CHAPTER – 2

REVIEW OF LITERATURE
 CHAPTER – 2

REVIEW OF LITERATURE

2.1 INTRODUCTION

The study of the available literature is necessary to get an insight into research
questions and address the research problems. Literature review is an immensely useful
tool to find out what has already happened and it helps the researcher to find the gaps
in the studies done so far in the topic of research interest. Some of the available and
relevant literature have been reviewed and presented in this chapter. This chapter also
includes review of the reports of various committees on income tax reforms in India.
A brief review of relevant studies is given below:

Indian Taxation Enquiry Committee (1924), under the chairmanship of

Charles Todhunter, examined the burden of taxation on different classes of citizens,
equity of taxation and suggested alternative sources of taxation. The committee
recommended the following measures to improve the taxation of income:

a. Losses should be carry forward and set-off in the subsequent year.

b. Income of the spouse should be taxed at the aggregated tax rates applicable.
c. Private companies formed to avoid taxes by withholding dividend should be
treated as firms.
d. The officers should have discretionary power to compute liabilities of
unregistered firms in the same manner as if they had been registered.

Taxation Enquiry Commission (1953) appointed by the government to

review the tax structure in India. The committee headed by John Matthai carried out
an in-depth study of the central taxes and their administration. The committee
recommended the following:

a. Widening and deepening the tax structure both at the Centre and the state level
for the purpose of financing the government plans and to reducing income
inequalities.
b. Provide tax incentives for production and investment and regular appraisal of
the incentives.
c. Financing research activities carried out by selected institutions.

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 Kaldor (1956) was appointed by the government of India to review personal
and business tax laws with a view to mobilize more revenue for the second five-year
plan. He opined that an effective system of progressive direct taxation is crucial for
the survival of democratic institutions in India. He pointed out the inefficient and
inequitable taxation system in India during his study period and recommended the
introduction of wealth tax, taxes on capital gains, gift tax, and personal expenditure
tax. He has recommended a comprehensive reporting system for benami transfers of
capital assets and transactions of capital nature with a view to reduce tax evasion. He
has recommended the common single return for all direct taxes assessments, he has
suggested that maximum rate of income tax should be not more than 45 per cent.
Further, he has suggested that there should be an adequate increase in the
remuneration to income tax authorities to improve the efficiency of income tax
administration.

Lakadwala and khambadkone (1959) are considered as pioneers in the field

of taxation in India. They measured the sensitivity of central Government taxes from
the period 1948 to 1955. They found the strong relationship between income elasticity
of the tax structure, objectives of revenue productivity, equitable distribution of
income and economic stability. They concluded that the central taxes were more
elastic to income.

Ambirajan (1961) studied the evolution, structure, administration and future

prospects of the corporate income tax in India in the changed tax policy. He pointed
out that revolutionary tax reforms were made only after the independence. He found
that the corporate tax structure had no influence on investment structure in corporate
sector. He lamented that the corporate tax rates were very high when compared to
other developing countries and even the underdeveloped countries. He concluded that
there was an urgent need for reforms in corporate taxation.

Boothalingam (1968) appointed by the government of India to examine the

structure of direct and indirect taxes in India, has suggested that the classification of
income under various heads should be abolished and losses should be allowed to be
set off against any other heads of income. He recommended spreading of arrears of
salary received over the future years rather than past. He suggested to stabilize the
rates of tax over the years, and to eliminate surcharge. He also suggested to raise the
exemption the then limit to `7500 for individuals, `10000 for HUF and to discontinue

19
personal allowances. He recommended to increase the number of public relation
officers for the tax payers’ convenience.

Singh (1971) pointed out the inherent weaknesses in the depreciation

provisions under the Income Tax Act 1961. He argued that too many rates of
depreciation for different assets, absence of depreciation allowance on the live-stock,
difference between actual economic life of plant and machinery are the ambiguities in
income tax law. He has stressed that rational and liberal depreciation policy should be
adopted and also suggested to adopt replacement cost method of depreciation.

Direct Taxes Enquiry Committee (1971) headed by Justice K.N. Wanchoo,

appointed by the government to recommend the measures to unearth black money, to
check tax evasion and to reduce the tax arrears. The unreported income during 1968-
69 was estimated to be `1400 crore, as estimated by the committee, which resulted in
tax evasion amounting to `470 Crore. The important findings of the committee were
the prevailing of high tax rates, controls and licenses in the economy, donations to
political parties, ineffective enforcement of laws and deterioration in the moral
standards among the tax authorities and asserted that these loopholes were the main
causes for tax evasion in the economy. The committee also observed that the chronic
problem with the income tax department was the arrears of taxes. The committee
found that unrealistic and over assessment of income, administrative delays, shortage
of administrative staff, lack of coordination were the main causes responsible for tax
arrears mounting in the department. The committee suggested the following measures
to overcome the problems identified.

a) Reduction in the tax rate from, the then prevailing tax rate of 97.75 to 75 per
cent.
b) Minimization of control and licenses.
c) Regulation of donations to political parties.
d) Improving morale of small tax payers
e) Introducing intelligence system
f) Imposing penalty on tax evaded and not on income concealed
g) Issuing PAN to all assessees
h) Prescribing a uniform accounting year to all tax payers.
i) Providing more administrative powers to authorities for search and seizure
operations.

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 j) Amending constitution to empower central government to impose tax on
agriculture.
k) Creating provisions for settlement of cases at any stage.
l) Compulsory registration of charitable and religious trusts claiming
exemptions.
m) Providing sufficient staff to collection and recovery units by increasing the
assessing officers
n) Giving sufficient training, infrastructure and authority to the field staff in the
recovery units.
o) Amendment of law to create automatic lien on moveable and immovable
properties under seizure.
Aggarwal (1971) in his study on the impact of corporate taxes on retained
earnings and performance of corporate sector in India based on the RBI data,
highlighted non-conducive tax structure that hinders the growth of corporate sector.
He found that the lack of internally generated funds adversely affected on investment
in corporate sector. He suggested rationalization measures to revive corporate tax
policy. He suggested that the dividend distribution tax should be exempted for small
companies, intercorporate dividend and bonus should be exempted, and development
rebate should be revived.

