UNIT 9 FINANCIAL SECTOR AND FISCAL SECTOR REFORMS

Objectives
After reading this unit you should be able to:
• review the major reforms introduced in the financial and fiscal sector during and after
1991;
• discuss reforms in the banking and insurance sector; and
• discuss tax reforms introduced in India in recent times.

Structure
9.1 Introduction
9.2 Banking Sector Reforms 1991
9.3 Reforms in Financial Sector
9.4 Reforms in the Insurance Sector
9.5 Tax Reforms 1991
9.6 Fiscal Sector Reforms
9.7 Summary
9.8 Key Words
9.9 Self-Assessment Questions
9.10 References/ Further Readings

9.1 INTRODUCTION

In Unit -5 you have studied the circular flow of income, output and employment and learnt how
various sectors of the economy interact with one another. In circular flow, the financial sector
plays a pivotal role in channelising savings and investment. The banking and insurance sector
is an important constituent of the financial sector. You must have noted that even after so many
decades of India’s Independence large chunk of the population is not covered by formal
banking and insurance services. Due to the dearth of these services, the social security of the
citizens is threatened and they have to be dependent on non-institutional sources of
credit/finance which is exploitative. The financial sector is itself marred with problems like
Non-Performing Assets (NPA), inefficiencies, lack of capital and many more. In this unit we
will examine the major banking sector reforms introduced as part of New Economic Policy

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(NEP) 1991 and then move to recent reforms introduced in the financial sector especially post
2010.

Fiscal policy is related to taxation, expenditure and public debt. Tax is mainly of two types
direct and indirect. An efficient tax system is necessary for collecting tax revenue in the
country. In unit 8, you have learnt about economic reforms of 1991 and during the process of
liberalisation, privatisation and globalisation a series of measures were introduced in the fiscal
sector in form of direct and indirect tax reforms.

In recent years, the economic policies of the country have taken a new direction and dimension
whereby emphasis is placed on domestic manufacturing, bringing more investment both from
the private and foreign sectors, reducing foreign dependence. Make in India and Ease of Doing
Business are the buzz word. To achieve these objectives lot of reforms have been introduced in
the banking sector, insurance sector, labour market, direct and indirect taxes and similarly in
many other sectors. In this unit, you will study major reforms and policies undertaken in these
sectors.

9.2 BANKING SECTOR REFORMS 1991

In continuation to NEP and to bring structural reforms in the working of the economy, a series
of measures were introduced in the financial sector especially in the banking sector. In the
following section, you will study about these reforms. In 1991, the Government of India set up
the Narasimham Committee to examine all aspects relating to the structure, functioning,
organization and procedure of the financial system to remodel these institutions for raising the
overall efficiency.

Narasimham Committee, 1991

Narasimham Committee was set up in 1991 to analyse the falling efficiency of the India
banking sector and then recommended certain reforms to revive the banking sector.

Major recommendations of the Narasimham Committee, 1991 are:

I. The committee felt that the present structure was too rigid and inflexible so it proposed
the deregulation of the interest rate structure and said that the interest rate should be
determined by market forces.

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 II. Re-examination of direct credit programme and to include small and marginal farmers,
tiny industrial sector and weaker sections. The aggregate credit to the redefined priority
sector to be fixed at 10%.

III. Reduction of Statutory liquidity ratio (SLR) to 25% over a period of 5 years from
38.5% in 1991. Further, the cash reserve ratio (CRR) to be reduced in a phased manner
from the existing rate of 15%.

IV. Establishment of 4 tier hierarchy for the banking structure which should be as follows:
a) 3-4 banks (including SBI) at the top of the banking structure and they could become
international in character.
b) 8-10 banks engaged in general or universal banking and they would have a network
of branches throughout the country.
c) Local banks whose operation would be confined to a specific region.
d) Regional banks including Reginal Rural Banks (RRBs) would be confined to rural
areas and they would be engaged in financing agriculture and allied activities.

V. Introduction of prudential norms and regulation:

a) Definition of Non-Performing Assets: An asset would be considered non-
performing if the interest on such assets remains past due for a period exceeding
180 days at the balance sheet date. Banks and financial institutions to be given a
period of 3 years to move towards these norms.
b) For the purpose of provisioning, the committee recommended classifying assets into
4 categories, namely, standard, sub-standard, doubtful and loss assets. Regarding
the substandard, a general provision should be created equal to 10 percent of the
total outstanding under this category. In case of doubtful assets provision should be
created to the extent of 100 percent of security shortfall. In respect of the secured
portion of some doubtful debts, further provision should be created ranging from 20
percent, 50 percent depending on the period for which such assets remain in the
doubtful category. With respect to loss assets, it is suggested that either fully they be
written off or provision be created to the extent of 100 percent. The committee also

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 suggested that a period of 4 years should be given to the banks and financial
institutions to conform to those provision requirements.
c) Banks and financial institutions should achieve a minimum of 4 % capital adequacy
ratio by March 1993 of which Tier-1 capital should not be less than 2%.

