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2) Presence of informal sector, parallel economy, cash based economy.

3) Low per capita income, high level of poverty. Concentration of income in the hands of
few- who are greedy to engage in tax evasion & avoidance.
4) Election funding as the mother source of corruption, and therefore black money.
Politician-Builders-Mafia nexus.
5) Due to political considerations, state governments and local bodies do not levy all the
taxes authorised by the constitution e.g. tax on agricultural income. So our (direct)
tax base is narrow. [Tax base: कराधार means the total value of all the income,
property, etc. on which tax is charged.]
6) Loopholes in the tax laws which encourage tax avoidance using Domestic and Offshore
channels.
7) Direct taxes like wealth tax, gift tax and estate duty suffered from loopholes, lax
monitoring and evasion. They didn’t yield much revenue. Hence even referred as
‘paper taxes’, and had to be abolished ultimately.

24.7.2 “Use Behavioural Economics to improve Tax Compliance”

Economic Survey 2018-19 observed that:
❖ Plato said, “What is honored in a country, is cultivated there.” Indians join military
because 1) salary 2) because serving in the armed forces is considered ‘honorable’.
❖ So, we should use the principles of Behavioral Economics ( यावहा रक अथ ा ) enhance
tax compliance (कर अनप ु ालन). We’ve to modify the social norm from “evading taxes is
acceptable” to “paying taxes honestly is honorable.”
❖ Tax Morale (कर संबंिी नै तक मनोबल): it is the intrinsic motivation (आंत रक ेरणा) of
taxpayers to pay taxes. When tax morale is down → motivation for tax evasion
increases.
Table 1: Tax Morale is affected by two types of fairness

Fairness _ _ _ _ Fairness _ _ _ _ Fairness

ि प ता (उ ्ाधार ि प ता ै तज) ( ै तज ि प ता)
Tax Payer’s What I pay in taxes is There should not be a great
thought commensurate to the benefits I difference in the taxes paid by the
process → receive as services from the ‘similar’ sections of society.
Government.
His Tax He sees taxpayers' money wasted If a salaried employee and a
morale is in public expenditure (like shopkeeper are earning ₹8 lakhs
lowered Mayawati’s elephant statutes) per annum, still the salaried
when → instead of better quality of water, employee is forced to pay more
road, education or electricity. taxes than this shopkeeper,
because
- TDS on salary whereas
shopkeeper underreports his
sales in cash payment.
- Shopkeeper shows less profit
through fictitious business
expenditures.

Mrunal’s Economy Pillar#2B: Budget → Revenue Part : Page 166

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Solution(s) ✓ under-constructions projects ✓ SMS, billboards highlighting

should show signboards “Your self-employed individuals who
tax money at work” pay good amount of tax.
✓ Reminding tax payers that ✓ Public shaming of individuals
public goods can only be who don’t pay taxes. It’ll scare
provided in return for tax other tax-evaders that the
compliance. Most people in probability of their detection
your local community pay has increased.
their taxes on time. ✓ Avoid Tax Amnesties. Give
stringent punishment to tax
evaders.
Further, CEA Subramanian K. suggested:
✓ Top 10 highest taxpayers within a district → They should be given VIP-treatment such
as faster boarding privileges at airports, special “diplomatic” type lanes at
immigration counters, fast-lane on roads and toll booths, etc.
✓ Highest taxpayers over a decade → Important places should be named after them e.g.
roads, trains, schools, universities, hospitals and airports.
✓ In Hinduism, Islam and Christianity - unpaid debt is considered a sin. So,
advertisements should highlight how tax evasion is a violation of such
“spiritual/religious norms”.
✓ Ease in Paying Taxes: Pre-populated Income Tax forms with easy to understand terms.
Even if a person’s tax liability is ZERO, he should be required to fill Income Tax form.
✓ Automated TDS as and where possible and timely release of Tax refunds.

