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Indian Economic Policy

Notes in every sector of the economy has very serious and in a number of ways pernicious influences
on the working of the Indian economy.
• As a consequence, India developed a regressive tax structure. Direct Taxes Enquiry Committee
in this connection mentioned : “Black money and tax evasion, which go hand in hand, have
also the effect of seriously undermining the equity concept of taxation and warping its
progressiveness.
• There are several factors responsible for the generation of black money. It would be relevant to
discuss those factors so that a correct understanding about the genesis, growth and expansion
of black money can be made.
• The high marginal rates led many experts on public finance to describe that we are “the most
highly taxed nation.” These high rates were gradually brought down to 40% by former Finance
Minister Dr. Manmohan Singh by 1996. Mr. P. Chidambram has further reduced them in 1997-
98 budget to 30 % for individual and 35% for corporations.
• Kabra writes : “In a regime which induces reduction in tax evasion by a method “soft” on tax
evaders (like cut in tax rates) rather than by “harder” method which enhances the costs and
risks of tax evasion, it would be difficult to expect a better tax compliance through “soft-methods.”
• Transparency International (TI) has been preparing Corruption Perception Index (CPI). It was
noted that India’s rank in CPI slipped to 71 among 102 countries surveyed in 2002 whereas it
was 88 among 158 countries surveyed in 2005.
• The dismantling of the system of controls initiated in 1991 Industrial Policy has resulted in a
slight improvement in level of corruption. The demand for transparency at a result of Right to
Information Act is also acting positively in reducing the level of corruption but we have miles
to go before we reach the levels of least corrupt sociaties like New Zealand.
• In short, corruption raises the cost of development, it breeds inefficiency in departments to
produce inferior quality of goods—roads, water works, substandard houses built by the PWD,
etc.
• It would be desirable at this stage to make a survey of the measures undertaken to unearth
black incomes since independence and to assess their success so that further course of action
can be decided.
• In 1946, demonetization was resorted to but the Direct Taxes Enquiry Committee in its interim
report admitted : “Demonetization was not successful then, because only a very small proportion
of total notes in circulation was demonetized. Notes demonetized in 1946 were of the value of
` 143.97 crores as against the total notes issued of the value of ` 1,235.93 crores.’’
• Special Bearer Bonds Scheme (1981) was intended for canalising unaccounted money for
productive purposes. The Special, Bearer Bonds, 1981 of the face value of ` 10,000 each were
issued at par with a maturity period of 10 years. The holders of these bonds were to be entitled
to receive ` 12,000 on maturity.
• There is no doubt that keeping the maximum tax rate as 30 per cent, the government was able
to garner ` 10,000 crores from tax evaders, but given the widespread growth of black money,
this is really the tip of the iceberg.
• In the connection, some suggestions have been made. First, the imposition of a uniform rate of
35 percent corporation tax on all companies needs to be reviewed. It would be prudent to
introduce a slab system and charge only 15 per cent on smaller companies upto a profit of
` 50,000.
• As a consequence of the efforts of international division of the Income Tax Department,
multinational companies paid a record ` 10,000 crores during 2006-07 which was 40 per cent
higher than the previous year’s collection from this set of companies. The singe in tax figure in
unprecedented as the normal increase is 15-20 percent.

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