19-05-2012, 03:23 PM
TAX REFORM IN INDIA: ACHIEVEMENTS ANDCHALLENGES
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There have been major changes in tax systems of countries with a wide
variety of economic systems and levels of development during the last two decades.
The motivation for these reforms has varied from one country to another and thethrust of reforms has differed from time to time depending on the development strategyand philosophy of the times. In many developing countries, the immediate reason fortax reforms, has been the need to enhance revenues to meet impending fiscal crises.
As Bird (1993) states, “…fiscal crisis has been proven to be the mother of tax reform”.
Such reforms, however, are often ad hoc and are done to meet immediate exigenciesof revenue. In most cases, such reforms are not in thenatureofsystemicimprovementstoenhancethelongrunproductivsystem.
PARADIGMS OF TAX REFORM
The philosophy of tax reform has undergone significant changes over theyears in keeping with the changing perception of the role of the state. With thechange in the development strategy in favour of market determined resource allocation,the traditional approach of raising revenues to finance a large public sector without
much regard to economic effects has been given up. The recent approaches to reform
lay emphasis on minimizing distortions in tax policy to keep the economy competitive.
Minimizing distortions implies reducing the marginal rates of both direct and indirectaxes. This also calls for reducing differentiation in tax rates to reduce unintendeddistortions in relative prices. To achieve this, the approach suggests broadening ofthe tax bases. Thus, over the years, emphasis has shifted from vertical equity inwhich both direct and indirect taxes are subject to high marginal rates with minute
differentiation in rates, to horizontal equity in which, the taxes are broad-based, simpleand transparent, and subject to low and less differentiated rates. Equity in general, istaken to mean improving the living conditions of the poor. This has to be achieved
mainly through expenditure policy and human resource development rather thanreducing the incomes of the rich as was envisaged in the 1950s and 1960s.
INDIA’s TAX SYSTEM PRIOR TO COMPREHENSIVE
REFORMS 1991
The trends in tax revenues presented in table 1 present three distinct phases.In the first, right from the 1970s to mid-1980s, there has been a steady increase inthe tax-GDP ratio in keeping with the buoyant economic conditions and accelerationin the growth rate of the economy. The tax ratio, which was about 11 per cent in1970-71, increased steadily to 14.6 per cent in 1980-81 (table 1). The ratio continued
to increase steadily during the early 1980s (chart 1). In addition to the economyattaining a higher growth path, the buoyancy in tax revenues was fuelled by theprogressive substitution of quantitative restrictions with tariffs following initial attemptsat economic liberalization in the 1980s. The economic recession following the severedrought of 1987 resulted in stagnation in revenues in the second phase until 1992-93.
Following the economic crisis of 1991 and the subsequent reforms in the tax system,particularly reduction in tariffs, actually caused a decline in the tax ratio. Overall, itis seen that the tax ratio which reached the peak of about 17 per cent in 1987-88,declined thereafter to 13.9 per cent in 1993-94 and gradually recovered to 14.6 percent in 1997-98. Overall, the level of tax revenues, although reasonable as compared
to the average tax level in developing countries, is clearly inadequate from theviewpoint of resource requirements of the economy.