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Father of tax reforms
June, 22nd 2010

Raja Chelliah played a key role in reforming Indian economic policies. After being Chief of the Fiscal Analysis Division in the Fiscal Affairs Department of the International Monetary Fund, he returned to India in 1975 at Finance Minister C. Subramaniam's insistence (to apply his knowledge and experience to the design, architecture, engineering and management aspects of fiscal policies, to quote the obituary by M.Govinda Rao) to set up the National Institute of Public Finance and Policy (NIPFP) in 1976.

Hailed as the father of tax reforms, he conceptualised the reform framework and was involved in its implementation in the early years. Author of the classic Fiscal Policy in Underdeveloped Countries (1960), Chelliah held several positions in government with distinction.

One must single out his contribution as Chairman of the Tax Reforms Committee (TRC) and as a member of the Committee on Financial Sector Reforms (chaired by M. Narasimham), whose reports ushered in dramatic changes in India's tax system and, subsequently, in Centre-State financial relations.

This book is a collection of his three articles on the political economy of poverty eradication in India; reforms of federal fiscal relations; and the recommendations of the task force on direct taxes. Had Chelliah lived longer, he would undoubtedly have enlarged the work by connecting these themes.

In the words of D.K. Srivastsava, a colleague of Chelliah almost from the start of NIPFP and at the Madras School of Economics (founded by Chelliah) who has provided an excellent introduction, the book is Chelliah's expression of an incomplete journey where India continues to co-exist with sprawling regions of abject poverty.

Chelliah realised that the reformation of the tax system was fundamental to achieving social goals and made out a case for a set of scientific, research-based policies that would redo the system of grants and sharing of Central taxes with the States. He was aware that the changes would be incremental but strongly felt that a long-term framework must be kept in view and developed.

Basis

Chelliah's recommendations provided the basis for the direct taxes emerging as the major component of tax revenues (a position occupied by customs and excise duties), and, as a consequence, the tax system becoming less regressive. By pushing for a slashing of the tax rates and the number of slabs in respect of corporate as well as personal incomes, he got the system modified to encourage tax payment rather than tax avoidance. He not only visualised and concretised VAT (Value Added Tax) but also negotiated with the State governments for adopting it.

With the Goods and Services Tax (GST) expected to become operational nationwide next year, India is all set to become a single market, with common tax rates across the States and on almost all goods and services. In the realm of fiscal federalism, Chelliah's contribution lay in switching to normative approach to the sharing of tax revenue, from what used to be a gap-filling exercise. His idea was to boost the States' tax collection efforts and improve the efficiency of their spending.

According to him, the basic principles in tax sharing are adequacy, autonomy, fiscal discipline, and equity. His vision, now embodied in the 80th amendment of the Constitution, was to replace the system of the Centre sharing revenue with the States tax-by-tax by one of sharing all taxes as a whole.

On borrowing

Chelliah's abhorrence of excessive borrowing by governments, whether from domestic or foreign sources, led to the enactment of a law on fiscal responsibility and budget management by the Centre and most States. Along with U. Shankar, he proposed a comprehensive set of taxes aimed at bringing down pollution and protecting the environment.

Unlike government spokesmen who would not mind trading off more inflation for higher growth, Chelliah was willing to forgo a little growth if it could have a greater impact on poverty reduction. He considered universal education and population control through family planning as important means of reducing poverty levels. Success stories of non-governmental organisations engaged in development work in the economically backward State of Bihar find a place in the book.

Chelliah has an uncanny skill of presenting complicated issues and arguments in a simple and easy-to-comprehend manner. This book is for everyone interested in the thinking behind modern Indian public finance, of which Chelliah was truly the father.

 
 
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