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Social Structure, Tax Culture and the State

Tax collection is an important function of the state and is a prime source of revenue for any government. Quite often, the tax culture and social structures are such that they seem to encourage tax evasion. This paper examines commercial taxes and the role of the tax culture of social structures in Tamil Nadu and finds that while the state aims at ensuring tax compliance, it has unwittingly promoted a social structure that is "anti-tax" in nature. This has serious consequences for the distributional effects of taxation as well as for the accountability of the state to its people.

Special articles

Social Structure, Tax Culture and the State

The Case of Tamil Nadu

Tax collection is an important function of the state and is a prime source of revenue for any government. Quite often, the tax culture and social structures are such that they seem to encourage tax evasion. This paper examines commercial taxes and the role of the tax culture of social structures in Tamil Nadu and finds that while the state aims at ensuring tax compliance, it has unwittingly promoted a social structure that is “anti-tax” in nature. This has serious consequences for the distributional effects of taxation as well as for the accountability of the state to its people.


ax – the compulsory collection of money (and occasionally goods or services) – is a prime source of revenue for the state, and a prime mover of public expenditure. In India, net revenue is 17 per cent of GDP.1 The political process of taxation is thought to be a fine summary indicator of state legitimacy2 and governance capacity.3 However, while in OECD countries this notion is an open social fact and tax is a prominent aspect of electoral politics, elsewhere it disappears – along with scholarship on the subject.4 This essay seeks to go a small way to remedy this neglect.

It also contributes to a small school of work in Oxford University which is challenging the tendency to analyse development policy as a residual (exemplified by routine conclusions) invoking “policy implications” without reference to either state or society and which seeks to explore with the use of field research, the ways in which the organisation and practices of the state, the market and institutions of civil society are instituted through social structures of accumulation in which social identity can and usually does play important roles.5

This project cannot avoid distortion because, as Sen has argued, the social identity of a given individual is made of many elements and unique.6 When identity is studied, however, these elements are examined separately. Although this is necessary for analytical purposes, more or less essentialised in categories such as gender or class, in reality they are combined and embodied in individuals. The analytical project reflected in this essay seeks to understand the extent to which logics of capitalist market economy and of bureaucratic rationality, which are widely considered to be universal and even “natural”, are in fact construed through social relations of identity which affect their operation. These effects are not to be dismissed as pre-capitalist relics: they are structures of modern capitalism. Their totality constitutes a culture.

Change originating in one arena – the family, for example – will have an impact on others, such as the market and the state. The reverse expectation is more familiar because it has often been assumed that inherited (“archaic”) social structures will be radically modified or even destroyed when confronted by the rationality of the market or the state. In practice the opposite is, if anything, more common.7 Structures and institutions may instead be reworked. A given kind of patterned behaviour – e g, “sharecropping” or the exercise of patronage or social relationships due to ethnicity or gender – may change its social role over time and space.8Opposing forces may operate simultaneously – dissolving and destroying structures in one site but reworking and intensifying them in another, or doing both in a given place. Thus, in India for instance, wage labour is being cosmopolitanised while the caste-based defence of occupations is being intensified.

Employees of states are bound by organisational laws and rules9 but the Weberian ideal type of office holder, whose official behaviour is entirely separate from his or her private interest, can never be taken for granted. As in firms, social relationships may be and are deployed to regulate behaviour alongside legalist contractual arrangements and rules. Whether one considers the state “organogrammatically” as a set of ministries, departments, parastatal agencies and quasi-NGOs (commerce, foreign affairs, defence, etc) or whether one cuts its work by sector (trade policy, agriculture, labour, tax, etc) and examines the roles of every relevant regulative norm and practice, the state is revealed as a congeries of quite particular arrangements.10 Without an understanding of the wider culture within which the state works, the autonomy of the state will be exaggerated, and its effects poorly predicted.

The concept of “tax culture” in this essay originates with Schumpeter, for whom fiscal history was nothing short of a development paradigm in which government evolved from being funded out of the surpluses extracted from the agrarian producers on the ruler’s landed properties, to being funded by levies on the private economic transactions of independent subjects. For this to happen, a consensual coalition between potentially mobile capital and rulers had to develop, and a public bureaucracy had to be created.11 More recently, the concept has been applied to the transformations of states which relied on revenue from publicly owned enterprises in centrally planned economies, to states financed from taxes on private enterprise.12 Lately the

Figure: The Transformation of Sales Tax Policy in the Political Economy of Tamil Nadu

Ideas about fiscal crises and tax paradigms prevalent in international economics and public finance

Tax environmental conditions Central economic Political, social advice and and cultural aspects thinking ‘Formal’ Sales Tax Policy

Academic experts

General character Administrative

and existing features ‘Intermediate’ ‘tax culture’ Sales Tax Policy within commercial taxes department

Resource availability of

Mobilisation of commercial taxes

taxpayers and reaction to department

social character of commercial taxes department

Tax environment conditions

‘Implemented’ Sales Tax Policy

Tax consultants intervention

Strategic responses of taxpayers



Pre-emptive behaviour: of programme objectives avoidance and evasion

International Monetary Fund (IMF), faced with states dependent on rents from natural resources and/or foreign aid,13has also come to recognise that “to function well, market economies need governments that can establish and enforce the rules of the game, promote widely – shared social objectives, raise revenues to finance public sector activities, spend the revenues productively, enforce contracts and protect property, and produce public goods” [Tanzi 1999:1] – but not at the cost of a dysfunctional burden on the “private sector”. For the IMF, the creation of a “tax culture” or “tax mentality”, by which it means (more narrowly than Schumpeter and the transition economists) a pervasive culture of compliance on the part of taxpayers, has to be achieved with a mix of appropriately-designed incentives and sanctions. This, however, has been extraordinarily difficult to “engineer”.