Hindi-Medium-Mains candidates should refer ES2018-19 Vol1 Ch.2

page52’s bullet 2.33 upto page 55’s box 5 to get the clean & formal
vocabulary for Answer Writing

24.8 TAXATION: MISC. TERMS

- American economist Arthur Laffer: if (direct) tax rates are increased
above a certain level, then tax revenue collection will fall because
higher tax rates discourage people from working and/or encourage
Laffer Curve them to engage in tax evasion and tax avoidance).
- So, tax-cuts could lead to higher tax revenue collections.
(ल र व ):
- Modi Budgets from 2017 onwards: The lowest Income Tax slab was
cut from 10% to 5%; The corporation tax on small sized companies
was also brought down from 30 % to 25% in a phased manner
- USA Budget-2017: Corporation tax cut down from 35 % to 15%

Tax buoyancy - If GDP grew by x%, then how much % Income tax collection will grow?
- E.g. if income tax collection growth rate is 11% when GDP growth
(कर उ लावकता):
rate is 10%, then Income Tax’s tax buoyancy is 1.1

Tax elasticity If first income tax slab increased from say 5% to 15%, then in absolute
(कर ल चलाता): terms how much more IT-revenue will be generated?

Mrunal’s Economy Pillar#2B: Budget → Revenue Part : Page 167

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24.8.1 Net Tax Revenue of the Govt (शु ध कर राज ि)

Sr. Budget → Revenue Receipts → Tax Receipts Expected in 2019-20
A Union’s Direct taxes, incl. cess and surcharge ~ _ _ _ _ lakh crores
B Union’s Indirect taxes incl. cess and surcharge. ~ _ _ _ _ lakh crores
- For Union: direct taxes income is >>
indirect taxes.
- But if we summed all the taxes of union,
state and local bodies then indirect taxes
income >> direct taxes.
C Union territories without legislature: their direct ~7000 crores
and indirect taxes: िधानमंडल र हत संघ रा य े
D Gross Tax Revenue (=A+B+C) सकल कर राज ि ~24 lakh crores
E Minus the Tax devolution to States (कर ह तांतरण) (-)~8 lakh crores
as per the Finance Commission
F Minus Contributions to National Disaster Response (-)~2500 crores
Fund in Home ministry*
D-E-F Net Tax Revenue of Union (शु ध कर राज ि) ~ _ _ _ _ lakh crores

*National Disaster Response Fund (रा य आपदा त या को ) is a statutory fund under

Disaster Management Act, 2005. Previously, called National Calamity Contingency Fund
(NCCF).

24.8.2 Revenue Shortfall (राज व म कमी)

Type of Tax Tax in ₹ crores 2018-19’s Advance Estimates 2018-19’s Revised
Made in Feb-2018 Estimates in Feb-2019
Direct-Tax Corporation Tax 621000 671000
Direct-Tax Income Tax 529000 529000
Direct-Tax STT 11000 11000
Indirect Tax Custom Duty 112500 130038
Indirect Tax Excise on Fuel 259600 259612
Indirect Tax GST 743900 643900
Gross Tax Revenue → 22.7 lakh crores 22.4 lakh crores
- 1/2/2018: Budget 2018 is presented for the next financial year starting from 1st April
2018 to 31st March 2019. So, FinMin could have only made projections /estimations
about how much taxes will be collected during 1/4/18 to 31/3/19.
- But throughout the year, based on the advance tax-collection figures & monthly GST
collection figures, FinMin will have to re-adjust the estimates.
- 1/2/2019: (Interim) Budget 2019 is presented, along with that, Govt will present
revised estimates for previous Financial Year (2018-19).
- From the table we can see that Gross Tax collection is less than expected (22.7 MINUS
22.4) = ~30,000 crores is ‘Revenue Shortfall’, mainly because _ _ _ _ _ _ _ _ were less
than expected.

24.8.3 Mock Questions for UPSC Mains (250 words each)

4. (Asked in GSM3-2013) Money laundering poses a serious threat to country’s economic
sovereignty. What steps are required to be taken to control this menace? मनी लॉ ंग दे श
क आ क सं भत
ु ा के लए एक गंभीर खतरा है। इस खतरे को नयं त करने के लए या कदम उठाए
जाने क आि यकता है ?

Mrunal’s Economy Pillar#2B: Budget → Revenue Part : Page 168