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Why   is   income/wealth   tax   evasion   much   higher   in   India?

    Contents

  1. Introduction
  2. The most important reason
  3. Other reasons
  4. Why should citizens of India reduce tax evasion?
  5. How can citizens of India reduce tax evasion?

Introduction

The evasion of income and wealth tax in US/West does occur, but it is much much less (as a % of tax collected) than in India. The purpose of this article is to enumerate and discuss ONLY those factors
  1. which decrease evasion, are present in West, and absent in India
  2. which increase evasion, are present in India, and absent in West
The purpose of this article is NOT to enumerate factors that are present/absent in BOTH countries. Hence a large number of factors, such as moral values, history, greed etc will get dismissed as non-issues. Why? Becuase greed is present in US/West as well as India. And moral values are at same level in India as well as West.


The MOST important --- Universal indexing and cross-indexing

I would broadly classify income tax evasion into two categories :
  1. Single evasion
  2. Double evasion
Single evasion is when X makes some payment to Y, X does NOT claim it as a deduction, and Y does NOT show it as income and evades taxes. eg a person pays money to a small time street food vendor, the vendor does NOT report it and evades taxes.

In contrast, a situation is what I call as double evasion is as follows :
  1. X makes payment to Y
  2. X manages to claim payment as expense and thus get deduction.
  3. Y DOES NOT show payment as its reciept and does NOT pay taxes, and income tax dept fails to even detect it, forget prosecuting Y.
A common example is as follows : Say a person's gross reciepts from business is Rs 10000/-. Say he buys stationaries from a store and pays Rs 1000/-. In most cases, stationaries are deductible expenses, and so the buyer can deduct stationary expenses from gross reciepts and so needs to pay tax ONLY on Rs 9000/-. But the stationary seller destroys copy of the bill, and does NOT even show the sale of Rs 1000. This way, he evaded the tax that could have been due from his sale's profits.

From what I noticed, "single evasion" is rampant in US, UK etc and perhaps all over the world, though it is more rampant in India then in US etc. But in US, cases of "double evasion" are rare. While "double evasion" is also rampant in India.

The double evasion can be stopped trivially. How? Using cross-indexing.

What is cross indexing?

Cross-indexing is : say two persons with ID A and B have entered into a transaction, and say A paid some money to B, then if A cites that transaction in his balance sheet, he is required to cite ID of B.

So what is the advantage of cross indexing? If A reports the payment, citing B's ID, then B will have NO choice but to report that transaction. Or else the income tax dept can easily note the discrepency and send notices to A or B or both.

Another instance of cross-indexing is as follows :
  1. In many western countries, like US, Germany etc, every person has income tax ID, and every land/building also has an ID provided by local municipality, and registered by income/wealth tax dept

  2. every time a person buys a property, he has to provide his income tax number to the local property registrar (a govt officer).

  3. The local registrar reports the buyer's ID, seller's ID and the purchase price to the income tax dept.

  4. In addition, every person has to file his wealth tax return, in which he has to state his income tax number, and show his wealth holdings.

  5. The income tax dept use this information that the person's stated incomes and wealth are in synch

  6. The income tax dept also conducts a survey, to ensure that tax-id of EVERY plot/building owner in the country is registered and reported, and tax is paid on it.

Cross-indexing is possible and fruitful ONLY if there is "universal indexing' i.e. EVERY entity, such individual, company, bank account, share, piece of property such as land/building etc has a UNIQUE unambiguous index.

The cross-indexing is THE MOST important reason why income tax evasion in US is so low, and its due to lack of cross-indexing, that income tax evasion in India is rampant. eg in US, when a bank pays interest to a person, it is required to report tax-ID of the person in its report to income tax dept. So the income tax dept while examining bank's return will verify that interest reciever, as cited by the bank, has indeed reported his interest income from that bank. Hence if the interest reciever has not reported this income, he will get caught. IOW, if the payer cites, or he is forced to cite tax-ID of the reciever, the reciever cannot under-report his revenue collection.

Putting indexing and cross-indexing togather, such indexed and cross-indexed data-keeping reduces the oppurtunities the private citizens as well as govt officers get to commit frauds, take bribes, siphon funds or evade taxes. Hence there are lesser frauds, lesser tax evasion etc in west. This has vastly improved economies of the West. Whereas in many departments in India, such record-keeping method has NOT been adopted. So private citizens as well as govt officers get too many oppurtunities to commit frauds, take bribes, siphon funds and evade taxes. This has weakened our economy and created 10s of other problems.


Other reasons?

The indexing and the cross-indexing are the two resons which explain over 99% of the difference in the levels of tax-evasions in India and US.

