The intellectual framework for high taxes was set by Finance Minister C.D. Deshmukh in his 27 February 1953 Union Budget speech, where he set up the Taxation Enquiry Commission.
The following is a chapter from the book 70 Policies that Shaped India: 1947 to 2017, Independence to $2.5 Trillion.
Find the book here.
In her 28 February 1970 Union Budget speech, then Prime Minister Indira Gandhi, who also held the Finance Minister’s office, increased the marginal tax rate by 11 percentage points to 93.5 percent on all incomes above Rs. 200,000. <1> This meant that for every Rs. 100 earned above Rs. 200,000, a citizen could take home just Rs. 6.50. When a surcharge of 15 percent was taken into account, the highest marginal rate rose to 97.5 percent. <2> “Taxation is also a major instrument in all-modern societies to achieve greater equality of incomes and wealth. It is, therefore, proposed to make our direct tax system serve this purpose by increasing income taxation at the higher levels as well as by substantially enhancing the present rates of taxation on wealth and gifts,” she said. <3> This increase followed the 1969 split in the Congress, and experts said <4> it was done to give the party a “pro-left image.” This was completely in tune with a politics that saw wealth creators as parasites and highincome earning and tax-paying citizens as evil and believed in the distribution of wealth without creating it. The intellectual framework for high taxes was set by Finance Minister C.D. Deshmukh two decades earlier in his 27 February 1953 Union Budget speech, where he set up the Taxation Enquiry Commission <5> under the chairmanship of John Mathai, with six other members, including V.K.R.V. Rao, who recommended a maximum marginal rate of 13.5 annas in the rupee <6> or 85 percent on incomes above Rs. 150,000, which seemed to them “as far as one can go in present circumstances.” But even high taxes weren’t enough. “Fiscal instrument must be deployed to discourage payment of high salaries and remunerations which go ill with norms of egalitarian society,” Finance Minister Y.B. Chavan said in his 28 May 1971 Union Budget speech, while placing a ceiling of Rs. 5,000 per month on salaries, with Rs. 1,000 as perquisites. <7> To put these rates in context, it wasn’t just the socialist influence that created such tax abominations; they also mirrored global benchmarks. The marginal rate in the US around this period was 70 percent, significantly lower than in 1944–45, when it stood at 94 percent. <8> These high rates penalised wealth creation, turned average households into criminals, kicked entrepreneurship in the face and created a whole new industry of organised tax evasion.
<1> Speech of Shrimati Indira Gandhi, Prime Minister and Minister of Finance, Introducing the Budget for the Year 1970–71, Para 22, 28 February 1970, accessed 8 January 2018.
<2> M. Govinda Rao and R. Kavita Rao, “Trends and Issues in Tax Policy and Reform in India,” National Institute of Public Finance and Policy, India Policy Forum, 2006, 68, accessed 8 January 2018.
<3> Speech of Shrimati Indira Gandhi, Prime Minister and Minister of Finance, Introducing the Budget for the Year 1970-71, Ministry of Finance, 28 February 1970, para 20, accessed 8 January 2018.
<4> M. Govinda Rao, R. Kavita Rao, op. cit.
<5> Speech of Shri C.D. Deshmukh, Minister of Finance Introducing the Budget for the Year 1953–54, Ministry of Finance, 27 February 1953, para 41, accessed 8 January 2018.
<6> Report of the Taxation Enquiry Commission 1953–54, Ministry of Finance, Government of India, 1955, 136.
<7> Speech of Shri Y.B. Chavan, Miniter of Finance Introducing the Budget for the Year 1971–72 (Final), Ministry of Finance, 28 May 1971, para 47, accessed 8 January 2018.
<8> Tax Foundation, accessed 8 January 2018.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Gautam Chikermane is a Vice President at ORF. His areas of research are economics, politics and foreign policy. A Jefferson Fellow (Fall 2001) at the East-West ...
Read More +
PREV
