On the negative side, there has been extensive tax evasion and ‘black economy’ became pervasive.
One of the main reasons cited for tax evasion and generation of black money was high effective rates of taxation.
Besides loss of revenue, tax evasion reduced built-in elasticity of the tax system and constrained tax reforms.
Another problem that arose was the erosion of equity. The share of direct taxes, in total tax revenues, had fallen from 37 % in 1950-51 to 15 % in 1984- 85. And the share of personal income tax dropped from 21 % to 5 % over the same period.
It is well-known that taxes like personal income tax have an important redistributive role in the tax structure, and cannot be substituted by indirect taxes on commodities.
In 1977, a high powered committee was set up under the chairmanship of Dr. P.C. Alexander, the then commerce secretary, for reviewing the nature of import-export policies and procedures.
Based on the recommendations of this Committee’s Report, a beginning was made to liberalise the import regime in the late 1970s.
By mid-1980s, tax evasion and the related black economy came to be attributed to the controls and regulations as much as to the very high levels of personal income taxes and complex commodity taxation system.
The submission of a number of influential reports prepared under Government auspices, including the Report of the Committee to Examine Principles of a Possible Shift from Physical to Financial Controls (the Narasimham Committee 1985), the Report of the Committee on Trade Policies (the Abid Hussain Committee 1984), a series of reports prepared by the Economic Administration Reforms Commission (L.K. Jha 1984-86), the Report of the Working of the Monetary System (the Chakravarthy Committee 1985) and the Report on the Black Money by National Institute of Public Finance and Policy (NIPFP) resulted in certain bold initiatives taken on fiscal policy front.
These developments suggested the following type of changes in the fiscal policy:
- A systematic effort to simplify both tax structure and tax laws,
- A deliberate shift to a regime of reasonable direct tax rates and better tax administration, and
- The fostering of a stable and predictable tax policy environment.
