AN EMPIRICAL RESEARCH ON TAX LITERACY

AMONG SALARIED INDIVIDUALS OF

RAJASTHAN
ABSTRACT

1. Purpose
The purpose of this paper is to identify the awareness level of the prevailing personal
taxation system among the tax payers of various government & private institutions, in
Rajasthan. This paper provides a brief review about the basic financial knowledge,
attitude of people towards tax filing, their perception about tax rates, and the ways in
which this this literacy rate can be improved.

2. Design/Methodology/Approach
The research will be conducted through a questionnaire which will be sent via e-mail
with attached Google form to the respondents. 500 employees from both the
government as well as private institutions of Rajasthan will be taken into account to
reach the conclusions.
Prior to this research a pilot survey will be conducted on the group of 35 individuals,
who will be asked to fill the questionnaire in the same manner, to reach the expected
findings.

3. Findings
Findings of the research suggest that the tax literacy is very low in India as compared
to other countries. It doesn’t matter at all that whether a person is working in a
government or a private institution, none of them have an absolute idea about the
determination of their tax liability, tax filing, and about the deductions u/s 80 of
Income Tax Act 1961, with the help of which they can save a lot of their hard earned
 money. Now time has come when the government as well as the group of individuals
should take the initiative to increase this tax literacy rate.

4. Originality/value
This paper helps the readers to understand that why it is important to file the income
tax returns by their own, instead of relying on the agents. It gives the prime reasons
behind the hesitation of not filling it by their own & also depicts a picture of tax as
well as financial literacy prevailing among individuals of Rajasthan.

5. Keywords
Income tax regimes; financial literacy; tax liability; and deductions.

INTRODUCTION

 Financial literacy refers to the knowledge and understanding of knowing how money is

earned, expended, and saved. It also covers the skills and ability to use the hard earned
money. Tax literacy is one of the most important branches of financial literacy. Tax literacy
is the knowledge that a person should bear in order to manage the genuine issues regarding
personal taxation in an effective manner. One should bear the knowledge about filing tax
returns, self-assessing the tax liability, ways to save the taxes by availing numerous deduction
provided by the govt. The Government of India is continuously trying to boost the tax morale
of its citizens. Numerous measures have been adopted by the governments of different
countries to raise the level of tax literacy. For this purpose RBI has created critical volume of
literature and provided it on its websites in 13 different languages. It also celebrates a
financial literacy week to let the Indians know about the importance of finance. It is also
indulged in financial awareness messages (FAME) which targets particular sectors and
influences their financial knowledge.

Most of the countries focus on the knowledge enhancement of the young generations while
others tries to cover entire population .Millennial & Centennials need to be more financially
literate than generation X. Research from all around the world reveals the low levels of
financial literacy among individuals (Chen and Volpe, 1998; Beal and Delpachitra, 2003;
Lusardi and Mitchell, 2007; Mandell, 2008). Indians make a large number of financial
decisions throughout their life time. When a child begins with his school he starts managing
the pocket money, when he gets job he tries to manage the salary, than tries to arrange the
finances for marriage, post marriage thinks about the expenditure on upbringing of children,
their education, their marriages & management of post retirement funds for self. In all these
activities a finance person goes through with it smoothly. Except from pocket money all the
above expenses needs the tax management. One can avail rebates or deductions while
managing the above expense, and in case of lack of knowledge in these fields, he may end up
spending a lot of money and will give up all the chances of saving hard earned money.

It is believed that Indians have various perceptions towards the prevailing taxation system.
They think that taxation system is complex, the rates are high and that’s why they try to
evade the taxes. The main reason behind this is the very low level of basic knowledge on
taxation. In India, tax education is provided in the form of either a University Bachelor
degree in Law & taxes; Accounting & taxes degree; vocational training in finance or willing
people can avail certified courses from various sites. Even the people who have completed
their bachelor’s degree in Accounting don’t know how to put their theoretical knowledge in
the practical world

According to one of the research in India, the level of tax literacy varies significantly among
respondents and it is affected by their genders, age, varied education, different incomes; types
of employment and place of work. [Bhushan, Medury (2013)]. The presented paper focuses
on providing an overview of this research, primary data of 500 respondents from public and
private sector through a questionnaire and judges the level of tax practice on the basis of tax
literacy testing. The paper is concluded by providing the results of a pilot survey conducted
using the Google forms.

