CHAPTER V

DYNAMICS OF DIRECT TAX STRUCTURE IN INDIA

This chapter has been organised into three sections. Section I deals with the
changes in the structure of direct taxes during the pre and post-reforms period. Section II
attempts to evaluate the impact of direct tax reforms on some selected macro-economic
parameters like deficit financing, public expenditure, and government borrowings etc.
And the last section analyses the impact of direct tax reforms on the personal income tax-
payees vis-à-vis the corporate income tax-payees. The performance of Direct Tax
Administration on various parameters during the period under study has also been
discussed in the last section.

Section I

Taxation policy is an integral part of overall fiscal policy of a country. It acts as

a part of the economic strategy to influence growth of a wide range of economic
activities. The term fiscal has been derived from the old Greek word ‘fisc’ for basket
which symbolized the public purse. The meaning of word ‘fisc’ is the Treasury or
Exchequer. It means fiscal policy related to the Treasury of government. Fiscal policy
generally refers to the government’s choice regarding the use of taxation and
government spending to regulate the aggregate level of economic activity. In the same
vein, the use of fiscal policy entails changes in the level or composition of government
spending or taxation, and hence in the government’s financial position. Key variables
on which policy-makers focus include government deficits and debt, as well as tax and
expenditure levels (Hilbers, 2004).

5.1: TAXATION POLICY

When voluntary savings are not forthcoming either due to low saving potential
or unwillingness to save due to negatively ingrained attitudes; involuntary measures

112
 have to be adopted to increase the rate of savings. Two of these involuntary measures
are: taxation policy and forced private savings.

In a country like India, public sector investment has been playing a crucial and
dynamic role in the economic development of the country. This aspect assumes a
further significance due to the fact that growth of other sector is largely dependent on
the volume and pattern of public sector investment. Therefore, the principal objective
of fiscal policy is to make available resources for public investment. It is the taxation
which brings resources necessary for public expenditure and to raise the volume of
public savings for public investment.

Taxation also helps in curtailing private consumption. Wider coverage of taxation

helps in raising more resources. The large increases in revenue resulting from this source
would provide the base and enlarge the scope of further taxation. Annual doses of
taxation via budget are, therefore, considered legitimate for development purposes.
Taxation helps in cutting down private consumption, reduce inequalities in income and
wealth and raises public savings.

Working of Taxation Policy in India

Indian Tax system had been designed primarily to raise sufficient revenue to meet
the requirements of the government for public expenditure, administration and allied
services. In the planned economic model adopted since independence, taxation has been
used as an instrument for reducing private consumption and transferring resources to the
government to enable it to undertake large-scale public investment in an effort to spur
economic growth. Taxation has also been used as a tool to reduce inequalities through
progressivity in respect of income and wealth, particularly during the 1970s. The non-
integrated and complex nature of the indirect tax structure and the problems it created in
terms of multiplicity of levies and the resultant cascading effects received attention in the
mid-1980s. Preliminary steps to reform the tax structure were taken in the form of
introducing the Modified Value Added Tax (MODVAT). However, tax reforms received
a boost in the early 1990s under the structural adjustment programme initiated in the

113
wake of the economic crisis of 1991. Since then, reforms in the tax structure of both,
direct and indirect taxes have been a continuous process.

A number of tax reforms initiatives have been introduced since 1991 by the
respective governments to achieve the objectives of simplicity, equity, and efficiency.
Though the wave of tax reforms was started during late 1980s, it was during 1991-92
when tax reforms were introduced in a big way. The budget for 1991-92 indicated a
major effort towards correcting the fiscal imbalances and increasing the tax revenue
through increase in the direct taxes. It aimed at controlling government expenditure and
augmenting revenues, reversing the downward trend of the share of direct taxes in total
tax revenues, and curbing conspicuous consumption.

However, the tax reforms initiated during 1990s could not solve many of the
problems. The major problem with the tax reforms has been that it could not reduce the
fiscal deficit of the country (Sidhu, 2003). There are many causes of increasing fiscal
deficit, such as, increase in the non-planned expenditure of the government, increasing
tax exemption limits, reducing tax rates, and increase in the arrears of taxes etc.
Economic survey of 1990-91 pointed out that persistent and large deficits have serious
implications not only for the finances of the government but also for price stability and
economic growth. Such deficits have been met by borrowings by the central government
with subsequent obligations for interest payments and debt repayments. At
macroeconomic level, a fiscal deficit is viewed as a spill over into problems related with
balance of payments and as a consequence creates inflationary pressure in the economy.
In view of the above, fiscal correction and consolidation has remained one of the crucial
issues for the respective governments during the post-reforms. The other problems
developed during the post-reforms period include: low revenue productivity despite
reforms, narrow base of direct taxes, exemption to agricultural income from tax, tax
evasion and avoidance, poor information system, low tax compliance, and widening gap
among states in regard to tax revenue generation.

114
5.2: TAX STRUCTURE IN INDIA

The instruments of government’s tax structure in India include taxes on income

and expenditure, taxes on property, taxes on commodities, and taxes on services. The
broad dichotomy of tax revenue includes direct and indirect taxes, both of the central and
the state governments. The authority to levy taxes in India is divided between the central
government and the state governments. The central government levies direct taxes such
as personal income tax (PIT) and corporate tax (CIT); indirect taxes such as customs and
excise duties and service tax. States levy a Value Added Tax (VAT) on goods, sales
taxes, and various local taxes. The tax structure in India is shown with the help of
following figure 5.2.1.

It is clear from the figure that except land revenue and agricultural income, all
other direct taxes are levied and collected by the central government and except custom
duty, Union excise duties, service tax, stamp and registration fees, and additional duties
of excise in lieu of sales tax, all other indirect taxes are levied and collected by the state
governments according to the provisions made in the Indian Constitution regarding the
sharing of revenues between the central and the state governments. The absence of joint
occupancy of tax fields is meant to avoid duplication in tax administration, and minimise
tax rivalry between the Centre and States, and among states themselves. The taxes like
property tax, octroi and taxes on vehicles etc. are levied and collected by the local
governments (Municipal Authorities) on behalf of the state governments.

115
 TAX STRUCTURE IN INDIA

Total Tax
Revenue

Direct Tax Indirect Tax

Revenue Revenue

Central Direct State Direct Central Indirect State Indirect

Taxes Taxes Taxes Taxes

Personal Central Excise State Excise

Land Revenue
Income Tax Duty Duties

Corporate Agriculture
Customs Duty Sales Tax
Income Tax Income Tax

Stamp &
Wealth Tax Registration Tax on Vehicles
Fees

Addl. Exicse
Gift Tax (till Entertainmnt
Duty in Lieu of
1998) Tax
Sales Tax

Estate Duty Tax on

Service Tax
(abolished) Electricity

Value Added
Expenditure Tax
Tax

Property Tax

Octroi
Source: Sury, M.M., 1997, pp.17-25.

Figure 5.2.1
116
 There is no legal definition of direct and indirect taxes in India. Taxes under the
control of Central Board of Direct Taxes are direct taxes while those administered by the
Central Board of Excise and Customs are categorised as indirect taxes. With regard to the
direct taxes, it has the merit of justification due to its progressiveness and it also satisfies
the social concept of equity and therefore it can reduce high concentration of income and
wealth more effectively as compared to indirect taxes.

5.3: GROWTH OF TAX REVENUE OF THE CENTRE AND THE STATES

To analyse the growth of tax revenues of the central and state governments, time-
series data is presented in table 5.3.1. The analysis shows that direct taxes accounted for
a Rs.1,009 crore out of total tax collection (all India) of Rs.4,752 crore in 1970-71. Direct
tax collection increased to Rs.12,260 crore in 1990-91 from 1970-71, resulting in an
increase of about 12 times over the period of 20 years. Whereas indirect taxes increased
from Rs.3,743 crore to Rs.75,462 crore during the same period, resulting in 20 times
increase. It is clear from the analysis of data that during the pre-reforms period, more
emphasis was given in collecting revenues from indirect taxes. However, this trend has
been reversed during the post-reforms period, where direct tax revenue collection has
increased by 32 times from Rs.16,657 crore in 1991-92 to Rs.5,38,083 crore (Budget
Estimates) in the year 2011-12. Over the same period, resultant increase in indirect tax
collection was only 11 times, form Rs.86,541 crore to Rs.9,56,415 crore.

However, the analysis of data makes it clear that despite of the continuous efforts
on the part of central government, revenue collection through indirect taxes still
constitute approximately 2/3rd share of the total tax collection. It shows that the direct tax
reforms initiated since 1991 could not increase the proportion of direct taxes in total tax
revenue. The scenario is not much different even if direct and indirect tax collection of
central and state governments is viewed separately. However, on the basis of T-values,
compound annual growth rates (CAGR) of all the taxes were found significant at 1 per
cent level of significance during both the periods (pre-reforms and post-reforms) which
implies that the growth of all taxes has been satisfactory.

117
 Table 5.3.1
Growth of Tax Revenue of Centre and the States
(Rs. in Crore)
Total Tax Revenue (All India) Central Govt. (Gross) States' Own Tax
Year Direct Indirect Total Direct Indirect Total Direct Indirect Total
Pre-reforms Period
1970-71 1009 3743 4752 869 2337 3206 140 1406 1546
1971-72 1171 4404 5575 1047 2826 3873 124 1578 1702
1972-73 1346 5090 6436 1233 3272 4505 113 1818 1931
1973-74 1552 5837 7389 1375 3695 5070 177 2142 2319
1974-75 1834 7389 9223 1650 4672 6322 184 2717 2901
1975-76 2493 8689 11182 2205 5404 7609 288 3285 3573
1976-77 2585 9747 12332 2328 5943 8271 257 3804 4061
1977-78 2680 10557 13237 2405 6453 8858 275 4104 4379
1978-79 2851 12677 15528 2528 7997 10525 323 4680 5003
1979-80 3096 14587 17683 2818 9156 11974 278 5431 5709
10-yearly Avg. 2061.7 8272 10333.7 1845.8 5175.5 7021.3 215.9 3096.5 3312.4

1980-81 3268 16576 19844 2997 10182 13179 271 6394 6665
1981-82 4133 20009 24142 3786 12061 15847 347 7948 8295
1982-83 4492 22750 27242 4139 13557 17696 353 9193 9546
1983-84 4907 26618 31525 4498 16223 20721 409 10395 10804
1984-85 5330 30484 35814 4798 18673 23471 532 11811 12343
1985-86 6252 37015 43267 5620 23050 28670 632 13965 14597
1986-87 6889 42650 49539 6236 26602 32838 653 16048 16701
1987-88 7483 49493 56976 6752 30913 37665 731 18580 19311
1988-89 9758 57168 66926 8830 35644 44474 928 21524 22452

118
 1989-90 11165 66528 77693 10003 41633 51636 1162 24895 26057
10-yearly Avg. 6367.7 36929.1 43296.8 5765.9 22853.8 28619.7 601.8 14075.3 14677.1

1990-91 12260 75462 87722 11030 46547 57577 1230 28915 30145
Pre-reforms
4597.81 25117.76 29715.57 4149.86 15563.81 19713.67 447.95 9553.95 10001.9
Period Avg.
Standard Deviation 3293.8 21693.7 24975.6 2968.05 13484.3 16440.0 328.5 8214.1 8538.7
CV (%) 71.64 86.37 84.05 71.52 86.64 83.40 73.33 85.96 85.37
CAGR (%) 11.76* 14.98* 14.42* 11.86* 14.86* 14.17* 10.99* 15.18* 14.95*
T-Value 39.34 145.10 113.24 40.05 115.69 97.93 18.34 108.22 103.52
Post-reforms Period
1991-92 16657 86541 103198 15353 52008 67361 1304 34533 35837
1992-93 19387 94779 114166 18140 56496 74636 1247 38283 39530
1993-94 21713 100248 121961 20299 55443 75742 1414 44805 46219
1994-95 28878 118971 147849 26973 65324 92297 1905 53647 55552
1995-96 35777 139482 175259 33564 77660 111224 2213 61822 64035
1996-97 41061 159995 201056 38898 90864 129762 2163 69131 71294
1997-98 50538 170121 220659 48282 90938 139220 2256 79183 81439
1998-99 49119 183898 233017 46601 97196 143797 2518 86702 89220
1999-00 60864 213719 274583 57960 113792 171752 2904 99927 102831
10-yearly Avg. 33625.4 134322 167947 31710 74626.8 106337 1915.4 59694.8 61610.2

2000-01 71762 233558 305322 68305 120298 188603 3457 113260 116719
2001-02 73109 241426 314535 69198 117862 187060 3911 123564 127475
2002-03 87365 268912 356277 83363 132542 215905 4002 136370 140372
2003-04 109546 304538 414084 105091 149257 254348 4455 155281 159736
2004-05 137093 357277 494370 132183 172774 304957 4910 184503 189413
2005-06 167635 420053 587688 162337 203814 366151 5298 216239 221537

119
 2006-07 231376 505331 736708 225045 248467 473512 6331 256864 263196
2007-08 318839 551490 870329 312220 280927 593147 6619 270563 277182
2008-09 327981 587469 915450 319892 285406 605298 8089 302063 310152
2009-10 376995 623849 1000844 367595 256932 624527 9400 366917 376317
10-yearly Avg. 190170 409390 599561 184523 196828 381351 5647.2 212562 218210
2010-11 (R.E.) 450093 813175 1263268 438509 348379 786888 11584 464796 476380
2011-12 (B.E.) 538083 956415 1494498 525160 407280 932440 12923 549135 562058
Post-reforms
153041.5 339583.2 492624.8 148331.8 163031.4 311363.2 4709.667 176551.8 181261.6
Periiod Avg.
Standard Deviation 157443.8 247415.6 403938.6 154126.1 103681.5 256639.1 3366.7 144841.2 148198.3
CV (%) 102.88 72.86 82.00 103.91 63.60 82.42 71.48 82.04 81.76
CAGR (%) 17.39* 11.64* 13.15* 17.66* 10.11* 13.12* 11.25* 13.22* 13.17*
T-Value 42.23 51.13 47.33 41.99 32.60 35.51 38.84 66.03 65.69
Source: Indian Public Finance Statistics 2011-12, Ministry of Finance, Government of India
*Significant at 1 per cent level of significance

120
 500000

0
1000000
1500000
2000000
2500000
3000000
3500000

1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86

Direct
1986-87
1987-88
1988-89

121
1989-90

Figure 5.3.1
1990-91
Indirect 1991-92
1992-93
1993-94
1994-95
1995-96
Total

1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Trends in All IndiaTax Revenue (Rs. in crore)

2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
 200000
400000
600000
800000

0
1000000
1200000
1400000
1600000
1800000
1970-71 2000000
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87

Direct
1987-88
1988-89

122
1989-90
1990-91

Figure 5.3.2
Indirect
1991-92
1992-93
1993-94
1994-95
Total

1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
Trends in Central Government Tax Revenue (Rs. in Crore)

2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
 0
200000
400000
600000
800000
1000000
1970-71 1200000
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86

Direct
1986-87
1987-88
1988-89
1989-90

123
1990-91

Indirect
1991-92

Figure 5.3.3
1992-93
1993-94
Total 1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
Trends in State Governments' Tax Revenue (Rs. in Crore)

2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
5.4: PERCENTAGE SHARE OF DIRECT AND INDIRECT TAXES IN TAX
REVENUE

The relative importance of direct and indirect taxes can be measured from their
percentage share in the total tax revenue. Table 5.4.1 depicts the share of direct and
indirect taxes in the total tax revenue. The analysis of data reveals that the share of direct
taxes was 21.23 per cent in 1970-71 as compared to 78.77 per cent of indirect taxes
during the same period. The share of direct taxes declined to 19.89 per cent in 1974-75.
This was the time when maximum marginal tax rate was highest at 97.75 per cent
(including surcharge). The data further shows that the share of direct tax reduced to 13.98
per cent in 1990-91.