Jhaveri (1972) analyzed the impact of tax concessions on post-tax income

from different financial assets eligible for concession. The author resorted to
hypothetical examples taking certain assumed tax rates, rates of interest before tax,
different levels of income and saving period. It was found that qualifying financial
assets were more useful for those taxpayers who had to pay high marginal tax rate.
Tax payers of middle and lower income did not get benefit in real terms in qualifying
assets, and they preferred units, preference shares to public provident fund,
cumulative time deposit and employee provident fund. The author suggested that
deduction related to savings in specified assets should be given according to different
grades. It should vary from more than 100 per cent at low levels of gross assessable
income to 40 per cent at high gross assessable income. Further, the author suggested
that exemption of income earned from qualifying financial assets for tax relief should
be withdrawn to avoid the disparity.

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 Suman (1974) has examined the impact of personal income tax and
corporation tax in India, on savings and investments and the role in resource
mobilization for public sector during the first five years plans. He calculated
coefficient of income elasticity, coefficient of correlation and regression coefficient of
these two taxes. The study revealed that corporate tax revenue collection is more than
that of personal income tax, in spite of higher tax rates, and played a significant role
in raising public revenue between the periods 1950-51 to 1966-67. He has pointed out
that inadequate taxation of agricultural income, political consideration, existence of
non-monetary sector, inefficiency of tax administration and a large degree of tax
evasion were the main weaknesses of the Indian tax structure. The researcher noticed
that the tax evasion was mainly concentrated in upper income brackets. The
researcher suggested for simplification of tax law and its stability, proper assessment
by Income tax authorities and concentration on realization of tax arrears. Further, the
researcher suggested to adopt the Japanese system of self-assessment to put an end to
large degree of tax evasion in self-employment sector.

Jain (1975) conducted an empirical study on taxation of income in India since

1939 and discussed the basis of tax liability and threw light on the history and scope
of super tax, excess profit tax, capital gains tax, super tax and sur-tax etc. Further, the
researcher examined the taxation procedure of the special taxable entities like HUF,
Partnership Firms, co-operative society, local authorities, public charitable and
religious trusts. While emphasizing the growing importance of corporation tax, he
showed that the revenue from corporation tax rose rapidly. He noted that despite the
fact that agriculture occupied key position in Indian economy; the income from
agriculture was untaxed. He discussed the problem of tax evasion and avoidance
along with causes modes and consequences, and suggested the measures to tackle the
tax evasion. The study also examined the tax administration, but no notable measures
suggested by the author.

Roy (1977) has attempted to trace out year wise developments in the growth
of corporate tax between 1960 and 1975. The study exhibited a summarized data on
the changes in various Finance Acts during the study period. The study pointed out
that most of the recommendations were not properly implemented, rather most of the
recommendations were misconceived. The study also pointed out those frequent
changes in law made Income Tax administration further complicated and inefficient

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in their routine function of verification of income tax returns resulted in poor taxpayer
relations. The study recommended for simplification of tax structure, abolition of tax
on dividend distribution, withdrawal of surtax, reduction in corporate tax rates,
offering only direct incentives.

Direct Tax Laws Committee (1978) was constituted by the Government of

India on June 25, 1977 under the chairmanship of N.A. Palkhiwala. Later on
C.C.Choksi took over the charge as chairman since Palkhiwala left. The committee,
known as Choksi committee, was directed to recommend measures for simplifying
and rationalizing the direct tax laws and improvement in income tax administration.
The committee observed that frequent amendments in tax laws violated the principle
of certainty and made the authorities and assessees confused. The committee
suggested a uniform law for registering trust, regulating their fund raising, accounts
maintenance, liability to pay advance tax and furnishing an estimation of advance tax
payable and paying in equal installments. Depreciation rates revised as 10 percent on
building, 20% on furniture, 30% for plant and machinery etc. The committee
recommended the changes in the cadre of various officers, giving CBDT chairman the
rank of secretary to the government of India, augmenting of adequate manpower for
office, and recommended to amend any tax law in July only.

Sundaram and pandit (1979), tried to find out the rationality of existence of
tax entity and its impact on equity and the public revenue. The author highlighted the
lacunae of the existing system of considering individual and H.U.F as independent
units. The study reveals that this system resulted in a severe loss to the government,
since each tax entity enjoys variety of deductions and exemptions that results in the
reduction in marginal tax rate. The author opined that these entities should be treated
as nuclear family and taxed separately, and H.U.F and individual should not be treated
separately. The author argued on the ground that new recognizing system would
generate an additional amount about `130 Crore. Further, the author argued that the
changes make taxation system more equitable. The study also recommends some
rationalization measures of reducing the exemptions and deductions.

Rao (1980) in his study on corporate tax system tried to prove that there was
zero shifting of the tax incidence of corporate taxation in Indian context. In his study
of 21 selected industries between the study period from 1950-51 and 1965-66,
compares the tax rates with other 30 countries and found out that the rate of tax was

23
the highest in India. The study highlighted that the lower tax rates for priority sector
failed to achieve higher capital formation, in majority of the industries; tax was
neither shifted to consumers nor to the employees. The author recommended a
uniform tax rate for all domestic companies, removal of surtax and integration of
personal income tax with corporate tax.

Ansari (1982) tried to examine the impact of three independent variables-

GDP, international trade and density of population- on the tax revenue. The author
used data from IMF publication for the period 1972 to 1976, applied regression
equations to find the impact. The study concluded that real GDP and international
trade were positively correlated whereas density of population was negatively
correlated with tax revenue.

