CHAPTER I11

RATE COMPLIANCE - SALARIEII V NON-SALARIED:

AN EQUITABLE ANGLE

CHAPTER I11

RATE COMPLIANCE - SALARIED V. NON-SALAFUED:

AN EQUITABLE ANGLE

Equity in taxation demands that all income in whatever form received should

be brought into the tax base after allowance for legitimate costs of earning.' In a

developing economy with a large unorganized sector the idea presents acute

problems.' Still it is essential to inspire public confidence in the fiscal stability of

government which sustains pilblic morale, and promotes productive effort and

economic progre~s.~ In developing countries, ability of government to ensure tax

compliance at reasonable cost is a fundamental attribute of fiscal system. Design of

tax structure and rate policy have little importance in countries where tax

compliance is low.' Fair tax administration is fundamental to uniform enforcement

of tax obligations and the knowledge of widespread tax evasion undermines morale,

puts a heavy strain on tax colnpliance by the honest tax-payer and undoubtedly

impairs taxable capacity.'

It is important to ensure that income tax is equitable and non-discriminatoryb.

The fairness is based on principles of equality and demands that people in similar

economic conditions should be treated alike or the converse, people in dissimilar

economic circumstances shouki be treated differently.' An analysis of the issue

' Direct Taxes Enquiry Committee Final Reporl (December 1971) Ministry of Finance Government o f India, p.l lO.para.rj.l3.

Ibid 3 Report of the Taxation Enquiry Commission 1953-54 (Minishy o f Finance Government of India)

Vol 1, p.147.

Arindam Das-Gupta .Dilip MooW~erjee, Incentives and Institutional Reform in Taz Enforcemenr An Analysis of Developing Count~y Experience (1998, Delhi), p. 4.

Supra n.at 151. para 20.

T.N.C. Rangrajan, "Loss of Income -Tax Compliance in lndia," http:www.esceo.com/html, p.6 Visited on 4-8-2004

' Ibid.

whether salaried class and non-salaried class are differently circumstanced from

compliance perspective and whether equal treatment of these classes amounts to

violation of equality are discussed in the chapter. Tax compliance by assessees at

varying income levels and their responses to marginal rates since independence is

analyzed. Tax compliance of the salaried as against nonsalaried at different income

ranges and their compliance responses to progressive rates at marginal rates are also

analyzed. The estimates of magnitude of tax evasion by various committees and

experts and problems related to evasion are also discussed. The impact of

noncompliance on the morale of genuine taxpayers, especially salaried class, is also

probed. The study is extended to aspects of administrative implementation of

income tax, expenses related compliance and cost of collection on the salaried due to

evasion by others. The results of such study are given in this chapter.

Ever since tax on income was f i s t levied on a progressive scale, revenue

authorities have struggled to maintain yields from given rates of tax in the face of

efforts by taxpayers to avoid or evade their tax burdens. Compliance may be defined

as the ratio of people who pay taxes to the magnitude of people who should be

paying taxes.8 It implies cornpliance with all statutory obligations. including

registration, maintenance of required records, filing accurate returns and payment of

taxes correctly and on time9. The tax compliance responses of non-corporate

individual assessees to progressive rates for five decades are analyzed and the result

is given in the following paragraphs.

The tax compliance in early fifties and sixties were moderate at the initial as

well as higher slabs. The starting rate varied from 3% to 5% and the top rates varied

between 18 to 25%.1° The percentage of taxpayers to the total was highest in the first

slab and the percentage of rehlmed income constituted two digit numbers for the

first five slabs. The figures in Table 1 indicate that the compliance further improved

8 Surjit S. Bhalla, "Tax Rates, Tax Compliance and Tax Revenues: India, 1988-2004" (June 22, 2004 revised July 7,2004) www.oxusresearch.com p.6. Visited on 4-6-2005.

9 Saumen Chattopadhyay and Arindam Das-Gupta, The Personal Income Tax in India Compliance Costs and Compliance Behaviour of Taxpayers (2002 New Delhi), p. I .

' O Finance Acts of 1960, 1961, 1962, 1963, 1964.

in 1960s and the income assessed at different income ranges indicates that tax

compliance at the first five slabs continued to be fair which varied from 27.9% at

second slab of Rs.5000-10000 to 14.2 % at the fifth slab.

Table - 1

Distribution of assessees, and income of individuals by grades of income

Ranges of I Percentage in the range to the total No. of Percentage of the assessment in the range to income in assesse~:~ the total assessment

-. ~ ~ - 6 1 1 9 ~ 1 . 1 9 6 ~ ~

In the early seventies initial slab rate was increased to 10% and upper slab

was as high as 85% plus 10% surcharge". The initial rate got further enhanced to

17% in 1975- 76, but the upper rate was brought down to 70% for individuals. The

tax compliance during this period for income above one lakh was confined to three

digit numbers of 159, 108 and 155 respectively for assessment years 1971-72, 1974-

75 and 1976-77.12 The starting, rate was 15% and top rate was 60% during the

period. The number of returns filed and income revealed were maximum for the

income range between Rs.10000 - Rs.15000. The tax compliance in seventies shows

a declining trend and compliance at the income range of Rupees one lakh and above

Below5000 53.7 46.9 44.8 :18.5

2 0 0 0 0 0 . 1 0.1 / (1 1 6.2 1 5.4 1 5.8 I 2.3 / 2.3 1 2.2

I I Finance Acts of 1970, 197 1 . 1972, 1973. ' Statistical Abstract India 1980 (Central Statistical Organization, Ministry of Statistics& program

implementation, Government of India, New Delhi), p.458.

36.5 21.2 19.8 17.8 16.4 16.2 15.5

Total 100 100 100

Source: Prepared to All I n d i ~ ~ ~ ~ r n e Revenue Staristics (Annual) of tie yea!x

100 100 100 100 100 100 100

was at low ebb even though maximum marginal rates were reduced at the top level.

Similar studies regarding the responses of tax compliance of the individual

(See Table 2)

Table .. 2

assesses were attempted for the period 1987 to 1994 by classifying them on the basis

of number of returns and level of income returned (Table 3). The top rates were

further brought down to 50% in 1986-87 I' and to 40% in 1992-93". Later the

Distribution of assessees,

Number of Assessees

1978-79 1979-80 1980-81

8760 366 N.A

33909 5050 N.A

209508 119879 54327

692942 723426 562166

273769 292818 232637

138777 125773 109504

69026 62580 64189

68096 57870 56018

35236 34902 25972

12944 16182 N.A

8078 8158 27445

10041 9632 9451

5181 5076 6074

759 807 854

281 269 320

123 143 156

262 355 292

1567692 1463286 1149405

Source: Prepared from

I3 Finance Act, 1987.

l4 Finance Act, 1992.

