Reforming Indian income tax enforcement

The Department operates with an outmoded information system, tax assessment and collection are ineffective and plagued with mounting arrears, and tax penalties are frequently watered down through various forms of amnesties and imposed on very few tax offenders. Moreover, India"s tax procedures are cumbersome and impose substantial compliance costs on taxpayers, factors which are allegedly aggravated by widespread corruption within the ITD. The result of all of these factors is that the contribution of the Indian income tax to government revenue has deteriorated over the past 25 years and tax compliance has declined steadily. Hence, there is a need for drastic reform of income tax administration in India. Section 2 of this report compares the performance of the Indian income tax system with those of other countries in order to emphasize the seriousness of Indian"s tax problems; discusses the possible causes for the poor and deteriorating performance of Indian income tax revenues, arguing that tax evasion is the major cause; examines the proximate causes for falling tax compliance since the mid-1960s; and, finally, examines the major problems encountered with enforcement of the income tax by the ITD. Section 3 describes recent experience of other developing countries with income tax administration and reform. Section 4 assesses lessons for Indian policymakers, drawing on reforms suggested by studies of the Indian context as well as international experience.