One reason for the limited purchase of state-engineered mechanisms of fiscal compliance is that even in the late 20th and 21st centuries, such attempts are still taking place in developing countries during an era of the initial concentration of capital on the one hand, and loss and dispossession of assets/ and “adverse incorporation” of labour on the other. While Adam Smith called this process capitalist prehistory and Karl Marx primitive (or original) accumulation, in practice it is not confined to the beginnings of capitalism but is continually reproduced in a huge range of non-market, coercive economic mechanisms. The state is deeply implicated in this process. It is not only necessary for the state to build infrastructure, and for capital to build physical plants, displacing labour; it is also the source of finance for private start-up capital, for wages to pay a wage labour force, and for the concentration of food and of raw materials for the industry. The society is being required to yield up tax for the state’s role in this primary process at the same time as primary producers are being subjected to pressures from capitalist accumulation and capitalists are struggling to accumulate from a low initial base. In the meanwhile both are engaged in a very intense struggle over private property rights.14

While societies unused to taxation widely reject proposed tax systems, attitudes towards tax are much too deeply embedded in society to be amenable to mere technical solutions of incentives and sanctions. Even in OECD economies, norms and semantics vary and this variation has material consequences. The etymological origins of terms for tax can be linked to variations in cultures of compliance. Tax evasion has been shown to be more extensive in Mediterranean cultures, for example, where the Latin root of the word for tax is “imposition”, than it is in Germany, where the word connotes “support”, in Scandinavia where it means “common treasure for common purposes” or English where the root for tax means to “touch”.15 The attainment of a given tax objective has correspondingly been shown to be more expensive for Mediterranean states, where taxes are seen as being “imposed” against feelings of justice and in a culture of more generalised resistance to all state impositions. Such attitudes obviously involve, centrally, the way tax officials themselves are regarded, and regard themselves – something rarely if ever included in the mainstream taxation literature.

So, the concept of tax culture must incorporate the formal rules of taxation, their derivation, the role of social structures of identity in the creation and implementation of rules and thus the formal and informal regulative relationships between tax authorities and taxpayers within which social struggles take place. The broad structure of our essay follows these components.

We examine the culture of commercial taxes and the roles in tax culture of social structures of identity in Tamil Nadu. The country is a useful case for two reasons. First, “the development of tax evasion is the real ‘structural adjustment’ “ [Harriss-White 2003:100]. The fiscal deficit stands at 4.6 per cent of GDP for the central government and 4.7 per cent for the constituent states.16 The main reason why expenditure exceeds revenue is the poor record of revenue generation from the major direct and indirect taxes, so much so that some theorists conclude from India’s ongoing fiscal crises that the state has failed in a fundamental way.17 Second, the introduction of value added tax (VAT) is at a crucial stage of replacing sales tax. As a result, tax, hitherto the domain of private pressure group politics, has risen up the public political agenda. Despite the technical elite’s consensus about the superiority of VAT over the highly complex system it replaces, its inauguration on April 1, 2005 was greeted by a three-day strike by traders.18While this essay will not explore VAT because Tamil Nadu was not among the first 20 of India’s 29 states to implement it, the public response to the transition in tax rules makes it possible to research the tax culture with unprecedented cooperation from the main interested parties. Tamil Nadu is a state where commodity taxes (the sales tax, ST) supply two-thirds of the state government’s revenue.19 Sales tax also originated in the Madras presidency in 1939. Throughout India it has been growing in its importance to state public finance, and state autonomy from the central government.20 The Tamil Nadu commercial taxes department is reputed to be one of the most professional and efficient tax bureaucracies in India, and is publicly aware of the paramount role played by taxation in development.21 We focus on the tax bureaucracy, defined as the organ of the state dealing with the implementation of tax policy, together with other interests such as taxpaying business, the party political process and those making expert technical inputs into policy design.22 The stakeholders and key relationships in the ST system are shown in the figure.

I The Role of the State in Tax Culture: Rules, Economic Interests and Social Identity

The Weberian ideal-type of bureaucratic efficiency premised on impersonality and objectivity has long been the one on which the Indian civil service is explicitly modelled. Both of the two cadres responsible for ST, the elite IAS (recruited by the central government and heading most state bureaucracies) and the state level administrative service, recruit on merit and are trained in rule-based practice.23 However, there is a long history of research which reveals divergences between technocratic policy norms and socially and politically embedded practice.24

In this section the formal rules of the ST system are laid out and the social composition of the bureaucracy and the intertwined nature of formal rules and social structures of identity are investigated.

The current system of commodity taxation has been in constant evolution to reflect the changing needs of the state. Tamil Nadu’s ST has been working in its current form since the 1959 Tamil Nadu General Sales Tax Act (TNGST) was passed, though it has received a number of amendments about which no ST officials were precise.25The proliferation of ST acts and their amendments about which there is what we may call “informed imprecision” is a salient fact for Indian business.

The TNGST Act requires dealers with turnover (gross output) in excess of Rs 3 lakh26 to be registered and therefore to file returns. ST is levied only on the taxable returns of registered dealers.27 Over the decade from 1995 and heavily influenced by the growing national fiscal crisis, the local state has been under contradictory pressure from liberal reformers in the central government. On the one hand, in order to compete for investment, provincial states must minimise distortions in tax and reduce marginal tax rates. On the other hand, they must increase revenues to cope with their own fiscal crises. This has resulted in ad hoc reforms throughout the Indian states. With respect to the TNGST Act the structure of tax rates has been streamlined and the base broadened. However, even within this single state, the system remains highly differentiated and complex, with 15 different rates in operation.

By 2003-04, there were 64 goods which were exempt from ST (see the appendix). When we research the interests served by exemption we discover a distinctive political economic rationale. For example, woven silk fabrics are exempt, and two of India’s major industrial clusters in silk are in Tamil Nadu. Silk sarees are luxury goods, demand for which is price inelastic. So exemption deprives the state of a significant quantum of revenue. Further examples are local tobacco and sugar products, agricultural implements and domestic utensils, a vast range of basic wage goods produced in the informal economy, and some factory-produced goods, notably educational equipment, contraceptives, a set of “life-saving drugs” and items of public health and small-scale renewable energy technologies such as energy saving stoves; solar equipment and landfill energy conversion devices. The point is not only that the production of wage goods is widespread and tends to be caste-stratified but also that many have long had more or less formal corporatist organisations of collective action representing the producers’ interests, and more recently regulating economic behaviour, controlling wage labour and providing primitive forms of occupational insurance.28 Other commodities (large numbers of them) have much higher ranks in taxable turnover than they do in tax revenue earned because they have distinctively low rates of sales tax, so that their tax base is under-exploited. Basic wage goods are in this category because of their importance in the consumption baskets of poor people. However, agricultural products such as sugar cane and cashew, and raw materials for the textiles industry – cotton – and the automobile industry – rubber – cannot be justified in this way, and were acknowledged (and “triangulated”) by finance officials as indeed having resulted from the exertions of the relevant lobbies and business associations.

