Following the crisis of early 1990s, fiscal re­forms were launched. Such reforms aimed at improving efficiency, production, and com­petitiveness of Indian industries and impart­ing dynamism to the overall growth process.

The basic objective of fiscal reforms particu­larly after 1991 has been to reduce fiscal defi­cits to sustainable levels by expenditure man­agement and resource mobilisation through rationalisation of taxes and duties, widening of tax base, modernising of tax administration, focussing attention on contingent liabilities and improving Centre-States fiscal relations.

In, 1991, the Government set up the Tax Reforms Committee under the Chairmanship of Raja J. Chelliah to examine the then tax structure of the country and suggest appro­priate changes therein. In its report submit­ted to the Government in January 1993, it has made several recommendations for reforming India’s tax structure.

The Committee has sug­gested far-reaching changes in the tax system with a two-fold objective:


(i) To remove the present defects, and

(ii) To make it more pro­ductive (i.e., to make it more efficient from the revenue-raising point of view).

It seems that the Committee had been guided by the philosophy of liberal econo­mist: a moderately progressive tax structure combined with strong enforcement is the best way of ensuring honesty and encouraging vol­untary tax compliance. Prima facie, the Com­mittee stressed the need for rationality and sta­bility in the tax structure.

The Committee ex­pressed the feeling that frequent and ad hoc changes in the tax structure undermine ration­ality, create several complications, and act as growth-retarding factor by creating uncer­tainty about the future. Business firms cannot take long-term decisions if there are year-to- year changes in the tax system of the country.


The Committee suggested that the tax sys­tem of the country and laws relating to taxes should be made as simple as possible (so that people understand the tax system better and make voluntary contributions to the Excheq­uer).

There are two ways of simplifying the tax system:

(i) Introducing a limited number of rates, and

(ii) Allowing few exemptions or deductions.


It is also necessary that the tax sys­tem gives little, if any, discretionary power to the tax officials for interpreting the law in their own way so as to make personal gains by har­assing the honest taxpayers. The Committee also expressed the view that there is need to modernise the then methods of tax adminis­tration as also to effect distinct improvement in tax enforcement.

Detailed Recommendations:

In respect of particular taxes, the Chelliah Committee made detailed recommendations.

The most important recommendations made by the Committee were:

(i) Lowering rate and narrowing spread:

In order to make the direct tax system more ef­fective, it is necessary to reduce the tax rate so that there is less tax evasion and avoidance. There is also the need to narrow the spread between the lowest rate and maximum mar­ginal rate (the rate of the highest slab). To neu­tralise the fall in revenue due to lowering of the rates of taxation it will be necessary to withdraw some of the tax incentives. In other words, there is need to provide minimum tax incentives.

(ii) Avoiding double taxation:

At present, there is double taxation of partnership firms. Such firms pay corporation tax. The partners also pay personal income tax. Consequently, very little surplus is left for corporate capital formation. This has to be avoided to lift the industrial sector out of stagnation (the proxi­mate cause of which seems to be excessive taxation at the corporate and personal levels).

(iii) Reducing corporate tax rate differences between domestic and foreign companies:

It had been suggested that the maximum mar­ginal rate of tax on domestic companies should not exceed 40 p.c. (including surcharge). Al­ternatively, the highest rate of tax on compa­nies should be fixed at 40 p.c. and the sur­charge totally abolished. To encourage the flow of foreign capital, it is also necessary to reduce tax rates of foreign companies.

If this is not possible, a preferable alternative would be to reduce the differential between the tax rates on domestic and foreign companies to 7.5 percentage points. This should not, in any case, exceed 10 percentage points.

(iv) Rationalising capital gains tax:

The Committee opined that the system of long term capital gains lacked rationality. The rea­son is easy to find out the deductions allowed in computing capital gains is not related to the period of time for which the assets have been held. The then system failed to take in effects of price inflation over the period during which taxable gain has occurred. This problem could be tackled by introducing some sort of indexa­tion as was recommended by the Committee.

(v) Rationalisation of wealth tax:

For levy­ing wealth tax, it is necessary to bring into fo­cus the distinction between productive and unproductive wealth. For reviving the money and capital markets, it is necessary to encour­age investment in financial assets like shares, securities, bonds, as also in bank deposits. So, it is necessary to exempt such productive as­sets from wealth tax.

(vi) Tariff reduction:


In the area of customs duties, the Committee made several impor­tant recommendations.

Three such recommen­dations made by the Committee were:

(a) A reduction in the general level of tar­iffs;

(b) A reduction in the dispersion of the tar­iff rates; and


(c) A rationalisation of the system with abolition of the numerous end-use exemptions and concessions.

However, the Committee cautioned that “the process of reform should be gradual, so as to moderate the impact of adjustment both in terms of possible revenue loss and the pace at which industry is exposed to competition.”

(vii) Rationalisation of excise duty:

Since, before the reform-era began, ad valorem excise duties had been replaced by specific duties, the revenue of the Government from this source had fallen. So the Committee recom­mended gradual switching over to ad valorem, more so in view of increase in the prices of most excisable commodities. At the same time it suggested that where specific rates have to be retained, these were to be revised—taking into account the rate of price inflation.

