Dodging taxes 'second nature' in India

Discussion in 'Economy & Infrastructure' started by Ash, Apr 3, 2013.

  1. Ash

    Ash Regular Member

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    New Delhi - In a country long defined by its poverty, it's easy now to find India's rich.

    They're at New Delhi's Emporio mall, where herds of chauffeur-driven Jaguars and Audis disgorge shoppers heading to the Louis Vuitton and Christian Louboutin stores. They're shopping for Lamborghinis in Mumbai. They're putting elevators in their homes and showing off collections of jewel-encrusted watches in Indian luxury magazines. They're buying real estate in comfortable but unpretentious neighborhoods - neighborhoods thought of as simply upper-middle-class just a couple years ago - where apartments now regularly sell for millions of dollars.

    They're just about everywhere. Unless it's income tax time. Then, suddenly, they barely exist.

    The reality is simple: "There are very few people who are paying taxes," said Sonu Iyer, a tax expert at Ernst & Young in New Delhi. And tax dodging is everywhere. "It's rampant - rampant."

    If the generalities of that have long been known here, Finance Minister Palaniappan Chidambaram stunned the country in late February when he proposed a new tax on India's top earners. The surprise wasn't the temporary 10% surcharge on those earning more than 10,000,000 rupees, or about $185 000, per year, but the number of Indians who fall into that category.

    That number? Just 42 800 people.

    "Let me repeat," Chidambaram told Parliament in his budget speech, making sure no one thought he had misspoken, "only 42 800" people say they earn that much.

    In a country of 1.2 billion people, a country where years of staggering economic growth annually create tens of thousands of new millionaires and a recent slowdown has done little damage to a thriving luxury goods market, far less than one ten-thousandth of the population admits they are in the top tax bracket.

    With so few Indians willing to come clean, the perennially cash-starved government has to scrabble every year for revenue.

    Among the rich, dodging taxes has become second nature, said Jamal Mecklai, CEO of Mecklai Financial, a Mumbai-based financial consulting firm. About 158,000 Indians are thought to be dollar millionaires, according to a 2012 Credit Suisse estimate, though some analysts believe the number is far higher.

    "It's just taken as the reality" that most wealthy Indians are cheating, he said, adding that he pays everything he owes. India's top tax rate is currently 30%.

    It's not just the rich evading their taxes. Less than 3% of Indians file income tax returns at all, and officials say only about 1.5 million taxpayers say they earn more than 1,000,000 rupees per year -about $18 000.

    Most of those not paying have legitimate reasons. Well over half the population earns so little they don't have to pay income taxes. Despite its ever-growing population of nouveau riche, more than 400 million Indians still live below the poverty line.

    Millions more people are exempt because regulations exclude agricultural income from taxes, no matter how much is earned. Since India has hundreds of millions of small farmers, and a powerful bloc of wealthy farmers, that's a tax break few politicians dare challenge. Various other tax breaks legally keep many more people off the tax rolls.

    The bulk of those paying income taxes, experts say, are salaried employees whose companies are responsible for making their tax payments. While those taxpayers can fudge their numbers to an extent, using inflated receipts to magnify tax breaks on expenses like housing, it's extremely difficult for them to completely escape tax authorities.

    But most everyone else - from the barons of family-owned businesses to doctors, lawyers and small traders - operate in largely cash economies that enable them, if they want, to hide most of their income.

    The size of India's underground economy and the amount of lost taxes is widely debated, but even the lowball figures are immense in a country with a nearly $2 trillion GDP. In recent studies, experts estimated that anywhere from 17% to 42% of the economy operates beneath the official radar.

    Billions of dollars are widely thought to be hidden in Switzerland, Singapore and other tax havens.

    Then there is the strange case of Mauritius. More than 40% of foreign direct investment in India comes through this tiny island in the Indian Ocean. In part, that statistic reflects an India-Mauritius tax treaty that legally eases the flow of investment funds into India. But, experts say, it also allows Indians to launder vast amounts of untaxed wealth by sending their illegal cash to Mauritius, then "round-tripping" it back to India in the form of legal investments.