We conclude that, far from being technically-derived, tax policy is socially embedded from its inception. The neutral, technical language of policy design, its “discourse”, both masks and reproduces the balance of power between the state and powerful political interests in the economy which serves as the crucible of policy.

The second aspect of the state’s role in tax culture concerns those implementing the product of this crucible: the role of caste in the bureaucracy and its use as a political instrument in the control of the state. The history of low caste assertion in Madras presidency resulted, long before independence, in demands for the reservation of bureaucratic positions for members of deprived castes. As early as 1885, the colonial state had introduced preferential treatment for lower castes, and in Tamil Nadu, preeminently, as high a proportion as 69 per cent of places in higher education and public services were reserved for intermediate and

Table 1: Revenue from Top 20 Commodities in the Year 2002-03

(Rs in crore)

SI No Name of the Commodity Revenue
1 701 IMFL – VI Schedule 1695.16
2 316 High speed diesel oil 1389.90
3 319 Petrol 707.38
4 281 Cement and substitutes 298.37
5 252 Motor cars, MV chassis, trailers 229.36
6 296 Mineral oil of all kinds 228.40
7 273 Foods – branded 151.56
8 210 Fuel gas 144.55
9 244 Machineries (power operated) 135.82
1 0 176 Medicines, medical appliances 134.49
1 1 294 Sugar cane 125.14
1 2 186 Motorcycle, etc 124.01
1 3 404 Iron and steel 117.38
1 4 2 7 5 So a p s 117.05
1 5 295 Lubricating oils and greases 88.03
1 6 146 Television sets and cameras 82.85
1 7 321 Aviation turbine fuel 79.99
1 8 403 Cotton yarn 76.90
1 9 288 Paints, distempers, varnishes 74.88
2 0 253 Motor vehicle tyre tubes 74.18

Source: Survey of State Taxes (2003).

low caste people in 1980. The regularly rotating “dravidian” parties, initially movements policing ethnic boundaries and protesting against “brahmin” domination, have slowly devalued plebeian Tamil culture. If judged by practice rather than rhetoric, dravidian politics have reinforced the cultures of the intermediate Hindu castes and promoted revivalist versions of a Tamil nation centred on the norms of these castes. Ethnic appeals have been articulated within a populist discourse, leading dravidian regimes to create entitlements for the middle or lower castes. They are labelled “backward” although, by the standards of the agricultural labouring class, for the most part they are anything but. The distinctively populist mass politics that results has led to the proliferation of subsidies and the growth of state expenditure without a concomitant rise in revenue generation. The reservation of places in the public sector for “backward” castes is a defining feature of the entitlements of these castes, and the exercise of social and political patronage is a defining feature of the control of the bureaucracy by the dravidian political parties.29 The loss of autonomy of low and intermediate caste clients is qualified by their being able to mobilise outside the party framework too. Most notably this takes place through the caste-corporatist politics of collective action focused on trade associations.30 Most backward castes are local dominant agricultural castes and/or occupationally stratified in the non-farm economy in small to medium family firms and the non-agricultural labour force.

Patronage and political clientelism have implications for the composition of the state bureaucracy and the implementation of policy. In 2005, six ministers out of 25 with portfolios were members of backward castes, the majority of them, including the finance minister, being ‘vellalar’. Top officials in the ST department were alleged by respondents outside the department to be from ‘vellalar’ or ‘nadar’ castes. These castes are classified as backward but occupy dominant positions in the regional economies in agriculture and business – including textiles, which is the second-largest sector after agriculture. The implementation of fiscal policy cannot be divorced from their interests: to ignore the existence of such social relations is likely to allow future tax policy to continue to codify the same biases.

It would not be correct to conclude, however, that the ST department has been entirely captured by political clientelism or by backward castes. The third characteristic of the tax bureaucracy is the intertwining of formal rules with social forms of regulation. The commercial taxes department currently operates under the control of the minister of commercial taxes and is headed by an IAS secretary and an IAS commissioner. It has four wings: assessment,31 enforcement,32 audit33 and appellate,34 each of which is headed up by joint commissioners, deputy commissioners and assistant commissioners – in all about 500 specialist officials.35 However, despite this formal organisational structure, the combination of the dominant role played by state civil service officials (rather than the central government elite) and the political patronage exercised over the bureaucracy mean that the formal structure and the actual organisation of the department are far from coinciding.

In practice, policy is generated in a different set of institutions and at two levels within the state: in the 30 districts and at the headquarters. At the district level is a ST advisory committee headed by the IAS collector36 and including a local member of the state legislative assembly (MLA). Meeting every three months, this committee “fire-fights” local ST problems and generates policy ideas. The latter pass upwards via two routes, administrative and political, to a state-level ST advisory committee meeting once a year, of which the portfolio minister is the secretary. High-ranking ST officials are in a minority on this committee, which is stacked with representatives of business associations and financial interests.37 Party politicians are key players in the formal process of tax policy formation. Academic experts are completely absent.

