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a
a
a
= a
as shown in Table 8 (p 107).
The principal components of tax components are obtained as
normalised linear functions of standardised variables, where the
coefcients are elements of successive characteristic vectors.
Thus, the rst principal component for IT is:
TDS
t
99991727 AT
t
43944471
P
1t
= 0.4651
(
)
+0.4728
(
)
97237562 26096827
RA
t
9439298 PEN1
t
55652.59
+ 0.4399
(
) +0.1882
(
)
6482895 140906
PEN2
t
718993.4 IR
t
699472.7
+ 0.3719
(
)
+0.4250
(
)
2764113 2466368
REF
t
45808282 OR
t
243487.1
+ 0.1100
(
)
+0.0156
(
)
47585682 472320.8
For CT, it is:
TDS
t
51657666 AT
t
1.44E+08
P
1t
= 0.4371
(
)
0.4758
(
)
75686343 1.35E+08
RA
t
37865022 PEN
t
1 59162.58
0.4794
(
)
+0.0073
(
)
35989010 93511.47
PEN2
t
120306 IR
t
3837706
0.2955
(
)
0.2582
(
)
162499.6 6500979
REF
t
82390160 OR
t
166036.2
0.4383
(
)
+0.0817
(
)
1.36E+08 253484.3
The normalisation is such that the sum of squares of coef-
cients is 1.
The values of principal com ponents, for CT and IT for different
years, are obtained by substituting the corresponding values of
the indicators of tax enforcement.
The variance of successive principal components (equal to the
eigen values), proportion of total variation accounted for by them
and cumulative proportion of variation explained are given in
Table 9 (p 107).
From Table 9,
we observe that
53.21 per cent of
the total variation
in all tax com-
ponents of IT is
accounted for by
the rst principal
component alone;
77.05 per cent of
the variation is ac-
counted for by the
rst and second
principal compo-
nents and so on.
Similarly, 52.75
per cent of the to-
tal variation in all
tax components of CT is accounted for by the rst principal com-
ponent; 70.82 per cent of the total variation is accounted for by
the rst and second principal components, etc.
All eight principal components account for 100 per cent of the
total variation in all tax components. Table 10 provides the esti-
mated tax enforcement index calculated as
l
1
P
1
+
. . .
+ l
8
P
8
ENF = for the time period 1985-86 to 2003-04.
l
1
+ ... + l
8
Table 10: Tax Enforcement Index of IT and CT
Income Tax Corporate Tax
Year Index Revised Year Index Revised
Index Index
1999-00 2.51 102.51 2003-04 3.70 103.7
2002-03 2.13 102.13 2002-03 1.36 101.36
2003-04 1.50 101.5 2001-02 1.15 101.15
2000-01 1.18 101.18 1998-99 0.34 100.34
2001-02 1.11 101.11 2000-01 0.23 100.23
1998-99 0.07 100.07 1999-2000 0.20 100.2
1996-97 -0.11 99.89 1997-98 0.10 100.1
1994-95 -0.37 99.63 1996-97 -0.01 99.99
1995-96 -0.38 99.62 1995-96 -0.05 99.95
1997-98 -0.47 99.53 1994-95 -0.33 99.67
1993-94 -0.56 99.44 1993-94 -0.42 99.58
1992-93 -0.68 99.32 1991-92 -0.61 99.39
1989-90 -0.72 99.28 1992-93 -0.61 99.39
1990-91 -0.76 99.24 1990-91 -0.74 99.26
1991-92 -0.76 99.24 1988-89 -0.75 99.25
1988-89 -0.85 99.15 1989-90 -0.76 99.24
1987-88 -0.93 99.07 1987-88 -0.86 99.14
1985-86 -0.95 99.05 1986-87 -0.90 99.1
1986-87 -0.97 99.03 1985-86 -1.02 98.98
The revised index is obtained by choosing 100 for the zero value of the index.
SPECIAL ARTICLE
Economic & Political Weekly December 15, 2007
109
Table 11: Weights (Share) of Individual Tax
Components (%)
Tax Components IT CT
TDS 16.94 25.62
Adv Tax 16.94 19.83
Regular assessment 12.90 20.66
Penalty 1 23.39 -2.48
Penalty 2 19.35 9.92
Interest recovery 24.19 -4.13
Refunds -4.03 25.62
Other receipts -9.68 4.96
Total 100 100
Table 12: Weights (Share) of Individual Tax
Components (%)
Tax Components IT CT
TDS 27.64 26.97
Adv tax 23.52 21.40
Regular assessment 20.50 22.71
Penalty 28.38 7.75
Interest recovery 23.43 -3.59
Refunds -12.82 27.02
Other receipts -10.66 -2.27
Total 100 100
Rearranging terms in ENF, we obtain the coefcients of indi-
vidual tax components as given below:
For IT: 0.21 TDS +0.21 AT + 0.16 Reg asst + 0.29 Penalty 1 + 0.24
Penalty 2 + 0.30 Int recovery 0.05 Refund 0.12 other receipts.