Ministry of Statistics, Government of India, New Delhi.

individuals by grades of

Total income assessed

1978-79 1979-80 1980-81

26158 1017 N.A

219351 32350 N.A

1850199 1011132 426347

8282933 8679504 6733395

4585657 5043179 4008812

3078382 2778309 2439252

1879491 1701226 1740142

2351222 1980448 1913870

1550602 1540496 1150959

704752 880444 N.A

520065 522365 1604203

816013 783013 773410

685675 671187 776892

182390 193341 203499

96053 91910 109052

53628 63806 69291

175102 494007 313101

27257673 26467734 3849448

Abstract 1984, Central

and income of

Percentage in the

Range on total

assessees

1978-79 1'379-80 1980-81

0.56 0.03 NA

2.16 0.35 NA

13.36 8.19 4.73

44.20 49.44 48.91

17.46 20.01 20.24

8.85 8.60 9.53

4.40 4.28 5.58

4.34 3.95 4.87

2.25 2.39 2.26

0.83 1.11 NA

0.52 0.56 2.39

0.64 0.66 0.82

0.33 0.35 0.53

0.05 0.06 0.07

0.02 0.02 0.03

0.01 0.01 0.01

0.02 0.02 0.03

100.00 100.00 100.00

the data in the Statistical

iucome1978-1981

Percentage in the

Range on total

income assessed

1978- 1979- 1980-

79 80 81

0.10 0.00 NA

0.80 0.12 NA

6.79 3.82 11.08

30.39 32.79 174.92

16.82 19.05 104.14

11.29 10.50 63.37

6.90 6.43 45.20

8.63 7.48 49.72

5.69 5.82 29.90

2.59 3.33 NA

1.91 1.97 41.67

2.99 2.96 20.09

2.52 2.54 20.18

0.67 0.73 5.29

0.35 0.35 2.83

0.20 0.24 1.80

1.38 1.87 8.13

100.00 100.00 100.00

Statistical Organization,

bottom rate was further reduced to 20%. Maximum returns were filed during this

period for the income range between Rs.20000-50000 except in 1994-95. The

income returned were also maximum for Rs.20000-50000 slab for assessment years

1987-88,1988-89,1989-90and 1990-91 (See Table 3). In assessment years 1991 -92,

1992-93, 1993-94, 1994-95 income returned was maximum for the range between

Rs. 50000-100000.

Table .. 3

of Finance.

The initial rates were slashed down to 10% in 1997-98 and a flat rate of 30%

was fixed for income above R:;.1500001'. There was corresponding increase in the

returned income at the initial as well as at the topmost slab above five lakh (See

l5 Finance Act, 1996.

Table 4). The tax compliance at the middle range between two lakh and five lakh

remained at single digit number.

Table - 4

2001 1 4 . 7 142.90 1 23.10 1 3.40 1 5.40 1 7.60 1 21.1 1 32.9 Source: Prepared referring to data in the All India Income Tax Statistics of relevant

Percentage of income returned to the total income at various income ranges for 1995-2001

(Range of returned income in '000s of Rupees)

assessment Years

Analysis of the data regarding history of tax compliance responses of

assesses to rates for the period gives the impression that the temptation to conceal

above 1000

18.0 33.4 42.7 35.7 41.4 33.6

1996 1997

income was less and tax comp1,iance was reasonable when rates were low as in the

early fifties and sixties. The increase in rates in early seventies resulted in decrease

200-300

3.50 4.50 3.80 4.20 4.00 3.70

of compliance. The situation did not improve at the higher level even after reduction

of top rates from 85 % to 60%. Analysis shows that when top rate alone was

reduced, compliance did not improve but when rates were reduced at the bottom, tax

compliance shows corresponding improvement. This indicates that when rates were

high at initial level, the generak tendency was to keep away from the tax net. When

rates at bottom level were reduced most of the nonsalaried shows positive response

of compliance. It could be inferred that most of the assessees are prepared to reveal

income at initial slabs or remain outside the net when rates were high. Salaried class

has little scope for evasion and they bear the burden.

Analysis of category-wise increase in the number of non-corporate assesses

for the period, 1997-98 to 2001-02 shows that the number of assessees increased

from 128.83 lakhs to 258.77 (6.22%) during the period (see Table 5). The increase

was mainly confined to category 'A' (of below rupees two lakhs) that constituted

300-400 5.50 '7.00 '7.60 5.50 4.70 6.70

400-500 7.80 10.20 8.90 8.40 8.30 9.00

500-1000 19.7 27.2 41.8 32.9 27.3 23.7

95.94% of the total increase.I6 The income increased by 37.31 and 32. 64 per annum

respectively for B and C category but the income tax profile reveal only half of such

growth''. Comparing the compound average annual grawth rate, the present share in

the total assesses is far below.

Table - 5

I I (Number in lakh) I ( (Percentage) ( (Percentage) I

A* 1 123.7 1 243.50 1 18.45 I 94.10 1 94.10

Category wise increase of non corporate assessees

Compound average Annual growth rate

Present share in total assessees 1997-98 1 2001-02

B*** (higher)

* Category A assessees -Assessments with income I loss below Rs.2 lakh.

~ * * * * i 1 0.19 1 0.33 1 14.25

** Category B assessees (lower income group) - Assessments with income / loss of Rs.2 lakh and above below Rs. 5 lakh.

2.91 1.72 0.41

*** Category B assessees (higher incon~e group) - Assessments with income / loss of Rs.5 lakh and above below Rs. 10 lakh. **" Category C assessees - Assessments with income / loss of Rs. I0 lakh & above ***** Category D assessees - Search and seizure assessments Source: CAG Report 2003 (Direct Taxe:s) Page 22.

0.15

It may be inferred from the data that in spite of the increase in the number of

11.17 2.98 0.79

0.13 Total 1 128.93 1 258.77 1 19.02

non- corporate assessees the tax compliance at top rate were low and assessees opted

to reveal income at incorrect low levels. The improvement in the rate compliance by

39.92 14.73 17.88

- 100

assessees has been far below the desired levels. In spite of several compliance

100

improvements strategy adopted by the Government, rate compliance was not in

4.30 1.15 0.30

keeping with the increase in the ratio of number of returns and GDP. The data

4.32 1.15 0.30

indicate that though there was improvement in the number of returns it was not

extended to rate compliance. Tax compliance by non-corporate assesses in higher

brackets continued to remain much below the potential. The analysis further

indicated that the tax complianc,e was directly related to progressive rates.

'' Report of Comptroller and Auditcr General 2003 (Direct Taxes), p. 22. para 2.7

The next issue probed is whether there is any difference in tax compliance

responses of salaried and non-salaried groups to rate compliance. The analysis is

attempted with reference to voi.ume of salary to the total volume of income and tax

rates in selected years of last five decades. The result of the study is given below.

Table - 6

Volume of salary income assessed in selected years

.4ssessmcnt ~ota i NO. of ~~d~~~ income (co1.5 rate in % rate

as % of Co1.3)

lakh crore crore 1 2 3 5 6 7 8

1954-55 4.85 561.00WO N.A 189.0 33.7 3 18 1969-70 18.28 21 24.00000

1988-89 1990-91 4526847 3940.18976 1992-93 5294814 4743.66849 1993-94 5904565 5441 .l%M> 1994-95 804391 8484.00916 1995-96 8082070 9883.93043 1996-97 8606040 12266.4859.Y 1998-99 12357891 1 1 1918.7593

Source: Prepared by reference to' corresponding Finance Acts.