The main generators of policy are supposed to be the IAS officials, who are also formally responsible for implementation. But the balance of power, the political settlement between IAS officials and politicians, is biased against the IAS for several reasons. First, their regular, increasingly politicised and ever higher-velocity rates of transfer prevent them acquiring authoritative knowledge and experience, just as it prevents their forming patronage ties.38 It also reduces their capacity to control lowerranking officials. The real power holders are TN public service commission cadre officials who are employed almost permanently in the ST department, being transferred only within the department and thus having the opportunity to develop and cement networks and coalitions among themselves which are impervious to IAS control. Tactical control of the department is largely in the hands of TNPSC officials of the rank of joint commissioner, while strategic control may well lie less with the IAS than with state-level politicians. The politics of this control is hidden from the public domain but two aspects have been suggested during fieldwork: the practice of paying for posts, and the practice of keeping posts vacant. It was suggested by a lawyer with relatives in the ST department, and repeated by others, that certain high-ranking posts may be sold by politicians. These posts are termed “sensitive” and are openly subject to competition. They are sensitive because it is expected that investment in the purchase of such a post will be recouped by illegal rents, what Kalecki termed the “self-employment” of officials.39 Both tax officials and taxpayers know each others’ earnings and deploy this information to mutual advantage in order to supplement salaries and business returns respectively – as will be seen in Section II.

A further aspect of political control is deliberately leaving positions vacant to prevent ST bodies from functioning. For example, the appellate tribunal is an important mechanism of dialogue between taxpayers and the ST department, in which liabilities can be contested. Political interference was widely reported to have halted its work for a significant spell in 2004, and data for the tribunal for 2003-04 shows that even without such interference a backlog accumulates which frustrates due process and invites bribery.

Table 2: Number of Registered Dealers and Assessees

Year Registered Dealers Assessees Proportion
Number Change Number Change that Pay Tax
(Per Cent) (Per Cent) (Per Cent)
1991-92 303,463 133,804 44.09
1992-93 313,726 3.4 136,089 1.7 43.38
1993-94 316,326 0.8 136,924 0.6 43.29
1994-95 327,726 3.6 134,831 -1.5 41.14
1995-96 325,138 -0.8 132,343 -1.8 40.70
1996-97 336,533 3.5 128,278 -3.1 38.12
1997-98 353,073 4.9 126,168 -1.6 35.73
1998-99 346,544 -1.8 107,857 -14.5 31.12
1999-00 355,458 2.6 109,677 1.7 30.86
2000-01 361,093 1.6 106,242 -3.1 29.42

Source: Reforms and Revenue Augmentation Commission Report, Chellaiah (2003).

Although the evidence was far from systematic and does not allow us to conclude that all members of the department were involved or complicit, there was a pervasive discourse of corruption. According to this general view corruption mainly takes the forms of bribes, payments to prevent harassment and permit fraud, and misappropriation of goods from warehouses and shops under inspection – blatant theft. There is no mechanism through which public concern or complaint about corruption may be channelled. The standard method of defence against extortion is to minimise contact with officials. However, while it is expected that on-line tax returns will reduce corrupt demands by officials, they will do nothing to curb evasion by those obliged to pay tax.

In sum, the tax system is a politicised social construct. Politicised policy design contributes to obstructions to its implementation because it detracts from state legitimacy in the eyes of both taxpayers and tax officials. The social composition and the practices of the tax bureaucracy both reflect and reinforce the contest between the state and social structures of caste and class. Tax policy is implemented idiosyncratically: some officials follow the formal rules of the TNGST Act while others do not. Patronage and caste-clientelism generates a pattern of transfers and promotions on grounds other than merit or seniority. Rules and procedures are disregarded. Very few taxpayers are privy to the kind of information that makes these structures and practices of the department comprehensible. The tax culture within the ST department has a profound impact on the level of taxpayer compliance.

II The Role of Society in Tax Culture: Taxpayers and Tax Consultants

Owners of firms with gross outputs in excess of Rs 3 lakh are supposed to register tax, whether or not they actually do so. The commercial tax department is revenue-driven, with targets set annually and increased each year in line with performance. There are two broad categories of taxpayers, traders and manufacturers, though both categories are highly differentiated by product. Table 1 lists revenue-generating commodities and is dominated by manufacturing. At the top of the list are liquor, diesel oil and petrol. Tax revenue is highly concentrated in being derived from the 0.1 per cent of registered firms which have turnovers in excess of Rs100 crore.40 These contribute 56 per cent of total sales tax.41 These high net worth firms have the best-developed book-keeping and accounts and according to Chellaiah (2003) revenue is extracted from them at the cost of either equity or efficiency.

To explain why this happens, the way in which the shared experience of taxpayers creates dispositions and habituated behaviour must be examined. Capital uses two types of behaviour to subvert tax policy: tax avoidance, which is legal, and tax evasion, which is not. Avoidance is the product of declared outputs below the tax threshold; transactions which are not taxable (i e, are not first, last or second-point contracts), successful pressure for tax exemption, or for tax levels disproportionately lower than their turnover; and the use of transfers between branches of firms to have profits arise in jurisdictions which minimise liabilities. Many cars in Tamil Nadu are registered in the enclave union territory of Pondichery which has much lower tax rates. Many software distributors, taxed at 4 per cent in Tamil Nadu, have offices registered in Gujarat where software is exempt.

Evasion, on the other hand, takes place through means such as accounts in which output is under-reported, the attribution of nonagricultural earnings to agriculture, or bribery to avoid inspection of accounts. Both avoidance and evasion affect the efficiency with which taxes are raised, and hence the capacity of the state.

For a number of reasons large firms are the easiest to tax and find evasion most difficult. First, the very large firms which dominate revenue are dependent on public sector services such as electricity and finance through which their gross output can be triangulated by tax officials. Second, the monitoring costs are lower per unit of revenue from large companies than smaller ones. The department has created a fast track assessment circle (FTAC) for firms with high turnover and there are plans to introduce on-line submission of returns. Third, the state also uses timebound tax exemption so as to incentivise the siting of large firms on industrial estates. After the end of the tax break such firms are contractually bound to pay those taxes from which they have hitherto been exempt.42

But, fourth, the collective politics of agro-commercial capital ensures an inequitable formal tax structure which privileges the products of intermediate capital, exempting whole sectors of intermediate-sized firms entirely. The cost of revenue collection ensures that the probability of successful evasion varies inversely with size. It was argued earlier, from the evidence in the appendix, that the major classes of exempted commodities reveal the power of commercial lobbies, particularly agricultural and textiles traders, to manipulate sales tax policy in their interests in complicity with the state and therefore to avoid ST. The same lobbies also work to ensure that the informal practices of ST operate inequitably, allowing them to evade ST. Barbara Harriss-White’s 1980 research on agricultural mercantile politics may be recalled here because the present field research corroborated it in a suggestive manner. The fieldwork conducted in 1980 showed the important role played by business associations in tax evasion and in the way it was justified.43 Experiences of mistreatment by ST officials, the arbitrariness and complexity of ST policy (in part the result of the very same interest groups which experience harassment), the ad hoc nature of the penalties and the idiosyncratic implementation of the formal rules all enter tax culture as reasons to justify tax evasion. Not only is the formal tax system structured to be inequitable, its implementation is experienced as inequitable.