VI. An Asset Reconstruction Fund (ARF) to be established for the recovery of loans.
This fund would take a portion of the bad and doubtful debts of the banks at a
discount.

VII. End to the duality of control and RBI should be the primary agency for the
regulation of the banking system.

VIII. To provide autonomy to the banks the chief executive of the bank should be
appointed based on professionalism and integrity and not on political
consideration.

IX. Banks can access the capital market and issue of fresh capital to the public through
the capital market.The Banking Companies (Acquisition and Transfer of
Undertaking) Act was amended so that banks can raise capital through public
issues but to the condition that the holding of Central Government would not fall
below 51% of paid-up capital.

X. Setting up of new private sector banks if they conform to the requirement of

minimum start-up capital and other requirements. Further, there should not be any
differential treatment between public and private sector banks.

XI. Opening of foreign banks to open offices in India either as branches or as

subsidiaries.

Narasimham Committee II -1998

This committee was given the mandate to review the progress of banking sector reforms,
and design a programme to further strengthen the financial structure, technological up-
gradation, human resource development, capital adequacy norms and bank mergers. The
major recommendations include:
I. A stronger banking system in the context of Current Account Convertibility (CAC).
Indian banks must be made capable of handling problems pertaining to domestic
liquidity and exchange rate management. So strong banks need to be merged which will
have a multiplier effect on the industry.

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 II. Revival of Narrow Banking Concept whereby weak banks should place their funds only
in short term and risk-free assets like government securities.
III. Setting up of small, local banks which would cater to needs of states or cluster of the
district to serve local trade, small industry and agriculture.
IV. Banks should aim to reduce gross NPAs to 3 % by 2002.
V. To improve the strength of the Indian banking system the government should raise
capital adequacy norms of 9 % by 2000, 10 % by 2002.
VI. Banks to give more autonomy and freedom in the recruitment of skilled, specialized
manpower from the market.
VII. Rapid introduction of computerization and technology.
VIII. Amendments in the Banking Regulation Act, Nationalisation Act and State Bank of
India Act, RBI Act, Bank Nationalisation Act, etc. to allow greater autonomy, higher
private-sector shareholdings, and so on.

9.3 REFORMS IN FINANCIAL SECTOR

The Government of India from time to time have been making certain reforms to strengthen
and stabilize the financial sector.
I. Financial Stability and Development Council (FSDC)

The government of India, in 2010 created an apex body (non-statutory) to promote

financial sector development and strengthen the mechanism for maintaining financial
stability. The regulator is entrusted with the responsibility to maintain macro-prudential
supervision in the country, inter-regulatory coordination and financial development issues.
The Union Finance Minister is the chairperson of the FSDC and other members include
the governor of RBI, chairman of SEBI, IRDA and others.

II. Merger of Forward Markets Commission (FMC) with the Securities and Exchange
Board of India (SEBI)

As you must be familiar with forward trading in the context of shares in which buyers and
sellers agree to trade a financial asset at a future date at a specified price. Similarly, forward
contracts are agreements in the commodity market concerning the future delivery of a
commodity at the pre-negotiated prices. The Forward Market Commission (FMC)
established in 1953 acted as the regulatory body for the commodity futures market in India.

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 However, as part of Financial Sectors Reforms, FMC was merged with the Securities and
Exchange Board of India (SEBI) in 2015. The merger aimed at realising the benefits of
economies of scope and scale for exchange and to harmonize the regulation of commodity
derivatives and the securities market.

III. Insolvency and Bankruptcy Code, 2016

Before the Insolvency and Bankruptcy Code, 2016, there were several laws and
procedures mostly overlapping and adjudicating forums that dealt with insolvency and
financial failure of individuals and companies in India. The institutional and legal
framework imposed a heavy strain on the Indian credit system as there was no time
limit on the effective and time recovery or restructuring of defaulted assets. Reforms in
the bankruptcy and insolvency regime were critical not only for credit markets which
were under a lot of stress but for the ease of doing business in the country. The new
code aims at consolidating and amending laws relating to reorganization and resolution
of corporate persons, individuals and partnership firms in a time-bound manner i.e. 180
days in case of companies. However, a subsequent amendment in this code in 2019
(The Insolvency and Bankruptcy Code (Amendment) Act, 2019) has enhanced the
mandatory upper time limit to 330 days which includes time spent in the various legal
processes to complete the resolution process.

To promote entrepreneurship and availability of credit and balance the interests of all the
stakeholders, under the new Code, the National Company Law Tribunal (NCLT) will now
adjudicate insolvency resolution for companies and the Debt Recovery Tribunal (DRT) will
adjudicate insolvency resolution for individuals. Establishment of the Insolvency and
Bankruptcy Board of India will oversee the insolvency proceedings in the country and
regulation of all entities registered under it.

To speed up the implementation of this Code, Government of India established the Tribunals,
National Company Law Tribunal (NCLT) and National Company Appellate Tribunal
(NCLAT) and Insolvency and Bankruptcy Board of India (IBBI) in 2016.