8.2 11.6 7.9 4.8 6.7

1537722 1669943 1918235 1748491 2259291 2439435 4049345 --

IN India 11 10 1 4 0

%ant years and

Analysis of the returned income of salaried and non-salaried classes over the

five decades reveals certain pattern of compliance responses adhered to by the non-

salaried class (see Table 6). The figures indicate that salary income has been a major

constituent of the income assessed to tax. In fifties the rates were moderate for all

levels of incomes varying from 9 pies in one rupee to four annas in one rupee"

(without surcharge) and the contributions of salaried class constituted 33.7% of the

total collections. In the early sixties the rates were moderate and ranged from 3% to

18% over seven ~ l a b s . ' ~ The Finance Act of 1965 enhanced the top rate to 65%,

which was further increased to 75% in 1969, the minimum rate remaining untouched

IS Schedule 1 of Finance Act, 1954. 19 Schedule 1 of Finance Act, 1962.

at 5%. The salary income constituted 35.1% of the total collections in 1969-70

showing 2% increase. The Finance Act, 1971 enhanced the initial rate to lo%, and

the top rate was raised to 85%. These rates continued until 1975. During this period

salary income ratio increased by 13% and nearly half of the total income was

constituted by salary element. During 1979-80 though the upper rate was brought

down to 60% the lower level rate was 15% and the percentage of salary income

constituted 52.1% of the total rsevenue. In 1983-84 initial slab rate was 30% and the

contribution by salaried class arnounted to half of the total re~enue.~"

In 1988-1989 bottom rate was 25%, and top rate also was brought down to

50%. In spite of the hike in number of returns and income returned by the salaried,

their share constituted only 20..5 % of the total revenue during this period. In 1990-

91 the initial slab rate was lowered to 20% and the percentage of salary income to

the total revenue lowered to 17.37 %. The rates remained stagnant for next four

years. During this period the percentage of salary income to the total income varied

between 16.73% to 16. 99% except in 1994-95, in which year it was only 12.78%.

The bottom rate was further lowered to 15% in 1996-97 and salary income, as

percentage of total revenue was 16.50%. In 1997-98 there was reduction of initial

rate to 10% rate and the percentage of salary income to the total revenue suddenly

dropped to 7.78 owing to enormous increase in the number non-salaried assessees.

The figures in the Table indicate that percentage of volume of income

returned by salaried group was the major constituent of the total revenue when rates

were high and shows declining trend with reduction of rates. It fiuther indicates that

variation in percentage of compliance by salaried class is not due to reduction in the

returned income or their nuniber. Their number and income returned showed

consistent increase throughout the period under study irrespective of variations in

rates. There was increase in the percentage of the salaried income to the total volume

of income because of reduction in the number and income returned by non-salaried

when rates were high. Similarly number and income returned by non-salaried

increased with the fall of rates, which consequently pushed down the percentage of

20 Schedule 1 of Finance Act, 1982.

salaried class. Hence it may be inferred that tax compliance by salaried class is not

related to rate, whereas the returned income of non-salaried has fallen with increase

of rates. When rates at the top alone are reduced compliance response by non-

salaried does not improve but reduction of' rates at lower slabs resulted in better

compliance. The response also indicates that non-salaried group reveals their income

at lower slabs and the compliance is positively related to tax rates, whereas salaried

class showed consistent compliance irrespective of rates.

Compliance by non-salaied is thus directly related to rates at the initial slab.

From this it may be further inferred that non-salaried group reveals their income at

lowest slabs and when the bottom rates go up they remain outside the net and start

revealing it at the lowest slab when the initial rates are reduced.

The research work of F'anchamukhi regarding the relation of tax rates and

gross income revenue for all sources (except house property) for twelve years, 1969

to 198 1, shows that in the case of salaried; the coefficient of the tax rate variable was

always negative and had no bearing on the c~mpliance.~' In the case of other sources

compliance displayed a positive significant relation2'. In this regard, the Tax Reform

Committee has also observed that 'salary earners (if they receive no perquisites)

were found to shoulder the highest tax burden'."'

The tax compliance pattern of salaried and non-salaried classes to rates at

various income ranges were studied for the period 1994 to 2002. The percentage of

distribution of number and gross income of salaried and non-salaried at various

income levels for the period (1994-2000) are shown in Tables 7 to 11. The

percentage of number of salaried and non-salaried at each income range and rates

applicable for 2001-02 are set out in Table 12. A comparison of percentage

distribution of number of salaried and non salaried group at each income level for

different assessment years from 1994 to 2002 are shown in Table 13 based on the

P.R.Panhamukhi, Tar Rate and Tax Revenue-A guantitotiveshrdy (1996 New Delhi), p.156.

22 Ibid. 23 Final Report of the Tar Ref0rm.r Commiflee Part-I, 1992 (Ministry o f Finance Government o f

India) p.74 para .4.10.

data born out in Tables 7 to 1 2 . The result of the analysis is given in the following

paragraphs.

Table -- 7

Comparison of numbers of returns and gross income of Salaried and nonsalaried (individuals) at various income range 1994-95

(Rs.'OOO)

Table - 8

Range o No. of returns

%

48722) 1.50 2223637 68.68 788635 24.36

97319 3.01 38858 1.20 22415 0.69 14989 0.46

404 0.01 2532 0.08

1 100.00

Table Showing Comparison of Numbers of Returns and Cross lncome of Salaried and Non-Salaried (Individuals) at Various Income Range 1995-96 (Rs. '000)

Range of returned n ( / W u i d % I 1 ; 1

Gross income

Source: AN lndia Income Tmr Statistia AY-1994-95, Directorate of lncome Tax

12653574 66429388 19954241 1426949 1039365 742971

1079123 857260

108135040

Salaried

11.70 61.43 18.45 1.32 0.96 0.69 1.00 0.79

100.00

18.88

42.89

28.82

7.67

200-300 0.76

300-400 0.36

400-500 0.21

500-1000 0.30

0.1 1

1 9

3952169) 3.65) 57819957) 17.68

%

50724493 118337346 48601710

7552622 5298685 6487060

11932664 20333174

327087711

Source; All lndia lncome Tax Statistics AY-1995-96, Directorate of lncome Tax

4141419

26498827

70308398

4343341 1

3586002

1583414

1195933

2651901

8219879

161619184

Non-salaried

15.51 36.18 14.86 2.31 1.62 1.98 3.65 6.22

100.00

%

2.56

16.40

43.50

26 87

2.22

0.98

0.74

1.64

5.09

100

30414239

90990426

165505615

50137091

9308788

6049821

4520925

10472698

18192445

385592048

7.89

23.60

42.92

13 00

2.41

1.57

1.17

2.72

4.72

100

Table .- 9

Comparison of numbers of returns and gross income of Salaried and nonsnlaried (individuals) at various income range 1996-97

No. of returns Gross income

Non- Salaried % YO

salaried

5059511 2.56 33313654 6.83

40-50 32371663 16.40 102733141 21.06

50-100 85890587 43.50 188204068 38.59

1 OOO+ 5438 0.11 10041620 5.09 74706907 15.32

4990669 100.00 197438486 100.00 487734045 100.00

Source: Compiled and prepared refening to data in the AN India Income Tax Statistics AY-1996-97, Directorate of Income Tax.

