Column : Tax administration, heal thyself

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SummaryIncreasing compliance by just 3ppt among the middle classes will yield double the tax a 3ppt rich surcharge will.

brought to only the average of the economy—i.e. 30%—that alone would generate an extra R35,000 crore, i.e. 5 million extra taxpayers, paying an average tax rate of only 10%, on average incomes of R7 lakh. Okay, if tax administration increased compliance by only 3 percentage points, from 10% to 13% among this middle income group of R5-10 lakh, the extra revenue gained would be R5,250 crore, or double that gained from putting a 3% surcharge on the super-rich.

These simple calculations yield at least three recommendations. First, it should be mandatory on the finance ministry to release data on tax compliance by income groups—a practice common in most economies in the world. Surely, no one can oppose the release of this statistic so why isn’t it being practiced? Possibly because it will cast a very black shadow on the workings of the tax administration in India? Second, the biggest revenue gainer is via an increase in compliance, especially for the middle income group. Third, stop thinking of populist measures like surcharges on the super rich, or copy French measures like increasing tax rates for anybody. If any such measures are introduced in the budget, it would not be a “responsible” budget that the finance minister has promised—and not responsible by a long shot.

Surjit S Bhalla is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Blufin, a leading financial information company. He can be followed on Twitter: @surjitbhalla

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