Murti (1982) attempted to study different aspect of income tax administration

in India and reflected the strengths and weakness tax administration. The study covers
origin and development of income tax in India, the structure and organization of
income tax administration, public relations, recruitment and training of personnel as
well as morale of income tax personnel. The study highlighted that income tax
officials were overburdened with work and found that the service conditions in the
department were very unhealthy to accomplish the goals. The study concludes that the
reforms in administrative machinery were very slow. The researcher stressed upon
reviewing the administration mechanism of income tax department.

Bagchi (1982) examined the adjustment of personal income tax system with
inflations during the study period 1971-72 to 1981-82. The time series index of the
study reveal that exemption limit was over indexed in seven out of ten years which
implied that income tax system was adjusted according to inflation. The effective
burden of tax at selected levels of income during 1971-72 and 1981-82 showed that
the lowest and the highest levels of income were not affected by inflation but middle
income ranges affected by a higher incidence of tax due to inflationary situation. The
ratio of direct tax to indirect tax in India was very low. The ratio was just 0.21 as
compared to 0.4 to 2 in developed countries. While concluding, the Author opined
that coverage and yield of income tax should be improved by deliberately changing
the tax rates instead of allowing it to come about as a result of inflation.

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 Lall (1982) attempted to analyze the impact of direct taxes on individual and
business income. The analysis of average income tax rates for assessees in different
income brackets from 1974-75 to 1978-79 showed that average tax rates increased
progressively with the increase in income bracket but average tax rate was lower than
marginal tax rate applicable to that income level. The marginal rate of tax for a
particular income bracket showed a downward movement over the years. The
researcher opined that statutory tax rates should not be reduced further for giving
relief to assessees in the lower income slabs but the level of deductions and
exemptions could be raised. The study also revealed that annual average tax rate for
five-year period (1974-75 to 1978-79) for central government employees, state
government employees and for non-government employees was 7.8 percent, 9 percent
and 11.8 percent respectively. The researcher found the reasons for such differences
that the composition of salary income and discriminatory treatment of House Rent
Allowance. The author opined that saving schemes and concessions might not
increase total level of savings in the economy but the funds would flow from private
sector to public sector. He recommended for thorough reform of corporate tax and
personal income tax system.

Economic Administrative Reforms Commission (1983). Under the

Chairmanship of L.K.Jha, the committee was constituted by the Government in 1981
to review income tax law, procedure and organization of the income tax department.
The important recommendations of the committee are as follows:

a. Permission to employers to deduct from the salary payable to employees, the

tax payable on other head, if the specific requisition is given.
b. Penalties for certain defaults should be replaced by interest at a deterrent rate.
c. No tax to be deducted from the dividends paid through crossed cheques by
listed companies to non-corporate tax payers.
d. No tax deduction from dividends paid to non-corporate tax payers through
crossed account payee cheques by listed companies.
e. A Uniform provisions and procedures to be followed to all tax payers for the
payment of advance tax.
f. Penalties should be levied in case of proven concealment only.
g. All returns filed should be accepted on receipt, and for scrutiny purpose
selection of cases should not be made by ITO but at a higher level.

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 h. All first appeals should be entrusted to commissioner (Appeals).
i. Introduce computerization on a limited scale for checking TDS returns and
compiling statistics and later to extend it to assessment, tax accounting and
investigation.
j. The committee strongly recommended strengthening of training facilities
available and to building up a sense of confidence and security among the
officers and staff.
Lall (1983) studied the extent of tax savings enjoyed by corporate assessees
due to incentives granted. The study based on the sample of 223 companies for the
period 1961-62 to 1975-76 found that an effective tax rate was 47.5 per cent as
compared to the average tax rate of 54.9 per cent. The return on capital employed
substantially improved due to tax savings arising from tax incentives. The study
revealed that the capital intensive industries enjoyed the maximum benefit from
incentives and the tax base diminution effect was highest in engineering companies
followed by textile and chemical industries. The study concludes that the larger
companies availed the larger amount of concession as compared to smaller ones.
Newly established companies availed major benefit due to tax holidays as this relief
was generally linked to fresh investments.

Acharya, Shankar and Associates (1985) studied the various aspects of

unaccounted income in India. The study concluded that demonetization and voluntary
disclosure schemes were not effective and failed to achieve the objectives in checking
black money. The researchers suggested that reduction in tax rates, simplification of
income tax structure, strict enforcement and rigorous punishment to tax evaders were
necessary to eradicate the menace of black money.

Saxena (1985) tried to analyze pre-independence and post-independence

corporate tax policy of the government of India in terms of its effect on investment,
profitability, dividend distribution and capital structure. The researcher opined that
corporate tax structure was full of complexities and confusions due to frequent
amendments in income tax law. The study revealed that tax was distorting capital
structure by favouring debt financing more than equity financing. The study
recommended various measures such as inclusion of interest in the definition of
corporate income for purpose of taxation, preferential tax treatment of retained
earnings, lower flat rate of tax at 45 per cent with special relief to high priority

26
industries and establishment of a statutory body ‘controller of capital’ to exercise
control over funds.

Agarwal (1987) studied the effect of tax incentives on investment behavior in

India in comparison with other countries. The study based on the data pertaining the
sample industries. On the basis of sample industries-sugar, cement and fertilizer-
found that tax incentives offered in industrialized countries were fairly simple and
easy to implement as compared to developing countries. The results of the Ordinary
Least Square (OLS) regression model adopted in the study revealed that tax incentives
were important determinants of investment behavior in fertilizer and cement industry.
The study ended up with contradictory conclusion that tax incentives had important
influence on investment behavior in two of three industries. Although, the study
suggested to provide more incentives for foreign investment, encouraging energy
conservation, providing safety equipment etc.

