Indias tax base is 3.5 cr, a tiny portion of the 1.

2 billion people who inhabit the

subcontinent. Therefore the tax to G D P ratio is also small, over 10 %.
These figures are an indication to the fact that a large chunk of the population
is off the countrys tax net, a fact that should not be allowed to continue long,
given the ambitious projects the Government is embarking upon.
Look at the other side of the world. In the US 45 % of the population pay
taxes. India has one of the lowest tax-to-gross domestic product (GDP) ratios,
says a recent paper by the Centre for Budget and Governance Accountability.
Even lower middle-income countries had tax-GDP ratios of 17.7 per cent, the
paper said.
Among G20 countries, India had the third-lowest tax base, before Mexico and
Indonesia, the paper said. The 37.7 per cent share of direct taxes to Indias total
taxes was lower and regressive compared to developing countries such as South
Africa (57.5 per cent), Indonesia (55.85 per cent) and Russia (41.3 per cent).
Developed G20 countries had a greater share of taxes as part of total tax
revenues, the paper said, adding in the US, this stood at 75.8 per cent.
Tax G D P ratio has serious implication. A high tax GDP ratio while it facilitates
the Government to optimise the mobilisation of resources, such a ratio would
also is an indication to the welfare state .Empirically, the higher the social
security measures in a country higher the tax-gdp ratio.
Therefore, the higher the tax-GDP ratio, the higher the chances of the state
beign a welfare state.
Denmark , Belgium etc are fines examples.
Fiscal experts have been thinking a way out from the current position in which a
minority is in the tax net ie in the net of direct taxes. This need to be checked
markedly and quite a few experts have drawn up a road map for it.

H P Ranina Primarily, the Government should be in a position to ensure that all

expenditure should be recorded by the Government automatically, using the
technology available to it. The level of tax compliance in most advanced
countries is very high, almost without loopholes, and this is largely due to the
application of technology in the day today administration of tax.
Cash transactions, a major feature of the Indian economy is the stumbling block
that preclude the possibility of recording all transactions. Experts suggest ways
and means to overcome the problem.
First, the Government should , preferably within a time frame of five years,
should make it mandatory for all transactions to be through the medium of
debit/credit cards. In most developed or developing countries, at least 76 % of
the transactions are through cards.

Most advanced countries have mechanised the tax administration to the

maximum extent possible. For example the Internal Revenue Service of the
United States, the US counterpart of Indias Income-tax department has the
machinery to automatically record every transaction beyond the threshold limit
to be recorded automatically in their computer network. This computer network
has all the financial details of the tax payer which will
be displayed on the
screen with the click of a button. While high tax compliance is also seen as an
offshoot of high civic sense, it is also understood as the outcome of intense
vigil made possible by the application of suitable technology.
The technology era of India , ushered in by Sam Pitroda, Rajiv Gandhis
technology minister, over 30 years ago , has banks and financial institutions
gearing up for a fully automated transactions. Once debit card/credit card are
made mandatory by legislation in all transactions, the Income tax
departments technology network should be aligned to Permanent Account NO
(PAN), Unique Idxent5ification Number. Therefore, it becomes obvious that the
Government gets the record of all transactions without it asking the tax payer to
comply with.
Therefore, it is imperative that the Government should make it mandatory for
petrol pumps, hotels, restaurants, bars, clubs, to transact only through debit
card/credit cards.
And airline tickets, purchase of jewellery, gold ornaments, furniture, house hold
appliances, motor bikes, scooters,.Dealers of vehicles should be asked to accept
account payee cheques or cards. Architects, interior decorators, painters,
electricians and others who charge more than Rs 10,000 per transaction should
also be required to receive payments for the goods and services through debit
cards credit cards or account payee cheques. More the transactions are
accounted for more the chances of widening the tax net.

Another important step Government should contemplate is to restrict the

number of bank accounts one should own. Accounts opened in different banks
and different cities, sometimes with bogus addresses are also used to escape the
tax net. Tax evaded income is patked in these accounts . While some obtain
bogus PAN to open thee accounts with banks, mutual funds etc.

Therefore it should be made andatory to disclose all their personal accounts.

Legislate to use PAN even on accounts that existed in the past. PAN should be
aligned with the UID.
A positive outcome of upgraded technology for tax administration is that the
internacvtion between the tax payer and the tax officer become minmal, which is
the beginning of a road to a less corrupt Governemnt department.

Tax base also may erode if the tax regime does n ot keep pa e with the changes
in the cross border tax developments . It may facilitate thee MNCs shift profit and
result into double non-taxation, a a by which the tax payer end up paying taxes
nowhere in the world.
OECD research titled Addressing Base Erosion And Profit Shifting point out
increasingly aggressive tax planning strategies of multi- national companies are
the basis of this erosion.Domestic rules for international taxation and
internationally agreed standards may not have kept changes in global business
practices in the area of intangibles and development of digital economy.

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Number of income tax payers in India and US

by MAN SH U on JANUARY 19, 2011

in EC ONOM Y

Business Standard has an article today about howsalaried individuals may be spared from filing
tax returns.
It says that the Income Tax department is contemplating a proposal to make filing taxes exempt
for salaried taxpayers who dont have any other source of income.
So, a salaried individual will of course pay taxes, but wont have to go through the hassles of filing
tax returns. The story goes on to say that banks and employers have the details of salaried people
who dont have any other income, so in the future it might be possible to eliminate the need of
having the individuals file tax returns, and get this information from other sources.
This will obviously mean a lot less hassle for a lot of folks, and I hope this idea sees the light of
day in our lifetime.

What really caught my eye though was the number of people paying income tax in India. The
story has this number at 35 million, which is about 3% of our population, and is quite low.
Please note that this is not the total number of taxpayers because you pay indirect taxes on
almost everything you use, so in that sense taxpayers will be quite high.
Still, 3% is a very low number, and I thought Id compare this with the number of people who pay
personal income tax in the US.
Here is how that chart looks like.

In the US, about 45% of the population pays taxes, as the total population is about 307 million,
and thenumber of returns filed for individual income tax is about 144 million.
Thats a huge difference between India and the US, and Id think an indication of where India is
headed in the years to come as more people join the organized labor force, and more electronic
transactions bring in greater transparency.