India’s tax policy after independence strove to achieve a socialistic pattern of society. Public consumption and investment were used as tools to address several issues: inequality, unbalanced regional growth, lack of incentives for saving, price instability, balance-of-payments pressures, lack of support for small-scale industries, and weak job creation. Because of a narrow tax base, the government relied heavily on indirect taxes to meet its revenue targets. By 1973/74, the individual income tax structure comprised 11 tax brackets, with rates ranging from 10 to 85 percent. Taking into consideration an additional surcharge of 15 percent, individuals earning over INR 0.2 million faced a sky-high marginal rate of 97.75 percent. What did this result in? As one would expect, more and more people chose to evade taxes, uncollected tax arrears continuously increased, and black money proliferated across the economy. To investigate these problems, the union Ministry of Finance formed a committee under former Chief Justice, Supreme Court of India, K. N. Wanchoo. Its members included M. P. Chitale (Member); S. Prakash Chopra (Chartered Accountant, Member); P. C. Padhi (Former Chairman, Central Board of Revenue and Deputy Comptroller & Auditor General, Member); and D. K. Rangnekar (Economist and Editor, Economic Times, Member).
The Wanchoo Committee observed that the blame for evasion and unaccounted income lay chiefly with high direct taxes, weak administration, and heavy industrial regulation. It found that the black economy, which represented between 4 and 5 percent of GDP in the mid-1950s, had grown to 7 percent by 1970. Its report recommended that the effective top marginal rate (97.75 percent) be brought down to 70 percent. This was implemented by successive finance ministers, as the rate was brought down to 77 percent in 1974/75 and 66 percent in 1976/77. Income and wealth taxes were raised again by the Janata Party government (1977–80) and brought down next by Prime Minister Indira Gandhi. Subsequently, in his momentous FY 1985/86 budget, Finance Minister V. P. Singh cut the top marginal rate to 50 percent, decreased the wealth tax, and halved the number of tax brackets. Following the recommendations of the report, the Income Tax Settlement Commission was set up in 1976, which acted as the only income tax plea-bargaining authority in India.
The committee also recommended minimizing controls and licenses, regulating donations to political parties, taxing agricultural income, and introducing a Permanent Account Number system. To unearth black money, it suggested doing away with bearer bonds and Swiss-type bank accounts, and it recommended setting up a voluntary disclosure scheme. It also called for setting up (i) a Direct Taxes Settlement Tribunal to carry out fair, prompt, and independent settlements with taxpayers and (ii) an Income-Tax Settlement Commission as an alternative dispute-resolution body for administering fiscal laws.
The Wanchoo Committee underscored the need for a simpler, fairer tax system to curb evasion and reduce the black economy, advocating lower tax rates, streamlined regulations, and better administrative mechanisms to align fiscal policy with economic growth and compliance.
