12/29/2015 Black money: How government can increase tax compliance

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CHARAN SINGH

MONEY | 3-minute read | 09-02-2015

A number of disclosures on black money or unaccounted money have beenmade today, and even earlier by foreign institutions. In India, tax authoritieshave regularly been conducting raids and recovering large amounts ofunaccounted money for years.

The menace of black money is widespread and deeprooted in Indiaspanning a number of issues. First, number of income tax payers has beengenerally low. In a population of 1.2 billion, there are just about 35 milliontax payers of which, famously, there were only 42,800 persons with taxableincome exceeding Rs. 1 crore. This is too low a number in a country whichhas numerous luxury houses and cars; accounting for world's largest goldimports; and flourishing stock markets. The issue of tax exemptions andinappropriate use of such exemptions also needs investigation.

Black money: How government can increase taxcomplianceThere is a need to reduce dominance of cash transactions and encourageelectronic banking to enhance technological surveillance.

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Thus, the most crucial issue is how to increase tax compliance. To increasecompliance, many countries have experimented with different techniques ofreward and punishment, especially after seminal research on "crime andPunishment" in 1968 by Professor Becker. In the US, compliance is high andattributed to many tax policies and administration parameters, includingcriminal tax convictions. On other hand, literature is unanimous withfindings that suggest; rewards lead to higher tax compliance. ProfessorRosenberg, University of San Francisco suggested lower tax rates whileProfessor Kornhauser, Arizona State University proposes special rewardschemes for individuals. In India, there is a need to have a framework, wherea good tax behaviour is celebrated publicly and tax avoidance has a deterringpublic punishment. Simultaneously, tax administration would need to bestrengthened to avoid rentseekers.

There is also a need to investigate factors that can strengthen the tendency tobe tax compliant. According to McGee (Ethics of Tax Evasion, 2012), womenare considered more tax compliant than men across the global; but not inIndia. Logically, it can be deduced that in a country where females are notsecure at homes, public places and offices, the compulsion of tax compliancewould be less than optimal.

The problem of deeprooted black money needs to be tackled with differentschemes. First, as an immediate measure, to improve tax collection, there isneed to incentivise tax collectors and tax intelligence agencies. To improvetax collection in medium term, there is a need to reduce dominance of cashtransactions and encourage electronic banking to enhance technologicalsurveillance. The judicial system needs to be strengthened for quicksettlement of disputed cases. There is also an important role for social mediaand entertainment industry in this context. To draw long term benefits,introduction of courses on ethics need to be considered in higher education,including business schools.

The issue of black money is a challenge which cuts across parties and

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WriterCHARAN SINGH

RBI Chair Professor of economics at IIM Bangalore.

He has earlier worked at the IMF, Reserve Bank of

India, and other leading commercial banks.

ideologies and can only be handled by PM Modi because of his popularityand mandate. The most significant justification and cause of black money iselection funding and the Union government can help establish pristinestandards in tackling this issue.

A highly tax compliant economy would imply more publicly providedservices for all citizens; leading to higher welfare and better quality of life.This would require trust and cooperation between citizens, corporate sectorand the government a blissful state of Ram Rajya.

#Narendra Modi, #Black Money,

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