The declining share of direct taxes is not consistent with the norms of tax theory.
It is well known that as an economy experiences modernization, diversification and
expansion of corporate sector, the scope of direct taxes should widens. It is customary to
explain the limited role of direct taxes in developing countries in terms of their peculiar
circumstances which include large agricultural sector of subsistence nature, small scale
industrial activities, lack of monetisation and accounting practices, and low levels of
income. Even a modest exemption limit in personal income tax keeps the vast majority of
income earners outside the income tax net. In addition to these underlying reasons, a host
of specific factors also contributed to the reduced role of direct taxes. These included: (a)
scaling down rates of direct taxes (b) plethora of exemptions/concessions, (c) abolition of
estate duty in 1985 and (d) large scale tax-evasion.

The percentage share of direct and indirect taxes in the total taxes (combined),
central government taxes, and state governments’ taxes has also been shown with the
help of figure 5.4.1, 5.4.2, and 5.4.3 respectively.

124
 Table 5.4.1
Percentage Share of Direct and Indirect Taxes in Total Tax Revenue
Total Tax Revenue
(All India) (%) Central Government (Gross) (%) State Own Tax (%)
Year Direct Indirect Total Direct Indirect Gross Direct Indirect Total
Pre-reforms Period
1970-71 21.23 78.77 100 27.11 72.89 100 9.06 90.94 100
1971-72 21.00 79.00 100 27.03 72.97 100 7.29 92.71 100
1972-73 20.91 79.09 100 27.37 72.63 100 5.85 94.15 100
1973-74 21.00 79.00 100 27.12 72.88 100 7.63 92.37 100
1974-75 19.89 80.11 100 26.10 73.90 100 6.34 93.66 100
1975-76 22.29 77.71 100 28.98 71.02 100 8.06 91.94 100
1976-77 20.96 79.04 100 28.15 71.85 100 6.33 93.67 100
1977-78 20.25 79.75 100 27.15 72.85 100 6.28 93.72 100
1978-79 18.36 81.64 100 24.02 75.98 100 6.46 93.54 100
1979-80 17.51 82.49 100 23.53 76.47 100 4.87 95.13 100
10-yrly Avg. 20.34 79.66 100 26.66 73.34 100 6.82 93.18 100

1980-81 16.47 83.53 100 22.74 77.26 100 4.07 95.93 100
1981-82 17.12 82.88 100 23.89 76.11 100 4.18 95.82 100
1982-83 16.49 83.51 100 23.39 76.61 100 3.70 96.30 100
1983-84 15.57 84.43 100 21.71 78.29 100 3.79 96.21 100
1984-85 14.88 85.12 100 20.44 79.56 100 4.31 95.69 100
1985-86 14.45 85.55 100 19.60 80.40 100 4.33 95.67 100
1986-87 13.91 86.09 100 18.99 81.01 100 3.91 96.09 100
1987-88 13.13 86.87 100 17.93 82.07 100 3.79 96.21 100

125
 1988-89 14.58 85.42 100 19.85 80.15 100 4.13 95.87 100
1989-90 14.37 85.63 100 19.37 80.63 100 4.46 95.54 100
10-yrly Avg. 15.10 84.90 100 20.79 79.21 100 4.07 95.93 100

1990-91 13.98 86.02 100 19.16 80.84 100 4.08 95.92 100
Pre-reform
15.47 84.53 100 21.05 78.95 100 4.48 95.52 100
Avg.
Post-reforms Period
1991-92 16.14 83.86 100 22.79 77.21 100 3.64 96.36 100
1992-93 16.98 83.02 100 24.30 75.70 100 3.15 96.85 100
1993-94 17.80 82.20 100 26.80 73.20 100 3.06 96.94 100
1994-95 19.53 80.47 100 29.22 70.78 100 3.43 96.57 100
1995-96 20.41 79.59 100 30.18 69.82 100 3.46 96.54 100
1996-97 20.42 79.58 100 29.98 70.02 100 3.03 96.97 100
1997-98 22.90 77.10 100 34.68 65.32 100 2.77 97.23 100
1998-99 21.08 78.92 100 32.41 67.59 100 2.82 97.18 100
1999-00 22.17 77.83 100 33.75 66.25 100 2.82 97.18 100
10-yrly Avg. 19.141 80.86 100 28.33 71.67 100 3.27 96.77 100

2000-01 23.50 76.50 100 36.22 63.78 100 2.96 97.04 100
2001-02 23.24 76.76 100 36.99 63.01 100 3.07 96.93 100
2002-03 24.52 75.48 100 38.61 61.39 100 2.85 97.15 100
2003-04 26.46 73.54 100 41.32 58.68 100 2.79 97.21 100
2004-05 27.73 72.27 100 43.34 56.66 100 2.59 97.41 100
2005-06 28.52 71.48 100 44.34 55.66 100 2.39 97.61 100
2006-07 31.41 68.59 100 47.53 52.47 100 2.41 97.59 100
2007-08 36.63 63.37 100 52.64 47.36 100 2.39 97.61 100

126
 2008-09 35.83 64.17 100 52.85 47.15 100 2.61 97.39 100
2009-10 37.67 62.33 100 58.86 41.14 100 2.50 97.50 100
10-yrly Avg. 29.55 70.45 100 45.27 54.73 100 2.66 97.34 100

2010-11 35.63 64.37 100 55.73 44.27 100 2.43 97.57 100
2011-12 36.00 64.00 100 56.32 43.68 100 2.30 97.70 100
Post-reform
31.07 68.93 100 47.64 52.36 100 2.60 97.40 100
Avg.
Source: Indian Public Finance Statistics 2011-12, Ministry of Finance, Government of India

127
 10
20
30
40
50
60
70
80
90

0
100
1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89

Direct
1989-90

128
1990-91
1991-92
1992-93

Figure 5.4.1
1993-94
Indirect

1994-95
1995-96
Total Taxes (% Share)

1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Changing Proportion of Direct and Indirect Taxes in All India

2007-08
2008-09
2009-10
2010-11
2011-12
 10
20
30
40
50
60
70
80
90

0
1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90

Direct

129
1990-91
1991-92
1992-93
share)

Figure 5.4.2
1993-94
Indirect

1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Changing Proportions of Direct and Indirect Taxes of Central Government (%

2008-09
2009-10
2010-11
2011-12
 20
40
60
80

0
100
1970-71 120
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89

130
Direct
1989-90
1990-91
1991-92

Figure 5.4.3
Share)

1992-93
1993-94
Indirect

1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
Changing Proportions of Direct and Indirect Taxes of the State Governments (%

2008-09
2009-10
2010-11
2011-12
 The declining share of direct taxes caused concern in government circles and this
feeling has been expressed in official documents. The Long Term Fiscal Policy (LTFP)
while seeking to correct the imbalance maintained “while the predominance of indirect
taxes in the present situation is unavoidable, it cannot be denied that a certain balance has
to be maintained between direct and indirect taxes. Taxes like the personal income tax
have an important role in the tax structure and cannot be substituted by taxes on
commodities. It is not easy to tailor commodity taxes to the circumstances of the tax
payers in the same way as is possible with personal income tax. Hence, although reliance
on indirect taxation cannot be avoided in the foreseeable future, it is necessary to make a
transition to a system where income tax makes a larger contribution to revenue. Such
transition is not possible without a distinct improvement in the buoyancy of the income
tax in response to growth in incomes. An important objective of the fiscal policy must be
to reverse the decline in the share of direct taxes over the long-term” (Long Term Fiscal
Policy, 1985).

After the tax reforms initiated in 1991, the decline in the relative share of direct
taxes has not only been arrested but reversed. Since then, the share of direct taxes in the
total tax revenue has been continuously increasing which stood at 36 per cent in 2011-12.

Stating the reasons for fall in the share of indirect taxes and increase in the share
of direct taxes, the Tenth Five year plan (2002-07) observed, “The reasons for this fall in
the indirect tax revenue are obvious. The structural and administrative reforms in the
Indian Tax system during the nineties characterized by scaling down of the tax rate,
reduction in number of slabs, introduction of value added tax system, etc. among others
did not necessarily aimed at raising revenue productivity. Rather, the purpose was to
improve efficiency in production and trade by removing market distortions.

The improvement in direct tax collection which has been experienced despite the
scaling back of income tax rates in India during the post-reform period, could be
attributed to expansion in the tax base through introduction of innovative schemes,
extension of the base for tax deduction source and improvement in the direct tax

131
administration and its re-structuring and introduction of information technology on a
large scale to facilitate tax administration are expected to further enhance revenue
collection under direct tax.

Table 5.4.1 further shows the fact that state governments are heavily relying on
indirect taxes and not on the direct taxes. The share of direct taxes in total tax revenue of
state governments have declined from 9.06 per cent in 1970-71 to 4.08 per cent in 1990-
91. The share further declined in the post-reforms period, from 3.64 per cent in 1991-92
to merely 2.79 per cent in 2011-12. The reasons that why state governments could not
increase the share of direct taxes in total taxes can be many fold. First, the power to
collect major direct taxes rests with the central government as per constitutional
provisions. Secondly, state governments could not find new avenues/areas from where
they can levy direct taxes. Thirdly, state governments find it easy to collect taxes from
indirect sources. And lastly, the tax administration/ authorities are not efficient enough to
enforce tax compliance. For example, property tax is levied by state governments.
However, no mechanism has been developed by the state governments to enforce the
proper collection of the same, leading to poor tax compliance by the property tax
assessees.

5.5: PERCENTAGE SHARE OF DIRECT TAXES IN CENTRAL

GOVERNMENT REVENUES IN OTHER COUNTRIES VIS-À-VIS INDIA

Inspite of the major policy changes introduced by the central government, it is

pity to note that indirect taxes still form nearly 2/3rd of total tax revenue. In some
developed countries, the trend is just reverse. There, direct taxes constitute about 2/3rd of
total taxes (like OECD countries). Table 5.5.1 provides a glimpse of some of such
countries along with neighboring countries of India.

132
 Table 5.5.1
Percentage Share of Direct Taxes in Central Government Revenues in 2010 (Other Countries vis-à-vis India)
Country Direct Taxes as a percentage in Central
Government Revenues
Australia 65
Canada 53
Denmark 45
Malaysia 46
New Zealand 57
South Africa 53
Trinidad and Tobago 47
United States 50
Pakistan 25
Sri Lanka 18
China 25
India 47*
Source: World Development Indictors, 2011-12

* Indian figure is converted to Accrual Basis because in India, tax revenues are recorded on Cash Basis.

133
 The above table makes it clear that countries like Australia, Canada, New
Zealand, South Africa etc. are way ahead in mobilizing revenue through direct taxes.
However, countries like china is still having low direct tax base. The main reason of this
situation in China is because it is a manufacturing based economy heavily relying upon
taxation on manufacturing the products. It is interesting to note in case of India that share
of direct taxes in total tax revenue according to accrual basis in the year 2009-10 was 47
per cent, and the same on cash basis was found just 36 per cent during the same period. It
shows the inefficiency of the tax collecting authorities which could not collect remaining
11 per cent from the various corporate and non-corporate assessees.

5.6: IMPACT OF TAX REFORMS ON TAX-GDP RATIO

Level of taxation in a country is traditionally judged in terms of the ratio which

taxes bear to some measure of national income. This ratio is called tax-GDP ratio and the
change in it is determined by variations in both the numerator (total tax revenue) and the
denominator (national income). It is an important ratio to measure the level of taxation
and relative tax burden in a country.

The study of tax–GDP ratio is an important parameter to see the trends in taxation
in an economy or a group of countries. Therefore, the present study has taken tax–GDP
ratio for analysis of changes in revenue of the government of India. Time-series data for
1970-71 to 2011-12 is presented in table 5.6.1. the analysis in table 5.6.1 reveals that the
tax collection as a percentage of GDP has increased from 9.98 per cent in 1970-71 to
16.88 per cent in 2011-12. Similarly, Direct Tax-GDP ratio has also increased from 2.12
per cent to 6.08 per cent during the same period. Indirect tax-GDP ratio has also
increased from 7.86 per cent in 1970-71 to 10.80 per cent in 2011-12 respectively.

134
 Table 5.6.1
Tax-GDP Ratio of Various Taxes
Tax-GDP Ratio (All India) Tax-GDP (Centre’s Gross) Tax-GDP (States' Own Taxes)
Year Direct Indirect Total Direct Indirect Total Direct Indirect Total
Pre-reforms Period
1970-71 2.12 7.86 9.98 1.82 4.91 6.73 0.29 2.95 3.25
1971-72 2.30 8.64 10.93 2.05 5.54 7.59 0.24 3.09 3.34
1972-73 2.39 9.05 11.45 2.19 5.82 8.01 0.20 3.23 3.44
1973-74 2.27 8.53 10.80 2.01 5.40 7.41 0.26 3.13 3.39
1974-75 2.27 9.15 11.42 2.04 5.78 7.83 0.23 3.36 3.59
1975-76 2.88 10.02 12.90 2.54 6.23 8.78 0.33 3.79 4.12
1976-77 2.77 10.43 13.20 2.49 6.36 8.85 0.28 4.07 4.35
1977-78 2.53 9.97 12.51 2.27 6.10 8.37 0.26 3.88 4.14
1978-79 2.49 11.06 13.54 2.21 6.98 9.18 0.28 4.08 4.36
1979-80 2.46 11.60 14.06 2.24 7.28 9.52 0.22 4.32 4.54
10-yrly Avg. 2.45 9.63 12.08 2.19 6.04 8.23 0.26 3.59 3.85

1980-81 2.18 11.08 13.26 2.00 6.80 8.81 0.18 4.27 4.45
1981-82 2.35 11.38 13.73 2.15 6.86 9.01 0.20 4.52 4.72
1982-83 2.28 11.57 13.85 2.10 6.89 9.00 0.18 4.67 4.85
1983-84 2.14 11.62 13.77 1.96 7.08 9.05 0.18 4.54 4.72
1984-85 2.08 11.88 13.96 1.87 7.28 9.15 0.21 4.60 4.81
1985-86 2.16 12.78 14.94 1.94 7.96 9.90 0.22 4.82 5.04
1986-87 2.13 13.17 15.29 1.92 8.21 10.14 0.20 4.95 5.16
1987-88 2.03 13.44 15.47 1.83 8.40 10.23 0.20 5.05 5.24
1988-89 2.23 13.09 15.32 2.02 8.16 10.18 0.21 4.93 5.14

135
 1989-90 2.22 13.25 15.48 1.99 8.29 10.29 0.23 4.96 5.19
10-yrly Avg. 2.18 12.33 14.51 1.98 7.59 9.58 0.20 4.73 4.93

