Monday, 8 May 2017

Income Tax evasion in India

Manu advised that taxes should be related to the income and expenditure of the subject and should be collected without pinching the subject and spend on social services beneficial to the community. Kautilya states that if the King failed in his duty, the subject had a right to stop paying taxes, and demand refund of the taxes paid. The affluent had to pay higher taxes. Kalidas states that it was only for the good of his subjects that King collected taxes from them. 

The tax evasion propensity of Indians stem from some deep seated hangover from feudal times when the state was exploitative and citizens considered taxation system as - exorbitant and arbitrary; fundamentally illegitimate; excessively burdensome; irrationally complex; patently corrupt; simple greed. It is usually a varying combination of the above. As long as people are poor and less educated and governments are irresponsible, inefficient and blatantly corrupt in public spending, efforts for higher tax realizations will be thwarted by its citizens.

In India, today, income tax is paid by salaried class in full; business class remain the largest tax evaders; and people in informal sector just don't pay taxes. Collecting income tax from all subjects is next to impossibility. Politicians and business houses are the biggest tax evaders. Income Tax Officers are the blatantly corrupt and they actively assist tax evaders.

In India only about 1-2% of the population pay income tax. These figures effectively tells us that the domestic tax evasion is bigger concern than chasing the black money stashed abroad. It doesn’t make sense for any government to chase a magic treasure hidden somewhere in foreign lands when there is massive scale of income tax evasion happening right under its nose. But in a country like India where 30% are below poverty line , 70% are agriculture dependent, 90% people are employed in informal sector with most people's earnings are below taxable limits, it is no surprise that only 2% of 120 crore about 2 crore people pay income tax. As long as political spending is irresponsible, resembling that of erstwhile Nizam's, for which funding is done in black money by industrialists and businessmen and as quid pro quo they receive political favors of at least 10-100 times, the menace of tax evasion and black money will persist. The need of the hour is political will and bureaucratic honesty to eliminate the menaces of tax evasion, corruption and black money which are pulling down our progress. The culprits are politicians, businessmen & bureaucrats. Corruption has become so much rampant that it acquired dangerous levels of societal acceptance. It is hard to find anyone who doesn't deal with black money.

Broadening the tax net and taxing agriculture income are no solutions to increase tax revenues. 70% of population lives in 700,000 villages with meager incomes. Taxing them will yield nothing since collecting taxes requires very large numbers of taxmen with infrastructure and revenue net of expenses could very well be negative. That was the underlying reason for exempting agriculture income from income tax, not out of any love of politicians or government men for farmers. The reality is that taxes evaded by politicians/ industrialists/ businessmen/ bureaucrats on their ill gotten wealth is much larger than the amounts that are likely to be received by widening the tax net and/or taxing agriculture income. If Government focuses on corruption elimination, tax evasion by bigwigs up to 90% level, the tax revenues will treble or quadruple or even more. But where is political will and bureaucratic honesty for this herculean task?

The reality is that no one in the world pays taxes willingly and smilingly. That would be very strange economics and irrational. Hence laws and its enforcement must be stringent so that people will comply with the law or fear the law. Chances of getting caught & punished must increase from present below 5% to at least 80%, otherwise crooks will always find ways around laws with the help of rogue politicians and bureaucrats.

No. Tax evasion isn’t as widespread, or even as deliberate, as we think. 
Are Indians hard-wired to evade taxes?

Government's solution to the problem is usually as worst as the problem itself.

My View:
Government failed to collect income tax from all qualifying persons and the present scenario resulting in heart burn among the honest tax payers. While salaried class pays full, others evade most and pay nominal amounts. Habits won’t be change overnight. It will change when people will see changes around them, and they see their money is put to right use and is beneficial to them. Just passing legislation, making public life miserable doesn't produce lasting results. The question is people should trust government and winning people's trust by government men is not easy. Until then people look around the laws and at the end worthless government can't force people beyond certain point.

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