Academic journal article Journal of Management and Public Policy

Unaccounted Income Vis-À-Vis Public Perception in India: An Empirical Analysis

Academic journal article Journal of Management and Public Policy

Unaccounted Income Vis-À-Vis Public Perception in India: An Empirical Analysis

Article excerpt


The history of evasion of taxes dates as back as to the origin of taxes themselves. History abounds the examples of tax evasion and unaccounted income. In India, the problem could be traced back to the regime of Emperor Chandra Gupta Maurya in the 4th century B.C. Kautilya, his wise advisor, enumerated the numerous ways by which money could be misappropriated. Unaccounted income is a multi-dimensional phenomenon. The concept and scope may differ across jurisdictions primarily on account of the social behavior or cultural values that determine the validity or unacceptability of particular conduct. What may be an offence or an illegal act in one jurisdiction may be an acceptable customary practice or a legal activity in the other jurisdiction. The exact definition thus depends on the circumstances in which the concept is being used. The present study follows the definition given by the National Institute of Financial Management1 (NIFM, 2012). According to NIFM, "Unaccounted Income is the income from those economic activities that circumvent or otherwise avoid government regulation and taxation." This definition attempts to cover illegal as well as legal economic activities where tax could be evaded. Thus, as per this definition if the actual income of an individual is $1 million and he/she reports an income of half a million dollars only, then the remaining half million (unreported) constitutes Unaccounted Income.

The phenomenon has started grabbing scholarly attention given the gigantic estimates presented for India (Acharya et al., 1986; Kar, 2011; Ministry of Finance, 1971; Press Trust of India, 2013). The report by Global Financial Integrity (Kar & LeBlanc, 2013) estimated a total of approximately USD $ 343,932 million worth of unaccounted income from India as stashed abroad. An important repercussion is the revenue lost by the exchequer, in addition to social and economic effects the phenomenon brings along. The loss of revenue poses serious restrictions on government's attempts to bring the desired socio-economic changes in the economy. It undermines the principles of social justice and equity. It shatters the faith of common man in the virtues of honest labor and virtuous living (Ministry of Finance, 2012).

The composition of Indian taxpayers (in terms of incomes reported) presented in table I depicts the skewed direct tax base in the country. Table I reveals that majority of taxpayers fall in the income slab of ^ 0 - ^ 5 lac (88.9% of the total taxpayers). Incomes under ^ 5 lac attract only 10% income tax levy in India with incomes up to first 2.5 lacs being the basic exemption limit. Such skewed taxpayers' composition within an already tiny tax base indicates that either the growth fragrance has not reached the masses or the government has not been able to know that! The statistics itself presents the large scope for the possible widening of direct tax base and the pressing need to understand the dynamics of unaccounted income in the country.

Background Literature

A number of attempts have been made in the past to explore the dynamics of the phenomenon of unaccounted incomes worldwide. Prominent contributions in the field have been made by Frey and Weck(1983), Fiege (1990), Mirus et al.(1994), Soldatos (1995), Cebula (1997), Johnson et al.(1998), Giles (1999), Tanzi (1999), Schneider and Enste (2000), Anno (2003) , Bajada and Schneider (2005), Breush (2005), Kar (2011) among others. As regards India, in the post-independence context, such attempts have been made by Kaldor's study (1956) and the direct taxes enquiry committee report (1971) which estimated tax evaded income to be to the tune of Rs. 700 crores (1961-62), Rs 1000 crores (1965-66) and Rs 1400 crores (for 1968-69). Numerous studies (as shown in table II) also identified the gravity of the problem by quantifying the amount of unaccounted incomes in relation to India's GDP.

Much of the focus has been concentrated on quantifying the amount of such incomes alone. …

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