GK Chronicle GK Chronicle

Indian Economy / Fiscal System

Tax Reforms in India


    Several committees examined the taxation system in the country. The first committee was headed by Raja Chelliah on both Direct and Indirect taxes. Another committee under the chairmanship of K.L. Rekhi, examined the taxation system on indirect taxes. The latest committee covering both direct and indirect taxes was under the chairmanship of Dr. Vijay Kelkar.

    Raja Chelliah Committee on Tax Reforms

    The Tax Reforms Committee ( TRC ) was constituted in 1991 under the chairmanship of Dr. Raja J. Chelliah and it submitted its report in 1992 and it recommended tax reforms in both Direct and Indirect taxes. The important recommendations of this Committee are

    • Direct Taxes -
      • The tax rates should be brought down and the difference between the entry rate and the highest marginal rate should be narrowed down and bring the agricultural income under the tax net.
      • The corporate tax rates should be brought down and the difference between the tax rates of domestic and foreign companies should not exceed 10%.
      • There should not be any wealth tax on the productive assets. Only those assets are to be taxed which are unproductive and are socially undesirable.
      • Some sort of indexation needs to be introduced while calculating long term capital gains in order to compensate for inflation.
    • Indirect Taxes -
      • Regarding Customs Duty, there should be reduction in the number of tariff rates and there should be rationalization of the system by abolishing numerous exemptions and special treatments.
      • Regarding Excise Duty, the law and procedure pertaining to valuation should be simplified. Ad valorem Duty should be applied instead of specific duties. The present Excise Duty system should be gradually transformed into Value Added Tax ( VAT ) at the manufacturing level.
      • The services sector should be brought under the tax net.

    Rekhi Committee on Indirect Tax Reforms

    It was constituted in 1992. The recommendations are

    • A Tribunal should be setup to deal with problems between taxpayers and tax collectors.
    • A high level All India Classification Committee with trade and industry representatives should be set up.
    • Import consignments should be cleared within 3 days.
    • Monopoly of one nominated bank in each State should be supplemented by another bank.
    • Coercive measures must not be used for recovery of disputed duty amount when the assessee files a stay application.

    Kelkar Committee on Tax Reforms

    A Task Force on Direct and Indirect Taxes was constituted under the chairmanship of Dr. Vijay Kelkar in 2002. The recommendations of this committee are

    • Direct Taxes -
      • Income tax exemption limit must be increased to Rs. 1 lakh from the present Rs. 50,000. Tax exemption limit for senior citizens and widows should be Rs. 1.5 lakhs.
      • There should be two tier Income tax structure with 20% tax for earnings of Rs. 1 lakh to Rs. 4 lakhs and 30% tax for over Rs. 4 lakhs. Standard deduction must be abolished but suggested exemption for conveyance allowance.
      • There should be abolition of long term capital gains tax, dividend tax and wealth tax. There should not be any surcharge on income tax.
      • There must be elimination of tax incentives for savings and other income except for the handicapped.
      • There should be interest subsidy of 2% for housing loans upto Rs. 5 lakhs.
      • There must be 30% corporate tax for domestic companies and 35% for foreign companies and there should be no Minimum Alternate Tax ( MAT ).
      • There should be 20% tax on short term capital gains derived by Mutual Funds.
      • There should be no distinction between the unabsorbed depreciation and the business loss.
    • Indirect Taxes -
      • There should be 14% Central Value Added Tax ( CENVAT ) rate.
      • There should be nationwide VAT and Comprehensive Service Tax.
      • Exemptions for life saving drugs, security items and farm products.
      • Exemption of tax for small scale units with a turnover upto Rs. 50 lakhs.

    Different tax reform measures were being taken by the Government of India based on the recommendations made by the above committees and the reforms are still continuing to this day. The biggest reform measure that was taken by Independent India is introduction of Goods And Services Tax ( GST ).

  • Goods And Services Tax - The Goods and Services Tax replaced almost all the existing indirect taxes throughout the country except Customs Duty and it came into force effective from 1st July, 2017.