    If it would take concerted effort to shut down complex, international money-laundering operations, catching at least some of India's high-end tax dodgers should be ridiculously simple. This is, after all, a country where flaunted wealth often seems as common as traffic jams.

    How about targeting the buyers of the 25 000 luxury cars sold last year in India? Or the buyers and sellers of big-budget apartments? What about the people racking up thousands of dollars a month in credit card bills? Maybe tax investigators could go to those high-end malls, looking to see who is buying all the expensive shoes.

    While the government says it recently has begun targeting some big spenders, mailing notices to tens of thousands of people they say may have underpaid their taxes, few believe officials have truly become aggressive.

    "It's not really that difficult to chase down the tax dodgers," said Mecklai, the consulting firm CEO. "It's just a matter of putting the machinery in place."

    So why isn't the government doing that?

    The answers range from sheer incompetence to corrupt tax bureaucrats to a political class accustomed to making vast wealth on the side, and unlikely to do anything that might jeopardize its ill-gotten gains.

    Certainly the Indian public sees official corruption as a major part of the equation.

    "Of course I don't pay all my taxes," said a New Delhi businessman who spoke on condition he not be named because he was admitting to breaking the law. "Why should I pay my taxes while the politicians are getting richer and richer every day?"

    Such talk is, experts say, the most commonly heard rationale for tax evasion, one entrenched by decades of political corruption and waves of official scandals.

    But it doesn't explain everything. Iyer, the Ernst & Young tax expert, notes that the culture of tax-avoidance runs deep in India. She points particularly to the way buyers and sellers of real estate openly discuss how much of the price will be paid in "white" declared money, and how much will be paid under the table in "black."

    "No one thinks of it as something to be ashamed about," she said. "In a country of holier-than-thou's, no one thinks that it's a blatant lie" to cheat on your taxes.

    Embarrassment, she said, may be what India needs most of all.

    "The moment this society establishes a stigma to it, I think you'd see a change."
     
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  3. Singh

    Singh Phat Cat Administrator

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    Why should we care about direct taxes
    Most of the people "avoiding taxes" are using loopholes both infrastructural and legal.

    The govt should focus on indirect taxes and perhaps on electronic transactions.

    Your taxation shouldnt depend on what your income is but what your expenditure capability is.


    Sent from my iPhone using Tapatalk 2
     
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  4. arnabmit

    arnabmit Homo Communis Indus Senior Member

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    TDS Zindabaad! VAT Zindabaad!
     
  5. pmaitra

    pmaitra Moderator Moderator

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    Do the governments at different levels dodge their responsibilities? Roads are not good. Government hospitals are either devoid of doctors or basic medical supplies. The Income Tax department swallows away all the housing/rent deductions and never returns even the legitimate ones to the filer. Given these circumstances, it is very wrong for Indians to actually pay any taxes. There is corruption from top to bottom. For starters, there should be a thorough audit of the thugs in the IT departments.
     
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  6. Daredevil

    Daredevil On Vacation! Administrator

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    Exactly. If it were for me, I would never want to pay taxes because the worth you get for your taxes is almost negligible. No tap water, no proper electricity, lack of proper roads, lack of proper infrastructure, lack of security and full of corruption.
     
  7. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    Last time I heard in one of the debates, IT dept is understaffed. And although they are sitting on large dataset but they have not yet got a good IT infrastructure. Now, they are trying to build it up and may be in the future would use smart analytics to nab the tax evaders.
    @Singh Now, coming to the question of direct vs indirect taxes.Both of them have different welfare effects with general view in favor of direct taxes. If interested, you can read this: http://emlab.berkeley.edu/users/saez/w8833.pdf
     
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  8. sob

    sob Moderator Moderator

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    @Ash, could you please give the source of the article.

    There are many factual inaccuracies in this article.

    First and formost just 10% of the taxpayers contribute to almost 85% of the tax collected.

    Most of the super rich like Ambani, Mittals, Birlas derive the bulk of their income from Dividends of the shares they own in their company. For the individual the Dividends are tax free while the company has to pay a dividend distribution tax.

    Most of the Top end Luxury cars are bought in the name of the companies and not in the individuals name. These companies are paying taxes, IT or MAT. Nobody can escape from taxes.

