The Committee on Direct Tax Reforms was commissioned as part of the Indian government’s ongoing tax-reform efforts initiated in the early 1990s. The goal was to enhance the efficiency, equity, and effectiveness of the direct tax system. The committee identified several key issues with the tax structure, including its complexity, lack of transparency, high levels of tax evasion and avoidance, inefficiencies in tax administration, and disparities in tax burdens across different sectors and income types. It was chaired by Vijay L. Kelkar, Adviser to Minister of Finance & Company Affairs. Members included S. N. L. Agarwala (Advocate & Ex-Chief Commissioner of Income Tax); Omkar Goswami (Chief Economist, Confederation of Indian Industry); Arvind Sonde (Advocate); Urjit Patel (Executive Vice President, Infrastructure Development Finance Corporation Ltd.); S. Ananthanarayanan (Executive Director, AMCO Batteries Ltd.); Dipankar Chatterji (Chartered Accountant); T. V. Mohandas Pai (Chief Financial Officer, Infosys Technologies Ltd.); P. C. Parmar (Chartered Accountant); and A. J. Majumdar (Joint Secretary (TPL), Department of Revenue, Government of India and Member-Secretary).

The report found that while direct taxes formed a significant portion of total revenue, collection was below potential because of widespread evasion and avoidance. Detailed data showed that exemptions under sections like 10A and 10B, which provided tax holidays to certain export-oriented units, led to substantial revenue loss estimated in thousands of crores annually. The wealthiest individuals and corporations could reduce their tax liability through various exemptions and deductions, resulting in a heavier burden on smaller taxpayers and salaried individuals. The committee concluded that India’s tax system lagged behind international standards in terms of simplicity and efficiency.

To address these issues, the committee made several key recommendations. It proposed simplifying and rationalizing the tax code by reducing the number of exemptions and deductions, which would broaden the tax base and make the system more equitable. Specific recommendations included abolishing or phasing out certain provisions like Sections 33AB, 33AC, 35CCA, and 36(1)(iii) and adjusting depreciation rates. The committee also recommended reforming tax administration by expanding taxpayer services, using the Permanent Account Number for all financial transactions, mandating electronic submission of information returns, and enhancing transparency in search and seizure operations.

For corporate taxes, the committee proposed integrating them with personal income taxes, taxing corporate profits at the same rate as the top marginal rate for personal income tax (30 percent), and exempting dividends and long-term capital gains on listed equity to avoid double taxation. It also recommended eliminating tax incentives like Sections 10A and 10B for all but software manufacturers. For personal income taxes, the committee suggested increasing the basic exemption limit, implementing a simplified rate structure with two tax slabs (20 percent for incomes between Rs. 1,00,000 and Rs. 4,00,000, and 30 percent for incomes above Rs. 4,00,000), and eliminating the standard deduction. Administrative improvements included establishing a National Tax Information Network to streamline tax administration, digitizing returns, and outsourcing noncore functions like data entry.

The committee believed its recommendations would broaden the tax base, improve compliance, and enhance revenue, thereby boosting economic growth and enabling increased investments in social and physical infrastructure. It also proposed abolishing the wealth tax, integrating the service tax with the central excise tax, and implementing measures to encourage voluntary compliance through improved taxpayer services and reduced compliance costs.

Based on the recommendations of the committee, personal tax-exemption limits were extended, corporate tax rates were reduced, the wealth tax was abolished, and a Tax Information Network was introduced to streamline administration. These measures aimed to simplify the tax system and enhance India’s global competitiveness. However, the proposed elimination of the minimum alternate tax, aggregation of long-term capital gains with regular income for taxation, and abolition of standard deductions and certain tax incentives like those under Section 80C were either rejected or only partially implemented.

The report highlighted the complexities and inequities in India's direct tax system, including excessive exemptions, uneven tax burdens, and inadequate compliance. It recommended simplifying tax structures, reducing exemptions, and aligning corporate and personal tax rates to broaden the tax base and improve equity. These reforms aimed to create a fairer, more transparent, and growth-oriented tax framework.