Tax Compliance in India and Union Budget of 2018-19

This year the Union budget 2018-19 came in to the context with a greater emphasis on Tax proposals

It was in this budget that Long-Term Capital Gains (LTCG) tax was introduced, and there was a proposal for significant tax cuts for the senior citizens who earns an interest from their fixed deposits. But still, there is this one important part of tax reforms, that always get under reported even though it is present in every Union budgets of previous years. Yes it is the measures regarding tax compliance in Indian economy.

"In fact, a person decides on his own to whether file his income tax returns only on the basis of what kind of tax compliance measures are enforced by the Government. It can be the penalties imposed, or it might be the possibility of getting audited anytime"

In fact, a person decides on his own to whether file his income tax returns only on the basis of what kind of tax compliance measures are enforced by the Government

Studies conducted by the National Institute of Public Finance and Policy (NIPFP) investigates other aspects on tax compliance in Indian economy. Such as the demand of cash in the economy, the constraints of liquidity on taxpayers in the country and the timing of tax liabilities.

But these studies are only helpful in identifying the reasons behind basic tax evasion behavior. It do not explore the behavioral factors behind the tax compliance decisions and so on. For example, social status, social lie aversion, the difficulties in tax filing systems etc.

Tax Compliance Policies and Behavior of Taxpayers


We didn't saw any changes in the tax rates for the fellow taxpayers. But we saw several provisions being introduced to give more power and autonomy for the tax compliance enforcement agencies. It will help them to take greater care in analyzing the returns.

One of these provisions was to expand the list of places and premises that any tax enforcement officials can enter and seek the information on return. The extended it to add Charitable Organizations because it has been found in the recent years that, a lot of Indian and foriegn Non Governmental Organizations have been using such institutes and cover for money laundering activities. There were reports on how huge amount of money were getting hoarded  in these NGOs at the time of demonetization.
Further there are provisions which gives more power and autonomy to senior tax officials, to direct is subordinates to investigate on reports of non compliance or tax evasions, and to conduct inquiry without the approval of higher authority. Hence these measures are intended to bring more tax evaders or those who intend to avoid filing their tax return in to the light and to increase the chances of non compliance of tax being caught and get penalized.

The Union Finance minister Arun Jaitley had himself stated that the percentage of tax compliance in India is low at 36% including every individuals from the organized and unorganized sectors who files their tax returns. But when we study them further, we can find out that the actual number is between 11.5% and 12%. When we consider such a low percentage of tax compliance with the tax-to-GDP (Gross Domestic Product) ratio, it is so evident to understand that the government has to take more measures and steps forward to increase it tax base.

Post demonetization, income tax agencies where directed to step in and scrutinize any irregularities or inconsistencies in the financial transactions and bank deposits. Those steps were appropriate and helped to increase the possibility of tax evaders to be caught. But they also had a rebound effect of honest taxpayers to lose their trust in the system, since these steps can also be exploited as methods of coercive powers. Looking at the theories of behavioral economics, such a loss of trust in the government and the authorities may eventually result in to tax evasion, lesser tax compliance and dishonesty. Hence even though the increase in power and autonomy can be taken as a good move, but still it is possible to give a reverse effect of decrease in tax compliance.

Post demonetization, income tax agencies where directed to step in and scrutinize any irregularities or inconsistencies in the financial transactions and bank deposits

So what can be the solution  for tax evasion behavior


There is a solution, it seems basic, but in aspect of behavioral economics, this solution can be benefiting. We have to introduce social standards which encourage the individuals to be compliant and file their tax return. Introducing such social norms has been successful several European countries. UK, Guatemala, Norway etc has introduced such norms like "Nine out of ten people pay their taxes at time, Do you?","Be part of the larger community who pay their tax at time" etc. These norms, they can be basic norms, local norms, or minority norms, but they have been found effective in increasing the tax compliance in these countries. The local norms brought greater improvements in widening the tax base.

Further, the Government can make use of Information Communication Technology (ICT) to spread the message. There are already a lot campaign running in the background. We should make sure such campaign can bring an influence on the individual level. In the recent years, we have seen a lot of campaigns ran by Central Board of Direct Taxes were usually targeted in a mass public level, including their rewarding program for timely compliance. But we can modify such campaigns in a manner, that they should be targeted to the individual, making him aware about the value of being honest, and how much his contribution to the public can be significant. The government can also repeat the same method they followed in using Mahatma Gandhi's image and teaching as an influence to popularize Swatchh Bharat Abhiyan. Swatchh Bharat Abhiyan is a prime example for Targeted Behavioral Interventions.

The above said interventions and the method of campaign are cheap in cost. So the benefit-to-expense ratio is considerably better in such cases. CBDT has already set up an email communication system that will remind each tax payers for timely compliance. Setting up a Nudge unit and promotion of Online E Filing System was also a welcoming move from the part of Government.

In the present world, especially in the case of Indian society, spending huge sums of money may not work always in the favor of a consistent and better future. We have to create an awareness among the masses to create opportunities themselves. Behavioral changes are such a huge inevitable factor for the future of Indian society. Let us hope, these interventions and policies can bring the better out of our social structure, and let it result in to a fruitful future.

Related Articles

Comments