    A big area where the Govt. is missing out are the property transactions. This IMO is the single largest source of black money in the country and needs to be tackled.
     
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  9. mylegend

    mylegend Regular Member

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    Dodging taxes 'second nature' in the world. If the system has loophole, people will abuse it. It is plain and simple.

    Making a simpler tax system will work.
     
  10. Known_Unknown

    Known_Unknown Devil's Advocate Stars and Ambassadors

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    Is dodging taxes a bad thing? The debate about taxation is an old one, but in countries like Cyprus where the government is levying massive taxes on people's savings to pay off the country's national debt incurred due to unpardonable fiscal indiscipline, why shouldn't the common man hide his hard earned money from the long arms of government as much as possible?

    Cyprus shellshocked as savings tax imposed for EU bailout
     
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  11. Ash

    Ash Regular Member

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    @sob. Hi

    found the article on Fin24 – Business & Finance News | Stock Markets Data | Investing

    The article is now off the main page of the site. Will try and track it down for you if you like.
     
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  12. sob

    sob Moderator Moderator

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    At the end of the day for the average tax payer the basic question is -- IS THERE A SOCIAL SECURITY BLANKET FOR ME and the answer is NO

    Because we are not a vote bank this question will never be in the focus of the Government. Rather the attitude of the Government is that you should be ashamed of earning so a penance you have to pay almost 50% of your hard worked money on those people who have no incentive to work or to pay taxes.
     
  13. praneetbajpaie

    praneetbajpaie Tihar Jail Banned

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    It is in a country like India where the Tax to GDP ratio is hovering at around 7.5%, whereas worldwide standards are at 16%.
     
  14. Yusuf

    Yusuf GUARDIAN Administrator

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    1) People don't avoid all tax, they avoid "some" tax.
    2) Indias govt of the day is a Robinhood one. Takes from those who have and gives to those who don't. The process is not exactly prudent while no one opposes the social responsibility of the govt as well as large corporations, the tax payers themselves get short changed. Tax payers don't get services they deserve like good infrastructure, water and electricity supply etc while the poor are given free TVs! Problem is, tax payers are not VOTE BANKS but those who don't pay tax and live off des are certainly vote banks. In fact their votes are bought by loan waivers, direct cash transfers, etc and worse they are paid 500 for vote plus biryani and a bottle of Desi on Election Day while the tax payer may or may not come out and vote.

    The feeling of why should I pay tax is pretty rampant. Apart from te direct tax, the whole gamut of indirect taxes that we pay is killing. A liter of petrol has half of it in all kind of taxes. I go out to eat from what's remaining of my income minus the tax and I have to lay VAT and service tax. I buy anything I lay VAT or if I use any services I pay service tax. The 35 million people who pay tax is like an over flogged donkey that the govt keeps flogging to get the last penny from it. 10% additional tax on super rich was the latest.

    Because I am not a votebank, I cannot even demand decent roads from the govt but the govt taxes my car with VAT and ROAD TAX and taxes my petrol so heavily.

    I can go on.
    I mean its but natural that people start to think why should I pay?
     
  15. Yusuf

    Yusuf GUARDIAN Administrator

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    The thing about tax evasion or IT at least is that its not all that bad for the economy as it is spent within the economy which means consumption of products and services which attracts VAT and service taxes. Even if the evaded tax is taken out of the country, its brought back as FDI in the economy which is good as well for the economy.

    Indian real estate was saved from the crisis of 2009 because of the "black" component involved in real estate deals. The thing is, money remains within the system.
     
  16. PredictablyMalicious

    PredictablyMalicious Punjabi Senior Member

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    I think u dodge taxes :lol:
     
  17. Yusuf

    Yusuf GUARDIAN Administrator

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    I don't make that much money to dodge taxes :(
     
  18. anoop_mig25

    anoop_mig25 Senior Member Senior Member

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    one question can gov be chanllenged in court of law that since gov is not able to provide basic stuffs like water , electricity roads etc etc why we should pay taxes .
     
  19. sob

    sob Moderator Moderator

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    None of the Governments has ever done it's job, to whom would you sue, that is te million dollar question.
     

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