Question

Discuss briefly, causes and consequences of tax reforms taken by the Indian Government during economic reforms.

Hint:

1991 tax reforms simplified tax rates, broadened the tax base and promoted investment-led growth.

Answer 1

During the 1991 economic reforms, tax reforms were introduced to rationalize the tax structure and improve government revenue collection. Causes for Tax Reforms:
High Fiscal Deficit: India faced a severe fiscal crisis in 1991 due to a high budget deficit and low foreign exchange reserves.
Complicated Tax Structure: The existing tax system was complex, with multiple rates and exemptions that discouraged compliance.
Low Tax Revenue: The tax-to-GDP ratio was inadequate to meet developmental and administrative needs.
Encouraging Private Investment: Tax incentives and rationalisation were needed to attract domestic and foreign private investment. Consequences of Tax Reforms:
Simplification of tax structure and introduction of moderate tax rates.
Reduction in import and excise duties.
Broadening of the tax base by reducing exemptions.
Improvement in tax compliance and revenue collection.
Creation of a more investment-friendly economic environment.