The correct option is 2 and 3 only.
Explanation
The fiscal policy reforms initiated in India (post-1991) aimed to simplify the tax structure, lower tax rates to improve compliance, and integrate the economy with the global market. These reforms significantly altered the composition and generation of public revenue.
Statement-wise Analysis:
- Statement 1 is Incorrect: While the logic behind lowering tax rates was to encourage better compliance and reduce evasion (based on the Laffer Curve principle), the actual outcome in the immediate post-reform period was different. The tax reductions did not result in a substantial increase in tax revenue for the government. In fact, the tax-to-GDP ratio remained stagnant or declined during this period.
- Statement 2 is Correct: A key pillar of the economic reforms was the reduction of peak custom duties to open up the Indian economy and make imports cheaper. This deliberate reduction in tariffs significantly curtailed the scope for raising revenue through customs duties, which had previously been a major source of government income.
- Statement 3 is Correct: To attract Foreign Direct Investment (FDI), the government offered various tax incentives, exemptions, and tax holidays to foreign investors. These incentives narrowed the effective tax base, thereby further reducing the scope for raising tax revenues.
Key Takeaway:
Although fiscal reforms aimed to rationalize the tax structure, the combination of reduced tariffs and tax incentives for foreign investors limited the growth of tax revenue in the post-reform period.