise structure should be brought to their logical

conclusion.

Integrating CENVAT with State VATs

The biggest challenge for future tax reform is how to integrate
the central, CENVAT/services tax structure with the state VATs
(which have been introduced in 19 states and two union territories

on April 2005 in place of earlier sales taxes) in a manner which

mostclosely approximates the ideal of a destination-based, unified,

2068 Economic and Political Weekly May 14, 2005

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

retail level consumption VAT for the country. The challenge is

enormous and poses serious conceptual, constitutional, admin-

which empowered the centre to tax "all services, including the

services of trading and retailing of goods". This is an unsettled

istrative and economic issues.

legal issue. More important is the willingness of states to constrict

For a start, the ongoing transition from sales tax to VAT in

the majority of states is itself a mammoth enterprise, bedeviled
by the non-participation of nine states, basic design problems
with the form of VAT chosen (such as the excessive gap between
the two main rates of 12.5 and 4 per cent and the slotting of

their autonomy to the extent required in the 'grand bargain'. In

any case, given the current preoccupation of state governments
with the transition from sales tax to VAT, forward movement

too many goods into the concessional rate), the uncertainty about

on the KTF vision is unlikely to be imminent. Howvever its

economic and tax policy appeal is very considerable. The proposals merit serious consideration and.debate.

the reform trajectory for the central sales tax (CST),17 apparent
lack of preparation and training, the disparity across the reforming

states in commitment and capacity to implement the transition

and continuing political opposition in many quarters. Since this
major transition is likely to take at least a year or two to settle,
the important issue of integrating central taxation of goods and
services with state VATs can only be a medium-term objective.18
In 1992, the TRC had recommended extension of the reformed

central excise (later dubbed CENVAT) to the wholesale stage

(with the active cooperation of sales tax departments) and the
conversion of state sales taxes to retail-stage VATs on manufactures. In his 1993 budget speech Manmohan Singh had stated

"our long term aim should be to move to a Value Added Tax

System". Recognising that a national VAT raised many issues
and required cooperation between the centre and the states, he
asked the National Institute of Public Finance and Policy to design

a possible blueprint. The resulting report by Bagchi et al (1994)

was a classic study of India's domestic trade taxes and the feasible

Broadening the Base Gf Direct Taxes

Successive official reports, including TRC, the Shome report
and the recent KTF report have favoured phasing out the many
exemptions which today reduce the base for both company and
personal income taxes. For companies, these include incentives
for exports. foreign trade zones, technology parks, infrastructure

and backward area development. Typically such tax preferences

lead to significant revenue loss and economic distortions without
commensurate promotion of the desired objectives. Nevertheless
such tax incentives have proved resilient. not least because of
the influence of vested interests. The case for phasing them out

has now become stronger with the further reduction of the

company tax rate to 30 per cent in the budget for 2005-06. For
individuals, the recent budget, which effectively reduced rates

substantially (by raising and widening the tax brackets), has

attempted some rationalisation of savings incentives and an-

options. It became a key document for the decade-long effort

to harmonise and reform sales taxes, culminating in the ongoing
transition to state VATs. On the issue of integrating central and
state taxes on domestic trade, it concluded presciently "the only
feasible option seems to be a dual system in which VAT is levied

nounced another expert group to refine them further.

The current exclusion of both dividends and long-term capital
gains on security transactions from the base of personal income
tax is hard to justify in a poor country, straining to increase tax

by the two levels of government independently within the existing

exemption of returns from equity capital is stark. Some reform

revenues. The contrast between taxation of labour incomes and

constitutional framework. This would be possible if the

is in order, but it has to be carefully calibrated to minimise market

MODVAT.. .is made into a full-fledged manufacturers' VAT and

the states also adopt a destination-based harmonised system of

disruptions.

VAT in place of the chaotic sales taxes operating now".

Tax Administration

This is the current trajectory, with the important addition that

taxation of services is being successfully integrated with CENVAT

The last two decades have seen many initiatives to improve

at the central level. A far more radical vision was offered last

tax administration to make the systems friendly and transparent

year by the Kelkar Task Force (KTF) on Implementation of the

for honest assessees, while providing real deterrents to evaders.