Comparison of returns of salaried and non-salaried for 1994-95 shows that

68.05% of the salaried reveal their income above Rs.50,000/- whereas only 29.82%

of the non-salaried returned their income above Rs.50,000/- (Table 7).

Comparison for 1995-96 and 1996-97 also shows that 65.80% of the salaried

are above Rs 50,0001- income level as against 38.33 by the non salaried.(Tables 8,

and 9) the same trend continued1 in the succeeding years also as evident from table -

10 and 1 1 . In 1998-99 assessment year 49.19 % of the salaried were above one lakh

income level. The non -salaried constituted only 24.49% in that income level. For

the assessment year 1999-2000, compliance percentage was 45.17% and 13.47% for

the salaried and non-salaried respectively for income levels above one lake. In 2001-

02 the salaried percentage was 53.94 and that of non-salaried 24.72 (Table 12). The

analysis indicates that the non-salaried reveal their income at lower income brackets.

On a comparison between salaried and non-salaried regarding distribution of

returns for assessment year 2001-02,the returns of non-salaried class for income

ranged between 0-40000 constituted 26% of their total retums but the salaried class

constituted only 5.52% in this range, i.e. 20.58% higher than the salaried class

(Table 13). In the next slab of lls.40000-500000 also returns filed by salaried class

were as low as 2.01% as against 9.44% by non-salaried group. In other words,

35.44% of non-salaried assesse:; reveal their income below the taxable limit. So far

as the salaried class was concerned, their percentage of returns amounted to only

7.53% in this range and is much below the total retums in this slab. More than half

(52.75%) of the non-salaried class discloses their income at nontaxable limit or at

the lowest tax rate of 10%. The returns of salaried class constituted 55.04% in the

20% rate slab, whereas the non-salaried returns were only 36.83%. The slabs

between Rs1.5 lakh and RslO lakh and above to which 30% rate is applicable, the

salaried group constituted 26.17% of their total retums. At the highest tax rate of

30% the non-salaried returns constituted only 10.43%. The Table shows that out of

the total returns of the salaried class 11.26% pay tax at the rate of lo%, 55.04 % pay

tax at rate of 20% and 26.17% at the rate of 30%, and only 7.53% fall outside the

net. In contrast with this only 10.43 % of non-salaried class pay tax at the rate of

30%. Nearly 90% of the non-salaried c1a.s reveals their income below 1.5 lakh

whereas more than 75% of the salaried class pays tax at the rate of 20% or 30% as

against 47.28% by the non-salaried class

Table - 10

Table Showing Comparison of Numbers of Returns and Gross lneome of Salaried and Non- Salaried (Individuals) at Various lncome Range 1998-99

Range of returned I No. of returns Gross income 1 income

0-40 40-100 100-200 200-500 500-1000 1000-2500 2500-5000 5000-1 0000

Salaried 1 % I Non-salaried 1 % I 1174721 2.911 8926461 13.331

Salaried I % I~on-salaried1 %

34905651 0.401 250438791 0.66

10000 7 1 132531 0.331 583 151 0.871 1984998281 22.811 16050244281 42.52 Total 1 40356241100.001 66975991100.001 8704203361 1001 37750174991 100.00

Source:.Compiled and prepared refening to data in the All India lncome T m Srarisrics AY-1998-99, Directorate of lncome Tax

64

Table - 11

Table showing eomparison of number of returns and gross income of salaried and non- salaried Individuals at various income of range 1999-2000

Table - 12

10000+ 1 01 0.001 2581 O.OO/ 0 Total 1 56140711 100.001 86288981100.00/ 5676560321 100.001 6888455071 100.00

Source:_Compiled and prepared refeming to data in the Al l India Income Tax Statistics AY-

0.00

Distribution of returns for assessment year 2001- 02

Analysis of data (Table 13) of compliance of salaried and non salaried at

different levels of income for the period under study reveals that non-salaried class

continues to reveal their income at lower slabs, whereas salaried class shows

consistent tax compliance responses to progressive rates throughout the period under

study. Hence from the angle of rate compliance the salaried and non-salaried differ

widely. It may be inferred that the Government failed in the equitable

Income range Percentage distribution Salaried I Non- salaried

0 - 40000 26 40000 - 50000 9.44 50000 - 60000 I I .:!6 17.31 60000 - 80000 17.09 14.74 80000 - 100000 10.18 8.79 100000 - 150000 27.77 13.3 150000 - 200000 17.32 7.04 200000 - 300000 1.33 300000 - 400000 0.43 400000 - 500000 0.21 500000 - 1000000 1.15

> 1000000 0.27 Total 100.00 100.00

4152579 0.60

Total 17.73

Source: Prepared by reference to unpublished data complied by Research Wing of Directorate of lncome Tax and rates as per Finance Act, 2001

6.44 14.87 15.69 9.35 19.14 11.19 2.83 0.91 0.42 1.17 0.26

100.00

Rate of tax

Nil Nil 10% 20% 20% 20% 30% 30% 30% 30% 30% 30%

implementation of tax rates against non-salaried resulting in imposition of unequal

economical burden on salaried class

Table - 13 Percenta~e of Returns out of the total returns by the Salaried and Non-salaried in

It is widely accepted that a significant portion of potential tax revenue is not

collected because of tax evasion in India." Tax evasion exists in all countries in

varying degrees. But it is a serious problem in developing countries. Widespread tax

evasion is the bane of Indian tar: system and the history of taxation law amendments

is essentially the history of plugging loopholes, as and when discovered, to prevent

leakages of re~enue.~' Since early 1950 problems relating to evasion received

considerable attention in the reports of various committees.

- different slabs

24 Report of the Task Force 2002, p 28 para 1. 25 M.M. Sury, The Indian Tm: Systetn (1997, Indian Tax Institute, Delhi), p.35.

Slabs

0-35 0-40

35-50 40-50

40-100 50-100 100-200 200-300 300-400 400-500 200-500 500-1000

1000+ 1000-2500 2500-5000 5000-1 0000 1 OOOO+ 5000-1 0000 1 OOOO+ Sal: Salaried;

94-95 96-97

Source: Prepared based on data Table- 7 to 12.

