More than a year after Rajiv Gandhi had announced the government’s intention to set up a stock market regulator, Narayan Datt Tiwari informed Parliament that the new regulatory body would become operational “soon”. A month and a half later, on April 12, 1988, the Securities and Exchange Board of India was established. But it did not have any statutory powers. Tiwari announced that necessary legislation to make the stock market regulator a statutory body was under preparation. In addition, the government had moved ahead with its initiatives on setting up more mutual funds, laying down ground rules for the orderly operation of stock exchanges, improving their infrastructure, facilitating share transfers and enforcement of more efficient discipline on companies entering the market.

Keeping that objective in mind, Tiwari allowed income from the transfer of a capital asset by a holding company to its wholly owned subsidiary company or vice versa to be treated as capital gains and taxed accordingly, provided the capital assets were taken over as stock-in-trade at the time of transfer. For venture capital companies and venture funds too, the capital gains tax facility was extended. A new scheme was formulated, under which approved venture capital companies and funds could invest in new companies and become eligible for concessional treatment in the matter of capital gains tax, something non-corporate entities already enjoyed.

Similarly, tax concessions available for investments in equity shares of new industrial undertakings were extended to investments in special units of mutual funds where the resources were earmarked for investment in new projects. Dividend income of up to Rs 3000 a year was exempted from income tax, in addition to the already exempted categories of incomes of a total amount of Rs 10,000 a year. Tiwari introduced the short-duration Kisan Vikas Patra, a savings scheme of two and a half years’ duration, without tax concessions but aimed at tapping rural savings. He made many other minor changes in other existing savings schemes to increase the government’s access to a higher corpus of savings collections to finance its expenditure.

In 1987-88, exporters faced a new uncertainty in the form of sharp fluctuations in the international exchange rates of the Indian rupee.

Importers too were hit by higher costs as the Indian rupee depreciated against the US dollar. In an attempt to provide a degree of protection to projects dependent on imports or exports, Tiwari exhorted the state-owned financial institutions to come out with an appropriate scheme, whose broad contours he outlined in the Budget. The scheme allowed promoters of such projects to designate their foreign currency loans in Indian rupees to avoid the risk of exchange rate fluctuations. The Industrial Development Bank of India was made the nodal agency for implementing the scheme, under which the interest rate on rupee-denominated loans was variable, along with an exchange premium. To bolster the country’s foreign currency resources through higher deposits by Indians abroad, the government announced the introduction of a new scheme of foreign currency-denominated bonds or deposit certificates for non-resident Indians, or NRIs, on a non-repatriable basis. These bonds and certificates had a maturity period of seven years and carried a higher interest rate than the repatriable foreign currency NRI deposits. More importantly, the new non-repatriable NRI bonds were exempted from income tax, wealth tax and gift tax.

One of Tiwari’s first fiscal policy announcements in his Budget was the continuation of the surcharges the government had levied on income tax, wealth tax and customs duty in the wake of the drought of 1987. The surcharge was 5 per cent on income tax, 10 per cent on wealth tax and 5 per cent by way of auxiliary duty on customs duty. All essential commodities were exempted from the auxiliary duty on customs. In February 1988, Tiwari went a step further. In addition to continuing the surcharges imposed in 1987, he levied a surcharge by way of a special excise duty of 5 per cent on all commodities not exempted from the levy of excise duty. In other words, essential commodities and other priority items that were exempted from excise duty continued to remain exempted from the 5 per cent special excise duty too.

On direct taxes, Tiwari made no changes in the rates of taxation, although he increased the standard deduction allowed to income taxpayers from 30 per cent to 33.33 per cent of salary income, with the annual income ceiling going up from Rs 10,000 to Rs 12,000. The move to relax the limit of standard deduction benefited over 1 million taxpayers.

A significant change Tiwari introduced in the country’s inheritance taxation regime showed some clever thinking. The estate duty, which had to be paid on the value of assets that got transferred to inheritors upon the death of their original owner, had been abolished in March 1985, when VP Singh had presented his first Budget. Tiwari argued that the abolition had been triggered by the government’s assessment that the estate duty law was complicated and had led to procedural harassment for many taxpayers following a death in the family, and had not resulted in any substantial revenue gain for the exchequer either.

Tiwari, however, believed that there was a strong case for an inheritance tax, displaying in full his socialist credentials. He argued that the estate duty should be reconsidered on the grounds of social justice to tax the transfer of wealth through inheritance, ‘especially where the volume of wealth involved’ was large. The government, he announced, had therefore decided to levy a tax on the transfer of wealth, to be applicable to all those who were liable to pay wealth tax. The contours of the modified estate duty were the following: the new tax would be levied in respect of assets subject to wealth tax; the method for valuation of the assets would be the same as for wealth tax; the tax would be administered by wealth tax officers, and; the rate of the wealth transfer tax would be five times the applicable wealth tax rates. The taxation rate was quite substantial as the wealth tax rate was 1 per cent on net wealth above Rs 30 lakh.

Tiwari had hoped that the new tax would not suffer from the rigidities and procedural delays which had characterised the enforcement of the old Estate Duty Act. However, the new tax had to be phased out many years later and wealth tax itself was abolished with effect from April 1, 2016.

Excerpted with permission from India’s Finance Ministers: Stumbling into Reforms (1977 to 1998), AK Bhattacharya, Penguin India.