Too often such efforts have come in sporadic bursts, which have
not been sustained. As noted earlier, since 2000 there have been

Fiscal Responsibility and Budget Management Act 2003 [Gol

2004]. KTF proposed a far more unified and comprehensive VAT

(dubbed the goods and services tax (GST)), to be levied concurrently by the centre and states on (almost) all goods and
services. In their triple-rate GST, the main 'standard' rate of 20
per cent would be constituted of 12 per cent by the Centre and
8 per cent by states. Both levels of government would agree on
common lists (for rate application), exemptions. thresholds and
so forth. The taxation of imports and exports would be fully
integrated into the proposed dual-GST system. As part of a 'grand

bargain', states would gain access to services and imports as tax

bases in return for giving up autonomy over GST rates, exemptions, thresholds and procedures. The nation would benefit from

a unified. destination-based. consumption VAT, which would

replace all inferior, cascading type taxes such as CST, sales tax,
stamp duties and octroi.
KTF believed that the key legal impediment hitherto confining

central excise taxation to the manufacturing stage had been

overcome by the 88th amendment to the Constitution (in 2003),

concerted programmes to deploy information technology and

modem risk assessment methods to both direct and indirect

taxation. The task ahead is to sustain these programmes with

requisite resources and ministerial backing. The dictum 'tax
administration is tax policy' is really quite true. 13
Email: [email protected]

Notes
[The views expressed in this paper are personal.]
1 This paper is largely confined to the central government tax system.

2 See, for example, Gillis (1989), Bird and Oldman (1990), Gillis et al

(1990) and World Bank (1991).

3 This is, of course, a summary and simple list of the main desiderata,
which omits many issues of tax policy and practice.

4 Interestingly, the rich theoretical literature on optimal taxation of goods

and services associated with Daimond and Mirrlees (1971) and others

Economic and Political Weekly May 14, 2005 2069

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms

(such as Newbery and Ster 1987) finds little reflection in the spread
of VAT as the key instrument for indirect taxation. This has been
attributed to the impracticality of the theoretical prescriptions (see.

Bird, Richard M and Oliver Oldman (eds) (1990): Taxation in Developing

Countries, 4th ed, Johns Hopkins Press, Baltimore.
Casanegra de Jantscher, Milka (1990): 'Administering the VAT' in Gillis,

[Gol 1991-93]).

Chakravarti, Shamit (2002): 'Reform of Tax Administration in India: A

for example. the Interim Report of the 'Chelliah Committee'

5 See Chelliah and Lal (1981) and Ahmad and Stern (1983) for early studies
of indirect tax incidence in India.

6 Many of the investment companies which figure prominently in today's

battles for corporate control owe their origin to the confiscatory tax regime
of the 1970s.

7 See the detailed assessnients of the Wanchoo Committee [GoI 19711,

the Venkatappiah Committee [Gol 1974] and the Jha Committee [Gol
19781.

8 For a comprehensive treatment of the problem and dimensions of the

'black economy' in the early 1980s see Acharya and Associates (1986).
9 Significantly, in the meantime, the chief economic adviser had changed
from the ideologically dogmatic Ashok Mitra to the more pragmatic

Manmohan Singh.
10 It is indeed quite interesting to find the LTFP arguing the case for a
uniform customs tariff 20 years ago. The relevant paragraph (6.26) reads,
"Ideally, in the long run, there is a strong case for subjecting all capital

goods, raw materials, components and other intermediate products to

the same nominal tariff. This system, if it could be implemented, would

New Delhi.

Chelliah, R J (2002): 'Task Force Recommendations on Direct Taxes',

Economic and Political Weekly, December 14.

Chelliah, R J and R N Lal (1981): Incidence of Indirect Taxation in India.
National Insititute of Public Finance and Policy, New Delhi.
Das-Gupta, Arindam (2002): 'Central Tax and Administration Reform in
the 1990s' in M Govinda Rao (ed), Development, Poverty and Fiscal
Policy, Oxford University Press, New Delhi.

Das-Gupta. Arindam and Dilip Mookherjee (1998): Incentives and

Institutional Reform in Tax Enforcement, Oxford University Press,
New Delhi.

Diamond, P A and J A Mirrlees (1971): 'Optimal Taxation and Public

Production', American Economic Review, March-June.

Gillis, Malcolm, Carl S Shoup and Gerardo Sicat (eds) (1990): Value Added
Taxation in Developing Countries, World Bank, Washington, DC.
Gillis, Malcolm (ed) (1989): Tax Reform in Developing Countries, Duke
University Press, Durham.

Gol (1954): Report of the Taxation Enquiry Commission, Ministry of

nominal tariff rates by a single rate would constitute an enormous

simplification for both trade and industry as well as for the customs

- (1971): Report of the Direct Taxes Enquiry Committee, Ministry of

administration. Second, this would vastly reduce incentives for

is, protection of value added) at different stages of production of

intermediate and capital goods. This would encourage the economy to
specialise in those activites in which it has comparative strength." Sounds
quite contemporary, except for a certain coyness in mentioning consumer

goods.
11 The continuity in policy was probably helped by the continuity in top
finance ministry officials assembled by Manmohan Singh [see Acharya
2002a].
12 The reduction of import duties was generally sharper for machinery and

capital goods and key intermediates such as metals and chemicals.

13 For an assessment of India's trade liberalisation in the 1990s see Acharya

(2002b) and Panagariya (2004).

