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In India, dodging taxes is part of the game

Wednesday - 4/3/2013, 2:54am  ET

In this Saturday, March 30, 2013 photograph, shoppers arrive at Emporio mall in New Delhi, India. In a country of 1.2 billion people, a country where years of staggering economic growth have created tens of thousands of new millionaires annually and a recent slowdown has done little damage to a thriving luxury goods market, far less than .01 percent of the population admits they are in the top tax bracket. Less than 3 percent of Indians file income tax returns at all, and officials say only about 1.5 million taxpayers declare earning more than 1,000,000 rupees per year (about $18,000). (AP Photo /Manish Swarup)

TIM SULLIVAN
Associated Press

NEW DELHI (AP) -- In a country long defined by its poverty, it's easy now to find India's rich.

They're at New Delhi's Emporio mall, where herds of chauffeur-driven Jaguars and Audis disgorge shoppers heading to the Louis Vuitton and Christian Louboutin stores. They're shopping for Lamborghinis in Mumbai. They're putting elevators in their homes and showing off collections of jewel-encrusted watches in Indian luxury magazines. They're buying real estate in comfortable but unpretentious neighborhoods -- neighborhoods thought of as simply upper-middle-class just a couple years ago -- where apartments now regularly sell for millions of dollars.

They're just about everywhere. Unless it's income tax time. Then, suddenly, they barely exist.

The reality is simple: "There are very few people who are paying taxes," said Sonu Iyer, a tax expert at Ernst & Young in New Delhi. And tax dodging is everywhere. "It's rampant -- rampant."

If the generalities of that have long been known here, Finance Minister Palaniappan Chidambaram stunned the country in late February when he proposed a new tax on India's top earners. The surprise wasn't the temporary 10 percent surcharge on those earning more than 10,000,000 rupees, or about $185,000, per year, but the number of Indians who fall into that category.

That number? Just 42,800 people.

"Let me repeat," Chidambaram told Parliament in his budget speech, making sure no one thought he had misspoken, "only 42,800" people say they earn that much.

In a country of 1.2 billion people, a country where years of staggering economic growth annually create tens of thousands of new millionaires and a recent slowdown has done little damage to a thriving luxury goods market, far less than one ten-thousandth of the population admits they are in the top tax bracket.

With so few Indians willing to come clean, the perennially cash-starved government has to scrabble every year for revenue.

Among the rich, dodging taxes has become second nature, said Jamal Mecklai, CEO of Mecklai Financial, a Mumbai-based financial consulting firm. About 158,000 Indians are thought to be dollar millionaires, according to a 2012 Credit Suisse estimate, though some analysts believe the number is far higher.

"It's just taken as the reality" that most wealthy Indians are cheating, he said, adding that he pays everything he owes. India's top tax rate is currently 30 percent.

It's not just the rich evading their taxes. Less than 3 percent of Indians file income tax returns at all, and officials say only about 1.5 million taxpayers say they earn more than 1,000,000 rupees per year -- about $18,000.

Most of those not paying have legitimate reasons. Well over half the population earns so little they don't have to pay income taxes. Despite its ever-growing population of nouveau riche, more than 400 million Indians still live below the poverty line.

Millions more people are exempt because regulations exclude agricultural income from taxes, no matter how much is earned. Since India has hundreds of millions of small farmers, and a powerful bloc of wealthy farmers, that's a tax break few politicians dare challenge. Various other tax breaks legally keep many more people off the tax rolls.

The bulk of those paying income taxes, experts say, are salaried employees whose companies are responsible for making their tax payments. While those taxpayers can fudge their numbers to an extent, using inflated receipts to magnify tax breaks on expenses like housing, it's extremely difficult for them to completely escape tax authorities.

But most everyone else -- from the barons of family-owned businesses to doctors, lawyers and small traders -- operate in largely cash economies that enable them, if they want, to hide most of their income.

The size of India's underground economy and the amount of lost taxes is widely debated, but even the lowball figures are immense in a country with a nearly $2 trillion GDP. In recent studies, experts estimated that anywhere from 17 percent to 42 percent of the economy operates beneath the official radar.

Billions of dollars are widely thought to be hidden in Switzerland, Singapore and other tax havens.

Then there is the strange case of Mauritius. More than 40 percent of foreign direct investment in India comes through this tiny island in the Indian Ocean. In part, that statistic reflects an India-Mauritius tax treaty that legally eases the flow of investment funds into India. But, experts say, it also allows Indians to launder vast amounts of untaxed wealth by sending their illegal cash to Mauritius, then "round-tripping" it back to India in the form of legal investments.

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