1990-91 2.09 12.87 14.96 1.88 7.94 9.82 0.21 4.93 5.14
Pre-reform
2.30 11.07 13.37 2.07 6.87 8.95 0.23 4.20 4.43
Average
Post-reforms Period
1991-92 2.47 12.84 15.31 2.28 7.72 10.00 0.19 5.12 5.32
1992-93 2.50 12.24 14.74 2.34 7.29 9.64 0.16 4.94 5.10
1993-94 2.44 11.25 13.68 2.28 6.22 8.50 0.16 5.03 5.19
1994-95 2.76 11.38 14.14 2.58 6.25 8.83 0.18 5.13 5.31
1995-96 2.92 11.37 14.29 2.74 6.33 9.07 0.18 5.04 5.22
1996-97 2.89 11.27 14.17 2.74 6.40 9.14 0.15 4.87 5.02
1997-98 3.21 10.82 14.03 3.07 5.78 8.85 0.14 5.04 5.18
1998-99 2.72 10.20 12.92 2.58 5.39 7.97 0.14 4.81 4.95
1999-00 3.02 10.62 13.65 2.88 5.66 8.54 0.14 4.97 5.11
10-yrly Avg. 2.70 11.49 14.19 2.54 6.50 9.04 0.17 4.99 5.15

2000-01 3.31 10.77 14.08 3.15 5.55 8.70 0.16 5.22 5.38
2001-02 3.11 10.28 13.39 2.95 5.02 7.97 0.17 5.26 5.43
2002-03 3.45 10.63 14.08 3.29 5.24 8.53 0.16 5.39 5.55
2003-04 3.86 10.73 14.59 3.70 5.26 8.96 0.16 5.47 5.63
2004-05 4.23 11.02 15.25 4.08 5.33 9.41 0.15 5.69 5.84
2005-06 4.54 11.37 15.91 4.40 5.52 9.91 0.14 5.85 6.00
2006-07 5.39 11.77 17.15 5.24 5.79 11.03 0.15 5.98 6.13
2007-08 6.39 11.06 17.45 6.26 5.63 11.89 0.13 5.43 5.56
2008-09 5.83 10.43 16.26 5.68 5.07 10.75 0.14 5.37 5.51

136
 2009-10 5.84 9.66 15.50 5.69 3.98 9.67 0.15 5.68 5.83
10-yrly Avg. 4.60 10.77 15.37 4.44 5.24 9.68 0.15 5.53 5.69

2010-11 (R.E.) 5.87 10.60 16.46 5.71 4.54 10.25 0.15 6.06 6.21
2011-12 (B.E.) 6.08 10.80 16.88 5.93 4.60 10.53 0.15 6.20 6.35
Post-reforms
3.94 11.00 14.95 3.79 5.65 9.43 0.16 5.36 5.51
Average
Sources: Indian Public Finance Statistics 2011-12, Ministry of Finance, Government of India

137
20.00

18.00

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00

Direct Indirect Total

Figure 5.6.1

138
 The analysis shows that the increase in the tax-GDP ratio had not remained
smooth. It is clear from the data that tax –GDP ratio had continuously declined from
15.48 per cent in 1989-90 to 13.39 per cent in 2001-02. Stating the reasons for the
slippage, the Government noted, “As a result of tax reforms, the indirect taxes relative to
GDP started declining whereas that of direct taxes started increasing. But the magnitude
of increase in direct taxes remained less than the fall in revenue generation from indirect
taxes. As a consequence, the overall tax–GDP ratio fell from its peak in 1989-90 (15.48
percent) to 13.39 per cent in 2001-02”. However, it again started increasing and reached
to 17.45 per cent in 2007-08.

Further, it is also clear from the analysis that direct tax-GDP Ratio remained
stagnant during the pre-reforms period. It is only during the post-reforms period when
direct tax-GDP ratio has picked up. It has increased by three times during the period
under study, as compared to 1.5 times increase in indirect taxes in monetary terms. But
direct tax contribution to GDP in India is far from satisfactory as compared to direct tax
contribution of other developed countries.

An attempt has also been made to compare the tax-GDP ratio of different types of
taxes for the different decades. The analysis of data reveals that the increase in tax-GDP
ratio is very small during both the decades of post-reforms period. It implies that direct
tax reforms could not influence much to the tax-GDP ratio. In other words, the tax
revenue could not increase at a higher rate even during the post-reforms period.

5.7: TAX-GDP RATIO OF SELECTED COUNTRIES VIS-À-VIS INDIA

The overall tax-GDP ratio of India is also very low as compared to other
developed countries. The tax-GDP ratio of selected countries is presented in table 5.7.1.
The table depicts that countries like Denmark, Sweden, Italy, New Zealand, United
Kingdom etc have tax-GDP ratio much higher as compared to India. Denmark accounts
for 48.9 per cent tax-GDP ratio followed by Sweden (48.2 per cent), Belgium (44.4 per
cent).

139
 Table 5.7.1
Tax-GDP Ratios of Other Countries vis-à-vis India (2010)
Country Total Tax Revenue as percentage of GDP
Canada 33.3
USA 28.3
New Zealand 36.0
Austria 42.7
Belgium 44.5
Denmark 48.9
Finland 43.3
France 43.2
Germany 38.7
Hungary 39.0
Iceland 35.0
Italy 43.1
Norway 42.9
Sweden 46.8
United Kingdom 36.3
India 15.50
Source: European Commission Report on Tax Trends, 2012 and World Development Indicators, 2012

140
 Total Tax Revenue as percentage of GDP
60

50
Percentage

40

30

20

10

Countries

Total Tax Revenue as percentage of GDP

Figure 5.7.1

141
5.8: GROWTH AND BUOYANCY OF VARIOUS TAXES (THE CENTRE AND
STATE GOVERNMENTS COMBINED)

Growth and buoyancy of taxes are another measures to see the effectiveness of
tax reforms in India. Data relating to growth and buoyancy of various taxes covering the
period from 1970-71 to 2011-12 is presented in table 5.8.1. It is clear from the analysis of
data that growth of direct tax has been more volatile than the indirect taxes. During the
pre-reforms period, the growth of direct taxes was as high as 35.93 per cent in 1975-76
and as low as 3.68 per cent just after two years in 1977-78 whereas the relative volatility
in indirect taxes was less during the pre-reforms period. Highest and lowest growth rates
reported during this period was 26.59 per cent in 1974-75 and 8.31 per cent in 1977-78
respectively. Similarly, growth of direct taxes became more volatile during the post-
reforms period. In 1998-99, even a negative growth was reported in direct taxes at -2.81
per cent. Whereas highest growth rate was found in 2007-08 when direct taxes grew by
38.02 per cent from the previous year. One of the reasons for this trend may be the
frequent tax rate adjustment experiments by the government in an effort to mobilize more
tax revenues through direct taxes.

Tax buoyancy is a key indicator to evaluate the efficiency of revenue

mobilization in response to growth in GDP at current prices. It is clear from the table 5.6
that direct tax revenue is not very much buoyant as its value is equal to or less than one
in most of the years, especially during the pre-reforms period. However, the situation
became worse in 1998-99 when this ratio turned negative at -0.19. The analysis further
reveals that direct tax buoyancy value reached to the highest level of 2.51 in 2002-03.
However, it came down to the level of 1.27 in 2011-12. Moreover, the value of tax
buoyancy on an average for all the four decades of pre and post-reforms has not changed
much.

142
 Table 5.8.1
Growth and of Buoyancy of Various Taxes (Centre and State Governments Combined)
Growth (%) Buoyancy
Year Direct Tax Indirect Tax Total Tax GDP Direct Tax Indirect Tax Total Tax
Pre-reforms Period
1971-72 16.06 17.66 17.32 7.06 2.28 2.50 2.45
1972-73 14.94 15.58 15.44 10.23 1.46 1.52 1.51
1973-74 15.30 14.68 14.81 21.71 0.70 0.68 0.68
1974-75 18.17 26.59 24.82 18.05 1.01 1.47 1.38
1975-76 35.93 17.59 21.24 7.35 4.89 2.39 2.89
1976-77 3.69 12.18 10.28 7.74 0.48 1.57 1.33
1977-78 3.68 8.31 7.34 13.30 0.28 0.62 0.55
1978-79 6.38 20.08 17.31 8.31 0.77 2.42 2.08
1979-80 8.59 15.07 13.88 9.67 0.89 1.56 1.44
1980-81 5.56 13.64 12.22 19.02 0.29 0.72 0.64
10-yrly Avg. 12.83 16.14 15.47 12.24 1.31 1.55 1.50

1981-82 26.47 20.71 21.66 17.48 1.51 1.18 1.24

1982-83 8.69 13.70 12.84 11.85 0.73 1.16 1.08
1983-84 9.24 17.00 15.72 16.46 0.56 1.03 0.95
1984-85 8.62 14.52 13.61 12.05 0.72 1.21 1.13
1985-86 17.30 21.42 20.81 12.83 1.35 1.67 1.62
1986-87 10.19 15.22 14.50 11.89 0.86 1.28 1.22
1987-88 8.62 16.04 15.01 13.66 0.63 1.17 1.10
1988-89 30.40 15.51 17.46 18.65 1.63 0.83 0.94
1989-90 14.42 16.37 16.09 14.89 0.97 1.10 1.08
1990-91 9.81 13.43 12.91 16.79 0.58 0.80 0.77
10-yrly Avg. 14.38 16.39 16.06 14.66 0.95 1.14 1.11

Pre-reform
13.60 16.27 15.76 13.45 1.01 1.21 1.17
Average

143
 Post-reforms Period
1991-92 35.86 14.68 17.64 14.95 2.40 0.98 1.18
1992-93 16.39 9.52 10.63 14.94 1.10 0.64 0.71
1993-94 12.00 5.77 6.83 15.08 0.80 0.38 0.45
1994-95 33.00 18.68 21.23 17.30 1.91 1.08 1.23
1995-96 23.89 17.24 18.54 17.32 1.38 1.00 1.07
1996-97 14.77 14.71 14.72 15.70 0.94 0.94 0.94
1997-98 23.08 6.33 9.75 10.79 2.14 0.59 0.90
1998-99 -2.81 8.10 5.60 14.69 -0.19 0.55 0.38
1999-00 23.91 16.22 17.84 11.58 2.06 1.40 1.54
2000-01 17.91 9.28 11.19 7.78 2.30 1.19 1.44
10-yrly Avg. 19.8 12.05 13.40 14.01 1.48 0.87 0.98

2001-02 1.88 3.37 3.02 8.29 0.23 0.41 0.36

2002-03 19.50 11.38 13.27 7.76 2.51 1.47 1.71
2003-04 25.39 13.25 16.23 12.14 2.09 1.09 1.34
2004-05 25.15 17.32 19.39 14.25 1.77 1.22 1.36
2005-06 22.28 17.57 18.88 13.92 1.60 1.26 1.36
2006-07 38.02 20.30 25.36 16.28 2.34 1.25 1.56
2007-08 37.80 9.13 18.14 16.12 2.34 0.57 1.13
2008-09 2.87 6.52 5.18 12.89 0.22 0.51 0.40
2009-10 14.94 6.19 9.33 14.69 1.02 0.42 0.63
2010-11 (R.E.) 19.39 30.35 26.22 18.84 1.03 1.61 1.39
10-yrly Avg. 20.72 13.54 15.50 13.52 1.52 0.98 1.12

2011-12 (B.E.) 19.55 17.61 18.30 15.40 1.27 1.14 1.19

Post-reform
20.23 13.03 14.63 13.84 1.46 0.94 1.06
Average
Sources: Indian Public Finance Statistics 2011-12, Ministry of Finance, Government of India

144
5.9: PERFORMANCE OF CENTRAL GOVERNMENT DIRECT TAX
REVENUE COLLECTION

As the constitutional powers to collect most of the important direct taxes like
Corporate Tax, Personal Income tax, Wealth Tax etc. lie with the Central Government,
therefore, the analysis of the structure, pattern, and growth of these taxes needs special
attention. Central government collects these taxes from all the states of the country and
then these receipts are shared with states on the basis of pre-determined formula, as per
the recommendations of various Finance Commissions constituted from time to time.
Time-series data in regard to the various components of direct taxes of the central
government and their Tax-GDP ratios for the period 1970-71 to 2011-12 is taken for this
purpose, which is presented in table 5.9.1.

The analysis of data reveals that direct tax collections as a percentage of GDP
increased from 1.82 per cent in 1970-71 to only 1.88 per cent in 1990-91, thereby
registering a small increase of 0.08 per cent over the span of 20 years. During the post-
reforms period, direct tax-GDP ratio has continuously grown from 2.28 per cent in 1991-
92 to 5.93 per cent in 2011-12 except for the year 1998-99, when this ratio declined to
2.58 per cent from 3.07 per cent as compared to previous year. The data further reveals
that while the corporate tax collections as a percentage of GDP increased from 0.78 per
cent in 1970-71 to only 0.91 per cent in 1990-91, the personal income tax-GDP ratio
decreased during the same period from 0.99 per cent in 1970-71 to 0.91 per cent in 1990-
91. These ratios increased slowly during the post-reforms period too, when Corporation
Tax-GDP ratio increased from merely 1.17 per cent in 1991-92 to 4.07 per cent in 2011-
12, and Personal Income tax-GDP ratio increased from 1.00 per cent to only 1.86 per
cent during the same period. It is interesting to note that the share of other direct taxes,
which includes Wealth tax etc. has declined continuously. It reduced to 0.01 per cent of
GDP in 2011-12. It implies that wealth holders (upper-rich class) has further benefitted
during the post-reforms period.

145
 The compound annual growth rates (CAGR) of all the taxes found to be
significant during the pre-reforms period at 1 per cent level of significance. However,
during the post-reforms period, CAGR of other direct taxes became insignificant, which
shows that government was unable to generate direct tax revenues from other important
sources. It has further led to widening the gap between upper and lower-income groups
of the society.

The decadal average tax-GDP ratios for different types of taxes have been
calculated. The analysis reveals that increase in the tax-GDP ratio has improved only
during the second decade of post-reforms period.

