The Government Of India had constituted a Committee of experts to examine the structure of Direct and Indirect Taxes on 29th August, 1986, under the Chairmanship of Dr. Raja J. Chelliah and the Committee consisted four other members. The terms of reference for Direct Taxes, were as under:

1. Ways of improving the elasticity of tax revenues, both direct and indirect, and increasing the share of direct taxes as a proportion of total tax revenues and GDP.
2. Making the tax system fairer and broad based, with necessary rate adjustments, particularly with regard to commodity taxation and personal taxation.
3. Rationalisation of the system of direct taxes with a view to removing anomalies, improving equity and sustaining economic incentives.
4. Identifying new areas for taxation.
5. Ways of improving compliance of direct taxes and strengthening enforcement.

The Committee had submitted interim report on Tax Reform in December, 1991 and had suggested the following Income-tax rates which are reproduced from para 12.2, Chapter - Summary of Recommendations, page 318;

"12.2 Ideally, a single rate income-tax would be the simplest both for compliance and administrative reasons. However, for the present, the following tax rate schedule for different taxable entities is recommended:

(a) In the case of individuals, the exemption limit should be fixed at Rs.28,000/-. The marginal rates of tax (inclusive of surcharge, if any) should be:

"12.4 The Committee had recommended that the following Tax Concessions, now available under the Income-tax Act should be abolished.

"12.6 The tax concession under section 80-CCA for any investment in the Jeevan Dhara or Jeevan Akshay annuity plans of the Life Insurance Corporation of India should be withdrawn. The tax concession under section 80-CCB for investment in Equity Linked Savings Scheme should be abolished."

"12.8 The provision of Section 35-AC, 35-CCA. 35-CCB and 80-GGA, should be amalgamated with section 80-G. The 100 per cent deduction at present allowable under section 35-AC, 35-CCA, 35-CCB and 80-GGA should be restricted to 50 percent as in the case of deduction for other donations under section 80-G. Further, deduction should be allowed only in respect of donations to an approved association/institution and not for expenditure incurred on an in-house programme.

"12.9 The tax incentives under sections 80-HH, 80-HHA, 80-I, 80-IA, 80-JJ, 80-QQ and 80-QQA should be abolished with immediate effect. With the result, the tax payers would not be henceforth be eligible for the tax benefits they have been enjoying under the above mentioned provisions."

"12.10. The provisions such as section 80-HHC, 80-HHE, etc., need not be kept under review."

"12.12. The provisions of clause (13A) of section 10 of the I.T. Act providing for exemption of house-rent-allowance as per rule 2A should be abolished."

"12.13. All tax payers, whether enjoying a rent-free accommodation or concessional rent accommodation or in respect of house rent allowance or receiving no such benefit on account of being self-employed should be entitled to relief under section 80-GG of the Income Tax Act for rent paid. For the purpose of computing relief under section 80-GG, 'rent paid' should mean that rent actually paid as increased by the amount of HRA that would otherwise have been admissible to the tax payer. The existing provisions of section 80-GG of the Income Tax Act should be modified to provide for deduction in respect of rent paid in excess of ten percent of salary upto a maximum of twenty per cent. The limit of Rs.1,000 under section 80-GG of the Income Tax Act should be removed. Further, since the income from a let-out property is taxable and the income from a self-occupied property is deemed to be nil, the benefit under this property should not be available in any case where the tax payer or his spouse or minor or the Hindu Undivided Family of which he is the Karta has a self-occupied property anywhere in India."

"12.15. At least 80% of the level travel allowance, home travel allowance, travel allowance on retirement, passage money and such other payments should be subjected to tax."

"12.16. The allowances paid to legislatures should be fully subjected to tax."

"12.17. The exemptions in respect of allowance covered under sub-clause (ii) of clause (14) of section 10 of the Income-tax Act should not exceed 10 percent of salary."

"12.18. All loans given to the employees should be deemed to have been given at the rate of 12 per cent and any concession implicit in the interest actually charged should be treated as a fringe benefit and taxed accordingly. However, where the concessional interest loan is utilized for construction of a house property or any other income generating asset, the perquisite value of the concessional interest loan should also be allowed as a reduction in the computation of income from such house property or any other income generating asset."

The Committee had also submitted its Final Report reported in 197 Income Tax Reports, p.177.

The Committee in its final report, had recommended to continue the Gift Tax as stated below:

"3.66. The Committee favours the continuance of the imposition of the Gift Tax. Even though the top marginal rate of income tax as well as the spread between the rates have been reduced, gift of assets to individuals other than minor children could still be used as a means of reducing the total tax liability of a family (either nuclear or extended). A tax on gifts is, therefore, necessary as a means of discouraging such transfers. Also the gift-tax cannot be said to affect incentive or lead to any enquiry."

"3.67. The exemption level of Rs.22,000 was fixed in 1985. Considering the rise in prices and the increase in the threshold level, for income tax, gifts in a year not exceeding Rs.30,000 may be exempted from the tax."