Can India Fix its Tax Evasion?

Arjun own a small shop that serves a village, one of many thousands of villages in India. He lives in the village with his wife and two children. As the oldest son, he also takes care of his parents. Life is fairly mundane: he awakes early each morning to open the shop and people come and go throughout the day. It is not a busy shop, but he has regular customers as his shop is one of a handful in the area. He is by no means wealthy, but he can make ends meet for which he is grateful especially when he sees the multitude of destitute in his area.

Arjun doesn’t have the best education and everything he does is in cash. He doesn’t keep detailed records of his transactions and files limited documentation for tax purposes. He always states he does not make enough to pay any taxes. Most transactions are in cash, so it would be hard for anyone to argue any different. Whether he earns enough to pay taxes is a mystery and not something with which he concerns himself.

What is tax evasion?

A bank employee counts Indian currency notes in Mumbai on June 24, 2010. India is on the hunt for a symbol to represent its rupee currency in a bid to match the US dollar, British pound, Japanese yen and the European euro. A shortlist of five designs has been drawn up based around the letter R as represented in both the Roman alphabet and Hindi script. The rupee is currently referred to by the abbreviation "Rs", "Re" or INR. AFP PHOTO/Indranil MUKHERJEE

India is seeking Trillions in missing tax revenue

People will try not to pay taxes whenever possible. There are legal means to reduce taxes called tax avoidance and illegal means called tax evasion. Tax avoidance allows people and companies to use existing rules for pre-tax deductions, allocation of losses, movement of profit to lower or no tax jurisdictions and other means to reduce the taxable income of that person or company. Tax evasion is not declaring income, fraudulently producing invoices for non-incurred costs and other illegal activities.

Ramesh, the tax inspector for the area, paid a visit to Arjun. Arjun had never met Ramesh or any other tax inspector. They rarely dealt with any of the small shop owners. Ramesh asked Arjun “we see that you did not pay taxes last year. Do you have your invoices and receipts so I can check if you were due to pay taxes?” Arjun was puzzled about what he meant and afraid that an official had come to his shop. He told Ramesh “I don’t know about these things.” Ramesh said “this is not good, but there may be a way we can arrange for all this not to be noticed by the tax office.” Arjun paid Ramesh a small bribe to avoid any complications. He doesn’t know if he is in the right or not, but he knows it is better not to mess around with any officials: nothing good can come of it.

How well did India’s tax evasion amnesty scheme work?

India’s finance minister, Arun Jaitley, stated there were nearly 65,000 declarations for just over USD 9.5 billion in undisclosed assets. Whilst this is admirable, according to economist Arun Kumar, this is only scratching the surface. By his estimate “India’s undisclosed wealth is about 60% of its GDP, which makes it around USD 1.35 trillion”. You have to look at the wealth to ensure everyone is treated equally. Therefore, “you have to account for not just undeclared income but also the wealth it generates after it is invested, used to buy property etc.”.

According to the Indian Press Information Bureau, in 2010-11 just under 34 million people paid taxes, which represents approximately 3% of the population. When compared to a developed nation such as the US where 45% of the population pay taxes, even taking into account the number of people who are likely to earn too little to be taxed, there seems to be widespread evasion. Given these numbers, the 65,000 declarations does not seem overly impressive.

Later that night, after eating with his family, Arjun met with a number of men from the village. He warned them that a tax official was going around the villages seeking taxes. One of his cousins, Ranbir, explained it was for a new bypass road. He heard from a friend of his in the city that the state was looking to raise funds to build a new road to help alleviate some of the congestion that is stopping goods from the north quickly reaching ports in the south. According to Ranbir’s friend, the road will be good for India. India will be able to send goods abroad to the UK and America more quickly, and business prospects will grow. That means more jobs for Indians.

Why is tax revenue important?

 

For India to grow, there needs to be a considerable effort in the development of its infrastructure. For poverty eradication and social mobility, India needs to provide the poor in both rural areas and cities with access to education services where at least the teachers turn up for work, the curriculums are more comprehensive, and the quality of teaching improves. All of this requires funding, which come from tax revenues.

Lakshay, one of Arjun’s close friends, had a different story to tell. He said that he had also heard about the road. Apparently there was a scandal and some protests in the city because the work to build the road was awarded by the state governor to a friend of his. His friend’s company apparently does build roads, but the price paid was too high and other bidders for the work were not even considered. It was a done deal before the state tendered the work. The overpriced road now has to be funded by new taxes, which they are raising from the poor. At least that is what the protesters were saying.

Why don’t Indians want to pay taxes?

Earlier this year Justice Arun Chaudhari called corruption a “hydra-headed monster” and advocated that “taxpayers’ should refuse to pay taxes through a non-cooperation movement”. Earlier this year he had placed restrictions on the Maharashtra government and Bank of Maharashtra (BOM) for overlooking embezzlement. This is an excellent example of how government and the private sector combine to steal from the country’s poor.

Many Indians feel aggrieved to pay into a tax system which is rife with corruption, where tax revenue is embezzled away or used to overpay for grand projects for the benefit of politicians and their friends rather than improving the lives and future prospects of ordinary Indians. This is obviously grossly unfair, and why would ordinary Indians want to pay into a system they know is for the benefit of a ruling elite rather than the country as a whole. For ordinary Indians to pay into a tax system that will benefit the country, the start has to be at the governmental level to control and reduce corruption. Only then can they expect the general populace to participate.

They talked late into the night. Tax inspectors rarely come to the villages, and there is little they will be able to do about new taxes or the bypass road. Arjun and his friends don’t see why they should be paying for the road. For them, there are enough rich people in India that make their money off the backs of the poor. It is their businesses that will benefit from the road, not the village people. They should be the ones paying; though they realise this will never happen.

Our efforts are based at the grass roots level. We work with ordinary Indians to provide them chances for work and social mobility. Only at this level do we feel people have the chance to benefit without the risk of expropriation of part or all of the funds that should rightly be used for improving their lives. We hope you support our efforts through the purchase of our clothing.

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About the Author

Valentina is passionate in expressing her voice through her writing, which she hopes will have a social impact. She grew up as a third culture kid that always fought for what is right and achieved a BA Hons. in International Business in order to understand the business world more clearly and leave a possible mark on society. Currently she is working for an ethical start-up company called Chanzez. Chanzez has been set up to provide people with chances whether they are people who design clothes, people who work to make clothes or people who want to be able to buy ethically produced clothes.

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