Why India Still Struggles with Compliance Despite Tech-Driven Tax Reforms

India’s tax landscape has undergone a dramatic transformation over the past decade. From faceless income tax assessments to the revolutionary Goods and Services Tax (GST), the government has heavily invested in building a digital-first, tech-driven tax regime. These reforms were expected to simplify processes, increase transparency, and reduce corruption. Yet, tax evasion in India remains a persistent and widespread challenge. Why?

Despite state-of-the-art portals, sophisticated analytics, and real-time monitoring tools, compliance levels have not kept pace with the technological advancements. The problem is not a lack of reform but a deep-rooted culture of evasion and structural gaps that continue to allow non-compliance to thrive.

A Snapshot of Tech-Driven Reforms

India’s tax reform journey has been ambitious. Some of the major digital interventions include:

• Faceless Assessment System under Income Tax

• GSTN Portal for centralized GST filing and reconciliation

• AIS (Annual Information Statement) for deeper reporting

• Pre-filled ITRs and e-verification processes

• Real-time TDS/TCS tracking

These initiatives were introduced to reduce human interface, eliminate discretionary power, and curb tax evasion in India by increasing traceability. However, the expected surge in voluntary compliance hasn’t materialized.

Why Tax Evasion in India Persists Despite Reforms

1. Cash Economy and Informality

India’s large informal sector continues to operate outside the tax net. According to estimates, over 80% of employment is in the informal economy. Transactions in cash remain widespread in rural and semi-urban regions. This makes tracking income and enforcing tax rules extremely difficult, facilitating tax evasion in India at a massive scale.

Even with UPI adoption on the rise, many businesses still accept and prefer cash to underreport revenue and evade GST or income tax.

2. Mismatch Between Technology and Ground Reality

While the government has moved fast on the tech front, taxpayer literacy hasn’t caught up. Many small businesses, especially in Tier 2 and Tier 3 cities, find portals like GSTN complex, glitchy, or simply intimidating.

This digital divide makes even well-intended reforms ineffective in practice. It’s easier for many small traders to avoid registration or underreport income rather than navigate the system. This perpetuates tax evasion in India, particularly among MSMEs and unorganized sectors.

3. Weak Enforcement and Deterrence

Digital infrastructure can only go so far without robust enforcement. Prosecution rates for tax crimes remain low, and penalties are inconsistently applied. Even when authorities identify instances of tax evasion in India, it often leads to prolonged litigation rather than swift action.

Moreover, influential evaders sometimes escape through loopholes or political connections, weakening the deterrent effect for others.

4. Overcomplicated Compliance Requirements

Ironically, many reforms have added layers of compliance without simplification. GST return filings, for example, involve multiple forms (GSTR-1, GSTR-3B, GSTR-9, GSTR-9C) and reconciliation burdens.

This complexity frustrates honest taxpayers and creates space for willful defaulters to exploit ambiguity. In trying to comply, businesses often make unintentional errors that are penalized, whereas deliberate tax evasion in India often goes unchecked due to legal loopholes.

5. Low Tax Morale and Cultural Acceptance

There’s a long-standing perception that taxes are burdensome and government services don’t justify what’s paid. As a result, many Indians see evasion not as a crime, but as a form of self-preservation.

This social normalization of non-compliance is a major reason tax evasion in India is so resilient. Until tax morale improves and paying taxes is seen as a civic duty rather than a burden, reforms will have limited success.

GST: A Mixed Bag for Compliance

GST was India’s biggest indirect tax reform, aiming to create a unified market and plug revenue leakages. While it has increased transparency, it has also created opportunities for fraud, such as:

• Fake invoice generation

• Input tax credit (ITC) scams

• Bogus registrations with no business activity

The government uses AI and machine learning to identify mismatches, but enforcement remains reactive rather than preventive. This undermines trust in the system and emboldens those inclined toward tax evasion in India.

The Cost of Evasion: Who Really Pays?

While the wealthy often evade taxes through shell companies and creative accounting, the burden eventually falls on compliant businesses and salaried individuals. They face stricter audits, higher rates, and mounting compliance costs, widening the trust deficit.

In essence, the honest are punished, and the dishonest often escape — a recipe for declining compliance and rising tax evasion in India.

Can Technology Alone Solve the Problem?

Technology is only a tool — it cannot replace sound governance, transparent laws, and taxpayer trust. India’s tax system, despite being digitally advanced, needs to work on:

• Simplifying procedures for small taxpayers

• Increasing prosecution rates for willful defaulters

• Reducing fear-based enforcement and promoting cooperative compliance

• Improving taxpayer services and grievance redressal

• Bridging digital literacy gaps across demographics

Only when the system is seen as fair, efficient, and humane, will the tide against tax evasion in India turn.

Building a Culture of Compliance

To truly reduce tax evasion in India, the government must go beyond digital tools and target behavioral change:

• Introduce tax education in schools and colleges

• Celebrate honest taxpayers publicly

• Use nudges and gamification to reward timely filing

• Simplify return processes using AI assistants

• Improve the cost-benefit perception of tax compliance

Conclusion

India has made commendable strides in digitizing its tax system. However, the persistence of tax evasion in India reveals that technological reform alone isn’t enough. Deep-rooted structural issues, a large informal economy, low tax morale, and ineffective enforcement continue to pose serious barriers to compliance.

To fix this, the government must take a more holistic approach — combining technology with empathy, simplicity with clarity, and reform with trust-building. Only then can India truly transform into a tax-compliant nation, not just on paper, but in practice.