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 Box 9.1: Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 was

promulgated in 2021. The Ordinance targeted the corporate persons classified as
MSMEs to provide them with an efficient alternative insolvency resolution
framework and to provide cost effective, faster and value maximising outcomes for
all the stakeholders . This is to be done in such a manner which is least disruptive
and preserve jobs. The incorporation of Pre-packed insolvency resolution process
for MSMEs in the code is expected to provide some reflief to Covid hit sector. The
timely and cost effective resolution of distress can ensure positiveness to debt
market, employment preservation and ease of doing business.

Source: The Insolvency and Bankruptcy Code (Amendment) Ordinanace, 2021.

IV. Banking Regulation (Amendment) Ordinance, 2017

One of the biggest problems in the Indian banking system pertains to Non-Performing Assets
(NPA). Over the years they have accumulated and have reached trillion of crore rupees. To
deal with the problem of stressed assets, Banking Regulation (Amendment) Ordinance, 2017
was promulgated in 2017. The bill has amended the Banking Regulation Act, 1949 and has
inserted two new sections namely 35AA and 35AB after Section 35A. Accordingly, RBI is
now authorized to direct banking companies to resolve specific stressed assets by initiating an
insolvency resolution process wherever required. The RBI is also empowered to issue other
directions for the resolution of the stressed assets. RBI can also form committees to advise
banks on the resolution of stressed assets and the members of such committees will be
appointed by the RBI. The Ordinance enabled RBI to deal with NPAs quickly. Accordingly,
now the Oversight Committee can bypass three major factors/hurdles which slowed the
resolution process. These are: 1) stop ‘free riding’ by lenders who did not participate in the
resolution process. 2) compliance after an agreement has been sealed. 3) certify the process to
alleviate fears of future investigations.

V. The Banking Regulation (Amendment) Act, 2020

To find a solution to the deteriorating condition of cooperative banks in the country, the
government amended the Banking Regulation Act, 1949 and promulgated Banking Regulation
Amendment Bill, 2020. The major objective is to bring cooperative banks under the
supervision of the RBI.

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RBI, after placing the bank under a moratorium can prepare a scheme for reconstruction or
amalgamation of the bank. This is done once the RBI is satisfied that such an order is necessary
to protect the interest of the depositors, public of the banking system. However, the act also
allows RBI to initiate such a scheme without imposing a moratorium.

The Cooperative bank can now issue equity shares, preference shares or special shares to its
members or to any other person residing within its area of operation, They can also issue
unsecured debentures or bonds with a maturity of 10 years or more to such person with the
prior approval of RBI. No person can demand payment towards the surrender of shares that are
issued by a cooperative bank.

The RBI may exempt a cooperative bank or a class of cooperative banks from a certain
provision of the Act through notification. The cooperative banks cannot employ someone who
is insolvent or has been convicted of a crime. The RBI has the power to remove the chairman if
he/she is not fit for the position and can appoint another person as chairman.

Cooperative banks cannot make loans or advances on the security of their own shares. They
cannot grant unsecured loans or advances to their directors or to private companies where the
bank’s director or chairman is an interested party. The Act has specified certain conditions
under which unsecured loans or advances may be granted and it specifies how these loans may
be reported to RBI.

The cooperative banks without prior approval of RBI, cannot open a new place of business or
change their location outside the city, town or village in which it is currently located. This Act
does not apply to Primary Agricultural Credit Societies (PACS) and cooperative land mortgage
banks.

9.4 Reforms in the Insurance Sector

To provide a universal social security system especially to the underprivileged and the poor
population of the country, the three major schemes were launched in 2015 namely, Pradhan
Mantri Suraksha Bima Yojana, Atal Pension Yojana and Pradhan Mantri Jeevan Jyoti Bima
Yojana. We shall study some details about these schemes in the following sections.

I. Pradhan Mantri Suraksha Bima Yojana (PMSBY)

The scheme provides for coverage of Rs 2 Lakh for accidental death and permanent total
disability and Rs 1 lakh for partial disability. This renewal of one-year accidental-death-cum-

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disability cover is available to account holders in the age group of 18-70 years. The premium of
Rs 12 per annum is deducted from the bank account through the ‘auto debit’ facility in one
instalment. As of April 2021, cumulative gross enrollment by banks in PMSBY stood at 23.36
crores. Over 45,600 claims were disbursed under this scheme.

II. Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

This scheme offers a renewable one-year term life cover of Rs 2 lakh to all subscribing bank
account holders. The subscribers can be in the age group of 18-50 years.. PMJJBY is offered
by Life Insurance Corporation (LIC) and all other life insurers. A premium of Rs 330 per
annum is auto-debited in one instalment from the subscriber's bank account.As of April 2021,
cumulative gross enrollment by banks in PMJJBY stood at 10.32 crores. Over 2,39,000 claims
were disbursed under this scheme.

