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Last Updated: Monday, 5 July, 2004, 16:39 GMT 17:39 UK
Reforming India's maddening tax system

By Soutik Biswas
BBC News Online correspondent in Delhi

Indian rupees
How can India get more tax from more of its people?
Every year before India's federal budget the biggest talking point among citizens and experts is: Will income tax rates be lowered?

The new Congress-led government will present its budget this Thursday and newspapers are full of speculative reports about tax cuts being on the way.

Experts debate the pros and cons of such cuts on prime time television news and talk shows.

Many people feel the time has come for an overhaul of India's tax system, which critics say targets honest citizens and the lower-paid unfairly.

The majority of India's income taxpayers are salaried employees working for the government or private firms, whose taxes are deducted at source.

They feel they are overtaxed and underserved by the state, and they want the government to crack down on the shadow economy - or what Indians call "black money".

Fraud

India has a flourishing underground economy, where transactions are in cash and people simply pay no taxes.

Concealment of income at these levels is rife
Dhruba Purkayastha, Investment Information and Credit Rating Agency

"The biggest problem is that the country's tax base remains very low because of bad tax administration," says Dhruba Purkayastha, general manager with India's leading credit rating and advisory company, the Investment Information and Credit Rating Agency (Icra).

Mr Purkayastha is alluding to the government's notoriously corrupt and poor tax collection system.

Out of India's population of a billion people only 20 million pay tax, he says - that is just 2%.

Tax collectors are still failing to raise as much as they should from the high income sections of society - doctors, lawyers, designers - and other independent, self-employed professionals whose tax is not deducted at source.

Salaried taxpayers are also riled by what they say are the government's outdated and misplaced socialist priorities in levying income tax.

Income earned from farms in India, for example, is exempt from income tax.

The result: a large number of rich farmers who earn much more than salaried employees in cities, and get away with paying no tax at all.

Threshold 'too low'

The amount India collects in income tax has risen to more than one trillion rupees ($22bn) today.

But the tax take has grown largely because of a three-band, low threshold income tax system.

Considering the government gives us no social security or medical facilities, the rates are high
Calcutta-based leather exporter Debangshu Saha

Income tax is levied at 10% of annual income between 50,000 and 60,000 rupees ($1,100-$1,333).

A 20% rate applies between 60,000 and 150,000 rupees - after which the top rate of 30% kicks in.

The matter is further complicated by the fact that the government offers various rebates to taxpayers who invest in a range of insurance and savings schemes, housing loans and equity and mutual funds.

Income tax rates in India have come down over the years - from a peak of 60% 25 years ago.

But rates remain among the most irrational and highest in the world, critics say.

Threshold limits are low - which they say hurts lower income groups and encourages the better off not to pay.

Dhruba Purkayastha says the people often avoid paying tax because the system is so complicated that they need to hire a tax consultant - which costs them more money.

What should India do?

According to accounting firm PricewaterhouseCoopers, India's government needs to widen the tax base and marginally lower rates.

Strengthen the net and catch the big fish
Vivek Mehra, PricewaterhouseCoopers

The firm says India's tax bands compare very unfavourably with those in other parts of the developing world, let alone in countries such as the United States or Australia.

Brazil's maximum rate of 27%, for example, kicks in at just over $7,300, the firm says. India's slightly higher rate applies at less than half that figure.

In Pakistan, you need to earn in excess of $15,000 to qualify for the top rate of 35%, while in Sri Lanka the 30% top rate applies at $6,250.

"The government should expand and widen the tax net," says Vivek Mehra, executive director (tax and regulatory services) of PricewaterhouseCoopers in Delhi.

"It should strengthen the net and catch the big fish instead of squeezing the small and medium fish."

Mr Mehra wants tax rates rationalised and compliance systems made simple so that more and more people are encouraged to pay taxes, not avoid them.

Delhi-based chartered accountant Ravi Bhatia advocates a simple three-band system beginning at 10% and ending at 25%.

He wants thresholds raises and an end to the rebate system, which he says makes compliance procedures complicated.

"The more the complications, the more the scope of corruption," he told BBC News Online.

Public awareness

Salaried taxpayers in India remain a disgruntled lot despite rates having gone down.

For years India has needed a more robust contract between the state and its citizens when it comes to collecting income tax.

The phrase "taxpayers' money" entered the public discourse only in the last few years, as people became more aware about what they received in return for their taxes.

Debangshu Saha, a Calcutta-based leather exporter, says he is not getting enough.

"Considering the government gives us no social security or medical facilities, the rates are high.

"The high rates also are an incentive to evade taxes," he says.

Dhruba Purkayastha says tax rates can be lowered "only slightly" - but things can improve enormously with corruption-free and more efficient collection systems.

Like everything else in India, tax reform is a painfully slow process.

Income tax rates and bands have remained the same since 1998, but many now say it is time for adjustments to reflect changes in inflation and India's economy.




SEE ALSO:
Bollywood cinemas end tax strike
06 Apr 04  |  Entertainment


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