RESEARCH PROBLEM

It is known that Indian’s literacy rate is high but majority of them are financially illiterate.
Financial illiteracy serves as a hurdle in managing the finances and individuals loses the
opportunity of saving the money from taxes.

Earlier conducted researches reveal that the socio-economic & demographic factors influence
the level of financial and tax literacy. If age is considered than young and older people shows
lower literacy rate in the field of personal taxation. Women are also considered to have low
finance literacy and very low tax literacy. (Lusardi and Mitchell, 2011; Lusardi and Tufano,
2015).

People tries to analyze the budget at the end of February each year, but before analyzing it
they need to take a deep dive into their basic financial knowledge. One of the paper
concluded that the total tax literacy level of 57.08% respondents among all the respondents is
not encouraging. It depicts that in India people were not aware about their personal taxation
related matters, when this research was conducted. This paper to adopt the necessary
measures by government and private institutions to increase awareness about tax related
matters amongst the population. (Bhushan and Medury, June2013).

This research will be conducted to check the level of tax literacy of Rajasthan’s people in this
digitalized era. All the individuals have access to numerous opportunities to learn from
various portals provided by the government as well as private institutions. Some of them are
free of cost while some are charging merely negligible amount from the subscribers. An
attempt will be made to check that whether the tax literacy of the salaried employees has
increased or not. If this rate has been increased than what are the measures they have adopted
to be proficient in it & what all they think should be done to boost up this rate. This will be
the only subjective type question in the questionnaire & will be optional. If the results won’t
be favorable than the required course of action can be taken by the Government of Rajasthan.

This research may help the central and state Governments in formulating the strategy to boost
up the rate if it is low (expected result). If this rate comes to be high than government can
adopt the same policy that it has used to boost this rate, in various other sectors. One such
prominent sector is artificial intelligence.

STUDY GOALS

The research will have following specific objectives-

 To analyze the knowledge of salaried class of public and private sectors on different
tax planning measures provided under The Income Tax Act, 1961.
 To ascertain the perception of citizens towards current taxation system.
 To check the reasons behind the people filing or not filing returns by their own.
There are 2 contradictory researches that have been conducted in this field. One research
conducted in USA, 2006 says that people having good knowledge of finance have more
chances of suffering finance frauds whereas other report released by The FINRA Investor
Education Foundation (FINRA Foundation), Washington titled: “Exposed to scams: what
separates victims from non-victims” shows that individuals who are socially isolated and
have low financial literacy have more chances of losing their money to a fraudulent person.

Literature review

The literature regarding the tax literacy is relatively poor than that available researches on
financial literacy.

Various studies have been conducted till date on taxation and on the various aspects of
financial literacy, by the scholars, research institutions, and Indian Government spanning
over a period of nearly seven decades. The prime focus of all these studies was on identifying
the defects in prevailing system and depicted the need for reforms. One of the most important
facts that have been missed till date is the lack of importance on personal taxation and the
literacy level of people regarding it.

Some researchers suggested that there is a link between the tax literacy and tax compliance.
They proved through their researches that if people have high level of tax literacy then there
are more chances that citizens will file their ITRs and will comply with the requirements.
(Huston 2010; Remund 2010; Zait and Bertea, 2014; Dajana Cvrlje, 2015; Abdul and
Sunitha, 2016).

As per one of the research low tax literacy forces a country to rely on import and export taxes
(Riezman and Slemrod, 1987). Ghura (1998) analyzed the effect of tax literacy rate on the tax
revenues and examined that there is a direct relationship between bot these variables. Author
highlighted that in case of the corruption, the magnitude and statistical significance of this
impact starts decreasing. A book by University of Chicago mentions that the employers act as
intervening agents for the pension savings. So the employers somehow have a connection
with employees in terms of taxation. They can also provide opportunities to the employees to
learn and gain knowledge about finance and personal taxation.
The apex bank of India i.e. Reserve Bank of India has also published a booklet on National
Strategy for Financial Education which outlines the benefits of financial and taxation
education. In this booklet they also accepted the fact that Indian population is financially
excluded as of now. RBI has the vision of having a financially aware and empowered India.

