The import duty structure has been simplified by the amalgamation of the basic and auxiliary duties. On the eve of reform the combined duty rates ranged from 250 per cent to zero per cent and the number of statutory rates, which were many, were effectively multiplied by special or concessional rates brought about through notifications. By now the peak rate has been reduced to 65 per cent and the total number of statutory rates has come down to 14. With the reduction of the peak rate, there has been general reduction in the level of rates and with such reduction a large number of notifications have been abolished. The import duty structure has become much simpler and less irrational, although several anomalies exist and the rates on raw materials such as metals and certain intermediate products particularly chemicals still remain high. The Tax Reforms Committee suggested that by 1997–78 (at the latest) the rates of import duty should range between 30 and 10 per cent (There should be no zero duty items). The only exception was to be consumer goods whose imports are now banned. When they are allowed in, the Committee suggested that, the rate of duty initially should be 50 per cent to give time for the domestic industry to adjust itself. It is clear that we still have a long way to go to arrive at the structure recommended by the Tax Reforms Committee which itself has been criticised for not going far enough.

Here again there has been progress in terms of reform towards a full-fledged value added tax. A major reform has been to make capital goods eligible for MODVAT credit. Additionally, the rates of duty have been unified and the number of rates has been brought down to 10 apart from the rate of tax on tobacco products. Another major change is the switch over from specific duties to ad valorem duties which would facilitate the introduction of the value added tax and also would make revenue more responsive to increases in nominal income. With the reduction in import duties, almost all imports have been made subject to countervailing duty and the countervailing duty in turn has been made eligible for MODVAT credit like the excise duty. There have also been several procedural improvements and subject to certain limitations the invoice has been made the basis of tax assessment. Some attempt has also been made to broaden the base through the removal of exemptions, although here the fear of political opposition and the strong pressures exerted by the affected groups have prevented the inclusion of many commodities within the tax net whose exemptions are clearly unjustified (for example, umbrellas and bicycles). But there is no denying the fact that the excise tax system is a much more rational and simpler system today than it was in 1991.

The direct tax structure has been greatly simplified. There is now only one rate of corporate profits tax for all domestic companies at 40 per cent. The personal income tax is levied at three rates: 20, 30 and 40 per cent and the surcharge on personal income tax has been removed, while the surcharge on the corporate profits tax (retained for revenue reasons) is expected to be abolished shortly. The rate of tax on branches of foreign companies has been brought down from 65 to 55 per cent.

Government has not found it possible to bring under tax all perquisites wholly or partially and thus remove tax shelters. Also, many tax concessions for industry continue such as partial tax holiday for a specified period of time for new industries or those located in backward States. Since the several perquisites of government employees, public sector employees and Ministers have not been brought under tax, it is difficult to justify strict taxation of all perquisites in the private sector. The real solution is, of course, to raise the salaries of senior government officials and Ministers and subject all their incomes in money and kind to tax. But this would demand a major change in the salary structure and is not likely to take place soon. Meanwhile, some broadening of the income tax base has been accomplished. For example, the property incomes of minor children is now included in the income of the parents. Again, all capital gains are now subject to tax provided taxable income including capital gains rises beyond the exemption level. Long-term capital gains which are worked out after proper indexation are taxable at a separate lower rate. Now there is no possibility of avoiding the tax on long-term capital gains by investing the proceeds in approved securities as could be done in the past. An attempt has also been made to broaden the base through the introduction of a presumptive tax in the form of a fixed sum payment by small businesses, and for certain classes of businesses an estimated income scheme has been introduced according to which the net taxable income is simply taken to be a given percentage of gross receipts, so that the assessee is freed of the necessity to produce detailed accounts and claim deductions and allowances. Lastly, efforts are under way to introduce comprehensive computerisation of the operations of the income tax department, which the in course of time would lead to the broadening of the base. However, it must be pointed out that the existence of several untaxed perquisites constitutes a violation of the principles of horizontal equity. This problem remains on the agenda of further tax reform.

The wealth tax on all assets other than what are termed as unproductive assets has been abolished. Unproductive assets which include jewellery, bullion, real estate (excluding one house where the assessee resides), passenger automobiles, yachts, aeroplanes, and urban land are subject to a flat 1 per cent tax on the excess of their value over Rs 1.5 million. This tax together with the marginal rate of income tax at 40 per cent represents in our view a sufficient degree of progression. In fact, with buoyancy in revenues it should be possible to reduce the marginal rate of personal income tax as well as the rate of corporate profits tax to 30 per cent which in the Indian context would lead to substantial improvement in tax compliance.

As noted earlier, one of the major shortcomings of the indirect tax system in India was the absence of any tax on the service sector, i.e., the value added by the service sector has been left untouched. It is clear that if a comprehensive value added tax is to be introduced, the tax on services must become an integral part of the system. A beginning has been made in this respect. Recently, tax at 5 per cent has been introduced on telephone services, on the services of stock brokers, and on premia for insurance of jewellery, real estate and passenger automobiles. There is also a so-called expenditure tax which is a tax to be paid on hotel bills whether for food or accommodation (cheaper hotels are exempt). The idea is that more and more services will be brought under tax and after a sufficient number of services are included, the services tax will be merged with the Union excise, in terms of eligibility for obtaining set-off for taxes paid on services by the manufacturers of goods and for getting set-off for taxes paid on goods by the producers of services. The regime of indirect taxes levied by the State governments still remains basically unreformed and quite unsatisfactory. The State indirect taxes, of which the sales tax forms the major component, are a source of distortion and cause hindrance to the smooth flow of trade and economic activity. The main sources of distortion are the sales tax and the octroi.

The major shortcomings of the existing system of State and local indirect taxes may be summarised briefly:

The State governments have become aware that their tax systems should be rationalised and tax administration modernised. They are now making efforts to bring about greater uniformity in their sales tax systems. A committee of State Finance Ministers has been appointed by the Finance Minister of India. Under the auspices of this Committee, work is being done to fix floor rates for particular groups of commodities (to prevent tax competition) to rationalise the systems of incentives and to evolve uniform procedures. With only three or four rates besides zero, it should be possible for the State governments to adopt a State value added tax. This would essentially involve two steps:

The first is to give full credit for tax paid on inputs by manufacturers against the tax payable by them; and the second is to convert the single point tax into a multi-point tax with a set-off for tax paid at the earlier stage. Before these steps are taken, there would have to be a fairly wide-spread educational programme and training of the officers. The Government of India is expected to provide assistance in respect of these matters.