Bagachi (1988) studied the statistical significance of increase in personal

income tax revenue during 1985-86 to 1987-88 and tried to identify the strength and
weakness of tax enforcement measures. The author compared actual revenue with
projected revenue based on elasticity of tax revenue with GDP from the 1973-74 to
1984-85. The study found that the deviations were not significant at 5 per cent level.
The author opined that a part of increase in tax revenue was due to amnesty scheme.
He opined that the tax frauds should be considered as criminal offences and not as of
civil offences. He concluded that the amnesty scheme could generate revenue only for
the short period and the same would become counterproductive in the long run. He
suggested that the tax raids should be the last resort and information regarding the
financial transactions should be collected from third parties to detect unprepared
incomes.

Kantawala (1988) examined eight selected individual areas of taxation in

India for a period of 30 years from 1964-65 to 1995-96. The areas studied included
adequacy of exemption limit to cope up with inflation, the burden of tax in real terms
at selected levels of income, burden of tax at selected levels of income at current
prices and collection of income tax from individual item of tax, the average rate of tax
in percentage terms for selected years, changes in average rate of tax in percentage
term, increase in tax liability in percentage terms at selected levels of income, the
progressiveness of tax rate. Trend analysis and indexation tools were applied. The

27
study revealed that for most of years notified exemption limit lagged behind the
inflation adjusted exemption limit. The author found that the Tax liability increased
for low income group and decreased for higher income group during the period of
study. The researcher observed that by simplifying tax structure, the lower income
group did not get the benefit which higher income group got. The tax liability per
assessee had gone up in real terms. The author concludes at the end that exemption
limit should be kept in line with inflation and tax structure should be revised for the
benefit of lower income group.

Aggarwal (1989) attempted to provide an empirical evidence of the effects of

tax incentives on the volume of charitable contributions, estimated the efficiency of
the incentives and evaluate effects of the alternative scheme of providing subsidy. It
was observed that the deductions for charitable contributions increased the quantum
of such contributions by companies would have been 64% lower in 1978-79. The
contributions exceeded the tax revenue foregone by the exchequer and one-rupee
sacrifice in tax revenue increased charitable donations by 2 rupees. There appeared to
be a trade-off between volume of charitable contribution and tax incentive and same
result could be achieved by tax credit of 30 per cent.

Raj (1990) examined Indian Tax Structure, growth of personal income tax,
income tax rates and administration during the period 1951-52 to 1988-89. The
analysis of the study revealed that share of direct taxes in central Government revenue
declined indicating higher dependence on indirect taxes. Increase in income tax
arrears during the study period at the end of sixth five years plan which showed the
inefficiency of tax administration. Further, it was found that the effective rate of tax in
each slab was less compared to nominal rate because of various exemptions and
deductions available under the Income Tax Act. the study revealed that elasticity of
personal income tax was greater than unity during the period of study. The author was
against to bringing small tax payers under the tax net since it would increase the
administrative cost disproportionately. He concludes that rationalization of tax
structure, certainty in tax administration and minimization of litigation were the main
areas need attention of the policy makers.

Jha (1990) in his doctoral thesis studied the impact of tax revenue on the
transformation of the national economy. The study based on the 15 years’ statistical
data collected from different publications of the Ministry of Finance and RBI revealed

28
the significant role of taxation in generating resources, mobilizing of savings, and
channelization of investments and acceleration of productivity. The researcher
suggested for restructuring the tax system by establishing an optimal relationship
between direct and indirect taxes, making tax authorities accountable and fixing the
target for tax collection, expansion of tax base, rationalization and simplification of
tax structure.

Kumar (1988) attempted to study revenue importance of income tax, factors

responsible for declining share of income tax revenue and effectiveness of income tax
administration in eradicating tax evasion. The study period was between 1960-61 and
1984-85. The study revealed that contribution of corporation tax to total revenue had
increased during the study period in spite of tax evasion that was present at the large
scale during the study period. The author opined that the income tax failed to achieve
the objective of social equity due to unrealistic character and ineffective
administration. He suggested for bringing agricultural income under the central tax
bracket, making family as the basic assessment unit, extending the scope of TDS,
increasing the number income tax staff, rationalizing income tax structure and
withdrawing the tax shelters for extending the tax base.

Raja J. Chelliah (1991) Committee Recommendations for Reforming the Tax

System.

The Government of India constituted a Committee of experts to examine the

structure of direct and indirect taxes under the chairmanship of Dr. Raja J. Chelliah
former Member, Planning Commission and Finance Commission and currently Prof.
Emeritus, National Institute of Public Finance and Policy. The Tax Reforms
Committee (TRC) was appointed in pursuance of the Government’s commitment,
reiterated by the Finance Minister in his Budget speech for 1991-92 to make the tax
system simple, credible, yet progressive in which people realize that honesty is the
best policy. The Committee has attempted to build fairly simple tax structure with
reasonable tax rate levels; a progressive tax rate and not deterrent to work, save and
invest and easy to enforce. To achieve this objective, the Committee has
recommended drastic changes in the income tax rates. The Committee recommended
the following rate schedule for individual income tax assessees.

29
 Total Income (Rs.) Recommended Tax Rate (%)

28,000 Exempted
28,000 to 50,000 20% (reduced to 15% by Devegowda Government)
50,000 to 2,00,000 27.5% (increased to 30% by Rao Government)
Above 2,00,000 40%

Gaba (1995) in his doctoral thesis, studied the techno-economic viability of

computer usage and adoption of Management Information System in Income Tax
Department. In his research, he also studied the extent of human resistance to
introduction of computerization in India. Based on both primary and secondary data,
the study highlighted that the introduction of computers was a welcome change which
would improve the revenue of the Income Tax Department and ensure better service.
He also pointed out that the absence of a plan for adoption of computerization by the
department. He suggested that the department should identify the specific work to be
done by computers to achieve economy and success of the IT project.