146
 Table 5.9.1
Direct Taxes Collection of Central Government (Rs. in crores)
Tax-GDP Ratio (%)
Year Personal IT other than
Direct Tax Corporate Tax Income Tax Other Taxes Direct CIT CIT Other
Pre-reforms Period
1970-71 869 371 473 25 1.82 0.78 0.99 0.05
1971-72 1047 472 534 41 2.05 0.93 1.05 0.08
1972-73 1233 558 625 50 2.19 0.99 1.11 0.09
1973-74 1375 583 741 51 2.01 0.85 1.08 0.07
1974-75 1650 709 878 63 2.04 0.88 1.09 0.08
1975-76 2205 862 1214 129 2.54 0.99 1.40 0.15
1976-77 2328 984 1194 150 2.49 1.05 1.28 0.16
1977-78 2405 1221 1002 182 2.27 1.15 0.95 0.17
1978-79 2528 1251 1177 100 2.21 1.09 1.03 0.09
1979-80 2818 1392 1340 86 2.24 1.11 1.07 0.07
10-yrly Avg. 1845.8 840.3 917.8 87.7 2.19 0.98 1.11 0.10

1980-81 2997 1377 1440 180 2.00 0.92 0.96 0.12

1981-82 3786 1970 1476 340 2.15 1.12 0.84 0.19
1982-83 4139 2185 1570 384 2.10 1.11 0.80 0.20
1983-84 4498 2473 1699 326 1.96 1.08 0.74 0.14
1984-85 4798 2556 1928 314 1.87 1.00 0.75 0.12
1985-86 5620 2865 2511 244 1.94 0.99 0.87 0.08
1986-87 6236 3160 2879 197 1.92 0.98 0.89 0.06
1987-88 6752 3433 3192 127 1.83 0.93 0.87 0.03
1988-89 8830 4407 4241 182 2.02 1.01 0.97 0.04

147
 1989-90 10003 4729 5009 265 1.99 0.94 1.00 0.05
10-yrly Avg. 5765.9 2915.5 2594.5 255.9 1.98 1.01 0.87 0.10

1990-91 11030 5335 5375 320 1.88 0.91 0.92 0.05

Pre-Reform
4149.86 2042.52 1928.48 178.86 2.07 0.99 0.98 0.10
Period Avg.
Std. Deviation 2968.05 1483.84 1436.57 111.76 - - - -
CV (%) 71.52 72.65 74.49 62.48 - - - -
CAGR (%) 11.86* 12.82* 11.03* 10.10* - - - -
T-Value 40.05 44.98 20.69 5.70 - - - -
Post-reforms Period
1991-92 15353 7853 6731 769 2.28 1.17 1.00 0.11
1992-93 18140 8899 7898 1343 2.34 1.15 1.02 0.17
1993-94 20299 10060 9123 1116 2.28 1.13 1.02 0.13
1994-95 26973 13822 12029 1122 2.58 1.32 1.15 0.11
1995-96 33564 16487 15592 1485 2.74 1.34 1.27 0.12
1996-97 38898 18567 18234 2097 2.74 1.31 1.28 0.15
1997-98 48282 20016 17101 11165 3.07 1.27 1.09 0.71
1998-99 46601 24529 20240 1832 2.58 1.36 1.12 0.10
1999-00 57960 30692 25655 1613 2.88 1.53 1.27 0.08
10-yrly Avg. 31710 15626 13797.8 2286.2 2.54 1.25 1.11 0.17

2000-01 68305 35696 31764 845 3.15 1.65 1.46 0.04

2001-02 69198 36609 32004 585 2.95 1.56 1.36 0.02
2002-03 83363 46172 36866 325 3.29 1.82 1.46 0.01
2003-04 105091 63562 41387 142 3.70 2.24 1.46 0.01
2004-05 132183 82680 49268 235 4.08 2.55 1.52 0.01
2005-06 162337 124837 62457 7954 4.40 3.38 1.69 0.22

148
 2006-07 225045 174935 81697 10784 5.24 4.07 1.90 0.25
2007-08 312220 223941 112910 16647 6.26 4.49 2.26 0.33
2008-09 319892 242304 116225 14386 5.68 4.30 2.06 0.26
2009-10 367595 288162 136551 10451 5.69 4.46 2.11 0.16
10-yrly Avg. 184522.9 131889.8 70112.9 6235.4 4.44 3.05 1.73 0.13
2010-11 (R.E.)
439258 355267 158631 8205 5.72 4.63 2.07 0.11
2011-12 (B.E.)
525151 359990 164526 635 5.93 4.07 1.86 0.01
Post-reforms
Period Avg. 148367 104051.4 55089.95 4463.62 3.79 2.42 1.50 0.15
Std. Deviation 154195.6 119404.3 51856.5 5317.6 - - - -
CV (%) 103.93 114.76 94.12 119.13 - - - -
NS
CAGR (%) 17.66* 20.50* 16.21* 7.72 - - - -
T-Value 41.99 33.85 43.75 1.54 - - - -
Source: Compliance Report on Direct Taxes, Comptroller and Auditor General of India, Various Issues
*Significant at 1 per cent level of significance
NS
Not Significant

149
5.10: COMPOSITION OF DIRECT TAXES OF THE CENTRAL GOVERNMENT

Composition of direct taxes shows the relative contribution of various

components of direct taxes in terms of percentage share. Table 5.10.1 shows the
composition of direct taxes of the central government. The analysis reveals that Personal
Income Taxes remained more dominant during the pre-reforms period. The share of
personal income taxes in total direct taxes of the central government was 54.43 per cent
in 1970-71 as compared to the share of corporate income tax of 42.69 per cent. Other
direct taxes were just contributing 2.88 per cent during the same period. However, the
share of corporate income taxes has increased gradually since then. It constituted more
than 2/3rd of the total direct taxes of the central government in 2011-12. At the same
time, the share of personal income tax has declined to less than 1/3rd during the same
period. The share of other direct taxes has become negligible in 2011-12. The change in
the composition of total direct taxes has taken place due to many reasons. First, the size
and turnover of the corporate sector have increased massively over the period under
study. Secondly, most of the population in India is working in unorganized sector. It
leads to large amount of tax evasion due to undeclared personal income. Thirdly, tax
reforms could not widen the tax base of non-corporate assessees. They still constitute
less than 3 per cent of the total population of India. The average share of personal income
tax and corporate tax on the basis of different decades reveals that percentage share of
corporate tax improved in the second decade of pre-reforms period which remained
stagnant in the first decade of the post-reforms period and increased during the second
decade of post-reforms period. It implies that there is a positive relationship between the
higher growth rate and revenue generation through the corporate tax collections. Last but
not the least, tax reforms initiated during 1990s could not generate more tax revenue
from upper-rich class of the society.

150
 Table 5.10.1
Share of Taxes in Total Direct Taxes of the Central Government
Share of Taxes in Total Direct Taxes (%)
Year Corporate Income
tax Personal Income Tax Other Direct Taxes
Pre-reforms Period
1970-71 42.69 54.43 2.88
1971-72 45.08 51.00 3.92
1972-73 45.26 50.69 4.06
1973-74 42.40 53.89 3.71
1974-75 42.97 53.21 3.82
1975-76 39.09 55.06 5.85
1976-77 42.27 51.29 6.44
1977-78 50.77 41.66 7.57
1978-79 49.49 46.56 3.96
1979-80 49.40 47.55 3.05
10-yrly Avg. 44.94 50.53 4.53

1980-81 45.95 48.05 6.01

1981-82 52.03 38.99 8.98
1982-83 52.79 37.93 9.28
1983-84 54.98 37.77 7.25
1984-85 53.27 40.18 6.54
1985-86 50.98 44.68 4.34

151
 1986-87 50.67 46.17 3.16
1987-88 50.84 47.27 1.88
1988-89 49.91 48.03 2.06
1989-90 47.28 50.07 2.65
10-yrly Avg. 50.87 43.91 5.22

1990-91 48.37 48.73 2.90

Pre-reforms Period
49.22 46.47 4.31
Average
Post-reforms Period
1991-92 51.15 43.84 5.01
1992-93 49.06 43.54 7.40
1993-94 49.56 44.94 5.50
1994-95 51.24 44.60 4.16
1995-96 49.12 46.45 4.42
1996-97 47.73 46.88 5.39
1997-98 41.46 35.42 23.12
1998-99 52.64 43.43 3.93
1999-00 52.95 44.26 2.78
10-yrly Avg. 49.33 44.21 6.46

2000-01 52.26 46.50 1.24

2001-02 52.90 46.25 0.85
2002-03 55.39 44.22 0.39
2003-04 60.48 39.38 0.14

152
 2004-05 62.55 37.27 0.18
2005-06 76.90 38.47 4.90
2006-07 77.73 36.30 4.79
2007-08 71.73 36.16 5.33
2008-09 75.75 36.33 4.50
2009-10 78.39 37.15 2.84
10-yrly Avg. 66.41 39.80 2.52

2010-11 (R.E.) 80.88 36.11 1.87

2011-12 (B.E.) 68.55 31.33 0.12
Post-reforms Period
70.13 37.13 3.01
Average
Sources: Compliance Report on Direct Taxes, Comptroller and Auditor General of India, Various Issues.

153
5.11: GROWTH AND BUOYANCY OF VARIOUS TAXES OF THE CENTRAL
GOVERNMENT

Time-series data in regard to the growth and buoyancy of various taxes of the
central government for the period 1970-71 to 2011-12 is presented in table 5.11.1.

The analysis of data reveals that growth of personal income tax remained more
volatile during the pre-reforms period, even it turned negative for two years during the
pre-reforms period in 1976-77 and 1977-78. However, the same trend has also been
followed in post-reforms period too, but to a lesser extent. The growth of personal
income tax turned negative during the post-reforms period in 1997-98. Surprisingly, the
growth projection of personal income tax for 2011-12 was just set at 3.72 per cent.
However, the growth of corporation tax remained less volatile as compared to other
direct taxes. The analysis of the data also shows massive growth in other direct taxes to
the tune of 432.43 per cent in 1997-98. The resultant increase in this period was due to
the Voluntary Disclosure Scheme launched by the government. The above scheme
helped to collect taxes on the undeclared income/black money of large number of
households.

Analysis of data in regard to tax buoyancy further reveals that direct tax
buoyancy of the central government fluctuated throughout the period under study. In
1971-72, direct tax buoyancy was 2.90, corporate tax buoyancy was 3.86, and other
income tax buoyancy was 1.83. Through various ups and downs, buoyancy of these taxes
declined to 0.61, 0.76, and 0.44 respectively in 1990-91. However, buoyancy of these
taxes remained greater than one on an average throughout out the post-reforms period.
Surprisingly, buoyancy of direct taxes found to be -0.24 (negative) in 1998-99. In 2011-
12, buoyancies of direct taxes, corporate taxes, and other taxes stood at 1.27, 0.09, and
0.24 respectively whereas buoyancy of other direct taxes turned negative at -5.99. The
declining tax buoyancy implies that the growth in the revenue from direct taxes had
remained lower than the growth in the GDP during the period under study.

154
 The analysis further shows that the volatility in the buoyancy of personal income
tax is more as compared to other taxes. In many years, it turned negative, while in other
years it was near or less than one. So, the data does not establish a consistent pattern in
tax buoyancy ratio in any of the taxes.
The similar trend is visible on the basis of decadal average values of percentage
share of different type of direct taxes and their buoyancies during both the periods under
study.

155
 Table 5.11.1
Growth and Buoyancy of Various Components of Direct Taxes of Central Government (Percentage Share)
Growth Rate of Various Taxes GDP Tax Buoyancy
Year Direct Corp. Income Others growth Direct Corp. Income Other
Pre-reforms Period
1970-71 - - - - - - - - -
1971-72 20.48 27.22 12.90 64.00 7.06 2.90 3.86 1.83 9.07
1972-73 17.77 18.22 17.04 21.95 10.23 1.74 1.78 1.67 2.15
1973-74 11.52 4.48 18.56 2.00 21.71 0.53 0.21 0.85 0.09
1974-75 20.00 21.61 18.49 23.53 18.05 1.11 1.20 1.02 1.30
1975-76 33.64 21.58 38.27 104.76 7.35 4.58 2.94 5.21 14.25
1976-77 5.58 14.15 -1.65 16.28 7.74 0.72 1.83 -0.21 2.10
1977-78 3.31 24.09 -16.08 21.33 13.30 0.25 1.81 -1.21 1.60
1978-79 5.11 2.46 17.47 -45.05 8.31 0.62 0.30 2.10 -5.42
1979-80 11.47 11.27 13.85 -14.00 9.67 1.19 1.17 1.43 -1.45
1980-81 6.35 -1.08 7.46 109.30 19.02 0.33 -0.06 0.39 5.75
10-yrly Avg. 13.52 14.4 12.63 30.41 12.24 1.40 1.50 1.31 2.94
1981-82 26.33 43.06 2.50 88.89 17.48 1.51 2.46 0.14 5.08
1982-83 9.32 10.91 6.37 12.94 11.85 0.79 0.92 0.54 1.09
1983-84 8.67 13.18 8.22 -15.10 16.46 0.53 0.80 0.50 -0.92
1984-85 6.67 3.36 13.48 -3.68 12.05 0.55 0.28 1.12 -0.31
1985-86 17.13 12.09 30.24 -22.29 12.83 1.34 0.94 2.36 -1.74
1986-87 10.96 10.30 14.66 -19.26 11.89 0.92 0.87 1.23 -1.62

156
 1987-88 8.27 8.64 10.87 -35.53 13.66 0.61 0.63 0.80 -2.60
1988-89 30.78 28.37 32.86 43.31 18.65 1.65 1.52 1.76 2.32
1989-90 13.28 7.31 18.11 45.60 14.89 0.89 0.49 1.22 3.06
1990-91 10.27 12.81 7.31 20.75 16.79 0.61 0.76 0.44 1.24
10-yrly Avg. 14.17 15.00 14.46 11.56 14.66 0.94 0.97 1.01 0.56
Pre-reforms
13.85 14.70 13.55 20.99 13.45 1.17 1.24 1.16 1.75
Period Avg.
Post-reforms Period
1991-92 39.19 47.20 25.23 140.31 14.95 2.62 3.16 1.69 9.38
1992-93 18.15 13.32 17.34 74.64 14.94 1.22 0.89 1.16 5.00
1993-94 11.90 13.05 15.51 -16.90 15.08 0.79 0.87 1.03 -1.12
1994-95 32.88 37.40 31.85 0.54 17.30 1.90 2.16 1.84 0.03
1995-96 24.44 19.28 29.62 32.35 17.32 1.41 1.11 1.71 1.87
1996-97 15.89 12.62 16.94 41.21 15.70 1.01 0.80 1.08 2.63
1997-98 24.12 7.80 -6.21 432.43 10.79 2.24 0.72 -0.58 40.08
1998-99 -3.48 22.55 18.36 -83.59 14.69 -0.24 1.53 1.25 -5.69
1999-00 24.38 25.13 26.75 -11.95 11.58 2.11 2.17 2.31 -1.03
2000-01 17.85 16.30 23.81 -47.61 7.78 2.30 2.10 3.06 -6.12
10-yrly Avg. 20.53 21.47 19.92 56.14 14.01 1.54 1.55 1.46 4.50
2001-02 1.31 2.56 0.76 -30.77 8.29 0.16 0.31 0.09 -3.71
2002-03 20.47 26.12 15.19 -44.44 7.76 2.64 3.36 1.96 -5.72
2003-04 26.06 37.66 12.26 -56.31 12.14 2.15 3.10 1.01 -4.64
2004-05 25.78 30.08 19.04 65.49 14.25 1.81 2.11 1.34 4.60
2005-06 22.81 50.99 26.77 3284.68 13.92 1.64 3.66 1.92 236.05

157
 2006-07 38.63 40.13 30.81 35.58 16.28 2.37 2.46 1.89 2.19
2007-08 38.74 28.01 38.21 54.37 16.12 2.40 1.74 2.37 3.37
2008-09 2.46 8.20 2.94 -13.58 12.89 0.19 0.64 0.23 -1.05
2009-10 14.91 18.93 17.49 -27.35 14.69 1.01 1.29 1.19 -1.86
2010-11
19.50 23.29 16.17 -21.49 18.84 1.03 1.24 0.86 -1.14
10-yrly Avg.
21.07 26.60 17.96 324.62 13.52 1.5 1.99 1.29 22.81
2011-12
19.55 1.33 3.72 -92.26 15.40 1.27 0.09 0.24 -5.99
Post-reforms
20.74 22.95 18.22 176.92 13.84 1.52 1.69 1.32 12.72
Period Avg.
Source: Compliance Report on Direct Taxes, Comptroller and Auditor General of India, Various Issues.

