Tax evasion in India: Possible solutions

In India, as we all know, there is a lot of tax evasion both by the corporates as well as individuals. In fact it is mostly the honest tax payers who generally get harassed by the income tax authorities while the big evaders never get caught. What are the primary reasons for this phenomenon? What could be the possible solutions? Let us first try to understand the problem in little more detail before we delve into solutions.

In India, the tax rates are comparable with the rest of the world. The tax structure is also quite simple to understand. But, when it comes to enforcement, there is a lot of scope for improvement. But what compels people to evade tax? The main reason is that they know they can get away with it very easily even if they are caught by an honest officer. This is also one of the primary reasons for the rise in unaccounted money in India.

Another very important reason why people in India may be reluctant towards paying tax is to do with what they get in turn from the government. None of the guaranteed benefits like health care, safety, public infrastructure, etc are really available in an acceptable form. People are right when they ask "why should we pay tax at all when we get nothing in return". Having said that, the evasion has more to do with the corruption which has been so well entrenched in India's DNA than anything else.

How can we solve this problem? The best solution lies in simplifying the tax laws even further and rewarding people who regularly pay tax rather than announcing schemes to enable people to declare their black money without attracting any penalty. In addition, the government should bring everything into the tax net. The notable exclusions at this point include agriculture and donations to religious trusts. These are two main sources where people hoard black money in India.

In summary, tax evasion in India is a problem which cannot be solved in a hurry. A lot needs to be done including simplifying tax laws, bringing everything under the tax net, better enforcement and more incentives to honest tax payers than evaders. There is some action on this front already, but we have a lot more distance to cover.