Raja Chelliah Tax Reforms Committee

Prior to the liberalization of Economy, India’s tax regime was marred with numerous problems. In terms of direct taxes, there was a high degree of progressiveness in 1960s and 1970s that led to adverse effect on tax collection efficiency. Further, there were large number of exemptions eroded the already narrow tax base in the country. Then, the poor enforcement of direct taxes led to tax evasion at vogue. In terms of corporation tax, there were numerous discriminations between different kinds of the companies that discouraged the investments. Further, double taxation of dividends was also common in those days. In terms of Indirect taxes, the high rates of custom / excise duties were prevalent. There was no VAT, there was no service sector within the purview of tax.

The efforts to reform India’s tax system began in mid 1980s when the government announced a Long Term Fiscal Policy 1985. This policy recognized that the fiscal position of the country is going downhill and there was a need to make changes in the taxation system. In that decade, a technical group to review and rationalize the central excise duties was established and this led to introduction of Modified System of Value-Added Tax (MODVAT) in 1986. To rationalize the custom duties, the harmonized system (HS) of the classification of goods was introduced.

Raja Chelliah Committee

The Government appointed a Tax Reforms Committee under Prof Raja Chelliah to lay out agenda for reforming India’s tax system. This TRC came up with three reports in 1991, 1992 and 1993 with several measures, which can be summarized in these points:

1. Reforming the personal taxation system by reducing the marginal tax rates.
2. Reduction in the corporate tax rates.
3. Reducing the cost of imported inputs
4. by lowering the customs duties.
5. Reduction in the number of Customs tariff rates and its rationalization.
6. Simplifying the excise duties and its integration with a Value-Added Tax (VAT) system.
7. Bringing the services sector in the tax net within a VAT system.
8. Broadening of the tax base.
9. Building a tax information and computerization.
10. Improving the quality of tax administration.

The tax reforms that began with the Chelliah Committee recommendations are still going on. Later on, government appointed the Vijay Kelkar Committee in 2002 which further provided direction to the tax reforms in the country. Below is the crisp summary of tax changes made in India since 1991.

The DTC and GST have been so far biggest reforms initiated by the Government in direct and indirect tax regime respectively. However, while DTC has lapsed and the government had decided to not to pursue it further, GST remains entangled into India’s murky politics.