There are numerous small reasons, some of which are as follows
  1. Evasion of capital gains tax : Individuals in India are NOT required to file wealth tax returns, unless wealth over and above one house (no matter how expensive it may be) is above Rs 15 lakhs. And properties like shares etc is also exempt from wealth tax. Since individuals are not required to file wealth statements, it is extremely easy to evade capital gains tax, if the property was purchased over 6 years ago. In most weastern countries, filing wealth tax returns are compulsory, and no evasion in capital gains is possible.

  2. Flat income tax rate : to a considerable extent, US follows a flat tax model as follows : there is 14% so called social security tax, which is deducted on income from $5000 to $60000 per year. This tax, added with income tax, makes taxes from $5000 to $150000 roughly the same rate of 30% to 35%.

  3. The wealth tax laws in India are officially written so that not much wealth tax will get collected. eg In US/West, every property is taxable, while in India all business property is tax extempt, and one house per person no matter how expensive it may be, is tax exempt. As a result, a family of 4 can easily have 4 houses, worth several lakhs or crores of rupees, and NOT pay any tax at all. So wealth tax collection in India is very low.

  4. Banks, post-offices, insurance companies and a large number of govt-owned as well as private depository institutions, in India enable persons to open account WITHOUT income tax number, and also pay interest without income tax numbers. Also, interest paid is NOT reported to income tax dept. This makes it trivially easy for individuals to evade incomes.

In addition, there are a large number of small reasons, which makes tax evasion in India easy and rampant. I have listed some of the reasons, with solutions at TX.01 , TX.02 and TX.03.

Why should citizens of India reduce income/wealth tax evasion?

Three reasons, why EVERY common should try his best to reduce income/wealth evasion, and ensure that laws too do NOT permit loopholes and lumpsump exemptions are :
  1. If evasion of income/wealth tax goes on, the Indian govt will NOT be able to get substantial money to maintain police, courts and military. In absence of robust police/courts, the law/order situation will detoriate, and with that economy too would implode, which will further detoriate industries, engineering and military. And if military keeps detoriating, one day, a nation like US may just devor India, just as UK devored India 200 years ago.

  2. If evasion of income/wealth tax goes on, the Indian govt will NOT be able to get substantial money to maintain police/courts. In absence of robust police/courts, the law/order situation will detoriate. And in some areas, like North East states, detoriation in law/order will result into growing dis-illusionment from local population and uncontrolled emmigration of Bangladeshies. This can threaten the integrity of India.

  3. If collection of income/wealth tax does NOT improve to meet the costs necessary to meet the necessary police, court and military operations, the government will resort to regressive taxes like excise/sales taxes on gutaka, tobbacco, coffee, tea, liquor etc. This increases the poverty of the poor. So in order to ensure that govt is NOT forced to go bankrupt or impose regressive taxes, it is necessary that commons pass the laws that would ensure the optimal amount of income/wealth tax is indeed collected.


How can citizens of India reduce tax evasion?

Trivial.

  1. Steps 1-3: The citizens should force MLAs, MPs and District Panchayat Members to create procedures that would enable citizens to pass laws in District Panchayats, Assemblies and Parliament. Please read LM.01 to see the procedure using which citizens can pass laws in District Panchayats and City Councils. Please read LM.02 to see the procedure using which citizens can pass laws in Assembly. And please read LM.03 to see the procedure using which citizens can pass laws in Parliament.

  2. Step 4 : The citizens of India, using LM.03 can enact procedure ID.01. This procedure will create a universal national ID-system, which can used to reduce evasion of income tax.

  3. Step 5 : The citizens of India, using LM.01-03 can enact procedure ID.04. This procedure will create an ID-system over plots/buildings that can be used to track land/buildings ownerships.

  4. Steps 6-8 : The citizens of India, using LM.01-03 can enact procedures TX.01-03. These procedures will ensure that GoI gets sufficient income tax, capital gains tax and wealth tax to fund military, courts etc. In addition, procedure TX.03 can also be used by State/District Govts to ensure that they get enough funds for police, courts, basic education etc. TX.03 would make annual filing of ownerships, purchases, sales and alteration-expenses on plots/builings, and other wealth, compulsory. This will reduce evasion of wealth tax and capital gains tax. This will also enable the tax dept to check that additions in wealth is consistent with income reported, and thus will also reduce evasion of income tax.

  5. Step 9 : The citizens of India, using LM.01-03 can enact procedures TX.04. Then using this procedure TX.04, the citizens, using "review by Jury" can invalidate the clauses in income tax code and wealth tax code using which a large number of wealthy individuals offically get tons of tax exemptions. The removal of these sections will improve collection of income tax, capital gains tax and wealth tax.

These TRIVIAL steps will be sufficient to evasion of income tax, wealth tax and also reduce evasion of capital gains tax. In addition, these procedures will also remove the clauses in income/wealth tax code which give unethical exemptions. With these steps, the citizens of India will be able to create a tax system that can fund creation of robust courts/police and an efficient army.


If you have any other question, please mail it to MehtaRahulC@yahoo.com. Thousand thanks in advance.