As a booming India strives to achieve ambitious development goals
set out in its national budget last month, it faces a major
obstacle: rampant income tax evasion. Only about 30 million Indians
pay taxes even though the country's middle class, estimated at 300
million, outnumbers the entire US population.
Analysts contend higher tax revenues would help India to provide
better public services, curb its large budget deficit, and boost
economic growth. But experts say widespread skepticism about the
efficiency of the state - the result of extensive corruption, past
economic mismanagement, and poor public-service provision - has
helped to sustain a culture of evasion.
"Tax evasion has become a national sport," says Jayaprakash
Narayan, the national coordinator of Lok Satta, a group campaigning
for better governance in India. "The majority of Indians work in the
unorganized sector, where cash payments are common and concealment
of income is easy."
Boosting the share of national income based on income tax has
become a priority for the government, which has adopted measures to
increase the taxpayer base and cut evasion - including more taxes on
services, a new value-added tax on goods, and an initiative to
create a digital-information network about taxpayers that could
The network, which was inaugurated in 2004 but is still under
development, would enable tax inspectors to track such things as
high-value purchases and large bank deposits, compare them with
declared incomes on individual tax returns, and investigate any
anomalies. The government hopes better administration will encourage
For now, though, tax dodging remains pervasive. Nonetheless,
rapid economic growth has boosted India's tax revenues, partly
because existing corporate and personal income taxpayers have
enjoyed rising incomes. The budget has forecast nearly 20 percent
growth in tax revenues for the coming financial year.
"I think the current government's approach is that it's hard to
change basic attitudes, so keep economic growth high, which will
push up incomes and tax revenues anyway," says Sunil Khilnani, a
politics professor at John Hopkins University in Baltimore, Md.
In the long-term, some experts are hopeful that the evolving
culture of India's rising generation promises a less adversarial
approach - and hence the potential for greater compliance.
"Young professionals want to get jobs in the organized sector,
where salaries are paid by check," says Mr. Ranina. Tax is typically
deducted automatically from this kind of pay, as in many other
countries. The young "are quite prepared to spend on plastic cards
too," he adds, which reduces the scope for evading income and other
taxes via the cash-based black economy. …