Just today, I was talking to a friend of mine over demonetisation. He told that those running tea stalls outside his office are not happy at the demonetisation. I asked him, what does that tea seller get. The answer I got will make anyone blink. It’s 20000 per day. Taking 20 working days per month, we are staring at 4 lakhs per month and 48 lakhs per annum – all untaxed. And when his income suddenly falls from 48 lakhs to 32 lakhs, obviously, he will be angry. This is the real situation in India. A microminority of 1.25 crore pay the income taxes and rest all enjoy, either because they are exempted or they are unorganized. What Modi did was to prise open the private coffers of those who are not paying their taxes. A similar thing applies for tax on expenses – VAT and all.

This makes one think, why are Indians not intent on paying their dues correctly, even those paying taxes honestly. Someone will produce fake medical bills, someone else fake house rent receipts and another, always buys from a shop which doesn’t give him an invoice. By not taking an invoice, he and the shopkeeper are forming a nexus to share the tax money which the government gets. Now, what’s the genesis? Well, one theory is below.

Plucking the data directly from an India Today article,

In 1970-71, the personal income tax had 11 tax brackets with the tax rates progressively rising from 10 per cent to 85 per cent. When the surcharge of 10 per cent was taken into account, the maximum marginal rate for individuals was a mind boggling 93.50 per cent  In 1973-74 the highest tax rate applicable to an individual could have gone up to an astronomical level of 97.50 per cent!
The Direct Taxes Enquiry Committee, 1971 attributed the large scale tax evasion to the exorbitant tax rates and recommended reduction in the marginal tax rate to 70 per cent. This change was implemented in 1974-75, when the marginal rate was brought down to 77 per cent, including 10 per cent surcharge. In 1976-77, the marginal rate was further reduced to 66 per cent. A major simplification and rationalization initiative came in 1985-86, when the number of tax brackets were reduced from eight to four and the highest marginal rate was brought down to 50 per cent.

Due to the warped socialist policy of our governments which killed investment and gave us nothing but something called Hindu Rate of Growth, a person is supposed to pay taxes as high as 97.5% at times over the income he earns. What incentive will he have to work? Besides creating a Lunch First Business Policy(lunch first, customer next, accountability last), this forces a person to be innovative enough to save a few extra bucks. What does he do? Produce fake bills on the income front. Anyways, the shopkeeper at the corner of the street doesn’t pay taxes. Why can’t I use him to save a few more rupees? Both of them decide not to declare the whole 100% of sales as sales. Government loses sales tax and the tax amount is distributed between the seller and the buyer. In such a case, does desperation to save more takes a priority or does being morally upright takes a higher priority? As and when time progressed, with the collusion of the authorities who again wanted some extra rupees, this would have been institutionalized. The outcome? A microminority takes the tax burden while the masses enjoy. Will this change even after the tax rates became rationalised?
Modi tried to correct this imbalance to an extent – all paper money stashing will have to start from scratch again. But, will this force people to move towards electronic payments, the only answer is wait and watch.

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