As a result, certain eligible firms with gross outputs above the ST threshold do not register for ST. The quantitative significance

Table 3: TNGST: Turnover Slab-wise Assessees and Tax Revenue

Turnover Slab No of Percentage Tax Revenue Percentage
(Rupees) Assessees (Rs in Crore)
0-3 lakh 22003 19.28 17.12 0.20
3-4 lakh 11718 1.27 15.75 0.19
4-5 lakh 9515 8.34 22.08 0.26
5-10 lakh 15116 13.25 60.64 0.71
10-25 lakh 18709 16.40 130.55 1.53
25-50 lakh 13566 11.89 187.72 2.21
50-75 lakh 7398 6.48 238.10 2.80
75-100 lakh 5051 4.43 260.30 3.06
1-10 crore 8911 7.81 738.84 8.69
10-50 crore 1670 1.46 1005.08 11.81
50-100 crore 326 0.29 926.28 10.89
100 crore and above 116 0.10 4896.15 57.55
TDS collection - - 8.28 0.10
State total 114099 100.00 8506.89 100

Source: Commercial Taxes Department at a Glance, government of Tamil Nadu (2002-03).

of losses resulting from 100 per cent non-compliance is debated.44 Registered firms suppress turnover and hide transactions but pay token amounts of ST or make payments which are partly bribes to ST officials and partly ST contributions.45 Sectors with a combination of relatively high tax bands and cut-throat competition were reported by all those concerned to maximise tax evasion: electrical goods, edible oils and – famously – jewellery.46 By virtue of their large numbers (Tables 2 and 3) and their low standard of accounts, small firms are costlier to inspect per unit of revenue raised. While the probability of inspection is low, small firms are also prey to arbitrary and predatory practices by ST officials. In a culture dominated by revenue targets and focussed on firms in the largest turnover category or “slab”, the commercial taxes department neglects the provision of information about rules and tax practice to small firms. Tax officials and taxpayers are therefore involved in coercion and evasion respectively.

Faced with lax scrutiny47 and/or harassment by ST employees, often reputedly in the form of the extortion of goods, or demands for bribes or gifts followed up by court proceedings for those reluctant to provide them, taxpayers have recourse to sales tax consultants to mediate and where possible halt prosecutions. To proceed with litigation to challenge fraudulent penalties 50 per cent of the tax said to be evaded has to be provided, along with a bank guarantee for the balance. Should the case be won the money is refunded. However the restitution of the refund is often adjusted against future liabilities. Consultants are needed to resolve refund negotiations.

In principle, ST consultants are independent advisors, but unlike income tax specialists who are chartered accountants, in practice, consultants are graduates without professional qualifications. A significant proportion of them are retired ST officials or their close kin, who have gained familiarity with the complex system of tax practices through experience rather than training. When asked why people use his services one consultant replied “fear”. A common fear is that of extortion. Tax consultants do not have fear. On the contrary, they cultivate close and cordial relationships with the commercial taxes department and receive preferential treatment. Other than through the media, they represent the main means by which taxpayers’ complaints can be conveyed to the commercial taxes department.48 However at the same time these consultants are used by ST officials as mediators for the extorting of bribes. Bribes are arranged, sometimes without the knowledge of the taxpayer, as their cost is added to the fee.

The proliferation of these intermediaries and these tax relationships has shaped tax culture. The overwhelming majority of respondents in the field research, while acknowledging that the reforms to the structure of the TNGST had improved its interpretation, still found the system extremely complex. Frequent amendments to the Act, raising tax rates to reflect the economic importance of new commodities or lowering them to increase compliance, have rendered it incomprehensible to the very people with whom it needs to be legitimised. The system lacks legitimacy and incentivises the avoidance and evasion which deprives the state of very significant proportions of revenue.49

Tax evasion may also be the result of ignorance. Paul and Shah in their analysis of corruption in public service delivery conclude that information barriers contribute to corruption.50 Although the ST website and official publications about ST are in Tamil as well as English, most public discussion about tax is in English. The media, the principal instruments of public education and information, though active on income tax, rarely report ST issues and have contributed little to public awareness about the introduction of VAT. They very rarely report consumer associations as having politicised ST, evidently not because ST has little effect on prices but rather because consumer protection law does not cover tax. Among manufacturers and traders, tax literacy was widely reported to vary directly with firm size. FTAC firms are highly tax-literate, with in-house tax teams dealing with their returns and getting preferential treatment from the commercial taxes department. The manufacturing industry was reported to be more “tax-literate” than commercial firms. The latter may be forced into compliance when the manufacturers from whom they purchase are, in turn complying. According to the president of the Madras chamber of commerce and industry, most small firms “prefer to remain ignorant”.

About 40 per cent of the commercial taxes department’s registered “assessees” are in turnover “slabs” under Rs 10 lakh (Table 3). They generate only 1.4 per cent of ST revenue. In stark contrast to the means by which the commercial taxes department services the largest manufacturing firms, for the rest it runs a fee-paying service (Rs 500) through which small assessees may obtain clarification about tax rates. However the service is avoided as it is perceived to lead to harassment. Despite having a small PR unit and internal documents detailing practice, the ST department provides no public information about its services. Its website displays the acts under its jurisdiction and a drop-down list of commodities and tax bands, but unlike the income tax department it does not explain procedures and practice.51 Small firms are further disadvantaged by being excluded from the most powerful chambers of commerce and industry such as the confederation of Indian industries or the Madras chamber of commerce and industry, which hold regular tax conferences and publish changes in tax laws – all in English. Small firms may have unsystematic access to the Tamil language bulletins of their trade associations. Tax illiteracy make illiterate firms vulnerable to the predatory activity of ST officials in response to which they may participate in corrupt practices or turn to tax consultants for “independent advice”. The complexity of ST law, the lack of information and the inaccessibility of ST officials for advice and clarification has created a culture where evasive behaviour and the corruption associated with it is felt to be justified on the part of taxpayers. So Paul and Shah’s conclusion is corroborated by our research.