Sal II

20.9

61 5.85 0.58 0.24 0.13

Sal

6.6

27.66

46.78 17.03 0.93 0.32 0.19

98-99 99-'00 9546

Non 1.5

68.68

24.36 3.01

1.2 0.69 0.46

Non

18.88

42.89

28.82 7.67 0.76 0.36 0.21

Sal

2.91

55.9

32.5

Sal

3.37

51.46

39.43

4.84 0.49

0 0 0

Sal

6.6

27.66

46.78 17.03 0.93 0.32 0.19

01-02

0.25 0.06

Non:

Non

13.33

62.18

15.34

Non

15.7

70.9

11.1

1.18 0.57

0.410.63 0.01

0 0

0.72 0.33

Non

18.88

42.89

28.82 7.67 0.76 0.36 0.21

sal

5.52

2.01

38.53 27.77 17.32

5.05 1.62 0.73

1.2 0.25

0.01 0.08

Non

non

26

9.44

40.84 13.3 7.04

1.33 0.43 0.21

1.15 27

0.28 0.2

Salaried

3.54 0.52

1.3 2.36 0.72 0.33 1 0.3 0.28 0.3

0.1 1 0.2 0.1 1

2.49 0.61

1.66 2.37 1.15 0.87

Nicholas Kaldor, a British economist, made a systematic estimate of tax

evasion in mid-fifties. He estimated income loss at Rs.200 to Rs.300 crores for the

year 1953-54.16 The method adopted by him was on the basis of an estimate of the

distribution of national income between wages and salaries, income of the self-

employed and income from all other sources, and then made certain assumptions

concerning the total income excluding salary.27

The Taxation Enquiry Commission, which dealt with administration of

income tax evasion, observed that statistics in connection with disclosure drive was

that income as originally inchided in returns sent to income tax department by

assesses who made disclosure was grossly understated, the difference between

income as originally retuned and that disclosed later to the department being on the

average as much as 600%."28

Several attempts have been made in the past to estimate the magnitude of tax

evasion. In 1970, the Government constituted a committee headed by Justice K.N

Wanchoo to examine the problem of black money. It estimated the escaped tax for

financial year 1961-62 as Rs. 8 11 cr~res. '~ Applying the ratio of evaded income to

the assessable non-salary income of 1965-66, the evaded income worked out to be

Rs. 1,216 crores. The commi:;sion ascertained the position for assessment year

1966-67 at a figure of Rs. 4,027 crore~.~' The extent of income tax evaded during

1968-69 was estimated on the basis of increase in the national income of the order of

Rs. 470 crores, being one-third of income." The number of assesses discovered

through survey operations were estimated to be 53608 in 1978-79, 81746 in 1979-80

26 Nicholas Kador, Indian Tax Reform (Depamnent of Economic Affairs, Ministry of Finance,Government of India, 19!;6), p.105.

27 Ibid at103. 18 Reporf of the Taxation Enquiry Commksion (1954) Vol. I, p. 147. 19 Reporf of the Direct Taxes Enquiry Commiffes, 1971( Ministry o f Finance, Government of

India), p. 107.

30 Ibid at 20 para2.16. ' Ibid at 2 0 para 2.18.

and 87304 in 1980-81.32 Suraj B Gupa's study estimates black income has risen

&om 41.7 %to 50.7% as aproportion of GDP during 1980-81 and 1987-88.)3

In spite of the fact that the rate of income tax was very high for nearly two

decades, it failed to achieve the goals as a revenue source or as an instrument of

ensuring economic justice." P'rinciples of progression were reduced to a blunt

instrument due to mass scale evasion, corruption and inert administration. The trend

continued even after the reduction of tax rates. Former Chief Justice M.

Hidayathulla, while he was the '{ice President of India, expressed his concern thus:

To me Income tax spreads a net and whoever comes within the net pays tax. It is said that the big fish breaks through the meshes and the small prey go through them and only the medium ones get caught."

According to the Tax R.eform Committee, 1991, not more than 30-35% of

taxable income is disclosed on the average.36 Industrialists, professionals traders,

entrepreneurs in services, artists - all continue to work hard and accumulate wealth

despite high taxes because many of them pay only a fraction of the taxes which they

should be paying." Nearly, forty per cent of the industrial output is accounted for

forty per cent by the small enterprises (traders, restaurant keepers, barber shops

transport operators). The hard to tax group manage to understate their income

because of inherent difficulty of verificati~n.~~ According to S.S Bagai, income

subject to tax constituted only 29% of the national income in 1991.99 The

compliance levels in western economies are close to hundred per cent for nearly all

income groups." Though equity demands that tax evaders should be booked it is

32 Estimate Committee Report "Din:ct Taxes" (April 1982), Part 11, p.82. 33 Suraj G Gupta, Black Income in lizdia (1992).p. 146. 34 A.N.Aganval, Indian Economy P.wblem ofDevelopment and Planning (1984 New Delhi), p. 194. 35 Nirmal Mukharjea, ConstihrtionalSanctions of Indian Tar Laws (1998 Cal), p.199. 16 Interim Report of the Tm Reforms Committee (December 1991), p.47. 17 lbid at 80 para 4.2 1 1984 38 lbid at 185. para 1.20. 39 S.S.Bagai, Black Money in India ( 1991 Bombay), p.46. 40 Supra n 8 at 53.

beyond the capacity of the tax atiministration."' The Committee has further observed

thus:

It seems to have fallen behind its counterparts in the rest of the world in modernizing administration, devising methods of collecting tax related economic infornlation on potential assesses and effectively checking widespread evasion by small and medium businesses. The Enforcement Directorate concentrates on tacking evasion by the potential large taxpayers and they can claim credit for unearthing large concealment in several cases."'

The same Committee recommended reduction of tax rates and slabs,

widening of tax base and effective implementation of penal provisions." The

department's compliance improvement strategy, designed as per the

recommendation of the Committee, improved the number of tax returnees but this

was not extended to rate compliance." The task force appointed a decade later has

also drawn the attention of Government to the problem of non-compliance by the

self-employed. It observed thus:

One of the tax departments biggest challenges will be to bring the 'missing middle' mainly urban, self-employed service sector professionals who, adv~:rtently or unwittingly, have dropped out of the tax base- into compliance, through the right mix of communication, education and enforcement. Presently, the compliance rate in percentage terms of this category of taxpayer is in the single digit. It is noteworthy that this undesirable outcome has occurred against the backdrop to considerable efforts in recent years by the tax authorities to fulfill its functi0n.4~

Similarly the verification of returns of large number of taxpayers in Mumbai alone

by the committee revealed that revenue loss from laundering of non-agricultural

income as agricultural income alone was estimated to be Rs. 1,000 coresu

'' Ibid. " Interim Reporf of the Tax Reforms Committee (1991), p. 87: Para 4.22.

" lbid at 3 17. " Compfroller and Auditor Genercal Report 2003 (Direct Taxes), Page 22, Government of India,

ht tp : / /ww cagindia org/reports/'index. htm. 45 Report of the Task Force (ZOO), p184, para.9.18

Ibid at 91 para 4.68.

According to the Comptrc~ller and Auditor General Report, 2001 the number

of individual filers with gross income exceeding Rupees 1 lakh, is estimated at

5.5million and the total number of potential filers were estimated to be 33.5

million4'. This suggested that only one in six potential taxpayers actually file returns.

Table - 14

Tax collections-GDP Ratio (per cent)

Corporation tax 2.68 3.27 3.02 3.03

Source: Report of Comptroller and Auditor General 2003 p.9.

Table 14 indicates that though there is improvement in the income tax

collection, income tax-GDP ratio is not satisfacto~y and limited to 1.12, 1.1 6, 1.33,

1.52 and 1.49 for 1997-98, 1998-1999, 1999-2000, 2000-2001 and 2001-02

respectively.