III. Atal Pension Yojana (APY)

In 2015, the Government introduced Atal Pension Yojana (APY) to provide pension especially
to people engaged in the unorganised sector like gardeners, maids, etc,. APY replaces the
previous Swavalamban Yojana. This scheme provides a defined pension depending upon the
contribution and its period. The subscribers are subject to the minimum pension of Rs 1000,
2000, 3000, 4000 or 5000 per month, from the age of 60 years contingent upon the contribution
by the subscribers and the age at the time of joining the scheme. The spouse of the contributor
in the case of death and nominee in case of death of both the contributor and spouse can claim
pension /paid the accumulated corpus. The central government co-contributes 50% of the total
contribution subject to a maximum of Rs 1000 per annum, to each subscriber’s account, for a
period of five years, i.e. from FY 2015-16 to 2019-20. To avail the benefit of this scheme the
subscriber should not be part of other social security schemes like EPF or be paying income
taxes. As of April 2021, a total number of 304.33 lakh people have enrolled, under APY.

IV. Ayushman Bharat

This Scheme was launched on the recommendation of the National Health Policy, 2017 to
achieve the Universal Health Coverage (UHC). Ayushman Bharat scheme is launched to meet
Sustainable Development Goals (SDGs) and its commitment of “Leave no one behind”. This
scheme has two inter-related components namely Health and Wellness Centres (HWCs) and
Pradhan Mantri Jan Arogya Yojana (PM-JAY).

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Health and Wellness Centres (HWCs): These centres were developed to cater to the primary
health care need of the citizens in their respective areas. A large number of services related to
reproductive, maternal, newborn, communicable diseases, ENT, Ophthalmology and others are
to be provided in these centres, so that people need not run to nearby towns or cities ultimately
leading to saving of both time, energy and money.

Pradhan Mantri Jan Arogya Yojana (PM-JAY): It was launched in 2018 in Jharkhand by
Hon’ble PM. It is the largest public health insurance scheme in the world aiming to provide
Swasthya Suraksha to nearly 10.74 crore poor and vulnerable families as per the Socio-
Economic Caste Census, 2011 and the beneficiaries of Rashtriya Swasthya Bima Yojana. The
Scheme provides a cover of Rs 5 Lakh per family per year for medical and hospitalization
expenses in most of the secondary and tertiary hospitals. 3 days of pre-hospitalisation and 15
days post-hospitalization expenses are covered under this and all pre-existing diseases are
covered from day one onwards. In 2020, according to National Health Authority, cashless
treatments of nearly Rs 15,500 crore was provided under Ayushman Bharat PMJAY.

Activity 1

1. Choose any bank of your preference (public, private or foreign) and from its website look
into its growth over a period of time like branch expansion, credit-deposit ratio, etc. Also,
look for data on the NPA of that bank.
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9.5 TAX REFORMS 1991

The government of India has appointed many committees to suggest measures in both the
direct and indirect taxation system of the country.
Chelliah Committee 1991
To examine the structure of both direct and indirect taxes, a Tax Reform Committee under the
chairmanship of Dr Raja J. Chelliah was constituted in 1991. The main task of the committee
was to give suggestions on ways to improve the elasticity of direct and indirect taxes, making
the taxation system broad-based and fair. Rationalisation of the direct taxes and improving

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equity, to identify new areas for taxation and methods of improving tax compliance and
strengthening enforcement. The committee made the following recommendations and most of
these suggestions were incorporated in the budget of 1993-94 (Appendix -I).

Kelkar Committee
In 2002, a task force under the chairmanship of Dr Vijay Kelkar was constituted to
recommend measures for simplification and rationalisation of direct and indirect taxes. The
committee recommended formulating a simple, effective and better tax system. For direct tax,
the recommendations were related to raising the exemption limit of personal income tax,
abolition of wealth tax, long term capital gain tax, etc. Further, widening of the tax base,
expansion in the coverage of service tax, etc. were the recommendations for indirect taxes
(Appendix-II).

Kelkar Committee on Fiscal Consolidation

In August 2012 a Committee was constituted under the chairmanship of Dr. Vijay Kelkar to
outline a roadmap for fiscal consolidation. The main reason behind constituting the Committee
was that in 2012-13, the fiscal deficit was soaring high and it was estimated to reach 6.1% of
GDP and a higher fiscal deficit is a cause of worry for the economy which could lead to higher
inflation, the external balance could widen, investment, growth and employment tend to
weaken and the overall confidence of investor is shaken. The recommendations of the
Committee are given in (Appendix- III).

Direct Tax Reforms

Direct Taxes are those taxes in which the impact and incidence of the tax fall on the same
person. Examples like Income Tax, Corporation Tax, etc. A series of reforms have been
introduced in the direct taxes which are given in (Appendix-IV).

Changes in Direct and Indirect Tax in Union Budget 2021-22

In Union budget 2021-22, the Finance minister has proposed the major changes/reforms in the
direct and indirect taxes (Appendix-V).