Research method

Paradigm- It is believed that around 76% people of India are unable to understand the
financial concepts. They incur losses because of this as they leave not only the chances to
availing rebates and deductions but also pay around ₹2500- ₹3500 as their commission.

1. Collection of primary data

Primary data will be collected through a structured questionnaire which will be sent to
the respondents working in different sectors of Rajasthan via email. The questionnaire
will be formed using the Google forms. The questions will be indulged in the
questionnaire in order to judge the basic knowledge of respondents. It will begin with
the simplest question and then simultaneously the level of difficulty will increase.
There are 22 questions in the questionnaire. 21 question will be close ended while one
question will be open ended, in which we will seek the suggestions for the ways in
which the current personal taxation system can be managed and the ways through
which the citizens morale can be boosted to learn about tax system.

2. Sampling design

Income tax assesse from the private and public sector will be taken as the population
of research. As they are the ones having continuous income and that’s why they are
liable to pay taxes. Around 500 salaried people will be asked to fill the questionnaires
who are the income tax assesse in the Assessment year 2020-21. Prior to this research,
a pilot survey will be conducted on sample size of 35 respondents to judge the
expected finding of the upcoming research.

3. Variables for the research

  Assessment year and previous year
 Awareness about the recent changes in slab rates of income tax
 Various exemptions available under income tax
 Deductions available under the income tax act.
 Knowledge about different forms under Income tax act
 Perception about prevailing income tax system.

4. Analysis

It will be done by analyzing the response of respondents in the Google spreadsheets

which will be linked directly to the questionnaire in Google form. It will give the
proportionate responses automatically. The expected results are also collected in the
same manner.

Expected results

The expected result shows the low level of tax literacy in Rajasthan. People are not even able
to tell the current assessment year accurately. To judge this expected result a pilot survey has
been conducted, the results of which are as follows:

Particulars Percentage of correct response

Current assessment year 68.6%

People filing ITR 74.3%

Current taxation system Complex-62.9%

Simple-39.1%

Tax rates Very high- 14.3%

High- 31.4%
 Neutral- 54.3%

Number of tax slabs in India 34.3%

Is minor’s income taxable in India 57.1%

Deduction for LIC u/s 150000 82.9%

Percentage of employer’s contribution towards 32.4%

PF

Standard deduction available from gross salary 17.1%

The above table shows the expected results of the proposed research. It clearly signifies that
the people do not bear the required knowledge about the taxation system.

 All the respondents covered are salaried employee; still they are unable to tell the
current assessment year with 100% accuracy.

 All the people are not even filing the ITR in Rajasthan, these people when go to avail
the loans were asked for ITR of last 2 years fails to get it even after having a good
creditworthiness.

 Majority of people feels that the taxation system is complex in India. They have also
suggested that if GOI wants to use the digitalization then they can get it as easier as
using a mobile app for payments. Individuals feel that if every bill can be filed
through just few clicks then why just same can’t be done for ITRs.

 Most of the people are neutral regarding the rates of income tax.

 Irony is that people are not aware about the prevailing tax slabs but they do bear the
knowledge regarding the available deductions.
 All the above analysis gives the conclusion that results are changing to a very little
extent. They are ready to pay the tax but also want the Government to develop some
apps for filing the returns for tax. Many of the respondents are suggesting the changes
in the school curriculum; people want the financial and tax literacy to be there.

Managerial implication

This research highlights the need of tax literacy in Rajasthan. It can help in the following
possible ways:

o The Government of Rajasthan can take the necessary actions after having a glance at
the findings which will show the low rates. It can either add the financial education in
the syllabus of the school students & can add a mandatory course at the college level
to boost the tax literacy rates. The rates of tax evasion can also be minimized by this
as citizens will know that how to save their hard earned money in a legal way. In
return the earning of government will also increase.

o Similarly, companies can also adopt this method. Companies may conduct a
workshop for the employees and can tell them the nut and bolts of the taxation
system. The employees will feel a unique a kind of belonging ness with the company
which will enhance the productivity and therefore the profits of the company.