158
 Section II

Impact of Changing Tax Structure on selected Macro-economic Parameters of the

Central and the State Governments

The foregoing discussion leads us to the conclusion that the government efforts to
generate large amount of revenue through direct taxes by introducing comprehensive
reforms could not achieve its objectives. However, government requires funds to cover
developmental and non-developmental expenditure. If the government is not generating
sufficient revenue resources to meet the demand of public expenditure, it goes for
borrowing the funds from various internal and external sources. The continuous
dependence on the borrowings leads to fiscal deficit which may put constraints on the
economy in the long run. Hence, a critical analysis of these aspects of the government is
required to be carried out. So, to achieve this objective, the following section has been
planned to study the impact of tax reforms on some of the selected macro-economic
parameters like gross fiscal deficit, capital expenditure, revenue expenditure, government
borrowings etc.

5.12: IMPACT OF TAX REFORMS ON THE FISCAL DEFICIT

Deficit financing is a policy adopted by the governments whenever its normal

revenue receipts from tax and non-tax sources are not sufficient to meet their
expenditure. The meaning of deficit financing is different in different countries. In
Western Countries, the budget gap, that is covered through market borrowing is
called deficit financing because if government borrows from banks rather than from
individuals, the idle funds will be utilised and there will, be an increase in the total
public expenditure and thus, there will automatically be an increase in the total
purchasing power in an economy.

In underdeveloped countries, however, the term deficit financing has been used in
a different sense. Here, it is used to denote the direct addition to gross national
expenditure as a result of budget deficit whether the deficit is on revenue or capital
account. Dr. V.K.R.V. Rao observed, “Deficit financing is the name of volume of those

159
forced savings which are the result of increase in prices during the period of the
government investment. Thus deficit financing helps the country by providing necessary
funds for meeting the requirements of economic growth but at the same time it also
create the problem of inflationary rise in prices. Thus, deficit financing must be kept
within limits”

The concept of budget deficit or deficit financing as it was popularly known has
occupied a unique place in the designing of the fiscal policy and planning in India. The
developmental planning in India assigned a prominent role to the public sector and thus
the role of government assumed crucial importance. However, the revenue potential was
inadequate to meet the growing expenditure requirements arising from developmental
needs. Therefore, deficit financing assumed a critical role in financing plan outlays. The
underlying economic rationale is that so long the resources mobilised through deficit
financing are spent on developmental projects, it may contribute positively to the
economy. Furthermore, it is assumed that borrowings to finance capital expenditure
would be self-financing, i.e., the returns from the investment expenditure would meet the
debt service. In reality, however, these assumptions did not hold true. During the 1980s,
large deficits emerged, accompanied by large debt and debt service burden. As a result of
such development, empirical research since the late 1980s has addressed the issues
relating to alternative measures of deficit and sustainability of deficit and debt. Fiscal
stabilisation programme introduced since July 1991 added a new dimension to the
underlying issues of budget deficit (Shome, 2002).

The increase in deficit over the period of time has generated a serious debate to
understand the various dimensions of fiscal deficit. To explain this concept further, terms
like budget deficit, revenue deficit, primary deficit and fiscal deficit etc. have been used
in the present study. Since 1950-51, the government of India recognized only two types
of deficits, i.e., revenue deficit and over-all budgetary deficit. However, in an attempt to
control deficit, new jargons have been devised by the government over the period of
time. For example, the government of India accepted the recommendation of Sukhmoy
Chakarvarty Committee by deviating from the conventional concept of deficit financing
from 1997-98 budget and adopting new concept of fiscal deficit. The concept of fiscal

160
deficit is a wider term as compared to the conventional concept of deficit financing.
Fiscal Deficit is a budgetary deficit plus market borrowings and other liabilities of the
government of India.

Fiscal deficit indicates the total borrowing requirements of the government from
all sources. It reflects the true extent of borrowing by the government in a particular
fiscal year. On the other hand, the conventional concept of budgetary deficit reflects only
the government’s borrowing from RBI.

In recent years, the Finance Ministry has introduced one more concept of deficit
known as primary deficit which is equal to difference between fiscal deficit and interest
payments. This new concept has helped the government to separate the deficit on account
of current difference in the revenue and expenditure of the government and the total
interest liabilities of the government. Such type of analysis necessitated due to the fact
that the Government of India followed an expansionary fiscal policy based on increasing
domestic and external borrowings during the eighties to boost the economy. As a result
of such a policy, the combined fiscal deficit of the Centre and the States reached to 7.42
per cent of GDP in 1980-81, which further increased to 9.41 per cent of GDP in 1990-91
(as given in table 5.12.1).

As a result of these developments, the reduction in fiscal deficit has become an

important issue for every Finance Minister while presenting the annual-budget since
Manmohan Singh’s budget of 1991-92. Budget targets, however, have gone away in
almost every year. Only in the first two budgets of then Union Finance Minister
Manmohan Singh, i.e., 1991-92 and 1992-93, there was a sharp reduction in Gross Fiscal
Deficit (GFD) as compared to previous years, which has brought about by a severe
compression of government expenditure after the acceptance of IMF conditions.
However, as soon as these pressures eased, GFD again shot up sharply in 1993-94 to
8.19 per cent, which was brought down in the next three years.

However, Gross Fiscal Deficit of the government again went up in the subsequent
years and reached to the maximum level of 9.94 per cent of GDP in 2001-02. Two

161
factors were identified that contributed to increasing fiscal deficit since 1997-98, namely,
continuous reduction in tax rates and increasing non-developmental expenditure.

The level of fiscal deficit relative to GDP in India at present is higher than not
only that of most internationally comparable levels (e.g. the Maastricht Treaty requires
fiscal deficit to be 3.0 percent of GDP) but also the levels recommended by the Eleventh
Finance Commission (6.5 percent of GDP for Central and State Governments combined,
4.5 percent for the central government and 2.5 percent for the States).

Further, the average decadal percentages of different types of deficits as

percentage of GDP for all the four decades of study period of pre and post-reforms
periods reveal that though some changes had taken place on annual basis but, no positive
change has taken place in all the four decades. It implies that one of the objectives of tax-
reforms to reduce the fiscal deficit as percentage of GDP could not be achieved.

The analysis of the data further reveals that the average fiscal deficit of the
Central Government decreased by only 1.60 per cent (from 6.85 per cent to 5.25 per cent)
during the post-reforms period. However, the same has risen for the state governments
from 2.88 per cent of GDP during the pre-reforms period to 2.92 per cent of GDP during
the post-reforms period under study. Though the Average Gross Primary Deficit has
decreased during the post-reforms period, there has been substantial increase in the
Revenue deficit at all levels of the governments. The average revenue deficit has
increased from 1.87 per cent of GDP during the pre-reforms period to 4.22 per cent of
GDP during the post-reforms period. This implies that though some progress was made
to control the fiscal and revenue deficits in the early years of economic reforms, there
have been significant slippages afterwards and the economy is almost back to the same
condition which sparked the crisis of 1991.

162
 Table 5.12.1
Deficits of the Central and State Governments
(As a percentage of GDP)

Year Gross Fiscal Deficit Gross Primary Deficit Revenue Deficit

Centre States Combined Centre States Combined Centre States Combined
Pre-reforms Period
1980-81 5.71 2.55 7.42 3.92 5.38 5.38 1.40 0.38 0.38
1981-82 5.07 2.38 6.21 3.20 4.01 4.01 0.23 -0.58 -0.58
1982-83 5.56 2.61 5.82 3.50 3.39 3.39 0.68 0.22 0.22
1983-84 5.86 2.86 7.18 3.70 4.69 4.69 1.14 1.05 1.05
1984-85 6.99 3.29 8.83 4.59 6.08 6.08 1.69 2.07 2.07
1985-86 7.77 2.67 7.88 5.10 4.82 4.82 2.09 1.86 1.86
1986-87 8.37 2.94 9.78 5.43 6.40 6.4 2.47 2.42 2.42
1987-88 7.56 3.14 9.06 4.41 5.43 5.43 2.55 2.86 2.86
1988-89 7.28 2.75 8.45 3.92 4.58 4.58 2.48 2.90 2.9
1989-90 7.31 3.16 8.84 3.67 4.63 4.63 2.44 3.20 3.2
10-yrly Avg. 6.75 2.84 7.95 4.14 4.94 4.94 1.72 1.64 1.64

1990-91 7.84 3.30 9.41 4.06 5.02 5.02 3.26 4.19 4.19
Pre-reforms Period Average 6.85 2.88 8.08 4.14 4.95 4.95 1.86 1.87 1.87
Post-reforms Period
1991-92 5.55 2.89 7 1.49 2.27 2.27 2.48 3.35 3.35
1992-93 5.34 2.78 6.96 1.21 2.12 2.12 2.47 3.15 3.15
1993-94 6.96 2.35 8.19 2.72 3.23 3.23 3.78 4.22 4.22
1994-95 5.68 2.69 7.05 1.34 1.90 1.9 3.05 3.66 3.66

163
 1995-96 5.05 2.59 6.52 0.86 1.56 1.56 2.49 3.18 3.18
1996-97 4.84 2.65 6.33 0.53 1.24 1.24 2.37 3.54 3.54
1997-98 5.82 2.85 7.25 1.53 2.13 2.13 3.04 4.11 4.11
1998-99 6.47 4.19 8.97 2.03 3.65 3.65 3.82 6.32 6.32
1999-00 5.36 4.62 9.47 0.74 3.81 3.81 3.46 6.22 6.22
10-yearly Average 5.89 3.09 7.72 1.65 2.69 2.69 3.02 4.19 4.19

2000-01 5.65 4.18 9.51 0.93 3.57 3.57 4.05 6.60 6.6
2001-02 6.19 4.14 9.94 1.47 3.69 3.69 4.40 6.99 6.99
2002-03 5.91 4.06 9.57 1.11 3.09 3.09 4.40 6.64 6.64
2003-04 4.48 4.38 8.51 -0.03 2.07 2.07 3.57 5.79 5.79
2004-05 3.88 3.32 7.24 -0.04 1.42 1.42 2.42 3.62 3.62
2005-06 3.96 2.44 6.49 0.37 0.96 0.96 2.50 2.69 2.69
2006-07 3.32 1.81 5.37 -0.18 -0.01 -0.01 1.87 1.29 1.29
2007-08 2.54 1.51 4.09 -0.88 -1.12 -1.12 1.05 0.19 0.19
2008-09 5.99 2.39 8.47 2.57 3.39 3.39 4.50 4.31 4.31
2009-10 6.48 2.92 9.42 3.18 4.55 4.55 5.25 5.73 5.73
10-yearly Average 4.84 3.12 7.86 0.85 2.16 2.16 3.40 4.39 4.39

2010-11 4.87 2.69 8.08 1.82 3.42 3.42 3.29 3.84 3.84
2011-12 5.89 2.23 7 2.78 2.51 2.51 4.46 3.25 3.25
Post-reforms Period Average 5.25 2.92 7.69 1.22 2.18 2.35 3.27 4.05 4.22
Source: A Handbook of Statistics on Indian Economy, 2011-12, Reserve Bank of India.

164
 Deficits of Central and State Governments
12

10

-2

Gross fiscal deficit Gross primary deficit Revenue deficit

Figure 5.12.1

165
5.13: IMPACT OF TAX REFORMS ON PUBLIC EXPENDITURE

Traditionally, public expenditure represents a form of government intervention

designed to promote allocated efficiency through correction of market failures,
redistribute resources equitably and promote economic growth and stability (Musgrave,
1959). The redistributive powers of the state, through public expenditure, emanates from
the normative arguments in favour of greater equality (Marshall, 1950; Rawls, 1971).

The level and composition of public expenditure can have conflicting

implications for diverse macroeconomic considerations, viz., growth, inflation, and the
Balance of Payments. Balance of Payments and inflation control often require a fiscal
contraction to contain aggregate demand. However, experience has been that such
adjustment tended to affect the expenditure side of the budget more than the revenue
side. Moreover, in face of the constraint imposed by high interest payments, especially in
the heavily indebted countries, and the resilience of some other current outlays such as
defense and social spending, capital spending, in general, and infrastructure projects, in
particular, have borne the burden of expenditure adjustment. While halting or delaying
public investment projects may offer sizeable immediate dividends for public finances,
the Balance of Payments, and inflation, a price could be paid in the long-term in the form
of lower growth, especially if more productive investments are affected.

Public expenditure is playing an important role in the economic development of

country like India. With the increase in responsibilities of the government and with the
increasing participation of government in economic activities of a country, the volume of
public expenditure in a highly populated country like India is subject to increase at a
galloping rate. Moreover, government of India could not formulate an appropriate policy
for public expenditure. The priorities of public expenditure had changed from time to
time as per the wishes of the different governments in our country.

Public expenditure in India assumed significance in the context of the mixed

economy model adopted since independence; whereby the primary responsibility of
building the capital and infrastructural base rested with the government. The concerns
166
regarding equity and poverty alleviation, particularly since the 1970s, added another
important dimension to public expenditure in terms of redistribution of resources. The
inadequate returns on the huge capital outlays over the years as well as the
macroeconomic crisis of 1991 stemming from high fiscal imbalances led to a shift in the
focus from mere size to efficiency in public expenditure management so as to facilitate
adequate returns and restore macroeconomic stability. The cutbacks in capital outlay
undertaken as part of the expenditure management in the first half of the 1990s, however,
raised concerns over the inadequate infrastructural investment and the repercussions on
the long-term growth potential. The upward movement in government’s revenue
expenditure was partly responsible for fiscal deterioration which set in during the latter
half of 1990s. However, with a renewed commitment towards fiscal consolidation since
2003-04, re-prioritization of expenditure and emphasis of outcomes rather than outlays
has been the guiding principles of public expenditure management (Pattnaik, Deepa and
Chander, 2007).

As one of the objective of economic reforms in general and tax reforms in

particular was to bring change in the composition of developmental and non-
developmental expenditures of the governments, to analyse the outcome of this objective,
the data relating to the developmental and non-developmental expenditure of the central
and state governments is presented in table 5.13.1. The analysis of data reveals that the
total expenditure of central and state government had increased from Rs.37,879 crore in
1980-81 to Rs.1,63,520 crore in 1990-91 (showing an increase of 4.30 times). Out of
which developmental expenditure increased from Rs.24,480 crore to Rs. 97,724 crore
(An increase of 4 times) and non-developmental expenditure increased from Rs.12,738
crore to Rs.64,360 crore (An increase of 5 times) from 1980-81 to 1990-91 respectively.
Hence, non-development expenditure has grown at a faster rate than development
expenditure during the pre-reforms period. Central government total expenditure
increased from Rs.23,194 crore to Rs.1,07,994 crore (increased by 4.70 times),
developmental expenditure increased from Rs. 13,327 crore to Rs.58,645 crore
(increased by 4.40 times) and non-developmental expenditure increased from Rs.9,867
crore to Rs.49,349 crore (increased by 5 times) during the same period. Similarly, the
167
state governments total expenditure increased from Rs.22,664 crore to Rs.91,088 crore
(increased by 4 times), developmental expenditure increased from Rs.15,961 crore to
Rs.63,370 crore (increased by 4 times), non-developmental expenditure increased from
Rs.4,289 crore to Rs.22,600 crore (An increase of 5.26 times) and other expenditure of
state government increased from Rs.2,414 crore to Rs. 5,118 crore (increase of 2.12
times) during the same period. So the analysis reveals that the expenditure of both central
government and state governments has grown due to the increasing share of non-
developmental expenditure over the period of time.

