DAVID GREENE, HOST:
Last year, India tried to force people who had large amounts of hidden cash to deposit it in banks and to face the tax man. That is no small thing because only a tiny percentage of Indians actually pay income tax. From New Delhi, NPR's Julie McCarthy looks at what's behind that.
JULIE MCCARTHY, BYLINE: At this complex in Gurgaon, Delhi's modern sister city, India's professionals spill from corporate offices. These salaried workers are tax compliant because their taxes are directly withheld. Twenty-three-year-old Devika Dhingra believes her taxes are building the nation. But she says she's in the minority and that most people tell her...
DEVIKA DHINGRA: Paying taxes is of no use to us because the government won't do anything for us. So they feel paying taxes is a waste of money and will always be.
MCCARTHY: Do you feel good when you pay them?
DHINGRA: Yeah, I do. I'd like to believe it's going towards helping somebody.
MCCARTHY: Devika is among 37 million Indians who filed tax returns last year. But the finance minister said just 27 million actually paid anything. That's about 2 percent of the country. Economist Mythili Bhusnurmath with the National Council of Applied Economic Research explains that a large segment of Indians are exempt from income tax because they fall below the $3,700 threshold required to even pay taxes.
MYTHILI BHUSNURMATH: So even if we are a population of 1.2 billion, there are not many, as a proportion of the population, who can pay.
MCCARTHY: Add tens of millions of farmers. None is required to pay any income tax. But Bhusnurmath says a lot of farmers in rich states like Punjab not only make considerable money, they get subsidized water, seeds and electricity and should pay taxes. Other economists argue - better to concentrate on making those already in the tax system pay everything they owe. But with cash still the preferred choice of payment, there's no paper trail. And self-employed doctors, lawyers and factory owners can underreport their income.
Vinod Gupta, vice president of the Traders Association in Delhi's Central Market of Lajpat Nagar, confirms that income tax evasion is pervasive here among businesses that rely on cash. He says they're mostly small traders and evade paying altogether.
When there's tax people coming around and inspectors coming around, how do they fly under the radar like that?
VINOD GUPTA: (Laughter) Sometimes, they hire their services. They pay some bribe to them, direct, straightforward (laughter). They pay bribes to them.
MCCARTHY: OK. So they're paying the tax inspector to leave them alone?
GUPTA: Yeah, that's right. That's right.
MCCARTHY: Gupta says about half the traders pay some but not all of the taxes they owe. Bhusnurmath says compliance suffers because Indians generally do not connect the duty to pay taxes with the right to receive services. And she says when the Indian taxpayer earning roughly $4,000 a year sees no benefit, they make a choice.
BHUSNURMATH: I'd rather cheat a little bit maybe and give - send my children, maybe, to a better school or give them a better meal to eat. I'm barely surviving. Government can perhaps, you know, get other sources of income.
MCCARTHY: In the absence of Social Security or guaranteed health care in old age, Indians rely on family for their welfare rather than government. As long as that remains the bargain, India is unlikely to see any great improvement in tax compliance.
Julie McCarthy, NPR News, New Delhi. Transcript provided by NPR, Copyright NPR.