For CT: 0.31 TDS + 0.24 AT + 0.25 Reg asst 0.03 Penalty 1 + 0.12
Penalty 2 - 0.05 Int recovery + 0.31 Refund + 0.06 other receipts.
The sum of the coefcients in ENF for IT is 1.24. Therefore,
weight (share) of TDS for IT is obtained as
(0.21/1.24) 100 = 16.94 per cent and so on
for other tax components of IT. Similarly,
sum of coefcients in ENF for CT is 1.21. There-
fore, weight (share) of TDS for CT is (0.31/1.21)
100 = 25.62 per cent, etc.
Table 11 gives weights (shares) of individual
tax components.
The above results show that TDS and ad-
vance tax, broadly considered voluntary tax
payments, contribute 33.88 per cent and 45.45
per cent of the tax enforcement in IT and CT, re-
spectively. Involuntary compliance resulting
out of regular assessment, levy of penalty, inter-
ests recoveries, etc, constitute the remainder.
While for personal income tax, the pen-
alty under Section 271(1) (c) is really a threat
against the taxpayer with 23.39 per cent of
the weight share in the enforcement index, it is
not a very effective enforcement measure against the corporates.
It should be observed that the magnitude of penalty 1 has re-
mained rather low for all years except 1999-2000 (showing a
peak). For CT, the year 1985-86 was really an outlier with respect
to penalty 1, as also 1998-99 showing a high value of penalties 1
besides 1999-2000 showing the peak.
As involuntary compliance results mainly from regular assess-
ment, the relationship between penalty 1 and regular assessment
is important. From Table 2 (p 105) we see that for CT the cor-
relation between regular assessment and penalty 1 is negative
(equal to 0.07). In fact, this is insignicant correlation.
If we combine penalties 1 and 2 the weight shares are as shown
in Table 12.
3 Conclusions
From the above analysis we nd that the voluntary compliance is
not more than 50 per cent in IT or CT. Close to one-fth of the
enforcement comes from regular assessment. Penalties on indi-
vidual taxpayers do act as a deterrent but such an effect is not
very perceptible in the case of corporate taxpayers. Since re-
funds, in the case of corporate taxpayers, are large due to the
high volume and magnitude of the disputed amount against
them, the enforcement index presents it as an important factor in
raising tax collection. In fact, it is said that till some years ago the
interest rates on refunds were high and many corporate taxpay-
ers were nding an opportunity for arbitrage on the interest rates
and therefore, were making higher instalment payments, only to
collect them later as refunds. Since such refunds are not so high
in personal income tax, they show up having negative effect on
the tax enforcement index.
Given the above and the fact that the tax enforcement index
have hovered around the same level, the deviation being low, it
is important that the tax administration improves each of the
key components of tax enforcement voluntary as well as invol-
untary. Since the two components of tax enforcement have a
feedback effect on each other, one cannot be improved at the
expense of the other. Each aspect of the tax administration, like
detecting stop-lers, penalising tax evaders,
and making delinquent taxpayers pay arrears,
bringing unregistered taxpayers to the tax fold
are important for creating an efcient and
effective tax administration. But as already
stated, it is also important that the tax depart-
ment focuses on facilitating voluntary compli-
ance through the provision of quality taxpay-
ers service. Important obstacles to taxpayers
voluntary compliance are the perceived in-
equity of the tax system, complexity of tax
laws, lack of fairness of the penalty system,
and weak taxpayer education programmes.
Lack of adequate training of the staff, the tax
administrations inability to ensure adequate
follow-up action during the appeal process,
and weak tax audit programmes act as impedi-
ments to the enforced compliance. Well-
designed preventive actions, such as the estab-
lishment of withholding schemes and development of preven-
tive audit programmes which will demonstrate to a signicant
number of taxpayers that the tax administration will use relevant
information from third parties to detect evasion, may also foster
voluntary compliance.
One key strategy to improving the effectiveness of administra-
tion would be to build a proper information system, and a data
base. A major aspect of poor tax administration has been the
virtual absence of data, and if there is data, it is inadequately
collated for meaningful analysis. This has not only rendered the
proper analysis of taxes to provide an adequate analytical back-
ground to calibrate changes in the tax structure but it has also
made enforcement difcult. Changes in the tax structure have
often been made in an ad hoc manner [Rao and Rao 2005]. High
compliance costs combined with the poor state of computerisa-
tion and information systems have led to a continued interface of
taxpayers and tax ofcials, with compliance costs but low levels
of tax compliance [Das-Gupta 2004]. An important indication of
the poor state of information system is that even as the coverage
of TDS was extended over the years, there was virtually no
1985-86 1990-91 1995-96 2000-01 01-02 02-03 03-04
Figure: Fluctuation in ENF Index for Income Tax and Corporate Tax
96
97
98
99
100
101
102
103
104
105
1985-86 1990-91 1995-96 2000-01
I
n
d
e
x
Year
CT
IT
SPECIAL ARTICLE
December 15, 2007 Economic & Political Weekly
110
Notes
1 A tax policy is only as good as it is administered and there-
fore, it is importan
t to design the tax system keeping the
administrative capacity in mind [Bird and Zolt 2005].
