What Do We Know About the Compliance Costs of the Tax System? Arindam Das-Gupta

Outline The cost of collecting taxes What are compliance costs (CCs)? Why do CCs matter? CCs: International evidence Recent estimates for India Determinants of CCs How to reduce CCs? How to estimate CCs?

The cost of collecting taxes Include “welfare costs, opportunity costs, psychic costs, social costs and so on” (Evans and Walpole, 1997) Costs of taxation (Yitzhaki-Slemrod). –Excess burden of taxes –Excess burden of tax evasion –Tax administration costs (substitute) –CCs and avoidance costs.

What are CCs? Citizen’s costs of meeting tax obligations Excludes actual taxes paid and excess burdens. Includes avoidance (“tax planning”) and evasion costs. Includes costs if taxpayers, non-filers, third parties (banks, tax withholders, helping others) Components:

What are CCs? - 2

Types of CCs Mandatory versus voluntary…...and quasi-voluntary costs In-house versus external Gross versus net –Cash flow benefits –Tax deductibility Private versus social –Bribes –Tax deductibility OVERALL versus from SPECIFIC provisions or procedures

Administration costs versus CCs Substitutes Other things equal, social cost considerations should dictate the choice between compliance requirements and administration responsibilities –EG: Official versus self-assessment Other things may not be equal… –Documents enclosed with tax returns –Desk versus field audits

Why look at CCs? Three of Adam Smith’s canons of taxation relate to CCs: ‘Certainty’, ‘Convenience’, and ‘Economy’. Policy uncertainty and complexity lead to higher CCs Raises the effective tax rate… without any revenue benefits Induces non-compliance and raises administration costs CC Assessments now mandatory in some countries

International evidence: Individual income tax

International evidence: Business income taxes

Estimates for India - Individual IT

Estimates for India - Individual IT - 2 Estimates for India - Individual IT - 2

Estimates for India - Corporation IT

Features of individual CCs in India Time costs: Non-salaried: 88 hours; Salaried: 28 hours; plus 3-4 hours helping others. – Approx. 11 hours (USA); 27 hours (NZ) –“Conservatively” valued in cost estimates Monetary costs: Even if time compliance costs are excluded monetary compliance costs are large compared to other studies –Median % of tax paid: 52% (non-sal); 1.6% (salaried) Advisor’s are used more to deal with tax uncertainty and administrative procedures rather than tax planning. Incidence of bribe payment and bribe quantum are high, especially so for non-salary earners. –Refunds, clearances and permissions Harassment of assessees is widespread. –Delayed refunds, PAN cards

Features of company CCs in India 62% benefit from compliance requirements: income statements & balance sheets are better prepared. 50% find audit requirements helpful in detecting dishonesty. Scrutiny assessment and accounting requirements are major cost items. 70%, especially small companies use external assistance. External costs: 39%. Voluntary costs: 19% to 43% of gross CCs Typical company has 12 to 14 open assessment years. –10 to 11 assessment years locked in disputes. –Each extra disputed year raises legal compliance costs by 5.7%

CCs and indicators of company size

“Hot spots” Legal requirements –Audit requirements –Tax deduction at source –International tax provisions –Loss carry forward and set off –Valuation of perquisites to employees –Others:export concession claims; non-resident withholding; inconsistencies with Companies Act, depreciation provisions, free trade zone reporting; Minimum Alternate Tax Administrative procedures –Refunds –Scrutiny assessment procedures –Accounting for TDS –Appeals and litigation –Completion and filing corporation tax return –Obtaining IT clearances and approvals

How to reduce CCs? Framework Overall CCs only show if broad tax reform is needed CCAs of specific administration procedures or legal provisions can suggest specific reforms MECF framework Applied in Poapongsakorn et. al. to taxpayer surveys

How to reduce CCs of the individual IT? Tax policy process reform to reduce instability and uncertainty Tax structure simplification –More presumptions? Simpler administrative procedures –Improved taxpayer services Institutional reform of tax administration If this does not reduce compliance costs…abolish Individual IT?

Reducing corporation tax CCs Net private CCs can be reduced, on average, to zero, if refunds delays and associated corruption are tackled –Strengthen penalties for IT officials –Institutional reform as for Individual IT Reduce complexity and ambiguity of tax law. Reform procedures for international transactions Streamline clearances and permissions. Streamline dispute resolution Alleged bribe taking by appellate authorities to give favourable judgments?

How to estimate CCs and their impact? Questionnaires/interviews needed Questionnaires cannot be long So clarity about objective crucial –Overall CCs - interesting but not so useful? –Impact of recent reform? –Tax reform or administrative reform? –Specific provisions and procedures? CCAs for specific items most promising

How to estimate CCs and their impact? -2 Taxpayer (individual, or business) sample –Random sample of taxpayers –Use (short!) questionnaires for taxpayers –PRETEST PRETEST PRETEST 2-3 versions for clarity and length…and focus groups –3 questionnaires: Canvassed/mailed with no evasion or bribe questions Anonymous mailing for non-compliance and bribes with a few extra questions to match samples Canvassed “bridge” questionnaires Canvassed/mailed questionnaires from a sample of third parties Tax practitioners sample on costs and activities Data from tax administration on enforcement, detected non-compliance and disputes if needed

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