Tax evasion is a national sport in the India

Offers of undeclared money from the India are holding back growth Neil Emmerson/Robert Harding world images/Corbis

Tushar Dhara and Cherian Thomas

As Rama Murthy completes the sale of his apartment in the India town of Hyderabad, the buyer accepts a bag full of rupees - part of the purchase price never see the tax man. "Almost 40% of the price of sale in hard cash, I got" says Murthy, 39, who works at a software company. "It is illegal, but it is rampant in the India to avoid paying taxes."

India lost 14 billion rupees (314 million dollars) from tax evasion to the year, depriving it of funds for investment in roads, ports and energy, said Arun Kumar, author of economy plunged into the India. General government revenues are approximately 18% of the India $ 1.5 billion in gross domestic product, the lowest among the four BRIC Nations, shows data from the International Monetary Fund. With so few income in first Minister Manmohan Singh is now in the India of the tax code revision in half a century.

Investors say tax reform would boost his confidence. "If the Government end up doing a substantial amount of revenue as a result of the tax reform, should bring down its deficit requirements and interest burden also falls apart," says Killol Pandya, Mumbai-based head of investment income fixed at Daiwa Asset Management (India).

As Finance Minister in 1991, Singh accelerated tax cuts and cutting red tape that many businesses are so suffocating. Thanks to their efforts, the top individual income tax rate is now 30 per cent, down 97.5 per cent in 1971. With its direct taxes code law, Singh is expected to cutting the corporate rate to 30 percent from 33 percent.

The new law, if passed, would also phase out tax holiday periods, many companies exploiting. For years, the State of Uttaranchal, North for example, has had a tax holiday for manufacturers. Companies in other countries in the India have booked their profits in Uttaranchal in subsidiaries to reduce their tax obligations, says Kavita Rao, an economist at New Delhi's National Institute of public finance and policy. "When this type of tax incentives always exists the possibility of misuse," said Sunil Gupta, an official of the Ministry of finance who helped write the legislation. Gupta estimated that India loses up to 800 billion rupees a year because of corporate tax incentives.

The draft law aims to become taxpayers by the dismantling of key exemptions to more individuals. Two of the largest are the jump to get investors to purchase bonds for infrastructure of the India and get to put money in funds for capital investment. In a separate proposal, Singh seeks to impose a tax of goods and services at the national level to replace similar State-level taxes. Finally, the Government wants to rewrite the tax treaty with Mauritius, an island in the Indian Ocean to the authorities in New Delhi that ports much income not declared in the India.

These reforms will be implementing extra. "People have to believe that if they do not pay taxes they fall," said Rao, who will lead one of three studies commissioned by the Government of the black market economy. There is a proposal to increase the number of tax collectors, and a group has been established to track financial transactions in the black economy.

A challenge is the paralysis which has affected the Parliament since the scandal this year about the irregularities in the sale of valuable mobile phone licenses. "The Government should begin the process of reform, once again," said Adi Godrej, Chairman of Godrej, a manufacturer of household products and consumption consumer products. Another reason for the reluctance of legislators is that you part of the money not declared to be of the India bankrolls electoral campaigns, said N. Bhaskara Rao, President of the Center for studies of media in New Delhi. "Political parties are only limit their purchasing power to make proposals to curb black money,", said.

The bottom line: Singh expected reduction in the rate of corporation tax will lower the incentive to exploit the exemptions which cost 800 million rupees a year.

Dhara is a journalist for Bloomberg News. Thomas is a reporter for Bloomberg News.

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