This paper attempts to measure the impact of the structure of income tax rates on compliance, and tax revenue. Compliance is simply defined as the ratio of people who file taxes to the magnitude of people who should be filing taxes. For example, in 2001-02, it is estimated that there were 62,000 individuals whose returns indicated that their taxable income was above Rs. 10 lacs. The earner income distribution in India suggests that there were 126,000 individuals belonging to this income class; hence, the compliance ratio for this class is 62 divided by 127 or 49.2 percent.

The compliance levels in Western economies is close to 100 percent for nearly all the income classes - which maybe one reason why the issue of tax compliance1 is not a much researched topic. The Indian tax system has been continually been under reform since the 80s; there have been several tax administration improvements, and tax rate changes - most prominently in 1997, but also before that in 1993-94 and in the eighties. The effect of these reforms has been tangible - direct tax revenues have increased from 1.9 percent of GDP in 1990-91 to 3.8 percent in 2003-04. Personal income tax collections (the subject matter of this paper) have increased from 0.9 percent in 1990-91 to 1.5 percent in 2003-04. The most significant tax change was that which occurred in 1997, when the entire tax structure moved downwards, providing economists with a made-to-order tax cut experiment. Surprisingly, this tax reform has not been much studied for clues about the effect of tax cuts on the filing of tax returns (compliance elasticity) and the chain effect on tax revenue (revenue elasticity). While studies have conjectured about its revenue enhancing effects (e.g. Shome et. al. (2001)), only Bhalla(2002) "Tax Compliance in India" has so far presented estimates of the effect on compliance of tax cuts.2 This paper is an extension of that earlier study; a possibly first empirical attempt at estimating compliance rates across different income groups and  different years.

1 A different form of tax compliance is in reporting the correct income for a given tax slab; this issue is discussed later when "bunching" of tax returns is discussed (see Box 1). 2 See the important Dasgupta (2004) study on the costs of compliance i.e. how much taxpayers pay in order not to comply. Our paper is concerned with estimating the number of people who actually comply, not the costs they undergo not to comply or to understate incomes, as done by Dasgupta. His earlier 2002 study does indirectly hint at an estimate of increase in compliance with tax reforms.