What Do We Know About the What Do We Know About the

Compliance Costs of the Tax System?Compliance Costs of the Tax System?

Arindam Das-Gupta

OutlineOutlineThe cost of collecting taxesWhat are compliance costs (CCs)?Why do CCs matter?CCs: International evidenceRecent estimates for IndiaDeterminants of CCsHow to reduce CCs?How to estimate CCs?

The cost of collecting taxesThe 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?What are CCs?

Citizen’s costs of meeting tax obligationsExcludes 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? - 2What are CCs? - 2

Types of CCsTypes 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 CCsAdministration costs versus CCs

SubstitutesOther 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?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 taxInternational evidence: Individual income tax

International evidence: Business income taxesInternational evidence: Business income taxes

Estimates for India - Individual ITEstimates for India - Individual IT

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

Legal compliance costs as a percentage of gross income

0

2

4

6

8

10

12

14

16

Rs 50,000 orless

Rs 50-100thousand

Rs 100-200thousand

Rs 200-300thousand

Rs 300-400thousand

Rs 4,00,000and above

Perc

ent

Non-Salaried Salaried

Estimates for India - Corporation ITEstimates for India - Corporation IT

Features of individual CCs in IndiaFeatures 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 IndiaFeatures 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 sizeCCs and indicators of company size

Book Value of Assets (Log Scale)

Com

plia

nce

Cos

ts (

Log

Sca

le)

Tax Paid Index (Log Scale)

““Hot spots”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? FrameworkHow 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

.expinalargMbenefit.exp.govtinalargM

revenueinalargmNETCCsburdenexcessinalargM

MECF

• Applied in Poapongsakorn et. al. to taxpayer surveys

How to reduce CCs of the individual IT?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 administrationIf this does not reduce compliance

costs…abolish Individual IT?

Reducing corporation tax CCsReducing 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?How to estimate CCs and their impact?

Questionnaires/interviews neededQuestionnaires cannot be longSo 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? -2How 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

Thank youThank you