Income tax compliance in India: An empirical analysis

Abstract

Aggregate data are used to study determinants of income tax revenues and taxpayer compliance in India during 1965–1966 to 1992–1993. The estimates show that both revenues collected and compliance were significantly affected by tax structure (marginal tax rates and exemption limit). In addition, inflation as well as declining assessment intensity had a significant negative effect, while traditional enforcement tools (searches, penalties and prosecution activity) had only a limited effect. “Best practice” enforcement, assessment and tax structure policies could have yielded at most a 90% revenue increase, leaving India's income tax performance below the average of countries with similar GDP per capita. Thorough reform of tax administration is therefore needed to raise income tax collection in India to international standards.