Project Leader: Dr. Parthasarathi Shome
Research Team: Neetika Kaushal
Commencement: July 2012
Completion: June 2013
Funded by: Directorate of Income Tax, Ministry of Finance, Government of India
An increasing tax gap and lower tax revenue is often attributed to non-compliance due to tax complexity. Such complexity in the tax system is caused by various factors that range from administrative procedures to discretionary provisions, tax concessions and poorly drafted laws. For individuals, the cost includes the financial and time costs of acquiring fiscal knowledge to meet legal obligations, time lost in filling up tax returns, as well as in obtaining, filing and storing data to facilitate the completion of returns. For firms, the cost involve costs of collecting information, accounts maintenance and generation, and ensuring remittance and receipt by the authorities, as well as follow-up that can be both continuous and sporadic.
This cost is often viewed as a major economic problem primarily because of four reasons. First, it reduces the resources of private businesses without raising the financial budget of the government resulting in waste of resources for the economy as a whole. Second, it has a negative impact on competitiveness of small businesses for whom the cost is higher than that for their larger counterparts. Third, the economic burden of tax compliance rises with international orientation of businesses, resulting in reduction in business access to international markets. Fourth, it raises the degree of non-compliance as high costs of compliance have often been identified as a factor that encourages non-compliance.
The Indian tax system is a Self Assessment System (SAS) whereby taxpayers are required by law to determine their taxable income, compute their tax liability and submit their tax returns based on existing tax laws and policy statements issued by the tax authorities. Studies have shown that the estimated compliance costs of custom and excise duties for both taxpayers and third parties is 0.03% of gross domestic product (GDP) and the gross compliance cost of company income taxation in India is between 5.6-14.5% of tax paid in 2000-01.
Keeping this in view, it is vital to access the barriers to compliance and cost of compliance with the direct taxes under the current tax regime. India already has a data platform from where regular studies of barriers to compliance with tax rules and their costs on the taxpayers can be initiated. With better electronic data interface coupled with a detailed survey of approximately 5,000 taxpayers, such exercises should be possible for all kinds of taxes and taxpayer groups.