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9.6 FISCAL SECTOR REFORMS

Goods and Service Tax (GST)

In India, the constitution of India gives the power both to the state and central government to
levy taxes. Central government levies tax like custom duty, central sales tax, etc. and state
government levies taxes like Value Added Tax (VAT). There was a large number of multiple
taxes at various levels of the supply chain levied by both Centre and State government that lead
to a complex structure of the indirect taxes. The cascading of taxes which is due to the ‘tax on
tax’ ultimately inflate the price of the goods and services artificially and the ultimate burden of
these indirect taxes fall on consumers. This set of multiple taxes with different tax bases and
tax rates are also costly to administer and comply with. So it was decided to have one
comprehensive indirect tax or consumption base tax namely Goods and Service Tax (GST).
The concept of GST was introduced in the year 2000. A task force on Fiscal Responsibility and
Budget Management was formed in 2003 and it recommended the introduction of GST in
2004. However, it came into effect by 101st Amendment to the Constitution of India from 1st
July 2017. The motto of GST is ‘One Tax, One Market and One Nation’. With the
implementation of GST large number of indirect taxes were subsumed into it. GST replaced the
taxes levied and collected by the Centre namely service tax, central excise duty, duties of
excise on medicinal and toilet preparations, additional duties of Excise (Goods of special
importance and textiles and textile products), additional duties of customs, special additional
duty of customs and cesses and surcharges related to supply of goods and services. State taxes
like state value-added tax (vat), central states tax, purchase tax, luxury tax, entry tax, taxes on
advertisements, entertainment tax and amusement tax ( except those levied by the local bodies),
state cesses and surcharges on supply of goods and services.

Salient Features of GST

GST is applicable on ‘supply of goods’ or services as against manufacture of goods or on sale

of goods or provision of services. It is a destination-based consumption tax. It is a dual GST
namely Central GST (CGST) and State GST( SGST). CGST is levied by Centre Government
and SGST is levied by State Government. An Integrated GST or IGST is levied on the inter-
state supply of goods or services. IGST is levied and collected by Centre Government and is
divided among the Union and the States on the recommendation of the GST Council. At
present there are 4 rates of GST namely 5%, 12%, 18% and 28%. Some of the items which are

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exempted from GST are alcohol for human consumption. Similarly, petrol, high-speed diesel,
supply of petroleum crude, natural gas and aviation turbine fuel and electricity are kept outside
GST.

GST Council

GST council act has a provision for the GST council which is an apex committee on GST
matters. The composition of the members includes the chairman of the council (which is the
Union Finance Minister), The Union minister of state in charge of revenue or finance, one
member from each state who is the minister in charge of finance or taxation or any other
member. The Vice-chairman is elected among these members of the state. The secretary of the
revenue department is the Ex-Officio secretary and the chairperson of the Central Board of
Excise and Customs is the permanent invitee in the GST but has no voting right. GST council
recommends the Union Government of India and States on subsuming various taxes, cess and
surcharges in GST. Deciding on the threshold limit below which services and goods will be
exempted from GST. Details of services and goods that will be subjected to GST or will be
exempted. Making special provisions to special category states namely Jammu and Kashmir,
Himachal Pradesh, Arunachal Pradesh, Assam, Mizoram, Nagaland, Manipur, Meghalaya,
Sikkim, Tripura, and Uttarakhand. Model IGST laws, principles of levy, apportionment of
IGST and the principles that govern the place of supply. Any special rate of rates for a
specified period to raise additional resources during a disaster or natural calamity and any other
matter relating to GST.

Input Tax Credit

Input tax credit refers to the tax which was already paid by the seller/manufacturer at the time
of purchase of goods or service and which is available as a deduction from the tax payable or
the seller can reduce/deduct the tax which they already paid on inputs at the time of paying tax
on output. For example, seller A bought the goods of amount Rs 18,000 and these goods attract
GST @ 18% so the GST amount is Rs 3240. Now, seller, A sold these goods for Rs 22,000 and
this attracts GST @18% or Rs 3960. In this case, the net GST payable will be (Rs 3960 -Rs
3240 = Rs 720) and the input tax credit is Rs 3240.

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GST Network (GSTN)

GSTN is a non-profit, non-government organisation and manages the entire information and
technology system of the GST portal. Taxpayers file their tax returns through this portal and
the government can track every financial transaction through GSTN.

Advantages of GST

Some of the benefits which can accrue due to GST are the creation of a unified common
national market for India and boosting the “Make in India” campaign.

• Elimination of multiple taxes and mitigating the cascading of taxes, harmonization of

laws and rates of taxes.

• Evolution of simple tax regime, increase in ease of doing business, reduction in the
prices of goods in the long run thus benefit to customers.

• According to Economic Survey 2020-21, the Government received GST revenue worth
Rs 1.15 lakh crore in December 2020 along with the ongoing pandemic of COVID-19.

