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Reforms in the fiscal policy

Fiscal policy means the policy relating to public revenue and public expenditure and their allied matters. The fiscal reforms of 1991 aimed to reduce expenditure, increase revenues and earn positive economic returns on investments. In order to bring about fiscal discipline in our economy, the Government undertook the Tax reforms. Tax Reforms Committee (TRC) was constituted by the Government in 1991 to recommend a comprehensive reform of both, direct and indirect tax laws.

Direct tax reforms

To bring about an increase in the collection of income tax, the below measures were undertaken:
  • In 1973-94, the maximum marginal rate of individual income tax was as high as 97.7%. According to the recommendations of the TRC, the income tax slabs were then reduced Up to the assessment year 1993-94, taxation of partnership firm was complicated. Following the recommendations of TRC, 1991, the taxation of partnership firms was modified through the Finance Act, 1992 and has further been simplified and rationalized thereafter
  • There has been a slash in the tax rate of domestic companies from 40% in 1990’s to about 30% at present. Tax rate on foreign companies too witnessed a reduction from 55% to 50% (which is on royalty) and to 40% on other incomes. Surcharges, however, are payable at specified rates over and above the specified limits
  • There has been an increase in basic exemption limits for individuals and Hindu Undivided Families (HUF’s)
  • Requirement of filing of return under the ‘one by six’ scheme has been stopped
  • For income below the basic exemption limit, individuals need not file the returns
  • Dematerialization of TDS certificates were made effective from 1st April 2008
  • A scheme was started allowing the submission of returns through tax return preparers
  • Power sector, SEZs and shipping industries enjoy special tax benefits

Indirect tax reforms

  • The peak rate of customs duties was reduced
  • Anomalies like inverted duty structure were rectified
  • Excise duties were rationalized through a movement towards CENVAT
  • State-level VAT, which aimed to achieve a non-cascading, self-enforcing and harmonized commodity taxation regime was introduced
  • The productivity of expenditure was increased by laying down performance indicators that are monitorable in nature
  • Financing mechanisms that are innovative in character, such as creation of a special purpose vehicle for infrastructure projects were introduced
  • The Fiscal Responsibility and Budget Management Act (FRBMA) was passed in 2003. It laid emphasis on revenue-led fiscal consolidation, better expenditure outcomes and rationalisation of tax regime to remove distortions and improve competitiveness of domestic goods and services in a globalized economic environment
  • Single point sales taxes were replaced by VAT in all states and union territories
  • Service tax was introduced by the Centre, and it witnessed a substantial expansion in its base
  • The multiplicities of CENVAT rates were reduced and there was a replacement in many of the specific rates which were on ad-valorem basis, based on the maximum retail price of the products. This led to the rationalization of CENVAT rates
  • To entail a restructuring of state VAT and Central excise tax, a plan is proposed to introduce goods and service tax (GST)
  • In order to further reform the taxation in India, a direct tax code (DTC) is being introduced. This will consolidate and amend laws relating to direct taxes

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