For Indians, the tax man rarely cometh

India's government wants to end a culture of tax evasion that is limiting funds for public services.

As a booming India strives to achieve ambitious development goals set out in its national budget last month, it faces a major obstacle: rampant income tax evasion. Only about 30 million Indians pay taxes even though the country's middle class, estimated at 300 million, outnumbers the entire US population.

Analysts contend higher tax revenues would help India to provide better public services, curb its large budget deficit, and boost economic growth. But experts say widespread skepticism about the efficiency of the state - the result of extensive corruption, past economic mismanagement, and poor public-service provision - has helped to sustain a culture of evasion.

"Tax evasion has become a national sport," says Jayaprakash Narayan, the national coordinator of Lok Satta, a group campaigning for better governance in India. "The majority of Indians work in the unorganized sector, where cash payments are common and concealment of income is easy."

Boosting the share of national income based on income tax has become a priority for the government, which has adopted measures to increase the taxpayer base and cut evasion - including more taxes on services, a new value-added tax on goods, and an initiative to create a digital-information network about taxpayers that could pinpoint evaders.

The network, which was inaugurated in 2004 but is still under development, would enable tax inspectors to track such things as high-value purchases and large bank deposits, compare them with declared incomes on individual tax returns, and investigate any anomalies. The government hopes better administration will encourage taxpayer compliance.

For now, though, tax dodging remains pervasive. Nonetheless, rapid economic growth has boosted India's tax revenues, partly because existing corporate and personal income taxpayers have enjoyed rising incomes. The budget has forecast nearly 20 percent growth in tax revenues for the coming financial year.

"I think the current government's approach is that it's hard to change basic attitudes, so keep economic growth high, which will push up incomes and tax revenues anyway," says Sunil Khilnani, a politics professor at John Hopkins University in Baltimore, Md.

In the long-term, some experts are hopeful that the evolving culture of India's rising generation promises a less adversarial approach - and hence the potential for greater compliance.

"Young professionals want to get jobs in the organized sector, where salaries are paid by check," says Mr. Ranina. Tax is typically deducted automatically from this kind of pay, as in many other countries. The young "are quite prepared to spend on plastic cards too," he adds, which reduces the scope for evading income and other taxes via the cash-based black economy.

India's finance minister, P. Chidambaram, forecast in his budget speech to parliament last month that the deficit would fall, and expressed hope that the Indian economy would soon grow at 10 percent per year, compared with around 8 percent currently.

But analysts say endemic evasion is one of the reasons why India collects only around 15 percent of its $690 billion national income in taxes, roughly the same proportion as 15 years ago. The tax-to-national income ratio has risen recently, but in many countries, the equivalent percentage is much higher, such as 25 percent in the US or 40 percent in Europe.

The statutory tax-free status of India's agricultural incomes, and a reduction in customs duties following economic reforms instituted in the 1990s, also hurt revenues.

Rampant evasion extends to other levies, too, such as taxes on goods and services or private property transactions. Frequently the true value of a property is deflated by 10 percent or more for official records. The hidden portion is transacted in cash, or "black money." The practice is so widespread that individuals who want to transact legally report finding it hard to do so.

"There's a cost associated with properly accounting for all of your income and personal dealings, and most people don't want to pay it," says Arun Kumar, a black- economy expert at Jawaharlal Nehru University in New Delhi.

Professor Kumar estimates that India's black economy is worth up to $345 billion. He argues a nexus of corrupt politicians, civil servants, and businessmen allows it to flourish, truncating democracy. Other experts argue that an underdeveloped sense of obligation to the state contributes to corruption.

"This is linked to the weakness of the notion of citizenship in India," says Professor Khilnani. "The idea of being part of a common citizenry to which the state owes responsibility and from which it can demand taxes hasn't come about."

Indeed, surveys often indicate that ordinary citizens perceive corruption to be widespread. In a report published last year, Transparency International said that some 66 percent of Indians surveyed felt their country's tax department was corrupt.

"In other countries the tax administration is greatly feared," says H.P. Ranina, a senior tax lawyer in Bombay. "People can end up behind bars, but this is unheard of in India. There are millions of tax evaders. They don't care for the law."