Black money: How government can increase tax compliance

A number of disclosures on black money or unaccounted money have been made today, and even earlier by foreign institutions. In India, tax authorities have regularly been conducting raids and recovering large amounts of unaccounted money for years.

The menace of black money is widespread and deep-rooted in India spanning a number of issues. First, number of income tax payers has been generally low. In a population of 1.2 billion, there are just about 35 million tax payers of which, famously, there were only 42,800 persons with taxable income exceeding Rs. 1 crore. This is too low a number in a country which has numerous luxury houses and cars; accounting for world's largest gold imports; and flourishing stock markets. The issue of tax exemptions and inappropriate use of such exemptions also needs investigation.

Thus, the most crucial issue is how to increase tax compliance. To increase compliance, many countries have experimented with different techniques of reward and punishment, especially after seminal research on "crime and Punishment" in 1968 by Professor Becker. In the US, compliance is high and attributed to many tax policies and administration parameters, including criminal tax convictions. On other hand, literature is unanimous with findings that suggest; rewards lead to higher tax compliance. Professor Rosenberg, University of San Francisco suggested lower tax rates while Professor Kornhauser, Arizona State University proposes special reward schemes for individuals. In India, there is a need to have a framework, where a good tax behaviour is celebrated publicly and tax avoidance has a deterring public punishment. Simultaneously, tax administration would need to be strengthened to avoid rent-seekers.

There is also a need to investigate factors that can strengthen the tendency to be tax compliant. According to McGee (Ethics of Tax Evasion, 2012), women are considered more tax compliant than men across the global; but not in India. Logically, it can be deduced that in a country where females are not secure at homes, public places and offices, the compulsion of tax compliance would be less than optimal.

The problem of deep-rooted black money needs to be tackled with different schemes. First, as an immediate measure, to improve tax collection, there is need to incentivise tax collectors and tax intelligence agencies. To improve tax collection in medium term, there is a need to reduce dominance of cash transactions and encourage electronic banking to enhance technological surveillance. The judicial system needs to be strengthened for quick settlement of disputed cases. There is also an important role for social media and entertainment industry in this context. To draw long term benefits, introduction of courses on ethics need to be considered in higher education, including business schools.

The issue of black money is a challenge which cuts across parties and ideologies and can only be handled by PM Modi because of his popularity and mandate. The most significant justification and cause of black money is election funding and the Union government can help establish pristine standards in tackling this issue.

A highly tax compliant economy would imply more publicly provided services for all citizens; leading to higher welfare and better quality of life. This would require trust and cooperation between citizens, corporate sector and the government - a blissful state of Ram Rajya.