Indira Rajaraman (1995) attempted to evaluate different indicators applying

presumptive taxation in India. It was widely viewed that production indicators were
better as compared to consumption-based indicators. She opined that good
governance is the precondition for the success of presumptive taxation and suggested
that the self- declared income should be verified properly. She further opined that in
case of hard to tax sectors, each occupation should have a unique norm and should be
scrutinized. She concluded that tax exemptions should be withdrawn, TDS coverage
should be widened and presumptive taxation requires a strong information network.

Mishra (1996) made an attempt to study the role of Income Tax in overall
income tax framework in terms of its coverage, contribution to tax revenue and
administration of the tax. The study was based on the secondary data collected from
published sources of the Governing bodies from 1960-61 to 1993-94. An analysis of
revenue contribution and coverage of corporate tax showed an increasing trend in
absolute figures where income tax had a low tax base, which failed to increase over
years because of a number of exemptions, deductions, allowances as well as tax
avoidance and evasion practices. The study revealed the inefficiency and overburden
of tax administration evidenced with the cases of arrears, refunds, revisions, appeals
etc. she viewed that income tax was unable to achieve the objective of redistributive

30
justice as it was inequitable not only in terms of coverage but also due to its
unrealistic character and ineffective administration. The study recommends the
introduction of agricultural income tax, to consider ‘Family’ as a unit of assessment
instead of ‘Individual’ and to withdraw favorable provisions to treat Firms.

Shome, Aggarwal, and Singh (1996) studied the system of Tax Deduction at
Source (TDS) on income from salary, securities, lotteries and payment to contractors
in India. The authors pointed out that TDS was an effective instrument for quick and
smooth collection of taxes. The study reveals that TDS as a percentage of net
collection of income tax increased from 26.45 percent in 1980-81 to 44.74 percent in
1989-90 and then declined to 37.15 per cent in 1994-95. The ratio of refund varied
between 11 to 22 percent of the gross income tax collection. The authors concluded
and suggested that the scheme of TDS should be extended to cover activities where
Black Money had been invested like the transfer of immovable property and securities
transactions.

Sharma (1997) studied the revenue potential of Minimum Alternative Tax

(MAT) levied on the basis of book profits of the company and Alternative Minimum
Tax (AMT) based on total assets of the company. He examined further the
depreciation rates, corporate tax rates and fiscal incentives available to companies in
India. The study found that 70 percent of 1500 selected companies did not pay any
corporate tax. The author argued that existence of Zero-tax companies was
contradictory to the principle of equity and justice in the tax system. The author
estimated that Government could collect net additional revenue of `2,178 Crore by
enforcing MAT and `3,700 Crore by enforcing AMT. The researcher highlighted the
superiority of asset-based AMT being it was simple, more effective and higher
revenue generating as compared to AMT based on book profits. He opined that lower
tax rates coupled with fewer incentives could be more practical than high tax rates
combined with a large number of tax relief. The study concluded that corporate tax
rates should be lowered to bring them in conformity with East Asian Economies to
attract Foreign Direct Investment. The study further concludes that depreciation rates
prescribed under the Income Tax Act should be harmonized with the rates available
under the Companies Act for improving the quality of corporate governance.

Das Gupta, A. and Mookherjee (1998) studied the role of incentives and
institutional reforms in tax enforcement in India in comparison with other countries

31
like Mexico, Spain, Singapore, Philippines, and Indonesia during the period 1965-66
to 1994-95. The study revealed that income tax compliance in India deteriorated
during the study period. According to authors, lower tax revenue in terms of ratio to
GDP was not because of tax rates, exemptions, amnesty schemes and no taxation of
agricultural income but was only due to poor enforcement. The principal tools of
enforcement in India are search and Seizure activity and prosecution of tax offenders.
The authors opined that these tools were ineffective for checking tax evasion. On the
basis of international experience, the authors emphasized the need for organizational
restructuring, computerization of information system, the introduction of presumptive
taxation and strict audit standards associated with strong political support from higher
levels. The researchers also suggested for amending appeals, penalties and
prosecution provisions which were exploited by large-scale tax evaders.

Jha (1999) studied the extent of tax evasion and black money in India. She
examined the reasons for tax evasion, black money, and implications of offering
amnesties to tax evaders. She opined that most important reason for tax evasion was
that it provided economic benefits to tax evaders. She further opined that besides tax
evasion, black income was generated from illegal activities like smuggling, trafficking
in illicit drugs and gambling etc. the study reported the black money in the rage of
`350-700 thousand Crore, comprising more than 50 percent of GDP. She
recommended the reduction in tax rates for individuals, firms, and corporations to
widen the tax base. She expressed the non-viability of amnesty schemes since the
evaders might continue tax evasion hoping that the scheme would continue in future
and therefore, the amnesty scheme should be eliminated to make tax administration.

Sreekantaradhya (2000) made an attempt to study the structure and reform of

taxation in India. He analysed the tax structure prior to 1991 and found that various
tax reforms were implemented during the period 1990-91 to 1999-2000. The study
revealed that share of personal income tax in the total tax revenue of the central
Government increased to 15.21 percent in 1999-2000 as compared to 9.33 per cent in
1990-91. The coverage of personal income tax was extremely limited because of
exemption of agricultural sector and predominance of unorganized sector in the
economy. The study also pointed out that high marginal rates and complicated rules
were responsible for poor compliance. It had been further observed that wide ranging
incentives, a large number of zero tax companies and complex system of corporate

32
taxation had affected the corporation tax revenue negatively. The author suggested
some measures for improvement in tax system such as the application of presumptive
taxation on the unorganized sector of the economy, bringing the agricultural income
under the tax net, adoption of tax deduction at source, the compulsory filing of return
on the basis of certain economic criteria and rationalization of Fringe Benefits
Taxation.