14 The Rao report's recommendation of a comprehensive service tax with

16
17
18

Quiet Revolution' in ADB India Economic Bulletin. October 2004,

have several important advantages. First, the substitution of the present

misclassification of imports to evade taxes. Third. a single nominal rate

of import duty would assure a uniform rate of effective protection (that

15

Shoup and Sicat (eds) (1990).

a negative list, if necessary, has also not been acted upon.

For a somewhat sceptical view of the commitment to revamping tax
administration, see Das-Gupta (2002).
Similar views are expressed by Virmani (2005).
Rao (2003) analyses the difficult issues involved in phasing out CST.
Rao (2005) offers a preliminary assessnient.

Finance, Government of India. New Delhi.

Finance, Government of India. New Delhi.

- (1974): Report of the Central Excise (Self Removal Procedure),

Review Committee, Ministry of Finance, Government of India,
New Delhi.

- (1978): Report of the Indirect Taxation Enquiry Committee. Ministry of

Finance, Government of India, New Delhi.
- (1983): Reports on Tax Administration, 1981-83, Economic Administration
Reforms Commission. Ministry of Finance, Government of India, New
Delhi.

- (1985): Long-Term Fiscal Policy, Ministry of Finance, Government of

India, New Delhi.
- (1991-93): Reports ofthe TaxReform Committee (Interim Report. December

1991; Final Report Part I. August 1992; Final Report Part II, January
1993), Ministry of Finance, Government of India, New Delhi.
-(2001 a): Report oftheAdvisory Group on Tax Policy and TdxAdministration

for the Tenth Plan, Planning Commission, Government of India. New

Delhi.

- (2001b): Report of the Expert Group on Taxation of Services, Ministry

of Finance, Government of India, New Delhi.
- (2002a): Report of the Task Force on Direct Taxes. Ministry of Finance,
Government of India, New Delhi.
- (2002b): Report of the Task Force on Indirect Taxes, Ministry of Finance,
Government of India, New Delhi.

References

- (2004): Report of the Task Force on Implementation of the Fiscal

Acharya.. Shankar (1988): 'India's Fiscal Policy' in Robert E Lucas and

Gustav F Papanek (eds), The Indian Economy: Recent Developments
and Future Prospects, Oxford University, New Delhi.
- (2002a): 'Macroeconomic Management in the Nineties', Economic and
Political Weekly, April 20.
- (2002b): 'Managing India's External Economic Challenges in the 1990s'

Kaldor. Nicholas (1956): Indian TaxReform, Ministry of Finance, Government

of India, New Delhi.

in M S Ahluwalia, Y V Reddy and S S Tarapore (eds), Macroeconomics

and Monetary Policy. Oxford University Press, New Delhi.
- (2003): India's Economy: Some Issues andAnswers, Academic Foundation,
New Delhi.

Acharya, Shankar and Associates (1986): Aspects of the Black Economy

in India, National Institute of Public Finance and Policy, New Delhi.
Ahmad. E and N Ster (1983): 'Effective Taxes and Tax Reform in India',
University of Warwick, Development Economics Research Centre,
Discussion Paper No 25, Warwick.
Bagchi, Amaresh (2002): 'Vision of the Kelkar Papers: A Critique', Economic

and Political Weekly, December 21.

Bagchi, Amaresh et al (1994): Reform of Domestic Trade Taxes in India:
Issues and Options, National Institute of Public Finance and Policy, New
Delhi.

Responsibility and Budget Management Act, 2003, Ministry of Finance.

Government of India, New Delhi.

Mukhopadhya, Sukumar (2002): 'Task Force Report on Indirect Taxes: A

Critique', Economic and Political Weekly, November 16.
Newbery, David and Nicholas Stern (eds) (1987): The Theory of Taxation
for Developing Countries, Oxford University Press, New York.
Panagariya. Arvind (2004): 'India's Trade Reform' in S Bery, B Bosworth
and A Panagariya (eds), India Policy Forum 2004, National Council
of Applied Economic Research, New Delhi and the Brookings Institution,

Washington. DC.
Rao, M Govinda (2003): 'Reform in the Central Sales Tax in the Context
of VAT', Economic and Political Weekly, February 15.

- (2005): 'VAT 2005: Gains Outstrip Losses', Business Standard,

April 6.
Thimmaiah, G (2002): 'Evaluation of Tax Reforms in India' in M Govinda
Rao (ed), Development, Poverty and Fiscal Policy, Oxford University
Press, New Delhi.
Virmani. A (2005): 'Customs Tariff Reforms'. Economic and Political
Weekly, March 12, Vol 40, No 11.
World Bank (1991): Lessons of Tax Reform, Washington, DC.

2070 Economic and Political Weekly May 14, 2005

This content downloaded from 210.212.249.227 on Tue, 26 Jul 2016 08:01:01 UTC
All use subject to http://about.jstor.org/terms