Jonah Patel
In 1991, the Indian government established a high-powered committee, known as the Raja Chelliah Committee, to recommend comprehensive reforms to the system of central taxes. The committee was chaired by renowned economist Dr Raja J Chelliah, who was later awarded the Padma Vibhushan in 2007 and is often referred to as 'The Father of Tax Reforms'. The committee's recommendations focused on simplifying the tax system, broadening the tax base, and improving tax administration, with an emphasis on reducing tax evasion and ensuring equity in taxation. The committee's suggestions laid the foundation for many of the tax reforms implemented during India's subsequent economic liberalisation.
| Characteristics | Values |
|---|---|
| Year | 1991 |
| Name | Chelliah Committee, Tax Reform Committee, Raja Chelliah Committee |
| Chairman | Dr. Raja J. Chelliah |
| Focus | Simplifying the tax system, broadening the tax base, and improving tax administration |
| Objectives | Reducing tax evasion, ensuring equity in taxation, rationalizing direct and indirect taxes, lowering corporate tax rates |
| Results | Laid the foundation for many of the tax reforms implemented during the economic liberalization period in India |
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What You'll Learn
The Chelliah Committee (1991)
The Chelliah Committee, also known as the Raja Chelliah Committee, was constituted in 1991 by the Government of India to recommend comprehensive reforms to the system of central taxes in India. The committee was chaired by Dr. Raja J. Chelliah, who was subsequently awarded the Padma Vibhushan in 2007 and is often referred to as "The Father of Tax Reforms".
The committee's primary objective was to reform the direct and indirect taxes prevailing in India at the time. Before the liberalization of the economy, India's tax regime faced several challenges. In terms of direct taxes, there was a high degree of progressiveness in the 1960s and 1970s, which adversely affected tax collection efficiency. Additionally, numerous exemptions further narrowed the tax base in the country, and poor enforcement led to widespread tax evasion. Regarding corporation tax, there were various discriminations between different types of companies, discouraging investments. Double taxation of dividends was also a common issue. As for indirect taxes, high rates of custom and excise duties were prevalent, and there was no Value-Added Tax (VAT) or service sector within the tax system.
The Chelliah Committee produced three reports in 1991, 1992, and 1993, outlining various measures for tax reform. These measures included reforming the personal taxation system by reducing marginal tax rates, improving the quality of tax information, simplifying excise duties, and integrating them with a VAT system. The committee also recommended bringing the service sector into the tax net within a VAT framework, reducing corporate tax rates, and lowering customs duties and tariff rates. Additionally, they proposed broadening the tax base, building tax information and computerization, and enhancing the overall quality of tax administration.
The recommendations of the Chelliah Committee initiated a long-term process of tax reforms in India, which continued with subsequent committees, such as the Vijay Kelkar Committee in 2002. These collective efforts aimed to enhance revenue generation, curb tax evasion, and establish a unified national market, ultimately fostering a more transparent and efficient tax system in the country.
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Simplifying tax system, broadening tax base
In 1991, the Government of India appointed the Chelliah Committee, also known as the Tax Reforms Committee, to recommend comprehensive tax reforms. Since then, there has been a push to reform tax regimes, particularly individual income taxes, and reduce corporate tax rates. This shift aims to move away from excessive tax rates that can inadvertently incentivize tax evasion, hindering revenue collection.
One way to simplify the tax system and broaden the tax base is to eliminate targeted preferences and tax capital gains as ordinary income. This approach removes complexities and reduces the incentive to shelter funds, encouraging compliance. It can benefit both low- and high-income households by making taxes fairer and more efficient. Additionally, broadening the tax base and lowering marginal rates can simplify the tax code, remove unfair preferences, and create substantial economic growth.
To achieve this, several measures can be considered. Firstly, base broadening can include previously exempt items, such as groceries, to keep tax rates lower. Secondly, a consumption tax or a value-added tax (VAT) can be implemented, where taxes are levied on retail sales of goods and services. This approach ensures that the tax base is equal to the full value of the final sales to the consumer, making it easier to administer. Thirdly, individual income tax rates can be reduced across brackets, encouraging voluntary income disclosure and promoting savings.
The implementation of the Goods and Services Tax (GST) in India is a step towards simplifying the tax system and broadening the tax base. The GST aims to harmonize state and central taxes, reducing tax cascading and creating a unified national market. This facilitates trade, reduces compliance burdens, and fosters transparency and efficiency in the tax system.
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Reducing tax evasion, ensuring equity
The Indian government has constituted several committees to drive tax reforms and reduce tax evasion, including the Chelliah Committee (also known as the Tax Reforms Committee) in 1991, the Rekhi Committee in 1992, and the Vijay Kelkar task force in 2002. These committees have played a crucial role in shaping India's tax system, fostering economic growth, improving compliance, and enhancing revenue generation.
Chelliah Committee (1991)
The Chelliah Committee, also known as the Tax Reforms Committee, was constituted in 1991 under the chairmanship of renowned economist Dr. Raja J. Chelliah to suggest reforms in the tax structure of India. The committee's recommendations focused on simplifying the tax system, broadening the tax base, and improving tax administration. It emphasized reducing tax evasion and ensuring equity in taxation. The Chelliah Committee's suggestions laid the foundation for many of the tax reforms implemented during the economic liberalization period in India. Dr. Chelliah is often referred to as "The Father of Tax Reforms" for his pioneering contributions to India's modern tax system.