The analysis of data further reveals that during the post-reform period from 1991-
92 to 2011-12, total expenditure of central and state governments has increased from
Rs.1,85,905 crore to Rs.24,14,027 crore (increased by 13 times) out of which
developmental expenditure increased from Rs.1,09,372 crore to Rs.14,16,484 crore (13
times increase) while non-developmental expenditure increased from Rs.72,319 crore to
Rs.9,65,306 (13.35 times increase). As in the pre-reform period, non-developmental
expenditure had grown at a faster rate than developmental expenditure, the same trend
continued during the post-reforms period as well. Central government total expenditure
increased from Rs.1,14,483 crore to Rs.12,84,321 crore (an increase of 11.22 times),
developmental expenditure increased from Rs.59,313 crore to Rs.6,62,256 crore (an
increase of 11.2 times) and non-developmental expenditure increased from Rs.55,170
crore to Rs 6,22,066 crore (11.3 times increase).

168
 Table 5.13.1
Development and Non-Development Expenditure of Central and State Government
(Rs. in Billion)

Centre State Combined

Development Non- Total Development Non- Development Non-
Year Development Development others Total Development others Total

Pre-reforms Period
1980-81 133.27 98.67 231.94 159.61 42.89 24.14 226.64 244.80 127.38 6.61 378.79
1981-82 137.91 126.44 264.35 179.60 49.96 22.14 251.70 287.96 136.09 20.74 444.79
1982-83 163.33 158.97 322.30 206.49 58.82 22.11 287.42 336.43 164.73 19.41 520.57
1983-84 194.07 183.64 377.71 239.72 68.82 26.86 335.40 383.52 199.36 17.01 599.89
1984-85 273.75 185.25 459.00 279.58 83.40 35.59 398.57 462.65 233.90 19.99 716.54
1985-86 329.09 208.99 538.08 317.32 96.18 35.17 448.67 505.09 273.01 8.17 786.27
1986-87 354.98 260.60 647.78 368.27 112.19 37.40 517.86 617.21 336.09 19.20 1004.7
1987-88 365.73 302.61 704.61 424.51 133.22 40.98 598.71 662.95 390.27 13.23 1102.7
1988-89 415.36 355.19 815.29 469.84 158.86 42.08 670.78 744.28 462.92 12.94 1264.9
1989-90 542.04 410.20 952.24 531.50 192.53 43.79 767.82 894.20 542.67 14.52 1451.4
10-yearly 290.95 229.06 531.33 317.64 99.69 33.03 450.36 513.91 286.64 15.18 827.05
Average
1990-91 586.45 493.49 1079.9 633.70 226.00 51.18 910.88 977.24 643.60 14.36 1635.2
Pre-reform
317.82 253.09 581.20 346.38 111.17 34.67 492.22 556.03 319.09 15.11 900.52
Average
Std. Dev. 155.98 124.71 284.34 154.14 60.41 9.72 223.76 245.03 172.95 4.73 422.99

169
CV (%) 49.08 49.27 48.92 44.50 54.35 28.04 45.46 44.07 54.20 31.32 46.97
NS
CAGR (%) 15.64* 15.01* 15.63* 13.74* 16.64* 8.46* 13.98* 13.83* 16.76* 0.63 14.78*
T-Value 17.76 25.48 43.66 86.02 117.83 9.77 84.53 44.41 65.00 0.16 51.39
Post-reforms Period
1991-92 593.13 551.70 1144.8 745.88 271.43 61.98 1079.3 1093.72 723.19 42.14 1859.1
1992-93 654.79 605.84 1260.6 805.67 321.04 66.64 1193.4 1182.02 827.95 20.46 2030.4
1993-94 724.64 735.86 1460.5 893.88 380.20 72.41 1346.5 1290.42 1002.61 33.47 2326.5
1994-95 828.03 824.02 1652.1 1043.48 495.56 76.50 1615.5 1503.67 1193.22 31.85 2728.7
1995-96 844.27 986.32 1830.6 1148.20 553.79 73.85 1775.8 1653.61 1352.74 29.47 3035.8
1996-97 941.97 1122.17 2064.1 1320.08 620.95 86.66 2027.7 1853.68 1549.00 32.80 3435.5
1997-98 1109.94 1278.20 2388.1 1452.69 717.67 111.0 2281.4 2013.99 1788.17 50.86 3853.0
1998-99 1372.57 1502.98 2875.6 1645.04 864.74 153.8 2663.6 2397.20 2156.62 85.63 4639.5
1999-00 1291.51 1779.28 3070.7 1872.97 1102.06 163.8 3138.8 2744.83 2571.42 87.98 5404.2
10-yearly 894.7 988.0 1882.7 1156.2 555.3 91.8 1803.3 1671.0 1380.9 42.9 3094.8
Average
2000-01 1393.86 1974.70 3368.6 2105.43 1188.87 177.7 3472.0 3085.46 2777.60 92.89 5956.0
2001-02 1593.64 2154.56 3748.2 2166.96 1380.80 225.4 3773.1 3322.24 3078.64 1288. 6529.7
2002-03 1841.97 2427.49 4269.5 2284.16 1518.98 401.5 4204.6 3593.29 3395.23 60.52 7049.0
2003-04 1954.28 2432.98 4387.3 2740.80 1660.74 762.0 5163.5 4178.34 3716.51 68.99 7963.8
2004-05 2149.55 2629.04 4778.6 2935.37 1882.99 905.2 5723.5 4453.54 4163.40 80.63 8697.6
2005-06 2290.60 2906.77 5197.4 3300.44 1900.21 416.2 5616.8 5095.25 4403.77 99.53 9598.6
2006-07 2557.18 3412.78 5970.0 3921.65 2118.72 532.4 6572.8 5880.28 5076.35 135.1 11092
2007-08 3256.70 4007.28 7264.0 4644.62 2332.33 546.3 7523.2 7102.71 5897.42 162.3 13163

170
 2008-09 4713.99 4281.45 8995.4 5670.86 2549.81 602.7 8823.3 9437.08 6373.09 185.2 15995
2009-10 5282.42 5141.01 10423 6377.31 3075.47 700.5 10153. 10628.08 7689.10 205.8 18523
10-yearly 2703.4 3136.8 5840.2 3614.8 1960.9 527.0 6102.6 5677.6 4657.1 122.0 10457
Average
2010-11 6682.77 5679.09 12362 7841.01 3696.34 826.2 12364 13460.24 8797.55 275.6 22533
2011-12 6622.56 6220.66 12843 8783.62 4154.89 959.0 13898 14164.8 9653.06 322.4 24140
Post-reform
Avg. 2319.07 2507.34 4826.41 3033.34 1561.31 377.22 4971.87 4768.31 3723,17 106.3 8597.78
Std. Dev. 1907.70 1707.19 3592.02 2356.22 1115.83 313.18 3734.95 3988.35 2658.49 83.00 6705.99
CV (%) 82.26 68.09 74.42 77.68 71.47 83.02 75.12 83.64 71.40 78.08 77.99
CAGR (%) 11.89* 11.85* 11.88* 12.00* 12.92* 15.35* 12.50* 12.77* 12.53* 11.62* 12.65*
T-Value 24.21 45.04 46.36 42.26 33.65 13.39 74.16 37.61 49.76 10.71 61.53
Source: A Handbook on Indian Economy, 2011-12, Reserve Bank of India.
*Significant at 1 per cent level of significance
NS
Not Significant

171
 Similarly, the pattern of expenditure of the state governments further reveals that
the state governments expenditure increased from Rs.1,07,929 crore to Rs.13,89,746
crore (12.9 times increase), out of which developmental expenditure increased from
Rs.74,588 crore to Rs.8,78,362 crore (11.8 times increase) while non-developmental
expenditure increased from Rs.27,143 crore to Rs.4,15,489 crore (15.3 times increase)
and other expenditure increased from Rs.6,198 crore to Rs.95,895 crore (15.5 times
increase) during the same period. Hence, expenditure of state government had grown at a
faster rate particularly of the non-development expenditure. So, the comparison of data
relating to both the periods under study reveals that the various policy measures adopted
during the post-reforms period could not change the situation which developed during
the pre-reforms period in regard to the change in the composition of developmental and
non-developmental expenditures. The only change is the shift of burden form the central
government to the state governments which has led to serious financial constraints for the
state governments.

5.14: IMPACT OF TAX REFORMS ON THE EXPENDITURE-GDP RATIOS OF

THE CENTRAL GOVERNMENT

To evaluate the impact of tax reforms on the expenditure-GDP ratio of the

Central government during the post-reforms period, the required data is presented in
Table 5.14.1.

The analysis of data reveals that revenue expenditure-GDP ratio increased from
6.77 per cent in 1970-71 to 13.17 per cent in 1989-90. After that this ratio declined to
11.53 per cent in 1996-97. However, it again showed an upward trend and reached to the
maximum at 14.12 per cent in 2009-10. Therefore, as for as the revenue expenditure-
GDP ratio is concerned, by the end of the 1990s the government was exactly in the same
position as it was by the end of pre-reform period. Both in pre and post reform period,
the interest payments-GDP ratio steadily rose from 1.3 percent in 1970-71 to 3.2 percent
in 1990-91 (pre-reform period) and from 3.4 percent in 1991-92 to 4.2 per cent in 2004-
05 (post-reform period). The capital expenditure-GDP ratio was 5.39 per cent of GDP in

172
1970-71 and after achieving its maximum value of 7.26 per cent of GDP in 1978-79, it
again started declining. It was 5.58 per cent of GDP by the end of pre-reform period. In
the year 1991-92 capital expenditure-GDP ratio was 4.45 percent. It declined steadily
throughout thereafter and stood at 2.27 per cent in 2000-01, and further declined to 1.60
per cent of GDP in 2006-07 and 2008-09 respectively. The data also reveals it clearly
that average capital expenditure to GDP ratio was much higher at 6.05 per cent of GDP
during the pre-reforms period as compared to merely 2.74 per cent during the post-
reforms period. It is thus clear that the burden of fiscal imbalances corrections during the
1990s has been primarily on capital expenditure and social sector expenditures. This
approach of the central government is questionable. Reducing expenditure on transport
and infrastructure development both in urban and rural areas has disturbed the growth
process. Reduced capital expenditure over the years has become a constraint for
investment in the private sector. This has caused a setback to overall growth process
particularly at a time when state has dramatically withdrawn from directly productive
activity (Chandrashekhar and Ghosh 2002).

173
 Table 5.14.1
Expenditure-GDP Ratio of Central Government
(As a percentage of GDP)

Year Revenue Expenditure Capital Expenditure Total Expenditure

Pre-reforms Period
1970-71 6.77 5.39 12.16
1971-72 8.01 5.90 13.92
1972-73 8.31 6.08 14.39
1973-74 7.19 5.18 12.37
1974-75 7.24 5.43 12.67
1975-76 8.29 6.41 14.70
1976-77 9.11 5.94 15.05
1977-78 8.86 6.22 15.08
1978-79 9.59 7.26 16.85
1979-80 9.66 5.86 15.52
10-Yearly Average 8.30 5.97 14.27

1980-81 9.91 5.75 15.66

1981-82 9.02 5.77 14.79
1982-83 9.81 6.31 16.12
1983-84 10.00 5.97 15.97
1984-85 11.11 6.40 17.50
1985-86 12.06 6.66 18.72

174
 1986-87 12.98 7.01 19.99
1987-88 12.90 6.17 19.07
1988-89 12.74 5.89 18.63
1989-90 13.17 5.88 19.05
11.37 6.18 17.55
10-yearly Average
1990-91 12.91 5.58 18.49
Pre-reforms Period Average 9.98 6.05 16.03
Post-reforms Period
1991-92 12.57 4.45 17.02
1992-93 12.32 3.98 16.29
1993-94 12.49 3.89 16.38
1994-95 12.02 3.80 15.82
1995-96 11.74 3.22 14.96
1996-97 11.53 3.05 14.58
1997-98 11.81 3.39 15.20
1998-99 12.36 3.59 15.95
1999-00 12.76 2.51 15.27
12.25 3.75 16.00
10-yearly Average
2000-01 13.22 2.27 15.49
2001-02 13.23 2.67 15.90
2002-03 13.80 3.04 16.84
2003-04 13.14 3.96 17.11
2004-05 11.85 3.51 15.37

175
 2005-06 11.90 1.80 13.69
2006-07 11.98 1.60 13.58
2007-08 11.92 2.37 14.29
2008-09 14.10 1.60 15.70
2009-10 14.12 1.74 15.87
12.93 2.46 15.38
10-yearly Average
2010-11 13.56 2.04 15.60
2011-12 13.12 1.77 14.89
2012-13 12.66 2.02 14.67
Post-reforms Period Average 12.07 2.74 14.81
Source: A Handbook of Statistics on Indian Economy, 2011-12, Reserve Bank of India.

176
 0.00
5.00
10.00
15.00
20.00
25.00
1970-71
1971-72
1972-73
1973-74
1974-75
1975-76
1976-77
1977-78
1978-79
1979-80
1980-81
1981-82
1982-83
1983-84
1984-85

Revenue Expenditure
1985-86
1986-87
1987-88
1988-89
1989-90

177
1990-91
1991-92

Figure 5.14.1
1992-93
1993-94
Capital Expenditure

1994-95
1995-96
1996-97
1997-98
1998-99
Expenditure-GDP Ratio of the Central Government

1999-00
2000-01
2001-02
Total Expenditure

2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
 Although sharp cuts in expenditure were affected as part of the stabilisation
package in 1991, attempts to curb expenditure growth in successive central government
budgets in the 1990s were found to be mostly ‘sporadic and arbitrary in nature’
(Premchand, and Chattopadhyay, 2002). It is only in the second generation of economic
reforms that expenditure reform has become an integral part of the overall fiscal reform.
Tax Reforms Commissions set up by the government from time to time suggested a host
of measures to curb built-in-growth in expenditure and to bring about structural changes
in the composition of expenditure. Some of these measures have been implemented by
the government.

5.15: IMPACT OF TAX REFORMS ON GOVERNMENT BORROWINGS

One way to finance fiscal deficit of a country is generating more tax revenue
either by imposing additional taxes or by increasing rates of existing taxes both in
developed and developing countries. However, there is a certain limit beyond which
rates of taxation cannot be raised without affecting adversely the level of investment
and production of that country, especially in underdeveloped countries where the level
of per capita income is considerably low. There is also a strong opposition to levying of
new taxes or raising the rates of old ones. Even if tax structure is wide-spread, there is a
lot of tax-evasion. In these conditions, the methods of financing deficit by the creation
of new money may be inevitable but its continuous exercise in underdeveloped
countries has been proved dangerous and inflationary. The governments of
underdeveloped countries, therefore, have to float loans at home and abroad, either by
offering attractive schemes of borrowing or by greater co-operation at the international
level.

