ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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An Estimate of Evasion of Personal Income Tax in India, 2011–12 to 2017–18

An estimate of the personal income tax evasion is attempted by considering total personal income, gross income of return filers, mixed incomes of agricultural landowners, income of below the poverty line population and income of above the poverty line population but below minimum tax exempt income. Tax evasion most conservatively is around 40% of personal income by about 16% of population in 2017–18.

Useful comments and interactions with senior income tax commissioners in the four training programmes conducted during 2022 at Indian Institute of Management Ahmedabad are gratefully acknowledged with usual disclaimers.

Personal income tax (PIT) is widely considered as fairer, just, efficient, and more equitable compared to any indirect tax. This is convincingly demonstrated with the help of indifference curves in all standard textbooks in the first course of microeconomics. These textbooks tacitly assume that both PIT and indirect taxes are fully complied with by everybody without any evasion. It is often considered a superfluous assumption that does not require explicit mention because its violation may not change the argument or the conclusion. This is an acceptable argument only if the extent of tax evasion is small in reality or negligible. However, if the tax evasion is substantial, it can change the above conclusion of comparison of PIT with indirect taxes. It is, therefore, extremely important to get at least a dimensional idea about the extent of PIT evasion in order to reform and modify the tax system on the principles of equity, efficiency, and justice. This article tries to provide an estimate of the evasion of PIT in India for the financial years 2011–12 to 2017–18 based on official statistics.

The next part of the article considers estimates of personal income at current prices as the base of PIT and the number of PIT return filers and their gross income in different years. Later, the article considers estimates of agricultural landowners and their income since such income is exempt for PIT by the union government. Further, an effort is made to put together an estimate of a poverty line based on multidimensional poverty and total income of the population living below such a poverty line because they should justifiably not be paying PIT. It then estimates the extent of evasion. Then comes the concluding remarks with some suggestions to reduce the extent of PIT evasion.

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Updated On : 3rd Jan, 2023
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