The Compliance Cost of the Personal Income Tax in India, 2000-01: Preliminary Estimates

Abstract

Compliance Costs in Developed Countries varied between 3.91 percent of tax revenue in the UK in 1986-87 to between 7.9 to 10.8 percent in Australia in the 1990s. Compliance costs are incurred by taxpayers but also third parties who collect taxes (e.g. tax withholders) or who are required to provide information to the tax administration. Non-filers incur costs of non-compliance. So tax compliance cost elements included, in principle, in this study are all costs incurred by taxpayers, non-filers and third parties to comply with tax obligations. Tax compliance costs can be voluntary or mandatory, though both add to the social cost of the tax. Bribes, being a transfer are part of private costs but not costs to society. Compliance activity also has benefits via better record keeping or cash flow benefits of tax deductors. Costs arising from economic distortions and equity violations are, however, omitted. For the survey, from a list of 10,234 names the eventual response rate was a disappointing 2.36% amounting to less than one taxpayer per 100,000 income tax payers in 2000-01. Overall, the final sample of 172 taxpayers is biased towards high income respondents and salary earners. Therefore, findings of this study must be taken as very preliminary and subject to a large error margin. Nevertheless, the high compliance costs documented make it clear that a reliable cost assessment is urgently needed. Besides primary survey data and case studies relevant secondary data are used. Estimates of compliance costs are high by international standards even for salary earners and excessive for non-salaried taxpayers equalling, at the median, 130 percent of taxes paid. - Costs are regressive and, for low income and middle income non-salary earners, can be more than double taxes paid even if bribe costs are neglected. - Both the incidence of bribe payment and the bribe quantum are high, even among salary earners, but especially so for non-salary earners. - Harassment of assessees in various forms, whether related to bribes or not, is a serious problem. Overall, despite the personal income tax being limited to only around 20 million taxpayers, costs directly borne by taxpayers are estimated at over 0.8 percent of GDP or 49 percent of personal income tax collections. With third party compliance costs this rises to 56 percent of taxes collected. If conservatively guesstimated non-filer costs are added, costs further increase to 59 percent of tax revenue. The overall social cost of the personal income tax, adding administration costs and subtracting bribes is 60 percent of tax revenue. It is reiterated that the poor information base implies that these estimates are subject to a wide margin of error.