Tax culture is thus, dominated by a mentality and by practices of evasion and avoidance. Tax mentality is constituted and legitimised through the social approval of non-compliant behaviour, knowledge of the politicisation of the tax bands and the demonisation of the commercial taxes department. Tax morality, unwillingness to pay on the part of taxpayers and unwillingness to collect on the part of tax officials,52 condones primitive forms of accumulation and the units of accountability which it benefits. It privileges the interests of the family firm and of close kin over those of the public or nation.

III Conclusion

Tax avoidance is a universal feature of capitalism; the question for research concerns the modes by which tax is avoided. Avoiding tax does not necessarily result in an anti-tax culture. Tax evasion is also a universal feature of capitalism, however only when it is extensive does it result in an anti-tax culture. In Tamil Nadu, while there is no general notion of a tax-paying culture, there certainly is a culture which is anti-tax. It is a system of shared beliefs and interpretations in which – in a nutshell – officials conceive taxpayers as selfish and criminal while taxpayers conceive officials as predatory and corrupt. The state’s governance capacity is internally compromised because its employees bring to their construction of tax culture values derived from social structures of caste, class and ethnicity and party-political ideologies. Formal and informal caste reservations within the bureaucracy are both developed by and incorporated into dravidian party politics. Policy and law which are framed in language neutral to identity are in fact formally derived and implemented through relations heavily embedded in social structures of identity and economic interests.

The state is caught in a contradiction. Not only is it the only body enforcing tax compliance but simultaneously it is complicit in the creation of formal institutions for tax avoidance and evasion. The compromised state has therefore not gained the necessary legitimacy or the capacity to implement its right to tax. Its right to implement fiscal policy is challenged not only by taxpayers but also by state employees themselves, who interpret fiscal policy as reflecting the dynamics and interests of specific local, social and political interests and reject it as being neither objective nor in the public interest. The state’s ability to implement tax policy is further constrained by taxpayers who use the internal divisions of the state and the private, identitybased allegiances of employees to by-pass their public interest obligations. Both formally and informally it is sabotaged as a structure of accumulation.

This has profound distributional consequences. State rules and informal social regulation together create mechanisms and instruments by means of which business taxpayers may avoid and evade tax. The burden of ST and the capacity to pressure the state is differentiated through commercial and manufacturing capital. Manufacturing capital is the more disproportionately taxed and commercial capital manipulates the formal tax structures more successfully in its interests. It is not surprising that the largest industrial firms which require disproportionate access to infrastructure that can only be supplied by the state are the most compliant.

While corruption is the idiom in which the state is discussed, the much more fundamental problem is tax avoidance and evasion.53 Primitive accumulation and obligations to caste and kin are privileged over the public interest. As a direct result, those too poor to pay tax struggle to gain access to public infrastructure and services.54

No culture, however, is unamenable to change. Moreover Tamil Nadu’s tax culture has normative implications. Contrary to expert discourse, tax reform is not implemented in a social and political vacuum; and state capacity is not the product of formal rules and institutions alone. Joel Migdal, in Strong Societies and Weak States, identifies four activities that indicate state capacity: those that (1) penetrate society; (2) regulate social relationships;

(3) extract resources; and (4) appropriate and use them in determined ways.55 Applying this to Tamil Nadu we can say that first, the state’s capacity to penetrate society is fundamentally uneven. While Tamil Nadu’s state institutions reach into slums and villages (electricity) and inside households (noon meals), society, with the exception of the largest firms, resists sales tax. Second, what Harriss-White has termed a “shadow state” of informal fixers, tribute takers and distributors coexists with the formal tax structure.56 So, tax relationships are not only the products of rules and voluntary compliance, they are regulated through coercion mediated by relationships of class, caste and faction, which are structures of accumulation mostly not regulated by the state. Third, Tamil Nadu’s tax culture seriously constrains its capacity to extract resources. Fourth, the state’s capacity to appropriate and use resources faces many obstacles, one of which is the mass of taxpayers’ alienated belief that they do not depend on or need the state. If tax reform were to politicise its sequencing in response to tax culture and state capacity, it could do worse than prioritise public education and information and ignite public debate about its own politicisation, about the reasons, grounded in primitive accumulation, for the culture of non-compliance and about the consequences of this for both society and state.


Summary of the Third Schedule of the Tamil Nadu General Sales Tax Act (1959): Goods Exempted from Tax by Section 8

Part A:

Country sugar (other than Khandsari sugar); unmanufactured tobacco, country cigars, cigarettes, chewing tobacco, snuff; smallscale production of woven silk; woven wool; woven cotton; woven synthetic yarn; lace and embroidery; canvas and tyre cord; flock and pile fabrics.

Part B:

Agricultural implements operated by human or animal power and spare parts; equipment for disabled people; domestic aluminium vessels; animal and fish food; prepared snacks; salt, herbs, spices and masala powder; coconut products; green manure and organic waste; bangles of non-precious metals and unbranded cosmetics; black sugar cane for retail consumption; blood and blood plasma; unbranded butter; candles; cereals and cereal products, including millets and tapioca; handspun and handloom textiles; condoms and contraceptives; cycle rickshaws and bullock carts; electrical energy, firewood and charcoal; fish nets and hooks; cheap footwear; non-branded and processed meat poultry, fish, seafood; dry fish and eggs; milk and curd; vegetables; frozen semen straws; blacksmiths’ products; water handpumps; handmade-matches; hurricane lights; kerosene stoves and lamps; silk products; life-saving drugs as listed by the government; livestock other than racehorses; medicinal herbs and country drugs as specified by the government; flowers, plants and all green leaves including unprocessed tea and betel; ‘panjamirdham’; paper bags and envelopes; pottery; products of palm, coconut and date trees including baskets, mats, brushes, fans, thatch; brooms; rope; products of paddy husk; rubber balls and balloons; saree borders; seashells and products; educational equipment (slates, charts and maps, textbooks, pencils, erasers, sharpeners, pens and ballpoints, ink, nibs, blackboards and dusters, dissection boxes); energy saving stoves; solar equipment and landfill energy conversion devices; steam; ‘vibuthy’; unbranded water.