Activity 2

Study the latest budget and economic survey and read about any new changes
introduced in fiscal measures like change in income tax rate or new changes in direct
or indirect taxes and list them.
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9.7 SUMMARY

In this unit, we studied the financial and fiscal sector reforms which were introduced as part of
NEP. Within the financial sector, banking sector reforms initiated on the recommendation of
the Narasimham committee were of much importance. These reforms overhauled the financial
sector in general and the banking sector in particular. Post-1991 reform period, recent reforms
in the banking and insurance sector have focused on expediting the insolvency resolution
process and a maximum time limit has been imposed to finalise these processes. RBI can now
have more supervision on the functioning of cooperative banks. The cooperative banks can
now float shares and debentures and work more efficiently. Schemes like PMSBY, PMJJBY
and APY seek to cover the unbanked proportion of the population and aims to bring them
under the ambit of formal basic banking and insurance services. These schemes aim at
extending the net of social security to the vulnerable workers and sections of society along with
the provision of health facility in the nearby Primary Health Centres.

The taxation reforms 1991 attempted to make taxation broad-based and increasing the
compliance mechanism. Recently the introduction of GST attempted to overhaul the existing
indirect tax regime in the country which was plagued with multiple taxes and that lead to an
artificial increase in the prices. GST has opened up entire India as a single market with easing
the movement of goods across states. Since its introduction, this system has shown many
encouraging results in the form of an increase in tax collection and revenue.

9.8 KEY WORDS

Insolvency: It is the state in which a person or company is unable to pay the debt at
maturity.
Fiscal Year: It is one year period that is used for financial reporting and budgeting by
companies and governments.
Non-Performing Assets (NPAs): It is a loan or advance that are in default or arrears. The
principal or interest payment is due for 90 days.
Incidence of Tax: It is the final burden of the tax. Incidence is one person who ultimately
bears the real burden of the tax.

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 Direct Tax: Taxes which are imposed on individuals or corporation. The impact and
incidence of these taxes are on the same persons. Income tax, corporation tax, wealth tax,
are some of the examples.
Indirect Tax: It a tax in which impact and incidence are on different entities. These taxes
can be passed on to another individual. They are generally imposed on manufacturer or
suppliers who ultimately pass on the burden to the final consumer. Some of the examples of
indirect tax are GST, VAT, customs duty, etc.

9.9 SELF- ASSESSMENT QUESTIONS

1. Discuss the major advantages and features of GST.

2. What are the major facilities offered under the Ayushman Bharat Scheme?
3. Discuss the Service exports from the India Scheme under Foreign Trade Policy
2015-2020.
4. Critically examine the recommendations of the Narasimham Committee.
5. Critically examine the recommendations of the Kelkar Committee.

9.10 REFERENCES/ FURTHER READINGS

1. Misra S.K. &V.K.Puri.(2020). Indian Economy (38th edition)- Himalaya Publication

House, Mumbai.
2. Datt,Gaurav. & Ashwani Mahajan. (2019). Indian Economy. S.Chand Publication
3. Ministry of Finance. (2015). Economic Survey 2014-15. Government of India. New
Delhi.
4. Ministry of Finance. (2016). Economic Survey 2015-16. Government of India. New
Delhi.
5. Ministry of Finance. (2017). Economic Survey 2016-17. Government of India. New
Delhi.
6. Ministry of Finance. (2018). Economic Survey 2017-18. Government of India. New
Delhi.
7. Ministry of Finance. (2019). Economic Survey 2018-19. Government of India. New
Delhi.

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8. Ministry of Finance. (2020). Economic Survey 2019-20. Government of India. New
Delhi.
9. Ministry of Finance. (2021). Economic Survey 2020-21. Government of India. New
Delhi.

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 Appendix-I
i) Reduction in rate of corporate tax from 51.75 % to 45 % and further reduction to 40 %
from 1994-95.
ii) Abolition of surcharge on corporate tax.
iii) Abolition of Interest tax
iv) To continue gift tax (however, exemption limit ehnaced to Rs 30,000 from 20,000)
v) Tax on agricultural income of non-farmers if it exceeds Rs 25,000.
vi) To extend Value Added Tax (VAT) tax system upto the manufacturing level.
vii) To start TIN (Taxpayer Identification Number) in place of Permanent Account Number
(PAN) for the identification of taxpayers.
viii) To reduce the import duty ceiling to 50 % from the existing 110 %.
ix) To minimise the tax slabs.
x) Import duty to have five slabs, lowest 5 % and highest 30 %.
xi) 50 % import duty on non-essential consumer items.
xii) Duty-free import of wheat and rice, but oilseeds, pulses and other agricultural products
to have 10 % ad valorem import duty.
xiii) Duty-free imported items should be charged 5 % duty under the ‘Protection’ head.
xiv) 5 % import duty on inputs of fertiliser and newsprints production.
xv) 20 % import duty on medical equipment
xvi) To continue the advanced licencing system for exporters.