The results of the research work of Ira N. Gang (Rutgers University) and

Arindam Das-Guptam (Rutgers University) reveals that reform did have the desired

effect but that the gains could not be sustained overtime because the magnitude of

the gains from reform was limited and failed to curtail losses from tax evasion to any

significant extent?' The work also shows that at a disaggregated level, gains to

exchequer from tax reform have arisen mainly from low-income taxpayers without

having much impact on upper income taxpayers." Furthermore, the reforms had

little or no impact on deductions taken by business income earners and

professional^.^^

47 Comptroller and Auditor General Report (200 I), p. 18. 48 Ira N. Gang & Arindam Das-Guptam, "Decomposing Revenue Effects of Tax Evasion, Base

Broadening and Tax Rate Reduction", 23 Jul 1991, http://netec. mcc.ac.uk/WoPEc/data html, p.3, Visited on 12-4-2003 .

49 Ibid.

'O 1bid

Justice Mohan Kumar responded to the inequity of compliance by the

salaried and others in the following words: 'It is the salaried persons who cannot

escape taxation and the dishonest taxpayers are able to get away and then use the

evaded income for luxurious co~~sumption.'~'

Department has been pursuing a range of initiatives aimed at discouraging

non-compliance. This included reduction of rates, broadening of tax base, extension

of tax deduction at source scheme and tax amenities. Tax amenities set bad

precedents and encourage tax evaders in the hope that they will be let off leniently

for their past sins and the hsonest taxpayers are demoralized and enforcement

machinery also loses respect in the eyes of the common man.'* The attempts on the

part of the Government to unearth black money through various voluntary disclosure

schemes also failed to achieve the intended target.53 The income tax system

introduced as per the suggestions of Professor N. Kaldor had proved to be

ineffective, and in the incessant war between tax evaders and administration, the

former always come victorious.

Tax evasion undermine:; the ability of the government to raise revenue in an

equitable and efficient manner. Evasion is an important cause for inequity between

honest and dishonest taxpayers." Black money and tax evasion undermine the equity

concept of taxation and warp it:; progressiveness." Together, they put the integrity at

a discount and place a premiuni on vulgar and ostentatious display of ~ealth. '~ This

shatters the faith of the comm~w man in the dignity of honest labour and virtuous

51 Justice Mohan Kumar, (former High Court Judge) in his interview on 21.8 2003 at Ernakulam. 52 "Tax Evasion in Theory and Pra~tice" (Research Wing of the Tax Institute, Indian Tax Institute,

1998, Delh), p.9. 53 Ruddar Datt and KPM. Sundarani, Indian Economy (49th Ed, 2004 New Delhi), p.391. 54 T m Reform Committee interim Report 1991(Ministry of Finance Government o f India), p. 70:

para 4.5. 55 Report of the Direct Tmes Enquiry Committee 197 I(Minist1y of Finance, Government o f India).

p.5. 56 Ibid at 6: para 14.

living.57 The progressivity of income tax has been weakened by the effect of

evasion, which is widespread and has grown over years.58

D.K Rangnekar as a member of the Wanchoo Committee in his minute of

dissent made the following observation:

Apart from the wide ramification of the parallel economy, one might also be alive to the fact that black incomes are accentuating the inequalities in income and wealth breeding a new class of 'black' rich in a society, which is already hardly stratified. The inequalities are no longer below the :surface. The conspicuous consumption of the new 'black' rich, their vulgar display of pomp and opulence, their unlimited accessibility to finance, their nest eggs in various places and countries, their influence in important places, all these are now common knowledge India ... So while the tax paying public finds its own income falling, the non tax paying public having a free run of swelling concealed incomes thereby adding a new dimension to the problem of inequality of incomes and wealth?9

The Supreme Court in 1Z.K.Garge v. Union of Indiaw explained the evils of

black money thus:

The first casualty of this evil of black money is the revenue because it loses the tax, which should otherwise have come to the exchequer. The generation of black money through tax evasion throws greater burden on the honest payer and leads to economic inequality and concentration of wealth in the hands of unscrupulous few in the country. In addition, since black money in a way cheap money because it has not suffered reduction by way of taxaticon, there is natural tendency among those who posses it to use it for lavish expenditure and conspicuous consumption. The existence of black money to a large extent responsible for inflationary pressure, shortages, rises in prices and economically unhealthy speculation in commodities. It also leads to leakage of foreign exchange making our balance of payments rather distorted ad unreal ad tends to defeat the econc~mic policies the government by making their implementation ineffective particularly in the field of credit and investment. ... It is a cancerous growth in the countries economic which if not checked in time is certain to lead to chaos and ruination. There can

" Ibid.

Amaresh Bagchi & Nicholas stein, Tax Policy And Planning in Developing Countries (Oxford University Press Delhi 1994), p. 40.

59 Supra n.at.249.

60 A.I.R.1981 S.C. 2140.

be no doubt that urgent rneasures are therefore required to be adopted for preventing further generation of black money as also for unearthing existing black money so that it can be chanalised for productive purposes with a view to effective economic and social planning"'.

While delivering the judgment in C.KT v. Arvindjb2 Sabyasachi Mukharji, C.J.

expressed his concern over the impact of wasteful expenditure of Government on the

moral fibre of honest asse~ses.~'

To study the effects on i:he moral fibre of the society a sample survey of the

assessees was conducted. Sample consisted of hundred assessees from salaried and

the same number from self-employed. The answers to the questionnaire circulated

among the salaried show that all of them without exception consider the

administration of tax compliance as unfair and painful. The responses from the self-

employed were rather disappointing owing to lack of cooperation. On repeated

reminders about 83% of the self-employed responded that they have entrusted their

income tax matters to income tin practitioners and could not give any answer. Fifty

two per cent of them believed that the advise of the tax consultants help them in

saving tax. From their behavioral responses it could be gathered that any query

related to tax matters was viewed with suspicion. Majority of the employees

believed that the self-employed had ample chance for tax evasion. A few of the self-

employed (3%) admitted that they did not reveal their exact income for tax purposes.

Majority of the employed replied positively to the question whether they would

evade tax if the circumstance permitted. It could be noticed that 98% of the salaried

disclosed only salary income in their returns even though option was given to

employees to add other income and pay tax on the total income by deduction of tax

61 Ibid at 2148 pars 10. " (1 988) 173 ITR 479

Ibid. at 487. Chief Justice Sabyasachi Mukharji obsevered thus: "One would wish that one could get the same enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilization. But the question which many ordinary taxpayers very often, in a country of shortages, with ostentations, consumptions and deprivation for the large masses ask is, does he with taxes buy civilization or does he facilitate the waste and ostentation for few. Unless waste and ostentation in Governmental spending are avoided op eschewed, no amount of moral sermons would change people's attitude to tax avoidance!'

at source by the e m p l ~ y e r . ~ Mljority of the employed and self-employed taxpayers

believed that government was indulging in wasteful expenditure.

