Tax evasion in India – Why do Indians feel they are justified in evading income tax?

The most stereotype thought process amongst Indian population is that “if such a few numbers of people pay taxes why should I?”. This is because they blindly follow the famous stat that there are only about 2-3% taxpayers in the country having over 1.25 billion population. So, before moving to the core subject matter of tax evasion in India without fearing the consequences”, let us clarify a huge misunderstanding related to the above-mentioned stats. India is unfortunately still a developing economy and the prime reason is the poor human resource quality. Our workforce still lacks sufficient educational qualification and skills found in the population of many developed economies. As a result, our population faces the problem of unemployment and the vicious circle of poverty.About 22% of the people are below poverty line and out of the remaining population, majority people belong to the lower middle and middle-income category. Moreover, the per capita income of our country as of 2017, was just over Rs.1 Lakh.

You might be wondering why all these stats are being mentioned all of a sudden?The reason is that our country’s tax exemption amount is Rs. 2 lakh 50 Thousand. This means that majority of our population doesn’t even fall into the taxpayers’ category.This might’ve made things clear to you as to why only 3% people pay taxes. But this not all of the truth behind the menace of tax evasion in India.

Inadequate tax law stringency:

Although the Central Board Of Direct Taxes latest data states that the tax base has increased from 4 Crore(2-3%) to 6.26 Crore(Approx 5%) in the last Financial Year 2017, the Tax laws and their execution still remain a point of concern. The tax laws still consist of many loopholes and discrepancies which are easily exploitable.For instance, the offshore earnings case known as “Panama Papers” involving many renowned celebrities worldwide or the recent “Vodafone tax case” related to the company’s Cayman islands share dealings, etc. Moreover, even the number of people punished in tax frauds is very small with majority cases dissolving unexpectedly.As a result of these lenient laws and poor execution of punishments, people take undue advantage of our tax system which ultimately encourages tax evasion in India, creating fraudsters like Vijay Mallya and Nirav Modi.

Infrastructure shortcomings and Agricultural Exemption

In addition to the legal inadequacies, many people are also discouraged to pay taxes due to the lack of appropriate infrastructural facilities. The tax compliance procedure has been made completely online a few years ago but the irony is that many rural and semi-rural regions in our country lack basic infrastructural amenities like a computer system, electricity connection, etc. so the availability of internet is a factor beyond imagination there. Due to these aspects, many people belonging to these backward regions feel that it is justified to not pay taxes as there aren’t any adequate infrastructural facilities available for them.

In addition, to the gospel truth behind the minuscule tax payers base revealed at the beginning, another major reason behind it is the total exemption of agricultural income from all kinda of taxes. And as India has a huge number of farmers, this eliminates a major proportion of our population from the obligation of paying taxes. But this provision too, has been misused by the people largely. With the original idea being to support the marginal farmers, this provision unfortunately also helps the rich farmers to purposely avoid tax payment. As a result, this is a sort of indirect evasion of tax or we can call it as a disguised form of tax evasion in India.