Tax policy in India - A case study

The tax reforms of recent years in India are based on Chelliah and Kelkar’s recommendations of simple broad-based taxes with a moderate and limited number of rates. The reduction in direct tax rates in the economy has not only increased revenue collection but also accelerated economic growth. This article aims to investigate the effect of India’s tax policy on private capital formation. A time series analysis of data for the economy for the period 1960-61 to 2008-09 reveals that a one percent increase in the direct tax ratio has led to a reduction of 0.12 percent in the ratio of private capital formation to GDP. The article also examines whether there is any gain in opting for an expenditure tax to promote savings and capital formation in the economy. The major problem facing the Indian direct tax system is evasion of income taxes.