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 Appendix-II
Tax Administration
I. To expand taxpayer services both quantitatively and qualitatively.
II. Extension of PAN to cover all economic agents/citizens.
III. The time limit of 4 months for the processing of tax returns and refunds.
IV. Transparency and objectivity in the process of selection of cases.
V. Establishment of a Tax Information Network on a build, operate and transfer basis to
speed up the process of modernisation and consequent simplification and rationalisation
of the scheme of tax deduction at source.
VI. Enhancing the accountability of officers and staff.
VII. To provide more administrative and financial powers to the Central Board of Direct
Taxes (CBDT).

Direct Tax
i) Generalised exemption limit raised to Rs 1 lakh from Rs 50,000.
ii) Exemption limit of Rs 1,50,000 for widows and senior citizens
iii) 3 tier income tax structure replaced with 2 tier structure.
Taxable Income tax rate(%)
Upto 1 lakh nil
1-4 lakh 10
Above 4 lakh 20
iv) Standard deduction and surcharge abolished.
v) Tax incentives for saving needs to be withdrawn.
vi) To encourage investment in an annuity-oriented pension scheme proposal to double the
exemption under 80 C to Rs 2 Lakh from 1 lakh.
vii) Deduction under Section 80CCC for contribution to pension funds to be increased from
Rs.10,000 to Rs.20,000
viii) Abolition of dividend and long term capital gain tax.
ix) Tax rebate on housing interest reduced to Rs 50,000 from Rs 1.5 lakh and 2 % interest
subsidy on housing loans upto 5 lakh.
x) Income tax on agriculture income should be left to states.
xi) Tax rebate schemes under section 88, 88 B and 88 C withdrawn.
xii) The deduction for handicapped under 80 DD and 80 U to continue.
xiii) 5 % surcharge on income tax to be withdrawn.
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 xiv) For domestic companies, corporate tax reduced to 30 % from 36.75 %.
xv) For foreign companies, tax on income reduced to 35 % from 40 %.
xvi) No tax on the distribution of dividends by a company.
xvii) The general rate of depreciation for plants and machinery reduced to 15 %.
xviii) Minimum alternative tax under section 1157 B abolished.
xix) Elimination of tax incentives under Section 88, 80L and interest income under section
10.

Indirect Taxes
i) The multiplicity of levies to be reduced to three, viz., basic customs duty, additional
duty of customs and anti-dumping duties
ii) For raw materials, inputs and intermediate goods customs duty reduced to 10 % and for
consumer durables it was reduced to 20 % by 2004-05.
iii) Removal of exemption under Section 33AB, 33AC, 33B, 35, 35AC, 35CCA .
iv) By 2006-07, customs duty for coal, ores and other raw materials to be reduced to 5 %
and for capital goods, basic chemicals to 8 %.
v) Higher duty of 150 % for specified agri-products and demerits goods.
vi) Complete exemption of customs duty on life-saving drugs and defence-related
equipment.
vii) Central excise duty on kerosene raised by Rs 1 per litre.
viii) Duty exemption for Small Scale Industries (SSIs) with turnover upto Rs 50 lakh.
ix) By 2003, the nationwide introduction of VAT and service tax.
x) Removal of exemption under Section 33AB, 33AC, 33B, 35, 35AC, 35CCA etc.
xi) Income of mutual funds derived from short-term capital gains and interest to be taxed at
a flat rate in the hands of the mutual funds.
xii) The merger of tax on expenditure in hotels with service tax.
xiii) A duty of 8 percent on crude oil and 15 percent on petroleum products from 2003-04. A
duty of 5 percent on crude oil and 10 percent on petroleum products from 2004-05.
xiv) All levies to be reviewed and to be replaced by only one levy, i.e., the CENVAT.
xv) A uniform rate of 16 percent on all fibres and yarns, by raising duty on cotton yarn
from 8 percent to 14 percent and bringing down duty on polyester filament yarn to 14
percent in four instalments.
xvi) All exemptions to be removed on the textile sector except for fabrics woven handlooms,
handloom fabric certified as khadi, etc.
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 Appendix- III
I. To bring the tax to GDP ratio to the high levels of 2007-08 i.e. 11.9 %
II. Establishment of data warehousing and data mining infrastructure, modernise outdated
investigation processes.
III. Revision of Direct Taxes code bill.
IV. Implementation of GST.
V. Revision of the negative list of services that are exempted from tax.
VI. Proposal of ‘call option model’ to accelerate the disinvestment process.
VII. Establishment of Exchange Traded Fund to provide investors with the benefits of
diversification, low-cost access and flexibility.
VIII. Selling of minority holdings in largely private entities.
IX. To mitigate the financial burden of subsidies, the committee suggested increasing the
price of diesel by Rs 4/liter, Rs 2/litre in kerosene and Rs 50 per LPG cylinder. The
committee also recommends phasing out the subsidy on diesel and LPG by 2014-15.
X. Increase the price of urea by 10 %.