Rekhi Committee (1992)
The Rekhi Committee, constituted in 1992 under the chairmanship of K.L. Rekhi, focused on facilitating reforms in the indirect taxation system. One of its important recommendations was the suggestion to establish a tribunal to deal with issues between taxpayers and tax collectors.
Vijay Kelkar Task Force (2002)
The Vijay Kelkar Committee, led by Dr. Vijay Kelkar, played a significant role in recommending the implementation of the Goods and Services Tax (GST) in India. The GST Act was passed by the Indian Parliament in 2016 to introduce a unified indirect tax system and simplify the existing tax structure.
Other Tax Reform Efforts
In addition to these committees, there have been other efforts to reform India's tax structure. Since the sweeping reforms of 1991, there has been a shift towards moderate tax reforms to discourage tax evasion and promote savings and voluntary income disclosure. This includes reductions in corporate tax rates, the introduction of e-filing systems, and the digitization of tax administration. The implementation of GST and the simplification of direct taxes, such as income tax, have also contributed to improving the ease of doing business in India.
The constitution of committees, such as the Chelliah Committee, the Rekhi Committee, and the Vijay Kelkar task force, has been instrumental in driving tax reforms in India. These committees have emphasized reducing tax evasion, ensuring equity, and improving the efficiency and transparency of the tax system. The implementation of their recommendations has contributed to economic growth, enhanced revenue generation, and improved compliance, ultimately fostering a more robust and equitable tax environment in India.
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GST implementation
The implementation of the Goods and Services Tax (GST) in India has been a significant milestone in the country's tax structure. The GST was first proposed in the 2006-2007 Union Budget by the then Finance Minister, P. Chidambaram, and was recommended by the Vijay Kelkar Committee. A GST panel was set up in 2007 under the chairmanship of Asim Das Gupta, the then Finance Minister of West Bengal, to design its structure. The GST came into effect on July 1, 2017, through the implementation of the One Hundred and First Amendment to the Constitution of India.
The GST replaced multiple indirect taxes levied by the central and state governments, such as excise duty, service tax, and value-added tax (VAT). It is meant to simplify the tax system and broaden the tax base, as well as lower production costs and raise the competitiveness of Indian goods in the international market. The GST has four tax slabs: 5%, 12%, 18%, and 28%, with essential commodities such as food and healthcare being taxed at a lower rate or exempted altogether. For example, certain foods, books, newspapers, and hotel services are taxed at 0%, while luxury products such as refrigerators, cars, and motorcycles are taxed at 28%.
The GST Council, comprised of representatives from both the Central and State Governments, governs the GST system in India. The implementation of GST has received both positive and negative reactions. On the positive side, it has reduced tax theft and corruption, lowered trade obstacles across states, and improved the competitiveness of Indian businesses. However, there have been criticisms of the GST, including concerns about its impact on people in lower and middle-income brackets, as well as practical issues such as tax refund delays and excessive documentation.
The central government released ₹352.98 billion (US$4.2 billion) to states as GST compensation to facilitate its implementation. Additionally, to boost GST billing, the Government of India launched the "Invoice Incentive Scheme" (Mera Bill Mera Adhikaar), encouraging customers to ask for invoices and bills for all purchases.
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Lowering corporate tax rates
The Indian government appointed the Chelliah Committee, headed by Prof Raja Chelliah, in 1991 to recommend comprehensive tax reforms. Since then, there has been a push to reform tax regimes, particularly concerning individual income taxes. The rationale behind this shift is the understanding that high tax rates can encourage tax evasion, which undermines revenue collection. As a result, there has been a move towards moderate tax reforms, including lowering corporate tax rates.
Corporate tax cuts have been implemented in various countries, with differing impacts on economic growth. Some sources suggest that the impact of corporate tax cuts on economic growth is ambiguous and may increase, reduce, or have no significant effect. However, there is evidence that corporate tax cuts can enhance economic growth. For example, in the United States, the Tax Cuts and Jobs Act (TCJA) made significant changes to business taxes, including lowering the corporate income tax rate from 35% to 21%. While this reduced revenues, it also incentivised multinational companies to repatriate income previously held offshore, increasing tax liability for this income.
In India, tax reforms have driven economic growth and improved compliance. Various committees have contributed to these reforms, leading to reductions in corporate tax rates, simplification of procedures, and the implementation of the Goods and Services Tax (GST) Act. The GST Act introduced a unified indirect tax system, replacing the previous graduated pattern of taxation. The introduction of GST was recommended by the Vijay Kelkar Committee, and the Act was amended by the Indian Parliament in 2016.
However, there can also be drawbacks to lowering corporate tax rates. Reducing corporate tax revenue can impact government spending on public services, social programs, and infrastructure. Lower corporate tax rates may also disproportionately benefit large, profitable corporations, exacerbating wealth inequality. Additionally, in the short term, lowering corporate tax rates may not significantly impact economic growth, as other factors, such as consumer demand and government spending, also play a role.
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Frequently asked questions
The committee constituted for reforms in tax structure is the Chelliah Committee, also known as the Tax Reforms Committee.
The Chelliah Committee was constituted in 1991.
The committee was chaired by Dr. Raja J. Chelliah, a renowned Indian economist and policymaker.
The committee's objectives were to simplify the tax system, broaden the tax base, and improve tax administration, with a focus on reducing tax evasion and ensuring equity in taxation.
The Chelliah Committee's recommendations laid the foundation for many of the tax reforms implemented during India's economic liberalization period, including the introduction of the Goods and Services Tax (GST) Act, simplification of direct tax codes, and digitization of tax administration.
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