Direct Tax Reforms in India: A Comparative Study of Pre- and Post-Liberalization Periods

In a developing economy like India, tax occupies a strategically important position in the overall development of the country due to its significant contribution to the national exchequer, which is ultimately spent on the overall development of different sectors of the economy. The budget for 1991-92 indicated a major effort toward correcting the fiscal imbalances and increasing the tax revenue through increase in the direct taxes. The study analyzes the impact of direct tax reforms on Indian economy in terms of various economic indicators and compares it with the pre-reform period. The study reveals that tax reforms introduced during the post-liberalization period could not generate the results as desired. The reduction in direct tax rates could not lead to better tax compliance in a much desired manner. Tax reforms have increased the number of assessees but the resultant increase in the tax revenue has not been sufficient. The major share of taxes comes from low income groups. This ineffectiveness will widen the gap between rich and poor and will lead to further inequality in the society. The rising arrears of taxes have further put a question mark on the efficiency and effectiveness of the tax collecting machinery. The widening fiscal deficit over the period will reduce investments in social sectors, like education and health. Therefore, there is again a very strong need to review the tax reform policies being followed in the post-liberalization period.