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 Appendix- IV

 The Taxation Laws (Amendment) Ordinance,2019 provides a concessional tax regime

of 22 % for all domestic companies from the Fiscal Year 2019-2010 provided they do
not avail any exemption/incentive. If surcharges and cess is also included then the
effective tax rate is 25.17 %. Such companies have been given exemption from paying
Minimum Alternate Tax (MAT).
 To give a boost to the ‘Make in India’ initiative a new provision is introduced in
Income Tax Act, which allows that any new domestic company to pay income tax at a
15 % tax rate if it is incorporated on or after 1st October 2019. Such companies should
not avail any exemption/incentive and commence production on or before 31st March
2023. Further, these companies are given exemption from paying Minimum Alternate
Tax (MAT).
 The rate of MAT has been reduced to 15 % from 18.5 %.
 In accordance with the Finance Act, 2019, exemption of income tax to individuals
earning income up to Rs 5 Lakh and the standard deduction is increased from Rs.40,000
to Rs. 50,000.
 The Finance Act, 2020, provides an option of paying income tax at concessional rates
to individuals and corporation, if they do not avail exemption/incentive.
 Dividend Distribution Tax (DDT) stands abolished.
 Direct Tax Vivad se Vishwas Scheme, 2020 to reduce the litigations and settle the
cases which are long pending before various appellate forums.
 Faceless E-assessment Scheme and Faceless Appeals: To eliminate the interface
between the assessing officer and the assesses and optimising the use of resources these
schemes/option was launched.
 Unique Document Number: To bring efficiency and transparency to every
communication.
 Encouragement to digital transactions to reduce unaccounted transactions.
 Provision of hassle-free tax environment to Startups like simplification of the
assessment procedure, exemption from Angel-tax, etc.
 A transaction like huge cash withdrawal, purchase of a luxury car, sale of goods, etc.
would be under the ambit of Tax Deduction at Source (TDS) and Tax Collection at
Source (TCS). These steps are undertaken to widen the tax base and ultimate increase in
tax revenue.

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 Appendix-V

Changes in Direct and Indirect Tax in Union Budget 2021-22

Direct Taxes
I. No change in the income tax rates for individuals and corporations
Income range tax rate
Upto 2,50,000 Nil
2.5 lakh to 5 lakh 5
5 lakh to 10 lakh 20
Above 10 lakh 30
II. Faceless Assessment and Faceless Appeal introduced.
III. Senior citizens over 75 years of age having only pension and interest income exempted
from filing tax returns.
IV. The time limit for reopening of cases reduced to 3 years from 6 years.
V. Dispute resolution committee to be set up for taxpayers with taxable income upto Rs 50
lakh and disputed income upto Rs 10 lakh.
VI. Rules to be notified for NRIs regarding their foreign retirement accounts.
VII. For entities that carry out 95 % transaction digitally the limit for such entities for tax
audit increased to Rs. 10 crore from the existing Rs. 5 crore.
VIII. Dividend payment to REIT/ InvIT exempt from TDS.
IX. Infrastructure Debt Funds cab raise funds by issuing Zero Coupons Bonds.
X. Additional deduction of interest, up to Rs. 1.5 lakh, for the loan taken to buy an
affordable house extended for loans taken till March 2022.
XI. Tax holiday for Affordable Housing projects extended till March 2022.
XII. Tax exemption allowed for notified Affordable Rental Housing Projects.
XIII. Tax holiday for capital gains from incomes of aircraft leasing companies.
XIV. Tax exemptions for aircraft lease rentals paid to foreign lessors.
XV. Tax incentive for relocating foreign funds in the IFSC.
XVI. Tax exemption to investment division of foreign banks located in IFSC.
XVII. Capital gains exemption for investment in start-ups extended till 31st March, 2022.

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 Indirect Taxes

I. Major measures were undertaken under GST. Nil return through SMS, Quarterly return
and monthly payment for small taxpayers, Electronic invoice system, Validated input
tax statement, Pre-filled editable GST return, Staggering of returns filing, Enhancement
of capacity of GSTN system, Use of deep analytics and AI to identify tax evaders.
II. Revised, distortion-free customs duty structure to be put in place from 1st October 2021
by reviewing more than 400 old exemptions.
III. New customs duty exemptions to have validity up to the 31st March following two
years from its issue date.
IV. Customs duty reduced uniformly to 7.5% on semis, flat, and long products of non-alloy,
alloy, and stainless steels.
V. Duty on steel scrap exempted up to 31st March 2022.
VI. Anti-Dumping Duty (ADD) and Counter-Veiling Duty (CVD) revoked on certain steel
products.
VII. Duty on copper scrap reduced from 5% to 2.5%.
VIII. Duty on solar invertors raised from 5% to 20%, and on solar lanterns from 5% to 15%
to encourage domestic production.
IX. Exemption on import of duty-free items rationalized to incentivize exporters of
garments, leather, and handicraft items.
X. Exemption on imports of certain kind of leathers withdrawn.
XI. Customs duty on cotton increased from nil to 10% and on raw silk and silk yarn from
10% to 15%.
XII. Agriculture Infrastructure and Development Cess (AIDC) on a small number of items.

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