Dipankor et al. (2001) examined the relative tax performance of a group of

16 states of India for the period 1986 to 1997. The performance was measured by the
Tax-State Domestic Product (SDP) rate and analyzed by using Quantile Regression.
The study revealed that states classified into four categories on the basis of tax
performance. First the consistently best performing states of south western region
including Karnataka, the next category of states, worst performing states. The position
of these two categories remained same over the period of study. The third and the
fourth category states are medium level performing states.

Pandey (2002) examined the measures taken by the government to widen the
tax base and related issues. The study highlighted that one-by-six scheme for
compulsory filing of return increased the number of assessees due to filing of return
by those who did not have taxable income. It increased the paper work for department
and taxpayers, without contributing any tax revenue. The study also observed that tax
buoyancy which was 2.64 in 1991-92 decreased to 1.67 in 2000-01. The author
suggested to bring the agricultural sector in the tax net, computerization of Income
Tax Department, networking of all income tax offices in the country, selective use of
search and seizure operations and developing a friendly atmosphere by Income Tax
Department for increasing tax base. As regards widening the tax base, It was further
recommended that Government should not merely concentrate on lower or middle
categories of assessees, but also ensure that persons in higher income group discharge
their tax obligations sincerely and correctly.

Task Force on Direct Taxes (2002) popularly known as Kelkar Committee

was constituted under the chairmanship of Mr. Vijay Kelkar by Ministry of Finance,
Government of India submitted its report in 2002. The committee was formed to
suggest measures to rationalize and simplify direct taxes, improvement in taxpayers’
service and redesign procedures for strengthening enforcement so as to improve
compliance of direct tax laws. It recommended the following measures:

33
 a) The income tax department must increase expenditure on tax payers’ services;
b) The Permanent Account Number (PAN) should be extended to cover all
citizens and therefore serve as a Citizen Identification Number;
c) the department should set up a structure for Electronic Data Interchange (EDI)
with some of the major departments;
d) The Government should establish national tax information network (TIN) on a
build, operate and transfer basis [BOT];
e) The basic exemption limit must be raised to `1,00,000 for individuals and
HUFs;
f) Standard deduction under the head salary should be eliminated;
g) The number of tax slabs should be reduced; Maximum marginal rate of tax
should be moderate; Personal income tax base should be broadened by
eliminating some tax incentives;
h) Corporate tax rate should be reduced; Dividend should be exempted from tax
in the hands of shareholders;
i) Minimum alternate tax under section 115JB and tax exemptions under section
10A and 10B of income tax Act should be omitted.
On the basis of the recommendations of Task Force Committee on Direct
taxes, the department has taken a number of measures to improve tax payer services.
Some of the important measures are enumerated below.

i. Various help centers have started for tax payers walk in for assistance
service.
ii. A better treatment of existing tax payer to increase morale and
compliance.
iii. Electronic filing of returns has started for corporate tax payers. It is
facilitated for easy access to tax payers through Internet and e-mail.
iv. Tax Return Preparer Scheme (TRP)
v. Communication with Tax payers

Sidhu (2003) studied the effectiveness of direct tax reforms introduced during
the post liberalization period covering the span of ten years from 1991-92 to 2000-01.
The study observed that direct tax reforms could not contribute positively to solve the
fiscal problems of the country. Tax compliance did not improve in spite of reduction
in the tax rates. However, reforms had succeeded in increasing the number of

34
assessees without increasing the Government revenue significantly. The researcher
pointed out that the major share of direct taxes had come from lower income group
during the study period. The researcher strongly recommends reviewing tax reform
policies implemented during the post liberalization period.

Ranka (2003) made an attempt to study the tax system in the post-
independent era, Evaluation of Income Tax Act, setting up of task force in the
country, existing tax evasion and tax management system. He has given various
suggestions such as levy of tax on the rich agriculturist, establish accountability and
transparency in the income tax department, treatment of tax payers, abolition of
amnesty scheme, and voluntary disclosures, and to bring about the change in the work
culture of income tax department.

Arora R.S. and Kumar (2005) attempted to study the performance of Income
Tax Department on the basis of secondary data collected from reports of Comptroller
Audit General of India during the period of 10 years from 1991-92 to 2001-2002. The
study revealed that number of assessees and tax revenue increased, whereas cost of
collection declined during the study period. Further, number of pending assessments,
outstanding refund claims and number of mistakes in assessments increased
considerably. The study emphasized on improving the efficiency of Income Tax
Department and suggested recruitment of tax officers, their proper training,
outsourcing of routine activities, simplification of tax procedures and adoption of
computer based technology.

Angela Franchini and Luigi Bernardi (2005) stated in his study that Indian
GDP showed an impressive rate of growth and general budget is structurally
imbalanced and public debts are high, the tax structure has not seen much change over
the decades, and indirect tax structure is complex. He also pointed out that direct taxes
were still in infant stage, both as weight as well as structure, social contributions were
entirely lacking. Further, he concluded that the road to update and improve the Indian
tax system had been entered since the early 1990s the reform was still largely to be
accomplished.

Torgler (2006) tried to examine the citizen’s outlook towards tax compliance
in India. The study observed the impact of non-economic factors on three tax
compliance variables namely justification of tax evasion, corruption and claiming

35
government benefits without justification. The author applied regression techniques
on micro data taken from the 4th WAVE OF WORLD VALUES SURVEY (1991-
2001). The results indicated that education, patriotism, religiosity and age had a
positive impact on compliance. Women and self-employed had a higher willingness to
comply tax rules. The study observed that lower middle class had the lowest
willingness to comply tax rules.

Helene Poirson (2006) studied the effect of India’s tax system on growth,
through the level and productivity of private investment. The author compares the
India’s indicators of effective tax rates and tax revenue productivity with other
countries and shown that the Indian Tax system is characterized by high dependence
of indirect taxes, low average effective tax rates and tax productivity and high
marginal effective tax rates. He pointed out that large tax induced distortions on
investment and financial decisions. He also states that recent tax reforms improved
the tax productivity and lowered the marginal tax burden and induced distortions.

