Tax Compliance in India

 

Tax to GDP ration in India is one of the lowest in the growing economies . Then it would not be wrong to say  India is “a tax non-compliant society and too many people evade taxes”. Here we are not becoming pessimistic but we need to acknowledge the ground realities. The fact is that less than 3% of Indians pay income tax implies that a large majority avoid paying income tax. It is also said that most Indians under-report their incomes.Many times Prime Minister Modi has pointed out this fact. Only 1 Million Indian acknowledge their income is more than 1 crore a year. This is quiet Tax compliance will increase the per-capita tax revenues.
 

 

 

 

Present Status

With rising per capita incomes, the tax-to-GDP levels are rising quite well due to increasing formalisation of the economy.  Between 2000-01 and 2017-18, the tax-to-GDP rose from 8.7% to 11.6%. During this period, personal income taxes, as a ratio to GDP, are up from 1.5% to 2.6%.  Corporate taxation levels have been falling for several years, with the slowing of corporate profitability, and had this not happened, tax revenues would have grown even faster. In the personal income tax (category), the salaried ones are paying more compared to business
people. It is important to ‘remove this unevenness’. Demonetisation, sustained campaign against tax evasion and the implementation of GST have resulted in greater tax compliance. GST implementation has increased the indirect taxpayer base by more than 50%. There has been a concerted effort to make India a tax compliance society. In Union Budget 2018-19, corporate tax rate of 25 per cent for businesses with turnover of up to Rs 250 crore was proposed.

 

 Reasons for low Tax Compliance in India

With agriculture not taxed, over 60% of the population is out of the ambit of the tax system or other exemptions given for senior citizens, etc.  The Economic Survey highlighted some local bodies are not collecting property taxes adequately.  The Government and citizens suspect that corporate business is dishonest and accumulating profits at their cost. The private sector and citizens suspect that the Government does not use their tax collection for general welfare of the society and taxes are wasted. The businesses, especially in informal sector, have to be self-dependent and, hence, they save on taxes. When employees are not secure at work places compulsion of tax compliance would generally be weak.

 

 

International Practice

In the US, tax compliance is high and ascribed to strong deterrent effect of selective, intensive audits. In advanced countries, high tax collection and excellent public services reinforce each other. Globally the revenue from personal income tax is much higher compared to corporate income tax. While in India the personal income tax collection has to go up.China’s taxpayers are more than those of India, even when its income levels were similar to those of India.

 

How to increase tax collection?

Rewards could be more effective in motivating people to pay tax like reduced public transportation fares or special privilege in government-operated hotels, hospitals, and airlines. South Korea considers allowance to airport, VIP rooms, and free parking in public parking facilities.
Providing tax-compliance certificates to firms to help them build an image. Making tax certificates mandatory to renew certain licenses.  Good financial behavior needs to be celebrated publicly.  Need to create trust and cooperation between citizens, corporate/business sector and the Government. Government could consider an insurance scheme for informal sector business tax payers by providing financial support in times of distress. Need to create a conducive tax administration. Incentivising tax collection and tax intelligence agencies, probably with higher allowances and compensation. Electronic surveillance through technology up-gradation. Quick settlement of disputed cases. Ensuring equity, certainty, convenience and simplicity in taxation. For creating conducive tax administration there is a need to introduce academic courses on ethics and business practices for business graduates, chartered accountants, company secretaries, auditors and legal experts. “The government will also need to stabilize GST implementation to remove uncertainty for exporters, facilitate easier compliance, and expand the tax base,” the Economic Survey 2017-18 said.

 

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