Plus declared goods taxable at the point of last purchase if such goods are sold in the course of inter-state trade and tax paid under the Central Sale Tax Act of 1956. Source: Survey of State Taxes, 2003-04.




[This paper was presented at the workshop on “The Artifices of Government: On the Appropriation, the Use and the Formation of States”, Max Planck Institute for Social Anthropology, Halle/Saale, Germany, July 20-21, 2006. The authors wish to thank the tax officials, tax consultants, business taxpayers and business association officials who were interviewed by AJ in 2004, together with Sarita Das, Sheela Rani Chunkath, and the late Indrani Sen for having generously discussed with BH-W their insights – drawn from widely differing circumstances – into the role of identities in the behaviour of bureaucracies; and N Narayanan, whose support enabled access to the Tamil Nadu commercial taxes department.]

1 This amounts to Rs 13,36,620 million. Total expenditure was Rs 36,24,530 million. Of the “non-plan” expenditure, 41 per cent consisted on interest payments, 21 per cent went on defence, 12 per cent into subsidies and 6 per cent for pensions [Controller General of Accounts 2001-02].

2 Moore (2004).

3 For Skocpol (1985, p 9), state capacity is the ability of a state “to influence official goals, especially over the actual or potential opposition of powerful social groups or in the face of recalcitrant socio-economic circumstances”. See also Smith (2003).

4 Moore and Rakner (2002). It is dominated by economics, where the focus is on revenue generation and performance [Mundle 1997] and the phenomenon of tax evasion analysed from the perspective of the economics of crime [Alm and Vasquez 2001]. The design of tax policy assumes individual utility maximisation, administrative simplicity and regulative frames discouraging evasion [Begg, Fischer and Dornbusch 2000]. The World Bank’s good governance agenda ( has required this economics approach to stretch itself into interdisciplinary territory in order to account for egregious failures in the design, implementation and performance of tax policy.

5 See Kotz, McDonough and Reich (1994), McDonough (2005) for exegeses of social structures of accumulation. That markets are embedded in social institutions builds on the premises of the substantivist school of anthropology [Eriksen 2001], and has been developed influentially in economic sociology by Granovetter (1985). The conceptualisation of social structure is from Durkheim; it makes “reference to orderly, patterned and enduring relationships that hold between elements of a society” which exist in their own right but may be acted on reflexively through agency [Jenks 1993, Hodgson 2001]. For the ‘Oxford school’, see Majid (1994) on class and ethnicity in land tenure arrangements; Rogaly (1995) on class, caste and gender in labour markets; Pujo (1997) on gender and markets (in Guinee); Sengupta (1998) on the roles of religion and locality and the reflexive role of gender in the ICDS bureaucracy, Mooij (1999) on informal coalitions of wealth accumulation within the Indian food bureaucracy; Fernandez (2003) and Sud (2003) on gender, religion and the state, Stanley (2002) on caste and class in a gold industrial cluster; Roman (2004) on caste, class and gender in the socialisation to work of a local labour force; Meagher (2004) on “identity economics” and Harrison, forthcoming, on the ways development NGOs are embedded in the economy, institutions of identity and party politics; see Harriss-White (2003, chs 1, 4 and 9) for a general statement for India and [with Janakarajan and others 2004], for the roles of gender, caste and class in the economy and state and for the consequences for state capacity of “institutional scarcity” caused by lack of resources. This paper is a summary of Jairaj (2005). Of course there is a well established and growing literature in politics and political sociology worldwide on the role of phenomena such as gender and caste in politics and the state, see Corbridge and Harriss (2002) for a review of caste, Goetz (1996) for gender and Midgal (1988 and 1994) for an authoritative statement about the ambiguous siting of the state in the web of social organisations competing over the ordering of social life. See Khan (2000, 2006) who justifies confining his analytical toolkit to class and faction on grounds of parsimony.

6 Sen (1999). 7 See Myrdal (1967) for a powerful statement of this expectation. See

Harriss-White (2003) for its refutation. 8 Majid (1994), Basile and Harriss-White (2000). 9 Weber is still key to our understanding of the technical superiority of

the bureaucracy: “precision, speed, unambiguity, knowledge of the files, continuity, discretion, unity, strict-subordination, reduction of friction and of material and personal costs – these are raised to the optimum point in the strictly bureaucratic administration, and especially its monocratic form” [Weber 1978, Vol 2, p 973].

10 This has implications for the body of literature theorising the state and the common practice of empirical studies to extrapolate from one sector to a general conclusion. See Mooij (1999) for a critical example of the

food bureaucracy and Horscoft (forthcoming), for a general statement.

11 Schumpeter (1991, p 7) in Moore (2004, pp 298, 301-03).

12 Nerré (2001).

13 Moore (2004, pp 299, 305-07).

14 Khan and Jomo (2000); Harriss-White (2006).

15 Schmölders (1970).


17 Economic Survey (2003-04); Roy (1995).

18 Chellaiah (2003), Times of India, April 1, 2005.

19 67.2 per cent to be precise in 2003 with 15 per cent derived from state excise, 8.5 per cent from registration and stamp duty, 5 per cent from vehicle tax and the rest from other minor sources, government of Tamil Nadu (2003).

20 The seventh schedule of the Indian Constitution stipulates the assignment of fiscal responsibilities and specifies the domains of central and state governments [Govinda Rao 1997, p 228]. Roughly, the powers to levy taxes on external trade and excise duty on goods manufactured in India (other than alcohol and narcotics) lies with the centre, as does income tax. States may tax alcohol, narcotics, the sale and purchase of goods other than newspapers and tax motor vehicles [Bagchi 1997].

