Answer:

Tax collection form the backbone of an economy as taxes fund an effective state that protects national security, administers justice, builds infrastructure and funds a social security net. However, India’s economic development lags behind its political development, as the tax collection is very low- only 3-4% registered voters pay income taxes in India.

Reasons:

♤ Ineffective tax administration: Therefore, we do not have data on potential tax payers.

♤ Frequent raising of tax exemption threshold- Faster than the rise in income levels.

♤ High rate of poverty.

♤ Tax evasion due to corruption, black money, low number of income tax official, high rate of tax due to multiplicity of tax and various tax exemptions.

♤ Non taxation of agriculture sector.

♤ 90% of workforce is in informal sector, which is poorly regulated and majorly out of tax net.

♤ Prevalence of cash transactions, avenues for parallel economy like Hawala transactions etc.