REFERENCES

1. Chen and Volpe, 1998 ‘An analysis of personal financial literacy among college
students’ Financial Services review, volume7 issue2
2. Beal and Delpachitra (2003) ‘Financial literacy among Australian university
students’. Economic Papers: Journal of Applied Economics and Policy, 22 (1). pp. 65-
78. ISSN 0812-0439
3. Lusardi and Mitchell (2007)  ‘Financial literacy and retirement preparedness:
Evidence and implications for financial education’, Business Economics
 4. Mandel, 2008 book on the ‘financial literacy of young American adults’ Press of
University of Washington
5. Bhushan and Medury, 2013 ‘Determining Tax Literacy of Salaried Individuals - An
Empirical Analysis, Journal of Business and Management, Volume 10, Issue 6
6. Lusardi and Mitchell, 2011 ‘Financial Literacy around the world: an overview’
Journal of pension economics and finance, Volume 10, Issue 4
7. Lusardi and Tufano, 2015 ‘Debt literacy, financial experiences, and overindebtedness,
volume 14; special issue 4
8. Huston, 2010 ‘Measuring Financial Literacy’ The Journal of Consumer Affairs
9. Remund,2010 Financial Literacy Explicated: The Case for a Clearer Definition in an
Increasingly Complex Economy, The journal of Consumer Affairs; volume 44, issue
2
10. Zait and Bertea, Financial Literacy – Conceptual Definition and Proposed Approach
for a Measurement Instrument, The Journal of Accounting and Management, Volume
4, No 3 (2014)
11. Dajana cvrlje, 2015 Tax literacy as an instrument of combating and overcoming tax
system complexity, low tax morale and tax non-compliance, The Macrotheme review.
12. Kiliyani and Sivaraman, 2016, ‘The perception -reality gap in financial literacy’
International review of economic education Volume 23
13. Riezman and Slemrod, 1987 ‘Tariffs and collection cost’ Review of world economics
14. Ghura, 1998, Book on Tax revenue in Sub-Saharan Africa: Effects of economic
policies and corruption

Annexure

 Questionnaire
The questionnaire was formed on Google forms, contains 22 questions and it is as
follows:

Tax literacy
Research on Tax literacy
* Required
1) Where do you work? *
o public sector
o private sector

2) Current Assessment year *

o 2019-20
o 2020-21

3) Your academic background *

o Finance
o Non finance

4) Do you file your ITR? *

o Yes
o No
o Maybe

5) The prevailing tax system in India is: *

o complex
o simple

6) What do you think about the tax rates? *

o 1 Very low
o 2 low
o 3 neutral
o 4 high
o 5 very high

7) In which individual tax payer category do you fall?

o >60 years

o 60>80 years
o <80 years
8) How many tax slabs are there in India? *
o 3
o 7
o 4

9) Your income is classified under how many heads? *

o 3
o 5
o 2

10)Y, of 67 years is working in a company, & earning ₹2,97,000 p.a. Is he liable

to pay tax? *
o Yes
o No
o May be

11)B, of 82 years is having a income of 4,52,335 p.a. Is he liable to pay tax? *

o Yes
o No
o May be

12)How do you file your ITR? *

o By yourself
o Through agent
o Through CA
o Through income tax officials

13)Have you ever tried self-assessment tax procedure? *

o Yes
o No
o Maybe

14)Reasons of not trying to pay tax by your own *

o I fill it by my own
o Never tried
o Complexity
o Fear or hesitation of mistake

15)Do you know underpaying penalty system? *

o Yes
o No

16)Is minor's income taxable in India? *

o Yes
o No

17)What is form 26 AS for? *

o Details of TDS
o Tax passbook

18)What is the purpose of deductions in Income Tax? *

o Increases gross income
o Reduces tax liability

19)Standard deduction available from gross salary *

o 40000
o @30% of gross salary
o 50,000

20)What is the exempted amount of employer's contribution towards Provident

Fund? *
o 14% of basic salary
o 12% of basic salary

21)If you will avail Life Insurance policy for self, then you will get deduction
under: *
o u/s 80 C up to 1,50,000
o u/s 80 D up to 30,000
o u/s 80 DD up to 20000

22)What do you feel about the level of tax literacy in Country? What can be
done to improve it further?