overall compliance rate of 33%. So, two-thirds of the taxable population avoided paying taxes altogether or paid two-thirds less taxes than they should have.
The dominantly large share of the flow of black money each year is indicated by the gap in tax collected and tax due and for 2011-12, this gap, R3.45 trillion, is about 4% of GDP. For the ten years 2002-03 to 2011-12, 4% of average GDP is R20 trillion. This suggests that the recent estimates pegging black money at around R25 trillion are in the right ballpark—and that our “missing tax” estimates are broadly correct.
The largest share of missing taxes is among those earning between R5 lakh and R10 lakh a year. They are in the top 7% of the population, they number around 25 million, and only about 10% of such individuals pay any tax. How much missing taxes are in this group, a group for whom the average tax rate is only 10%? About equal to the entire tax collected in 2011-12: R1,50,000 crore.
About R1 trillion is lost among those earning between R10 lakh and R20 lakh a year. Such individuals are in the top 2% of the population, and only a third of such individuals pay any tax.
The super-rich or those earning more than R20 lakh a year: There were 88 lakh such individuals and 58 lakh paid taxes, yielding a compliance rate of 66%. Missing taxes for this group, R0.46 trillion, or only 13% of the entire amount of PIT missing in India.
If compliance levels stay the same, a surcharge of 3% on super-rich incomes will yield about R2,600 crore. Alternatively, the government could make an effort, with support from its tax administration officials, to reduce corruption, reduce black money, and increase taxation among the top 7%. If compliance in this group was 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