NMIMS University Mumbai Part-time MBA - Finance Tax Reforms in India Dipankar De Mumbai, April 2011

Direct and Indirect Tax Revenues Source: Economic Survey 2010-11; http://indiabudget.nic.in/es2010-11/echap-03.pdf

Tax Revenue as a Percentage of Gross Tax Revenue

Service Tax – A Growing Source of Revenue   No. of services Tax rate (%) Tax revenue Growth rate 2004-05 75 10 14200 80 2005-06 78 23055 62.4 2006-07 93 12 37598 63.1 2007-08 100 51301 36.4 2008-09 106 60941 18.8 2009-10 109 58454 -4.1 2010-11 (Apr-Dec) 117 44081 19.2

Tax revenue as a percentage of GDP   1990-91 1995-96 2000-01 2004-05 2007-08 2008-09 2009-10 2010-11 Direct Tax 1.9 2.8 3.2 4.2 5.9 5.7 5.6 5.4 Peronal Income Tax 0.9 1.3 1.5 2.1 Corporation Tax 1.4 1.7 2.7 2.9 3.8 3.7 Indirect Tax 7.9 6.5 5.5 4.8 4.0 Customs duties 3.6 3 2.3 1.8 Excise duties 4.3 3.4 3.3 2.5 1.6 Service tax 0.1 0.5 1.0 1.1 Total 10.1 9.4 8.9 9.8 11.9 10.8 9.6 9.5

Personal Income Tax  Year Finance Minister MTR Percentage % Before 1974-75 Y V Chavan 85.0 Plus 15% surcharge, Effective rate 97.75 (highest in the world!!) Direct Tax Enquiry Committee (Wanchoo) - 1974-75 77.0 1975-76 to 1976-77 C Subhramanium 60.0 1984-85 Pranab Mukherjee 55.0 Long Term Tax Policy, 1985 V P Singh 50.0 Budget 1992-93 Manmohan Singh 40.0 Budget 1997-98 Chidambaram 30.0 Even in 1984-85, there were 8 income tax slabs 3 slab structure was first introduced by Manmohan Singh in Budget 92-93 Degree of progressivity schedule has been considerably reduced over time

Indian Tax Structure India has a tax structure with a three-tier federal structure (the union government, the state governments and the urban/rural local bodies). The main taxes/duties that the union government is empowered to levy are: income tax, customs duties, excise duties, sales tax and service tax. Income tax is a single tax that is levied on a comprehensive basis both on persons and companies. Internal indirect taxes are a complicated matter: they are separately levied on goods, services and intra-states’ sales.

History of Tax Reforms Reforms in personal income tax rates began in 1974-75, following the Wanchoo Direct Taxes Enquiry Committee report of 1971. Modern tax reform was really launched in India by V P Singh during his brief two years as finance minister in 1985-87. For a start, he and his team took a holistic view of the tax system, both direct and indirect. For the first time, V P Singh articulated a medium- term strategy for tax reform and placed the “Long Term Fiscal Policy” in Parliament. There was a conscious effort to deploy rule-based, fiscal policies in place of discretionary physical controls in the task of economic management. Finally, there was a serious attempt to improve tax administration.

History of Tax Reforms L K Jha chaired the Indirect Taxation Enquiry Committeee, whose report of 1978 laid the foundation of the Modvat reforms implemented in V P Singh’s time Professor Raja Chelliah was the head of the Tax Reforms Committee (TRC) of 1991-92. Its three volumes were widely (and rightly) acclaimed as the most comprehensive and analytical treatment of Indian tax policy and reform issues since Independence. Amaresh Bagchi and his team in 1994, at the National Institute of Public Finance and Policy produced a classic study of domestic trade taxes in India. This became a key report guiding the reform of state sales taxes and exploring the VAT options available under India’s Constitution. Govinda Rao in the Expert Group Report of 2001 suggested the basis for the recent integration of services taxation with goods taxation under MODVAT. Parthasarathi Shome’s report in 2001 updated the TRC’s recommendations Vijay Kelkar task force reports. The most recent report makes a persuasive case for a nationwide, integrated dual-VAT across the central and state governments.

Tax Reforms In 1991, in reaction to a severe macroeconomic crisis involving high fiscal deficits, India carried out a series of economic reforms, among which a tax reform. The main proposals comprised: the reduction in the rates of the most important taxes; the enlargement of all taxes’ bases; the transformation of the taxes on domestic production into something similar to a value added tax; the simplification of laws and administrative procedures. Most of the recommendations have been implemented over the years, at least at the central level. In the case of the states the reforms of their tax systems did not proceed.

Kelkar Committee In September 2002 the Government set up a new Task Force on tax reforms headed by V. Kelkar. The Kelkar committees suggested sweeping reforms including: raising the limits of income tax exemption and two-tier brackets; cut in corporate tax rate; three-rate basic customs duty structure; service tax levied in a comprehensive manner; repeal of wealth tax; removal of tax exemptions, rationalization of incentives for savings and simplification of procedures; gradual moving over the destination based, consumption type value added taxes at the state level.

Tax Reforms Strategy

Tax Measures Proposed

The Direct Code

The Direct Code

The Direct Code