Kumar (2006) has applied Stochastic Frontier Analysis method to examine

the income tax revenue efficiency of 17 states of India. The study covers the period of
1989-90 to 2000-01. The study found that the state of Karnataka showed maximum
revenue efficiency followed by Punjab. Bihar and Uttar Pradesh were at the bottom
with least efficiency preceded by the state of Arunachal Pradesh. It was also found
that ranks of different states with regard to their revenue efficiency remained stable
over the period of study, indicating that poor performing states showed no
improvement over the study period. The researcher highlighted that high income tax
rates and exemption limit had a negative effect on income tax revenue. However,
personal income and tax base had a positive effect on tax revenues. Author of the
view that intensive audit for richer section of the society, simplification of tax rules,
introduction of pragmatic tax rates and good governance were needed for increasing
the revenue efficiency.

Kumar, Nagar and Samanta (2007) made an attempt to examine the

effectiveness of direct tax administration in India by applying econometric model, by
taking into account collection of personal income tax and corporate tax at pre-
assessment stage and post- assessment stage. Tax Enforcement Index was constructed
by applying principal component analysis for the period 1986-87 to 2003-04. The
study found that TDS and advance tax, considered as voluntary compliance

36
contributed 33.88 per cent and 45.45 per cent of the total collection in personal
income tax and corporation tax respectively. The remaining revenue was collected
through regular assessment, levy of penalty and interest recovery. The author opined
that perceived inequity of tax system, complexity of tax laws, unfair penalty system
and weak taxpayer education programmes were the main reasons for poor voluntary
compliance. The study further highlighted that there was a need to build a proper
information system and database for improving effectiveness of income tax
administration. At the end, researcher suggested for maintaining a proper balance
between the services to taxpayers and enforcement of the tax laws to promote
voluntary compliance.

Singh and Sharma (2007) made an attempt to study the perception of

professionals with regard to Indian Income Tax System by collecting primary data
from 100 Tax Consultants operating in Punjab and Haryana. They tried to investigate
the role of tax consultants played in the revenue collection process by helping their
clients in understanding the complex tax system and meeting their legal obligations.
Factor Analysis of data showed that seven factors-reduction in tax evasion, extension
of relief to tax payers, incentives for dependents and honest taxpayers, broadening the
tax base, e-filing of returns, adequacy of deductions and impact of exempt-exempt tax
system played an important role in determining the effectiveness of Indian Tax
System. The study revealed that most of the tax consultants were satisfied with tax
rates. However, most of them were dissatisfied with regard to price level adjustment.
It was also observed that most of the taxpayers consulted tax experts because they
found it economical. At the end the authors suggested for adjustment of income tax
rates according to price level changes, broadening of tax base, strict measures against
tax evaders, extensive use of TDS, considering number of dependents for tax rate
purpose and establishment of good relationship with taxpayers.

Nagalakshmi C. (2008) in her Doctoral thesis entitled ‘Tax Reforms for the
twenty first century: A study with reference to perception of income tax assessees in
Tamilnadu’ studied the historical perspectives of tax policy in India and perception of
income tax assessees on the income tax system. The study based on both primary data
and secondary data under proportionate sampling method, used 694 samples from
different cities of Tamilnadu state. Secondary data consists of various reports, books
and journals published. Mean, standard deviation, Factor analysis, ANOVA and one

37
sample t test was applied for data analysis. The study found that the number of PAN
card increased but not tax payers. She argued that the Corruption and inefficiency of
the department were the major factors for lower income tax collection. She suggested
to introduce presumptive taxation by removing the identified loopholes in it. She has
also strongly commented on the functional discrepancies of the department and of the
view that the administrative machinery to be improved by proper infrastructural
facilities and reliable information network of tax payers. The study concluded that to
be successful, reforms need to be well planned, holistic in approach, organization and
job design should be streamlined and tax men should be involved in economic
planning.

Datar (2010) in his article entitled “why the code must be shelved?”
expressing his views about Direct Tax Code opined that people had to waste a lot of
time in understanding the new provisions of Income Tax Law, and CBDT required to
issue numerous circulars and frame several rules all over again. He expressed his
apprehension that proposed Code would neither improve efficiency nor tax collection
due to deep routed corruption. He felt that fault was not with existing Income Tax
Act, but the manner in which it is administered. Finally, he concluded that there was
no ground for replacement of the whole existing Act rather amendments could be
carried out.

Vaneeta Rani (2010), in her research entitled ‘Taxation of income in India: A

study of post Liberalization period’, examined the taxation of Income in India during
the post liberalization period and policy perspective in this regard. she has analyzed
the growth of income tax revenue, performance of Income Tax department and
perception of tax professional regarding Income Tax System in India. The study based
on primary data collected on geographical basis. The researcher applied Exponential
Growth Rate (EGR), Buoyancy coefficient, weighted score, etc. to study the growth
of income tax revenue during the study period up to 2008-09. Primary data consists of
perceptions of tax professionals about the income tax system in India. The sample
drawn from the locations of Punjab and Chandigarh only. The researcher resorted to
two stage sampling frame work. The study based on primary data of only small
sample of 250 respondents. Secondary data from various published sources have
been collected for the period from 1997-98 to 2007-08. Weighted Average, Chi
Square test and Kendall’s Coefficient tools applied without any hypothesis for the

38
study. She found that the tax buoyancy of Direct Taxes was higher than that of
Indirect taxes during the study period, Number of tax payers was marginally
increased. The study showed, on the basis of perception of the tax professionals, that
tax evasion and corruption were prevalent in the Indian Tax system. She pointed out
the multiple changes introduced every year in India. She opined that there was a need
for long term policy and frequent amendments must be avoided. She suggested to
reduce the rates of tax, and introduce agricultural income tax. While concluding she
suggested to remove deficiencies in Tax administration as the number of pending
cases, refund issues, mistakes, appeals, etc. were increased over the years. She has
also suggested to establish a friendly atmosphere in the tax offices and to strengthen
the information network.