Ila Patnaik, stressed the need for true commitment to reforms by

improvements in tax administration that would have increased the tax burden of

those who were not complying."' The observations of Suresh Krisnamurthi was also

to the same effect.66

The reasons for better compliance by salaried and the absence of same by

self-employed were also probecl to assess the fairness of law regarding compliance.

The study was mainly based on opinions of the academicians, tax experts and

officers of the department. Majority of them were of the view that systematic

keeping of records for various statutory purposes made it impossible for them to

suppress salary income. Anothtx reason attributed by them was that provisions in

the Income Tax Act made it obligatory on the part of the employer to deduct tax at

source so that the employee was getting the salary after deducting the liability. Tax

deduction at source as a method of collection reduces the scope for noncompliance

by salary earners.

The responses of the employers under statutory obligation to deduct tax were

also gathered. All of them responded negatively in the same manner to the question

Section 192(2B) of IT Act. 1961.

lla Patnaik, 'The Budget Milking Salaried Classes Dry? In Black and Whiten(2002), http://openlib.org/is p.1. Visited on 8-10-2003. The author is Senior Fellow Indian Council Of research. He observed thus: What is needed are improved systems to enforce compliance such as modernization, extensive use of IT, data warehousing etc. Instead, Sinha chose the easy way out. A hue commitment to reforms would have meant making improvements in tax administration that would have increased the tax burden of those who are not complying it is not hard to understand why the income-tax department is wielding its stick on the salaried class to bridge its revenue short fall". Mr. Naraendran also expressed similar views. He is a well known journalist. During his interview on 22.9.2004 at Kozikode, he opined that the salaried were sitting ducks so that the Government could chop it's head at any time, but on the other hand the department was not vigilant about the nonfilers for mopping up tax revenue.

66 Suresh Krisnamurthi, http://wmv.blonnet.com/ THE HINDU group of publications, Sunday, November l I, 2001. p.l.Visited on 7-4-2002. He opined thus: "The salaried sections are among the highest tax-payers in terms of the proportion of income they pay as tax since they are unable to avail of rules and exemptions that the self-employed can and unable to show various items of expenditure such as entertainment as costs. But the Government take away more from the honest citizen and letting the dishonest get away with it"

whether they would help the employees in reducing the tax liability in violation of

the statutory obligation. Some employees expressed their grievance that employers

were overenthusiastic to collect tax and deny deduction of eligible relief, and then

had to wait for refund of the same by tax authorities.

Section 192 provides for deduction of tax at source in respect of salary. The

employer deducting such tax should remit the same within the stipulated time to the

credit of Central G~vernment.~' Any default to deduct or credit attracts penal

provision by way of payment of defaulted tax plus interest of 15%.68 Human nature

being what it is the provisions are found sufKcient to ensure tax compliance by the

salaried group.

There was consensus of opinion among experts on noncompliance by the

non-salaried. They were of opirlion that the actual income received by non- salaried

could not be assessed unless voluntarily revealed by them, since there was no

practical way to find out the real income. Consultations and fee received by self-

employed are facts within their knowledge. Departmental scrutiny of all returns is

impracticable. In practice compliance improvement strategy is difficult because tax

evasion involves economic activities that are part of what is usually referred to as

'hidden' economy. The increased use of e-commerce through internet is posing

serious challenges to the tax department. Thus in a rigorous ineffective enforcement

regime, more effort is wasted on evasion.69

Random scrutiny method followed in India is really not an assured way to

identify defaulters. Only intelligent scrutiny work may provide adequate deterrence

for voluntary c~mpliance.~ The process encourages suppression of income by

people seeking to fall into a lower or less scrutinized category." Where individuals

6T Section 200 of the I.T. Act, 1961.

68 Section 20 1, Ibid. 69 Ameresh Banchi, " Recent Initiatixes in Enforcetnents and Trends in lncome Tax Revenues: An

Appraisal", 23 E.P.W. 89 (1998). " Dr. Rajiv Shukla, "Taxpayers in India: Their Profile and Suggestions For Increasing Their

Number", 129 Taxman .274 (200Ii).

" lbid at 273

are left to pay tax voluntarily, problems related to non compliance and evasion arise

owing to lapses of supervision. The costs associated with evasion are lower and

consequently default rates are high.'' The number of scrutiny has been declining

giving ample chance for evader:: (Table 15).

Table - 15

Cases selected for scrutiny for 1997- 2002

/ Financial Year I Opening baln-selected for scrutiny I Total cases for 1 of scrutiny (cases during the year

1999-00 39622;' 2000-0 1 237414 122737 360141

The figures indicate that the number of cases for scrutiny over the past five

years show a declining trend. This indicates that the department was ill-equipped to

deal with enforcement mechanism effectively. Individual as a rational actor always

acts to maximize his self-interest?) The declining trend in scrutiny gives increased

chance for non-compliance by the non-salaried group. Detection of evasion is not

followed in most cases by swijt retribution. Unfortunately the legal procedures are

dragged on by delaying tactics of accused assessees and entangle the department in

court action for years?' The department rarely resorts to penalty proceedings or

prosecution. During the year 2001-2002, number of prosecutions was 12,415. Out of

this only 212 cases were disposed off and five only resulted in convictions. The data

reveals ineffectiveness of penal provisions.

200 1-02

To assess the total impact of taxes on society, "the total sacrifice imposed

upon the populace - total collection costs, administrative and compliance costs,

-

'2 Surabi Ranganthan, "Collection 'k Recovery of Tax: An Economic Analysis of Tax Collection". 14 1 Taxman 208. (2004).

' Richard Posner Economic Analysis of Ltnv (4th ed. Boston, 1992), p.3.

Ibid.

Source: Report of Comptroller and Auditor General (2003) p.25. 134411 1 83129 217540

should be looked into."75 The low tax revenues often result from defects in the tax

collection system rather than low tax rates.76 Collection of tax involves expenditure

and it is desirable that this cost should be minimum.77 Detection of defaulters

imposes heavy workload on department. The evaders compel the administration to

spend a lot of its time and resources on tackling their devious ways of e~asion.~'

Individuals and businesses that evade tax in effect shift their tax burden onto those

taxpayers who comply with 1:heir tax obligations and this shift results in an

inequitable distribution of tax burden, and disadvantages those businesses that

choose to comply with their tax obligation^.'^ The contribution of income tax by the

salaried reaches the government at the earliest point of time even before becoming

due. On perusal of figures regarding the details of tax deducted at source revealed

that salaried class are the largest single class and their contributions constitute

nearly half of the total tax deducted at source. For the assessment years 1998-'99,

1999-'00, 2000-'01 and 2001-'02, tax deducted from the salaried constituted

39.62%, 50.43%, 48.99% and 44% respectively of the total tax deducted at source

(Table 16).