Taxation has got its limit in a poor country like India due to poor taxable capacity
of the people, thus the government has been taking recourse to public debt for financing
its developmental expenditure. Since the inception of planning, public debt was viewed
as significant part of the overall economic planning and was supposed to fulfill the
objective of planning that is, achievement of rapid rate of growth, maintaining stability

178
prices and an expansion of money market. To raise the financial resources through this
technique, two options are generally available for the governments, i.e., internal debt or
external debt. Internal debt indicates the amount of loan raised, by the government from
within the country. Whereas external debt means raising debt from abroad in the forms of
foreign debt, technical know-how and capital goods. The data relating to sources of debt
of the central and state governments as a percentage of GDP is presented in table 5.15.1.

The analysis of data reveals that the domestic debt of central government was
33.33 per cent of GDP in 1980-81 which increased to 49.69 per cent in 1990-91, i.e. in
pre-reforms period, the domestic debt of the central government increased throughout the
period. The domestic debt of the central government decreased from 48.53 per cent of
GDP in 1991-92 to 45.08 percent to GDP in 1996-97. However, due to the new policy
regime from the year 1997-98 onwards, domestic debt started increasing from 47.34 per
cent of GDP to 61.37 per cent in 2003-04. External liabilities of central government also
increased from 9.27 per cent in 1980-81 to 11.64 per cent in 1990-91 which further
increased to 16.75 per cent in 1991-92. However, the external liabilities of the central
government as a percentage of GDP started declining continuously and it stood at 3.31
per cent of GDP in 2011-12. On the other hand, total liabilities of central government as
a percentage of GDP increased from 42.6 per cent of GDP in 1980-81 to 61.33 per cent
in 1990-91. However, the situation during post-reforms period became worse. Total
liability to GDP ratio of the central government reached to 65.28 per cent in 1991-92,
which further increased to 69.08 per cent in 2002-03. Since then it started declining
gradually and reported to be 51.88 per cent in 2011-12.

It is pertinent to mention that the domestic debt of state governments also

increased from 18.42 per cent of GDP in 1980-81 to 22.5 per cent of GDP in 1990-91
(during the pre-reform period). However, it decreased from 22.46 per cent of GDP in
1991-92 to 20.74 per cent in the year 1996-97. It again increased from 21.66 per cent in
1997-98 to 32.79 per cent in 2003-04. The analysis reveals that the state governments
domestic debt also depicted the same trend as central government domestic debt, i.e., it
also increased throughout the pre-reform period and have same trend in the post-reform

179
period. It reached to 22.53 per cent in 2011-12. Hence, it can be concluded that the debts
of central and state governments remained at the same level as they were during the pre-
reforms period. It further implies that tax-reforms implemented during the post-reforms
period could not halt the dependence of governments on the internal and external
borrowings as the tax-reforms could not generate additional revenue to meet the
increasing needs of the country.

Although the primary deficit declined in the 1990s as compared to that in 1980s,
the growth in debt-service burden as a result of growing reliance on high cost market
borrowings largely contributed to the downward inflexibility in the debt-GDP ratio. But
despite some reasons for optimism in regard to the continuing financeability of the debt,
comparisons with other emerging market economies suggest that India might be more
vulnerable to a crisis than was generally perceived-especially by Indian policymakers-
and that fiscal adjustment was urgently needed to reduce vulnerability and the likelihood
of a crisis.

180
 Table 5.15.1
Selected Debt Indicators of Central and State Governments (as % to GDP)
Combined Combined
Total domestic total liabilities
Domestic External liabilities of Total liabilities of of Centre &
liabilities of liabilities of the Centre liabilities of Centre & States
Year (end-March) Centre Centre (2+3) the States States (3+6)
Pre-reforms Period
1980-81 33.33 9.27 42.6 18.42 40.07 49.35
1981-82 32.7 10.29 42.99 18.53 40.06 50.35
1982-83 37.26 10.58 47.84 19.35 44.27 54.85
1983-84 36.02 10.79 46.81 19.42 43.3 54.09
1984-85 38.84 10.69 49.52 20.35 46.91 57.6
1985-86 42.42 11.49 53.9 21.81 50.79 62.27
1986-87 46.45 11.62 58.07 22.2 55.11 66.73
1987-88 48.16 13.09 61.25 22.68 57.04 70.12
1988-89 48.06 12.74 60.8 22.09 56.93 69.67
1989-90 49.18 13.54 62.72 22.52 58.57 72.11
41.24 11.41 52.65 20.74 49.31 60.71
10-yearly Average
1990-91 49.69 11.64 61.33 22.5 59.21 70.86
Pre-reforms Period Average 42.01 11.43 53.44 20.90 50.21 61.64
Post-reforms Period
1991-92 48.53 16.75 65.28 22.46 58.27 75.02
1992-93 47.79 16.07 63.86 22.37 58.03 74.11
1993-94 49.74 14.76 64.5 21.7 59.77 74.53
1994-95 48.01 14.03 62.04 21.31 58.07 72.1

181
 1995-96 46.57 12.45 59.02 20.94 56.8 69.25
1996-97 45.08 10.85 55.93 20.74 55.42 66.26
1997-98 47.34 10.57 57.91 21.66 57.68 68.25
1998-99 47.66 10.16 57.82 22.82 58.95 69.11
1999-00 49.31 9.57 58.88 26.1 63.47 73.04
47.97 12.69 60.66 22.26 58.57 71.25
10-yearly Average
2000-01 52.45 9.04 61.48 28.26 67.26 76.3
2001-02 56.82 8.76 65.58 30.31 72.69 81.45
2002-03 61.09 7.99 69.08 32.04 77.64 85.62
2003-04 61.37 6.69 68.06 32.79 79.17 85.85
2004-05 59.64 5.9 65.53 31.28 76.24 82.13
2005-06 58.64 5.25 63.9 31.08 73.82 79.07
2006-07 56.72 4.68 61.4 28.91 69.98 74.66
2007-08 54.65 4.21 58.86 26.63 67.23 71.44
2008-09 53.93 4.69 58.62 26.11 67.52 72.21
2009-10 52.59 3.86 56.45 25.53 66.97 70.83
56.79 6.11 62.90 29.29 71.85 77.96
10-yearly Average
2010-11 49.27 3.54 52.81 23.4 62.44 65.98
2011-12 48.56 3.31 51.88 22.53 62.24 65.55
Post-reform Period Average 52.18 8.72 60.90 25.67 65.22 73.94
Source: A Handbook of Statistics on Indian Economy, 2011-12, Reserve Bank of India.

182
100

90

80

70

60

50

40

30

20

10

Domestic liabilities of Centre External liabilities of Centre

Total liabilities of the Centre Total liabilities of the States
Combined domestic liabilities of Centre & States Combined total liabilities of Centre & States

Figure 5.15.1

183
 Section III

The following section evaluates the growth and changes in various dimensions of
corporate and non-corporate income tax assessees due to the reforms initiated since
1990s to boost the revenue generation from direct taxes of the central government. The
period of study for this analysis was restricted from 1980-81 to 2010-11 due to the lack
of availability of data prior to this period.

5.16: GROWTH OF CORPORATE AND NON-CORPORATE TAX ASSESSEES

IN INDIA

One of the objectives of tax-reforms was to expand the direct tax base of Indian
economy. So an attempt has been made to evaluate the impact of direct tax on the
expansion of tax payers during the post-reforms period. Table 5.16.1 shows the growth
of corporate and non-corporate assessees and the resultant growth in the corresponding
direct tax revenues. The analysis of data reveals that the number of corporate tax
assessees increased from 44,000 in 1980-81 to 1,24,000 in 1990-91 while the number of
non-corporate assessees increased from 45.5 lakhs to 74.4 lakhs during the same period.
While the number of corporate tax assessees increased by 2.8 times, the number of non-
corporate assessees increased by 1.6 times only during this period. However, the trend
just got reversed during the post-reforms period, where, the number of corporate
assessees increased by 2.81 times only as compared to 4.33 times increase in the number
of non-corporate assessees.

184
 Table 5.16.1
Growth of Corporate and Non-corporate Assessees in India
No. of Assessees Growth of Assessees % of Non-Corporate Growth of Taxes
(In lakhs) (%) Assessees in Total (%)
Year Non-Corp Corporate Non-Corp. Corporate Population CT IT
Pre-reforms Period
1980-81 45.5 0.44 - - 0.67 - -
1981-82 46.14 0.46 1.41 4.55 0.67 43.06 2.50
1982-83 47.48 0.5 2.90 8.70 0.67 10.91 6.37
1983-84 48.79 0.53 2.76 6.00 0.67 13.18 8.22
1984-85 48.79 0.58 0.00 9.43 0.66 3.36 13.48
1985-86 54.33 0.69 11.35 18.97 0.72 12.09 30.24
1986-87 61.84 0.77 13.82 11.59 0.80 10.30 14.66
1987-88 64.38 0.88 4.11 14.29 0.82 8.64 10.87
1988-89 67.15 0.96 4.30 9.09 0.83 28.37 32.86
1989-90 67.42 1.09 0.40 13.54 0.82 7.31 18.11
1990-91 74.04 1.24 9.82 13.76 0.88 12.81 7.31
Average 56.90 0.74 5.09 10.99 0.75 15.00 14.46
Post-reforms Period
1991-92 76.6 1.35 3.46 8.87 0.89 47.20 25.23
1992-93 82.32 1.55 7.47 14.81 0.94 13.32 17.34
1993-94 100.29 1.71 21.83 10.32 1.12 13.05 15.51
1994-95 101.08 1.77 0.79 3.51 1.11 37.40 31.85
1995-96 104.77 1.88 3.65 6.21 1.13 19.28 29.62
1996-97 114.16 2.27 8.96 20.74 1.21 12.62 16.94
1997-98 128.93 2.74 12.94 20.70 1.34 7.80 -6.21
1998-99 169.59 2.95 31.54 7.66 1.73 22.55 18.36

185
 1999-00 195.67 3.1 15.38 5.08 1.95 25.13 26.75
2000-01 226.68 3.34 15.85 7.74 2.22 16.30 23.81
10-yrly 130.01 2.27 12.19 10.56 1.36 21.47 19.92
Avg.
2001-02 258.77 3.49 14.16 4.49 2.49 2.56 0.76
2002-03 281 3.65 8.59 4.58 2.66 26.12 15.19
2003-04 288.3 3.72 2.60 1.92 2.69 37.66 12.26
2004-05 267.95 3.8 -7.06 2.15 2.46 30.08 19.04
2005-06 293.95 3.93 9.70 3.42 2.66 50.99 26.77
2006-07 308.96 4 5.11 1.78 2.75 40.13 30.81
2007-08 331.65 4.98 7.34 24.50 2.91 28.01 38.21
2008-09 323.2 3.3 -2.55 -33.73 2.80 8.20 2.94
2009-10 337.2 3.7 4.33 12.12 2.88 18.93 17.49
2010-11 332 3.8 -1.54 2.70 2.80 23.29 16.17
10-yrly 302.30 3.84 4.07 2.39 2.71 26.60 17.96
Avg.
Post-reform
216.15 3.05 8.13 6.48 2.11 24.03 18.94
Period Avg.
Source: Compliance Report of Direct Taxes, Comptroller and Auditor General of India, Various issues.

186
 It is also clear from the analysis that the average growth of corporate income tax
assessees was more (10.99 per cent) during the pre-reforms as compared to non-
corporate income tax assessees (5.09 per cent). But this trend has been changed and
number of non-corporate income tax assessees has grown at a faster rate than the
corporate assessees during the post-reforms period. The average annual growth rate of
corporate and non-corporate assessees during the post-reforms period was 6.48 per cent
and 8.13 per cent respectively. However, it is surprising to note that the number of non-
corporate assessees was less than 3 per cent (2.8 per cent) of the total population of India.
It clearly indicates the failure of tax reforms to widen the total tax base of India. The
study pointed out that a large number of high income people are out of tax-net just
because of poor compliance and loopholes in the tax system itself.

The tax base of corporate sector also remained limited. According to Compliance
Report on Direct Taxes (2012) of Comptroller and Auditor General of India, total
number of companies registered with Registrar of Companies in India was 7.2 lakhs as
on 31st March, 2011. However, corporate assessees on Income Tax department’s records
were only 3.8 lakhs (table 5.13), leaving an un-reconciled number of 3.4 lakh companies.
According to Income Tax Act 1961 (as amended up to date), filing tax returns is
mandatory for all the companies. However, the analysis of data reveals that only half
(52.77 per cent) of the companies registered in India file their income tax returns, leaving
47.23 per cent companies without compliance. This situation has resulted due to number
of factors the poor enforcement, weak administration, loopholes in the system etc. So the
above analysis reveals that the reforms introduced in direct tax could not succeed to
generate additional revenue to finance the increasing expenditure requirements of an
expanding economy.

187
5.17: IMPACT OF TAX REFORMS ON PER ASSESSEE DIRECT TAX
REVENUE COLLECTION

To evaluate the impact of tax reforms on the volume of tax revenue, time-series
data relating to per assesse direct revenue collection is presented in table 5.17.1 for both
the categories.

The analysis of data reveals that revenue collection per assessee on account of
corporate income tax increased from Rs.3.13 lakh in 1980-81 to Rs.4.30 lakh in 1990-91,
and the revenue collection per assessee on account of personal income tax increased from
0.03 lakh to only 0.07 lakh during the same period. However, there has been a
considerable increase in the tax revenue collection per assesse during the post-reforms
period. Revenue collection per assessee on account of corporate income tax increased
from Rs.5.82 lakh in 1991-92 to Rs.93.49 lakh in 2010-11, resulting an increase of 16
times over the period. Whereas the revenue collection per assessee on account of
personal income tax increased by only 5.33 times from Rs.0.09 lakh to Rs.0.48 lakh
during the same period. It implies that the increase in tax revenue is mostly on account of
increased tax collection and not because of increased direct tax base. Direct tax reforms
could not expand the tax base by bringing more and more people under the tax net.
According to the Compliance Report on Direct Taxes, 2007-08 released by Comptroller
and Auditor General of India, most of the new assessees belonged to low-income strata
and, as a result, a declining trend has been seen many a times in per capita revenue
collection, especially during 1996-97 to 1998-99.