21 Citizens’ charter, commercial taxes department, government of Tamil Nadu (2003).

22 The research was conducted over three months in Tamil Nadu in 2004. The method deployed was that of semi-structured interviews with stakeholders. Structure was provided by the concepts of tax mentality, tax morality and tax discipline. The sample of five businessmen and five tax consultants originated in industry specific yellow pages on the web and was built up through snowballing, which led to the two business associations studied. Seven ST officials were interviewed at all levels of the department. Official documents were also collected and analysed critically. Insights were gained through confidential privileged admission and where possible this was triangulated by stakeholders representing other interests. In general only triangulated evidence is used in this essay. Confidential documents and written evidence was also provided to AJ. All confidential evidence has been used here without attribution. The key omissions in this material are the absence of a gender analysis, the direct evidence of party politicians and the bias caused by the metropolitan nature of the field sites – though Chennai district division provides 55 per cent of all receipts under the ST department. See Jairaj (2005) for a full account of fieldwork.

23 Das (2001).

24 See Jeffery and Jeffery (1998), Mooij (1999), Harriss (1984), Harriss-White (2003), Kjellberg and Banik (2000) for examples based on field research.

25 Ten acts are listed on the department’s website: misc/ctaxpolicy-2003.htm

26 A lakh is 1,00,000. Rs 3 lakh was worth about £3.6k using 2005 exchange rates.

27 For most goods the taxable turnover is the value of the first sale within the state. A new resale tax on second and subsequent sales was introduced in 2002. There are also 11 classes of goods on which tax is levied on the last purchase. Exceptions include cement which is subject to a multipoint tax and Indian-made foreign liquor (IMFL) which is taxed at first and second sales. For dealers with a taxable turnover in excess of Rs 10 crore (a crore is Rs 10 million) an additional ST of 1 to 3 per cent is levied [Chellaiah 2003].

28 Basile and Harriss-White (2000).

29 Guhan and Bharathan (1988), Subramanian (1999), Widlund (2003).

30 Basile and Harriss-White (2000) and Harriss-White (2003).

31 The state is divided into 10 assessment divisions headed by deputy commissioners, further divided into 40 ST districts administered by assistant commissioners. Chennai and Coimbatore have 323 assessment circles, most of which are headed by CT officials.

32 Enforcement is devoted to tax evasion and undertakes inspections. It has seven divisions headed by deputy commissioners, 10 assistant commissioners and 15 CT officials. There are also 29 checkposts and 48 roving squads.

33 Audit has 40 specialist auditors plus a follow-up cell in the office of the commissioner of CT.

34 Appeals have three levels. The first layer consists of 20 assistant commissioners; the second dealing with appeals from the first layer has four benches, two in Chennai, and one each in Madurai, and Coimbatore. The third tribunal in Chennai is for “special appeals”.

35 Appellate is controlled by the chairman of the TNST appellate tribunal in Chennai.

36 The chief district administrator, who is often an outsider to the state in the earlier part of his/her career. A district has a population of about two to three million.

37 The confederation of Indian industries, the Madras chamber of commerce and industry, farmers’ groups, trade associations, state banks and quango finance institutions.

38 Das (2001); Kjellborg and Banik (2000).

39 Kalecki (1972). The average private sector wage for a graduate is Rs 9 k to 12 k (£109-146 per month). A commercial taxes official earns between Rs 8 and 13.5 k per month but salaries of collection inspectors are lower at Rs 4-6 k.

40 Approximately £12 m.

41 Government of Tamil Nadu (2003).

42 Guhan and Bharathan (1988); SIDCO (2005).

43 In Coimbatore district, “Annur groundnuts traders lobbied the Coimbatore district collector, the district supply officials and the deputy commissioner of commercial taxes over penalty fines on stocks and unlicensed trade, winning technically illegal concessions. They launched a mass local agitation against the excesses of vigilance squads and can now carry on massive evasion of taxes” [Harriss 1981, p 451]. See also Harriss (1984).

44 ST officials consider it small. One estimate of 100 per cent non-compliance was 2 per cent of total registered dealers and Rs 2-3 crore lost revenue. However, field research on agro-commercial firms in 1980 and metropolitan businesses in 2004 -05 suggests that this is a gross underestimate [Harriss 1984].

45 An example is the powerloom textile industry in Erode. According to official statistics, the weekly market (‘sandai’) collects textile manufacturers from all over India to trade here and the average turnover is about Rs 5 crore [SIDCO 2005]. The powerloom textile industry is a large source of income in Erode. However, revenue capture is extremely low. Power loom owners are from the dominant land-owning classes; factories are constructed on low value dryland sites using agricultural electricity which is supplied with a heavy subsidy – practically free. Income from powerlooms is declared as income from agricultural production and, though liable for tax, it is untaxed. If compelled by ST officials to declare production, their evasive under-declaration is reckoned to be by about 50 per cent.

46 Jewellery is a sector in which non-local migrant castes are important. Receipts are rarely issued on transactions so consumers connive to avoid ST. Negotiated sums, said to be about Rs 10-15 k per firm per year are supplied by jewellers to ST officials so that these firms are not inspected. Such sums, part bribe, part ST, represent an extremely small proportion of actual taxable output.

47 Ad hoc implementation of tax collection includes the requisitioning of account books without corroborating evidence from banks, which when repeated acts as an incentive to fake accounts.

48 Dey and Roy (2005).

49 Harriss’ 1980 study of ST on groundnuts which compared official revenue with data on gross outputs from field interviews suggested that 90 per cent of tax was evaded [Harriss 1984]. One TN tax consultant who was a retired ST employee estimated (though this could not be corroborated) that as much as Rs 6,000 crore (£7.2 billion) might be uncollected.

50 Paul and Shah (1997).

51 It is not required to do this by law. Existing legislation on information states that public agencies are not required to divulge information about specific actions and decisions to the public [Paul and Shah 1997].

52 Nerre (2001).

53 Roy’s research showed that leakages from the state due to corruption were one-twentieth those due to tax evasion (1996).

54 Guhan (1997).

55 Migdal (1988).

56 Harriss-White (2003, Ch 4).


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