Follow-up measures:

India’s tax base was excessively dependent on indirect taxes and was characterised by taxes with a multiplicity of high rates falling on a narrow base before 1991. Several steps are being taken since 1992- 93. These measures were geared to move towards a tax structure which is simple and relies on moderate tax rates without levy of fresh taxes. Another key objective of tax reform measures has been to increase total tax to GDP ratio as a means of achieving fiscal con­solidation and improving resource allocation.


As a result of tax reform measures, tax rev­enues increased to 18.3 p.c. of GDP in 2007- 08. Overall tax reforms since July 1991 have helped in correcting the imbalance in the struc­ture of revenue sources. As a result of tax re­form measures, the share of direct taxes in GDP rose from 2.1 p.c. in 1990-92 to 5.7 p.c. in 2007-08. Also, the share of direct taxes in gross tax revenue rose from 19 p.c. in 1990-91 to 30.2 p.c. in 1995-96 and to 48.8 p.c. in 2007-08.

The personal income tax system has been restructured by lowering rates, introducing few slabs, providing a higher exemption limit and by reducing saving-linked tax exemption. Initial exemption limit for the levy of income tax has been raised from Rs. 22,000 in 1991 to Rs. 1,00,000 in 2007-08. The number of slabs has been reduced from 4 to 3 (i.e., 10 p.c., 20 p.c. and 30 p.c.).

As a result, peak rate of per­sonal income tax has fallen from 56 p.c. in 1991-92 to 40 p.c. in 2006-07. The maximum marginal tax for personal income has fallen to 30 p.c. as against 97 p.c. in 1975. As far as trends in direct tax collections are concerned, greater compliance is observed.

Presumptive tax (lump-sum) for small traders, retailers and small road transport op­erators has been introduced. To widen the tax net, in the 1994-95 budget, a service tax at the rate of 5 p.c. on the amount of telephone bills, premium payments for non-life insurance and on commission/brokerage charged by the stock-brokers was introduced. At least 100 types of services are subject to service tax as against 3 in 1994-95.

Since 1994-95, a number of provisions were introduced to widen the tax base. These in­clude taxation for small business, estimated income scheme for persons engaged in the business of civil construction, plying, leasing or hiring of trucks; tax deduction at source introduced on interest on term deposits in­come in respect of units of mutual funds, pro­fessional fees and host of contracts.

Corporate tax rates have been reduced and simplified over the past few years. At present, the rate of corporate tax for domestic compa­nies is 30 p.c. and for foreign companies 40 p.c. of their net profit. With a view to tack­ling the phenomenon of zero tax companies having substantial book profits, a ‘minimum alternate tax’ (MAT) was introduced in the 1996-97 budget.


To promote research and development ac­tivities—five-year tax holiday for investments in infrastructure facilities, power generation and distribution in backward states and electronics hardware and software parks.

Government has also taken several meas­ures since 1991-92 to reform the indirect tax structure by reducing the number of rates, re­moving exemptions, and by switching over to ad valorem rates. Import duties which rose to more than 150 p.c. in several cases prior to reform have been reduced in a phased man­ner to 10 p.c. by 2007-08.

There has been a switchover from a sys­tem where excise duties were specific and numerous to one largely based on ad valorem basis with fewer duty rates and exemptions. Ambit of MODVAT is being gradually ex­tended. However, performance of revenues from excise duty has been relatively slow with average growth of 10.2 p.c. during 2002-07.

Following the recommendations made by the Chelliah Committee, service tax hitherto not subject to domestic indirect tax—was intro­duced in 1994-95 for just three services. How­ever, now there are as many as 100 services subject to service tax at a rate of 12 p.c.


The tax reform measures aimed at increasing resource mobilisation, i.e., revenue buoyancy and removing anomalies and distortions in the country’s tax structure through restructuring, simplification and ra­tionalisation of taxes; tax compliance both direct and indirect. Consequent upon reform measures one finds a rising trend in tax revenue-GDP ratio.

It is indeed true that the robust economic growth and improved performance mainly of the services and manufacturing sector- have helped to keep tax revenues buoyant during 2004-08. Further, higher growth in rev­enues relative to the growth in revenue ex­penditure resulted in a decline in revenue deficit to 1.9 p.c. of GDP in 2006-07 as against 4.4. p.c. in 2002-03. Same is true about fiscal deficit that declined to 3.4 p.c. in 2006-07 from 5.9 p.c. in 2002-03.


Thus, there has been a progress in fiscal correction. Along with these quantitative progress, we also see some sort of qualitative improvement in the realm of fis­cal consolidation. This is reflected by the re­duction in the proportion of revenue deficit to gross fiscal deficit. This gain needs to be consolidated further.

Rakesh Mohan says that the country’s next step of reform would be the proposed move towards a unified “Goods and Service Tax” regime. The foundations of an efficient fiscal regime have been made.