He also worked in several state and central government financial institutions in India. He was considered a public finance expert in India, instrumental in bringing about the early reforms to the direct taxation structure. He was awarded Padma Vibushan in He was born on 12 December His father Chelliah Nadar was his greatest inspiration.
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On the eve of 25th anniversary of reforms, much has been spoken and written about reforms in India. The flood of articles in the past one week, has reminded us the genesis, the seriousness of the external payments crisis and the measures taken to tide them over and undertake structural reforms to steer the economy from a predominantly state controlled into market oriented one. It is interesting to read self-congratulatory accounts of how the balance of payments crisis was converted into an opportunity to undertake comprehensive structural reforms.
In this entire narration of historical accounts, there was virtually no discussion on the tax reform initiated as a part of the structural reform.
This is perhaps due to the fact that the reforms were not immediate—they were phased in subsequent years and partly because, the major architect of reforms, Raja Chelliah is no longer there to narrate the story. To be sure, the two commissions appointed in the maiden budget of Manmohan Singh in were, one on tax reforms chaired by Raja Chelliah and another on the financial sector reform chaired by M Narasimham.
Tax policy, until then, was designed to meet the requirements of planned development strategy and as an instrument to reduce inequality in incomes and wealth. Although it had failed on both counts, the extortionary structure of income tax was a symbol to achieve the socialistic pattern of society.
However, expansionary fiscal policy in the latter half of the s and persisting chronic fiscal deficits required reform of the tax system. The move towards market-led development required reorientation and modernisation of the tax policy. This required changing the tax system taking into account the developments in the theory of tax reform and the best practice approaches followed internationally.
Thus, the Commission had a clear mandate to recommend reforms in the tax system which will enhance revenue productivity and simplify and rationalise the tax structure and administration to meet the needs of the market economy. The Commission set about its task systematically. Before the second budget, the Commission had given the first report to the finance minister to initiate reforms. It produced two more volumes of the report dealing with the structure and operational aspects of both Union and State taxes.
The three volume report of the Tax Reform Commission provided the basis of reforms in the tax system. Interestingly, although the reforms were recommended and later carried out without any international pressure, they were broadly in conformity with the international trends and best practices.
The broad thrust of reforms was to move away from the levy of extortionary rates. The attempt was to evolve a tax system broadening the base and levying lower and less differentiated rates to evolve a simpler system.
Broadening the base entailed having a relook at the tax preferences. Chelliah had a competent team of scholars led by Arindam Das-Gupta to assist him.
They did pioneering work on various aspects of tax policy and administration. It was not easy for Raja to move away from the orthodoxy as even within the Commission there were people who believed that reduction in the rate would not lead to better compliance.
Indeed, Manmohan Singh had a strategy; after the submission of the report, he appointed Raja Chelliah as the Adviser to the finance minister with the principal mandate to implement the reforms he had recommended. Raja Chelliah, as the adviser to the finance minister was always looking for opportunities to expand the base to raise revenue. The reaction was simple.
He wanted me to write on a note exploring the possibility of taxing services in India. The result was the introduction of service tax on three services in the budget of telephones, non-life insurance and stock brokerage and in subsequent years the coverage of the tax base was expanded steadily to make it one of the most productive taxes in terms of revenue.
The report of the TRC was also the forerunner to the introduction of VAT at the state level though it fell short of recommending GST because Raja Chelliah thought that division of revenue from taxes on inter-state services will be difficult to manage. In fact, the recommendation to evolve a goods and services tax—at the manufacturing level by the centre and retail level by the states was first recommended by the Expert Group on Taxation of Services chaired by me in Perhaps the most difficult part of TRC work related to rationalising customs duties.
It was indeed implemented and the number of rates was brought down from 22 in to seven by There were papers written on expenditure reform and those highlighting the proliferation of subsidies. Papers were also written to identify the maladies affecting state finances and addressing reforms in that area. Like us on Facebook and follow us on Twitter. Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.
The broad thrust of his reforms was to move away from the levy of extortionary rates In this entire narration of historical accounts, there was virtually no discussion on the tax reform initiated as a part of the structural reform.
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REVIEW OF THE CHELLIAH TAX COMMITTEE REPORT
Raja Chelliah: The father of tax reform