2 Revenue productivity is a ratio of the effective tax rate
to statutory tax rate. For example, statutory corporate
tax (CT) rate in India in 2001 was 35.9 per cent and
the effective CT rate was 3.5 per cent, so the revenue
productivity was 9.7 = (
3.5
/35.9) 100. Ratio of corpo-
rate tax to GDP is used for calculating effective CT rate.
For comparison with other countries, see the table below.
3 This paper deals with only the direct taxes personal
income tax and corporate tax, which is collected by
the income tax department, government of India.
4 Stop lers are those taxpayers, who after paying tax-
es for one or more years stop ling their tax returns.
In many counties, the ratio of stop-ling taxpayers to
the total registered taxpayers is in the range of 20 to
40 per cent.
5 PAN is a taxpayers identication number.
6 Commissioners jurisdiction is called a charge.
7 See Section 139(1)(a) of the income tax act.
8 Government of India, Ministry of Company Affairs
web site.
9 Delinquent taxpayers are those who despite having
taxes due from them have not paid them. This may be
for various reasons, creating arrears.
10 The income tax act has provisions under Section 210
to even enforce such voluntary advance tax pay-
ments.
11 We can draw an analogy with the classical regres-
sion model. If the dependent variable (ENF) could
be measured, we would simply run a least squares
regression of ENF on various tax components and
determine optimal coefcient estimates. The total
variation in ENF is expressed as a sum of (i) variation
due to tax components and (ii) error variance. How-
ever, as corr (P
i
, P
j
) =0, the tax components are not
necessarily mutually uncorrelated.
References
Bird, Richard M and Eric M Zolt (2005): Redistribution
via Taxation: The Limited Role of the Personal Income
Tax in Developing Countries, Andrew Young School of
Policy Studies, Georgia State University.
Das-Gupta, Arindam (2004): Compliance Cost of the Per-
sonal Income Tax in India, 2000-01: Preliminary
Estimates, National Institute of Public Finance and
Policy.
Poirson, Helene (2006): Making Tax Policy Pro-growth,
India Goes Global, IMF, Washington DC.
OECD (2006): Tax Administration in OECD and Selected
Non-OECD Countries: Comparative Information Se-
ries, 2006, Centre for Tax Policy and Administration.
Rao, M Govinda and R Kavita Rao (2005): Trends and
Issues in Tax Policy and Reform in India, Working
Paper No 13, National Institute of Public Finance and
Policy.
Revenue Productivity (%)
Country Effective Statutory Revenue
Tax Rate (%) Tax Rate (%) Productivity
France 8.9 33.3 26.73
Germany 2.1 38.9 5.40
Italy 6.7 37 18.11
Japan 8.7 40.9 21.27
Korea 9.6 29.7 32.32
UK 9.9 30 33.00
US 5.3 45.8 11.57
OECD average 9.6 32.3 29.72
Source: Helene Poirson (2006).
information system to check whether those deducting the tax at
source le the returns and pay tax. As the CAG report for 2003-
04 states that of the 6,26,000 returns to be led by TDS assesses,
only 4,99,000 returns were led (ibid). In other words, more
than 20 per cent of the TDS assesses did not le the returns.
The recent initiative of the Central Board of Direct Taxes on
building the computerised information system may facilitate
compiling information on taxpayers. This would improve match-
ing and cross-checking of information from banks and other
sources, and may improve voluntary compliance. The online tax
accounting system operationalised in July 2004, may be one such
step in that direction. The current high growth rate in the direct
taxes should not be a reason for complacency if the effective-
ness of the tax administration is to be improved. In fact, in-
creased effectiveness of the tax administration would actually be
reected in the increased voluntary compliance. Penalising tax
evaders and pursuing delinquent taxpayers to collect tax arrears
cannot be the main objectives of an effective tax administration;
rather it should be to encourage voluntary compliance so that if
marginal non-compliance is detected, the same is effectively
punished. There is, therefore, a need to manage the tax admini-
stration with a view to achieving a proper balance between the
service to the taxpayer and enforcement of the tax laws to pro-
mote voluntary compliance.
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Consumer Protection in Indian Microfinance: Lessons from Andhra Pradesh and the Microfinance Bill Prabhu Ghate
A Microfinance Institution with a Difference Aloysius P Fernandez
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