The Tax Enquiry Commission had opined that the assessment of the salaried

class is 'relatively easy'.'" In the case of nonsalaried, arrears of demand continued to

mount despite direction of the Board for according priority for collection and

reduction of arrear demand. The department has to incur huge expenditure for

realizing the said uncollected amount. The magnitude of the problem of arrears in

75 Saumen Chattopadhyay and Arindam Das-Gupta, The Personal Income T m in India: Compliance Costs and Comp1iani:e Brhaviour of Tarpoyers (December, 2002 National Institute of Public Finance and Policy, New Delhi).

l6 Julia King, "Tax and Spend? Please Do" (2004), http://stream.realipactnet/rihurl.ram, p. 2. visited on 5-6-2005.

77 Anil Kumar lain, Direct Tmafion in IndIo-Some Aspects ( 2002 Jaipur), p.142. '' Report of the Direct Tares Enquiry Committee (Ministry o f Finance, Government of India,

1971, Chapter 2, p. 6 . para 13.

79 ibid.

Report of the Tmration Enquiry (!ommission (Ministry of Finance Government of india) 1953- 54 Vol 1 p.136 para 10

our country thus seems to have no parallel elsewheres'. The income tax collected

and demands remaining uncol1ec:ted for 1990 to 2000 are given in Table 17.

Table - 16

Details of tax deducted at source during 1998 - 2002

I I Amount of tax deducted Rs in crore I per cent to total tax deducted

(~nterest on securities 1 1276.79 ( 15'33 1 1847 1 2097

Winnings from lottery 69,76 or crossword puzzles 116 75 62

Winnings from horse 43,3 races 30 7 8

Payments to contractors and sub 3779.84 3678 4209 4005 contractors I

Ilnsurance commission 1 135.43 1 1:r2 1 203 1 321

Payments to non - residence and others I 130I.24 I 34 I 3944 ! 4797

I I -

Total / 16257.9 1 18147 / 28214 / 30671

Source; hepared by reference to Repo,.t No. I2(Direct Tme General p.p 22-24

8.003 1 0.18 1 1;: 1 14.68

99.997 99.99 93.88

of 2002 by the controller ofAuditor

Table - 17

Tax collection and arrears during 1990 -2000 @.in crore)

Income tax remaining uncollected 2886

1991-92 67'3 1 3423 1992-93 7898 3587 1993-94 4153 1994-95 12029 12809 1995-96 15592 16536 1996-97 18234 18152 1997-98 17101 21168 1998-99 20240 22189

1999-2000 25655 2462 1

Report ofthe Direct Taxes Enquiry Committee (1971). p.89. para.3

The data go to show that nearly half of the income tax by the non- salaried

remains uncollected. Amount remaining uncollected for the assessment year 1999-

2000 has increased by Rupees 8827.04 crore constituting 21.41% over the pervious

yea?'. Despite directions to the Board to accord priority for collection and reduction

of arrears, the amount remained uncollected and in 2001-02 increased by Rupees

33746 crore (59.8%) over the preceeding year. A major cause for the increase in

arrears was large scale interhence by courts, tribunals and revenue appellate

authorities. At the end of 31S' March 2002, fifty per cent of arrears including interest

and penalties were kept in abeyance. The mounting of arrears of tax shakes public

faith in the administration. Thus from collection perceptive also salaried class stands

on a different footing.

Table - 18

Cost of Income tax collection per assessee

Conformance with tax law represents a fixed cost for many individuals but

in fact the impact is that lower income individuals bear a greater relative tax

Year

I 199 1-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

1999-2000 2000-200 1

compliance burden than higher income individuals8'. The compliance cost hits lower

Source: Preoared from data in the reDort of the Comotroller and Auditor General of India

No of Assessses

2 7660407 9151288 94 15 102 10108012 10476940 11416315 12893417 16958884 19567397 226680 15

income individuals harder than higher income individ~als.~' In India cost of

Collection of Rs( in

crore)

3 673 1 7898 9123 12029 15592 18234 17101 20240 25655 31764

Comptroller and Auditor General Report (2003), p.26.

Scott Moody, "The Cost of Compliance" (2002), http: / /mt~fieedtodoy.org.html. p.3. Visited on 3-4-2003.

" Ibid.

Per assessee revenue

collection Rs (in la!&)

5 0.09 0.09 0.10 0.12 0.15 0.16 0.13 0.12 0.13 0.14

Cost of collection

Rs (in crores)

4 232 274 305 33 1 398 452 646 754 788 822

Per assessee cost

of collection in Rs

6 300 300 300 300 400 400 500 400 400 360

collection per assessee varied from Rs.3001- to Rs.5001- during 1991-2001. (Table

18)

The employer performs major part of collection and the cost involved has to

be born by them. The tax payable by the employee is withheld and is remitted to the

exchequer. Administratively this method entails little effort on part of the tax

authorities8'. They need only supervise the process to ensure accurate remission86.

Contribution by the salaried group reaches the exchequer at the earliest point of time

with least expenditure to the G~vernment.~'

It may be concluded that salaried class differ from non-salaried and are

unequally circumstanced in maiters of compliance, statutory compulsions attending

to compliance, evasion, administrative expenses incurred for compliance and

collection cost and procedure. 'Wages and salary bear heavy tax incidence. This has

given rise to gross inequities in the tax system. The income tax as it is administered

in India not only fails to treat equals equally but it also does not satisfy the

requirement of different treatment of unequals. If equals are not treated equally, or if

unequals are treated equally, a sense of being unfairly treated will be created in those

who sacrifice more.

Policies aimed at reducing tax evasion may not achieve the desired outcome

in an environment of increasing inequality and, depending on the remedy proposed,

K.C Gopalakrishnan, T m Law (1994 Banglore), p. 118.

86 lbid. 87 Supra n 6 at 52. 88 Nicholas Kador, Indian Tax Refi~rm (1956), p.40. It reads thus: "There is no point in having a

system of progressive personal muation at all.. .unless it is to secure a more equitable distribution of wealth in the country than would obtain without it. If the system fails to secure equity - whether on account of the legal loopholes tolerated or the failure to enforce the strict statutory provisions of the tax laws - it is better to abandon it altogether or reduce it to continue in a level at which it can be efficiently administered than to allow it to continue in a form in which its redistribute effects on wealth are only formidable on paper but ineffective in reality; and as result of which some unfortunate minorities in the community (who are unable to make use of the facilities for evasion and avoidance) are both unjustly and from a social point of view most harmfully penalized"

may have the opposite effe~t . '~ Though the criterion of equity cannot strictly be

applied to taxation it is possible to correct specific elements of inequity or injustice

in the tax system.% Vito Tanzi has rightly observed:

Income taxes on wages ,and salaries cannot be evaded, or at least it is harder to do so, which provides a good round for a lighter treatment of these incomes, and if' the assumption is true that taxes on them are difficult to evade, then a de jure non discriminatory treatment of these incomes should arnount to de facto di~crirnination.~'

Hence the salaried class in India requires special lenient treatment as given in China,

Russia and Pakistan.

89 Kim. M. Bloomquist, "Income inequality and Tax Evasion: A Synthesis" (2003), wwwirs.gov/pub/irs-soi/bloomg p. 4, visited on 20-3-2004.

90 Ibid. 91 Vito Tanzi, Individual Income Z113x and Economic Growth, (Baltimore, The John Hopkins Press

1969), p.5 1 .