Bhika lala, Jadhav (2013), in his research article made a comparative

analysis major Income tax reforms in India pre and post 1991. The study based on
secondary data, found that personal income tax growth rate is increasing at higher rate
of 17.59%, the growth of direct tax revenue is 19.19% and the share of income tax to
Direct tax revenue is decreased to 35.42% from 44.26% in 1991-92. He tried to show
that India’s Income tax rates were reasonably moderate in comparison with some
western and European developed countries. He highlighted some of the important
administrative reforms. Pointing out the major changes envisaged by various
committees, he recommended to simplify tax structure, widen the tax base and
improve administration for voluntary compliance. Further, supporting the arguments
of economists, he questioned the rationality of deduction of interest on housing loan.
He opined that no Government should take money from the people through taxes
more than required for genuine capital and revenue expenditure. While concluding, he
argued that the provisions in the proposed DTC bill would promote horizontal equity.

Gupta Priya & Gupta Munish (November 2013), in their research paper,
titled ‘Income Tax Structure of Individual Assessees in India- A critical study’ made
an effort to analyze the present tax structure in India. In their paper, issues relating to
high tax burden on lower and medium income groups and low tax burden on high
income group are taken. The secondary data analysis shows the percentage tax
increase between different slabs for the periods from 2005-06 to 2013. They opine
that several problems like high compliance costs, tax evasion etc arise due to poorly
designed tax structure. They conclude that present tax regime has to be reformed.

39
Suggest, further, that basic exemption limit must be at moderate level and tax brackets
need to be redesigned in such a way that high tax should be imposed on high income
and lower income should be taxed with lower rates.

Samuel R.V (2015) in his research “Corporation Tax in India-A study of

Compliance cost, Compliance Behaviour and Tax evasion in Goa” attempted to
examine the growth and trend of corporate tax in India, study the compliance cost,
compliance behavior and possible reasons for tax evasion in Goa. With the convenient
method of sampling the companies in Goa he tried to explain the opinion of tax
professionals about reasons for low tax compliance in the selected research area. He
found that 98% of the respondents depend on external tax advisors for the
compliance. He found that frequent changes in the income tax law caused the low
compliance. The study also found that all most all the companies in the study claimed
depreciation as a tax saving tool. The study observes that more than 15% of the total
compliance cost accounts for external cost of compliance. Surprisingly, none of the
sample companies favoured the reduction of corporate tax rate. The study claims that
tax evasion in the corporate world is moving away due to online system and
procedure, and Business persons in Goa region are more tax-compliant.

William G. Gale, and Andrew A. Samwick (2016) in their paper titled

‘Effects of Income Tax changes on Economic Growth’, examined how changes to the
individual income tax affect long-term economic growth. They argued that the
structure and financing of a tax change are critical to achieving economic growth.
They opined that the reduction in tax rates encourages individuals to work, save, and
invest. They also view that if the reduction in tax rates are not financed by immediate
spending cuts, they will result in an increased budget deficit, which in the long-term
will reduce national saving and raise interest rates. The study shows that the net effect
was uncertain amidst many studies suggestions that it is either small or negative. The
study argued that the increase in tax base could eliminate the impact of reduction in
tax rates on budget deficit but it might reduce the impact on labour supply, saving,
and investment and thus reduces the direct impact on growth. Their assertion is that
not all tax changes would have the same impact on growth. They conclude that
reforms that improve incentives, reduce existing distortionary subsidies, avoid
windfall gains, and avoid deficit financing would have more auspicious effects on the

40
long-term size of the economy, but may also adversely affect the equity and efficiency
of the tax system.

2.2 RESEARCH GAP

From the above review of literature, it is found that many research studies on
Income tax are on tax buoyancy, tax structure, tax incentives, compliance cost and
unaccounted income. These studies have highlighted the weaknesses and operational
inefficiency of the tax department due to lack of sufficient staff and infrastructural
facilities. Most of the studies are based on the secondary data source, and analyses
were more of quantitative in nature. Recently, only two studies were conducted on tax
reforms and policy perspective based on the perception of assessees and Tax
professionals. These studies, however, restricted to – one Tamil Nadu and the other
one Punjab- state only. The scope of the studies was limited and the sufficient time
has elapsed since the research. No studies were found, especially after Task Force
recommendation, based on the perception of Income Tax Authorities and Taxpayers.
Hence, the researcher has taken up the present research study.

2.3 CONCLUSION

Various available relevant literature were reviewed to understand the research

topic better and find the research gap. Some of the useful literature reviewed for the
subject include, Reports of the Government, Reports of the Tax Reforms committees,
Research studies, books, articles, papers, working papers, and reviews. The studies
relating to reforms in personal income tax, corporation tax, reforms in tax
administration, issues relating to tax evasion and black money, compliance cost,
recommendations of various committees on direct tax reforms up to 2015-16, have
been covered in the literature review.

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GOVERNMENT REPORTS AND PUBLICATIONS

• Mithai John Committee. (1953). Report of Taxation Enquiry Commission.

• Nicholas Kaldaor Committee (1856). Indian Tax Reform-Report of a Survey.
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• Raja. J. Chelliah Committee. (1992). Final Report of Tax Reforms Committee.
• Vijay.Kelkar Committee. (2002). Report of the Task Force on Direct Taxes.
• Direct Taxes Code, Bill No. 110, (2010).
• Parthasarthy Some Committee. (2014). Reports of Tax Administration Reforms
Committee (TARC).

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