188
 Table 5.17.1
Tax Revenue Collection per Assessee
No. of Assessees
(Rs. in crore) (in Lakhs) Per Assessee Revenue Collection (Rs. in Lakhs)
Year CIT PIT Non-Corp. Corporate Corporate Non-Corp.
Pre-reforms Period
1980-81 1377 1440 45.5 0.44 3.13 0.03
1981-82 1970 1476 46.14 0.46 4.28 0.03
1982-83 2185 1570 47.48 0.5 4.37 0.03
1983-84 2473 1699 48.79 0.53 4.67 0.03
1984-85 2556 1928 48.79 0.58 4.41 0.04
1985-86 2865 2511 54.33 0.69 4.15 0.05
1986-87 3160 2879 61.84 0.77 4.10 0.05
1987-88 3433 3192 64.38 0.88 3.90 0.05
1988-89 4407 4241 67.15 0.96 4.59 0.06
1989-90 4729 5009 67.42 1.09 4.34 0.07
10-yrly 2915.5 2594.5 55.18 0.69 4.19 0.04
Avg.
1990-91 5335 5375 74.04 1.24 4.30 0.07
Pre-reform
2042.5 1928.5 56.90 0.74 2.76 0.03
Period Avg.
Post-reforms Period
1991-92 7853 6731 76.6 1.35 5.82 0.09
1992-93 8899 7898 82.32 1.55 5.74 0.10
1993-94 10060 9123 100.29 1.71 5.88 0.09
1994-95 13822 12029 101.08 1.77 7.81 0.12
1995-96 16487 15592 104.77 1.88 8.77 0.15

189
 1996-97 18567 18234 114.16 2.27 8.18 0.16
1997-98 20016 17101 128.93 2.74 7.31 0.13
1998-99 24529 20240 169.59 2.95 8.31 0.12
1999-00 30692 25655 195.67 3.1 9.90 0.13
10-yrly 15626 13797.8 114.75 2.06 7.20 0.12
Avg.
2000-01 35696 31764 226.68 3.34 10.69 0.14
2001-02 36609 32004 258.77 3.49 10.49 0.12
2002-03 46172 36866 281 3.65 12.65 0.13
2003-04 63562 41387 288.3 3.72 17.09 0.14
2004-05 82680 49268 267.95 3.8 21.76 0.18
2005-06 124837 62457 293.95 3.93 31.77 0.21
2006-07 174935 81697 308.96 4 43.73 0.26
2007-08 223941 112910 331.65 4.98 44.97 0.34
2008-09 242304 116225 323.2 3.3 73.43 0.36
2009-10 288162 136551 337.2 3.7 77.88 0.40
10-yrly 131889.8 70112.9 291.77 3.79 34.45 0.23
Avg.
2010-11 355267 158631 332 3.8 93.49 0.48
Post-reform
Period Avg. 86909 47255.4 216.15 3.05 28.48 0.22
Source: Compliance Report of Direct Taxes, Comptroller and Auditor General of India, Various issues.

190
5.18: IMPACT OF TAX REFORMS ON THE COMPOSITION OF PROFILES OF
NON-CORPORATE ASSESSEES IN INDIA

One of the main objectives of tax reforms was to widen the direct tax base. Due
to continuous efforts of the central government, the number of non-corporate income tax
assessees has increased by almost three times from 1996-97 to 2007-08. Table 5.18.1
depicts the profile of such non-corporate assessees in terms of the income group in which
they fall.

The analysis of data shows that most of the income tax assessees fall in the
income group of Rs.2,00,000 or less (86.81 per cent in 2007-08). Though the proportion
of other categories are steadily increasing, yet 86.81 per cent assessee reported less than
Rs.2,00,000 income, and only 0.66 per cent fall in the income category of Rs.10,00,000
or more. It shows that though the tax base has widened in terms of number of assessees,
however, position of tax assessees has not improved much in terms of higher income
category. In other words, tax base is widening without tapping the upper rich class.
Hence, it is only the middle class which is still paying the major share of taxes in India
even in case of direct taxes after the implementation of tax reforms.

191
 Table 5.18.1
Profiles of Non-Corporate Assessees
Year Number of Assessees (in Lakhs)
Income up to Rs. 2 Lacs Income b/w 2 Income above 10 Search and Seizure cases Total
Lacs-10 Lacs Lacs
1996-97 110.02 3.57 0.31 0.24 114.16
(96.37) (3.15) (0.27) (0.21) (100)
1997-98 123.70 4.63 0.41 0.19 128.93
(95.94) (3.59) (0.32) (0.15) (100)
1998-99 163.39 5.46 0.48 0.26 169.59
(96.34) (3.23) (0.28) (0.15) (100)
1999-00 187.45 7.49 0.58 0.15 195.67
(95.80) (3.82) (0.30) (0.08) (100)
2000-01 216.07 9.72 0.73 0.16 226.68
(95.32) (4.29) (0.32) (0.07) (100)
2001-02 243.50 14.15 0.79 0.33 258.77
(94.09) (5.47) (0.31) (0.13) (100)
2002-03 255.25 21.89 0.88 2.98 281.00
(90.84) (7.79) (0.31) (1.06) (100)
2003-04 265.46 21.67 1.05 0.12 288.30
(92.08) (7.52) (0.36) (0.04) (100)
2004-05 243.63 22.96 1.22 0.14 267.95
(90.92) (8.57) (0.46) (0.05) (100)
2005-06 258.98 27.22 5.62 2.13 293.95
(88.10) (9.26) (1.91) (0.73) (100)
2006-07 273.30 27.87 5.79 2.00 308.96
(88.46) (9.02) (1.87) (0.65) (100)
2007-08 287.90 41.47 2.18 0.10 331.65
(86.81) (12.50) (0.66) (0.03) (100)
Source: Compliance Report of Direct Taxes, Comptroller and Auditor General of India, Various issues.

192
5.19: IMPACT OF TAX REFORMS ON THE COMPOSITION OF PROFILES OF
CORPORATE ASSESSEES IN INDIA

An attempt has also been made to measure the impact of tax reforms on the
composition of corporate tax-payees over the period of time. Table 5.19.1 focuses on the
profile of corporate assessees. The data presented in the table again confirms the fact that
tax base is widening due to increase in the low income earning companies. The
provisions of unlimited tax exemptions, multiple tax laws are the major reasons for the
poor tax compliance by the corporate tax assessees. The analysis of the data reveals that
63.45 per cent of the companies filed returns of their income less than Rs.50,000 in
2007-08, while 24.30 per cent companies filing returns had income between Rs.50,001 to
Rs.10,00,000, whereas only 11.85 per cent companies declared their incomes above
Rs.10,00,000. Low compliance coupled with tax avoidance has continuously affected the
level of tax revenue generation capacity of the country.

The analysis of data further reveals that while the total number of registered
companies in India was 7.2 lakh as per the records of Registrar of Companies as on 31st
March, 2011, the number of companies filing their returns were as low as 3.8 lakh as per
the records of Income Tax department, which means that nearly 3.4 lakh companies were
not reporting their income to income tax authorities. This implies that only 52.77 per cent
of the total companies reported their earnings to the income tax authorities were
complying. This situation is prevailing at the time when it is mandatory to file income
tax returns by all the companies registered in India. It puts a big question mark on the
working and efficiency of tax collecting machinery of the government. Tax compliance
has been a big issue since the history of direct taxes and much change is not visible even
in this regard.

193
 Table 5.19.1
Profiles of Corporate Assessees
Year Number of Assessees (in Lakhs)
Income up to Rs.50000 Income b/w Rs.50000 to Income above 10 Lacs Search and Seizure Total
Lacs-10 Lacs cases
1996-97 1.28 0.69 0.27 0.03 2.27
(56.39) (30.32) (11.86) (1.43) (100)
1997-98 1.61 0.86 0.25 0.02 2.74
(58.68) (31.42) (9.28) (0.62) (100)
1998-99 1.73 0.91 0.29 0.02 2.95
(58.64) (17.97) (12.88) (0.83) (100)
1999-00 1.82 0.92 0.33 0.03 3.10
(58.71) (29.67) (10.65) (0.97) (100)
2000-01 1.95 0.96 0.41 0.02 3.34
(58.38) (28.75) (12.27) (0.60) (100)
2001-02 1.91 1.22 0.34 0.02 3.49
(54.73) (34.96) (9.74) (0.57) (100)
2002-03 1.83 1.29 0.39 0.14 3.65
(50.14) (35.84) (10.68) (3.84) (100)
2003-04 2.00 1.25 0.44 0.03 3.72
(53.76) (33.60) (11.83) (0.81) (100)
2004-05 2.05 1.19 0.54 0.02 3.80
(53.95) (31.32) (14.20) (0.53) (100)
2005-06 1.99 1.24 0.68 0.02 3.93
(50.64) (31.55) (17.30) (0.51) (100)
2006-07 2.05 1.25 0.68 0.02 4.00
(51.25) (31.25) (17.00) (0.50) (100)
2007-08 3.16 1.21 0.59 0.02 4.98
(63.45) (24.30) (11.85) (0.40) (100)

Source: Comptroller and Auditor General of India

194
5.20: IMPACT OF TAX REFORMS ON THE TAX COMPLIANCE OF DIRECT
TAX PAYEES

Another objective of the tax reforms introduced during the post-reforms period is
to increase the tax compliance by the direct tax-payees. The argument was that lower
level of tax compliance is due to higher rate of taxes in the past. Therefore, emphasis was
on the reduction in tax rates and simplification of tax procedure. Therefore, to evaluate
the effectiveness of tax reforms in terms of tax compliance, time-series data regarding the
amount of taxes collected and taxes remaining uncollected from 1991-92 to 2010-11 is
presented in table 5.20.1. The data reveals that though the amount of tax collected on
account of assessment of corporate and individual income tax has increased over the
period, the share of uncollected taxes has also increased at a faster rate during the same
period. The rising amount of direct tax arrears during the period does not support the
argument that lowering tax rates and de-regulations always lead to better tax compliance.

A look on the uncollected taxes as a proportion of taxes collected explains that

default is more frequent and large in case of personal income tax assessees as compared
to corporate income tax assessees. The proportion of taxes remaining uncollected was
more or approximately equal to the taxes collected for personal income tax assessees
continuously from 1994-95 to 2004-05. The situation in case of corporate assessees
remained comparatively better, but amount remaining uncollected as a proportion of
amount collected varied from 35.59 per cent (lowest) in 2007-08 to as high as 116.20 per
cent in 2001-02. As on 31st March 2011, the total taxes remaining uncollected from both
corporate and non-corporate assessees as a proportion to taxes collected stood at 65.25
per cent.

The reasons for such a large amount of accumulating arrears of taxes can be many
fold. These reasons may include: shortage of staff in the income tax department,
corruption, inefficiency, and poor compliance, and lack of rigorous punishments,
including penalties and fines, lack of stringent laws etc. are some of the reasons for the
increase in the amount of arrears of taxes even during the post-reforms period.

195
 Table 5.20.1
Arrears of Income Tax Including Corporation Tax
(Rs. in crore)

Year Tax collected Tax remaining uncollected Uncollected Taxes as a

Proportion of Tax Collected (%)

CIT PIT Total CIT PIT Total CIT PIT Total

1991-92 7853 6731 15352 5038 3423 8461 64.15 50.85 55.11

1992-93 8899 7898 18142 5624 3587 9211 63.20 45.42 50.77

1993-94 10060 9123 20298 6627 4153 10780 65.87 45.52 53.11

1994-95 13822 12029 26971 9890 12809 22699 71.55 106.48 84.16

1995-96 16487 15592 33564 12434 16536 28970 75.42 106.05 86.31

1996-97 18567 18234 38895 15433 18152 33585 83.12 99.55 86.35

1997-98 20016 17101 48280 20062 21168 41230 100.23 123.78 85.40

1998-99 24529 20240 46600 21954 22189 44143 89.50 109.63 94.73

1999-00 30692 25655 57959 28349 24621 52970 92.37 95.97 91.39

2000-01 35696 31764 68305 24402 32029 56431 68.36 100.83 82.62

10-yrly Avg. 18662.1 16436.7 37436.6 14981.3 15866.7 30848 77.377 88.408 76.995

196
 2001-02 36609 32004 68,613 42,538 47,639 90,177 116.20 148.85 131.43

2002-03 46172 36866 83,192 35,057 32,581 69,760 75.93 88.38 83.85

2003-04 63561 41387 1,05,085 37,631 50,386 89,415 59.20 121.74 85.09

2004-05 82677 49,259 1,32,093 39,204 83,977 1,24,329 47.42 170.48 94.12

2005-06 101277 55,985 1,57,512 55,098 40,289 1,04,878 54.40 71.96 66.58

2006-07 144318 75079 2,19,637 64,683 51,771 1,17,370 44.82 68.96 53.44

2007-08 192911 102655 295566 68,662 55,612 124274 35.59 54.17 42.05

2008-09 N.A. N.A. 333818 N.A. N.A. 201276 N.A. N.A. 60.30

2009-10 N.A. N.A. 378063 N.A. N.A. 229032 N.A. N.A. 60.58

2010-11 298687 140042 446934 N.A. N.A. 291629 N.A. N.A. 65.25

10-yrly Avg. 120776.5 66659.63 222051.3 48981.86 51750.71 144214 61.93714 103.5057 74.269

Post-reforms
64046.28 38758 129744 28981.53 30642.47 87531 100.54 75.63 100.54
Period Avg.*
Source: Compliance Report of Direct Taxes, Comptroller and Auditor General of India, Various issues.
*Post-reforms period average has been adjusted according to availability of data.

197
5.19: CONCLUSION

The analysis of data reveals that substantial changes have taken place in the
overall tax structure and composition of taxes in India during the post-reforms period.
However, such changes could not bring the desired results. The analysis of data reveals
that tax-GDP ratio of India is still lower as compared to other developed countries. The
analysis further reveals that indirect taxes are still dominant in overall tax revenue of the
government despite of the continuous efforts to increase the proportion of direct taxes.
The growth of direct taxes remained volatile over the years and tax buoyancy has been
found fluctuating. The revenue deficit has increased despite of the fact that proportion of
capital expenditure has declined during the period under study. Decrease in indirect tax
revenues due to continuously slashing down of the tax rates and growth of direct taxes
remaining slow have also resulted in increased revenue deficit.

The lowering of tax rates both of direct and indirect taxes has not been resulted in
expected increase in the tax revenue. Since the government could not generate additional
revenue through tax reforms, the only way left to reduce fiscal deficit has been to enforce
cut in the capital expenditure, which has further hampered the social sector developments
during the post-reforms period.

The poor coverage of income tax assessees (both corporate and non-corporate) in
the group of Rs.10,00,000 and above has led to slow growth of direct tax revenues. This
is despite of the fact that a the number of millionaires in the country has increased during
this period. Due to tax distortions, huge exemptions and tax breaks to corporate sector,
the number of companies filing income more than Rs.10,00,000 is still very small.

The study further found that major share of taxes is still coming from low income
groups. This development puts a question mark on the objective of reducing income
inequalities in society. The rising arrears of taxes have further put a question mark on the
efficiency and effectiveness of tax collecting machinery. The widening fiscal deficit over
the period has reduced the public investment in social sectors like education and health.
Therefore, there is again a very strong argument to review the tax reforms policies being

198
followed during the post-liberalization period. The enactment of Direct Tax Code is a
welcome step in this regard, which will simplify the tax procedures by removing
unnecessary distortions, allowances, exemptions etc. from the tax system that are
currently distorting the whole system.

The findings of the study have questioned the effectiveness of the direct tax
reforms introduced during the post-reforms period. The major issues which emerged
from the comparison of pre and post-reforms developments in the tax structure include
the higher dependence of revenue on the indirect taxes during the post-reforms period,
the narrow base of direct tax/corporate tax collection from the upper section of the
society, and the high extent of defaulters of direct tax etc. The increasing arrears of direct
tax during the post-reforms period does not lend support to the argument that lowering
tax rates and deregulations always lead to better tax compliance.

199