Read the following statements carefully and choose the correct option regarding Assertion (A) and Reason (R).
Assertion (A): Tax reforms post-1991 included lowering income tax rates.
Reason (R): Lower tax rates were believed to increase tax compliance and reduce evasion.
Show answer & explanation
Correct answer: A
Explanation
Correct Answer: Option 1 (Both A and R are true and R is the correct explanation of A.)
Explanation:
Assertion (A) is true: After 1991, India underwent major reforms in both direct and indirect taxes. Personal income tax and corporate tax rates were gradually reduced to make the economy more liberal and competitive.
Reason (R) is true and correctly explains: The main rationale behind reducing tax rates was based on the theory of the Laffer Curve. It was believed that if tax rates were too high, people would resort to tax evasion. Conversely, lower and reasonable tax rates would lead to voluntary tax compliance, thereby increasing the government's total tax revenue.
Additional Facts:
Raja Chelliah Committee: The recommendations for the 1991 tax reforms were primarily made by the Raja Chelliah Committee.
Direct Taxes vs. Indirect Taxes: The reforms aimed to broaden the base of direct taxes and reduce indirect taxes (such as customs duties) to facilitate trade.
GST: In this series of tax reforms, the Goods and Services Tax (GST) was implemented in 2017, which is the largest indirect tax reform in India's history.
Possible Questions for the Upcoming Exam:
Who was the Chairman of the 'Tax Reforms Committee' (1991) in India?
(Answer: Raja J. Chelliah)
The Laffer Curve shows the relationship between which two factors?
(Answer: Tax rate and total tax revenue)
In which year was the New Economic Policy (NEP) announced in India?
(Answer: 1991)