Project Brief Investment Climate | World Bank Group 90704 Simplifying Taxation in Bihar, India Project At A Glance Results and Impacts Country/Region INDIA/South Asia • Enactment of simplified tax regime Product BUSINESS TAXATION for small businesses. THEME SMALL AND MEDIUM ENTERPRISES • Implementation of electronic tax The Bihar Tax Simplification Program began in 2009 and focuses filing and payment, among other on good governance and improved service delivery. It reduces simplification measures, expected to time and costs for small businesses and simplifies tax compliance generate private-sector savings of for larger firms through online filing and payment. The more than $7 million annually. government passed legislation for the new tax regime in 2010 • Simplification of taxpayer regime and and expanded online payment options in 2012 as part of ongoing online tax filing for large businesses service delivery reforms. decrease rent-seeking opportunities, thus reducing corruption. • Tax reforms encourage micro Context and small informal businesses to In the Indian state of Bihar, nearly two-thirds of business taxpayers participate in formal economy while surveyed stated that the process of paying taxes was more fostering good governance and burdensome than the tax itself. This was one result of a survey of broadening tax base. over 1,000 business taxpayers and 280 accountants conducted by the World Bank Group. The survey also highlighted the narrowness of the taxpayer base: The survey indicated that about half of the businesses liable to pay value added tax (VAT) are not registered. In Partnership with THE UNITED KINGDOM World Bank Group Because of an onerous tax system, many micro and small In 2012, IFC supported an initiative to improve tax payment businesses remain off-book. While they avoid the tax, they options in Bihar. The result was an expanded gateway for lose out on benefits of formalization, particularly access to e-payments that allows taxpayers to pay through more finance. than 40 banks. The tax program in Bihar also gained momentum with Our Role the help of communications and outreach in the form of Investment climate teams of the World Bank Group peer-to-peer learning events. In May 2010 and December advised Bihar’s government to reform to its tax regime to 2011, workshops organized by the team on e-governance encourage smaller business to register and streamline the in business tax administration were attended by more compliance process for larger firms. than 100 tax officials, businesspeople and bankers. Tax officials from six other “good practice” states shared how The key recommendation of the project, managed by IFC, they improved tax services by overcoming obstacles such was to segment taxpayers into two groups: small, those as information technology problems and resistance from with revenue below 4 million rupees, or around $90,000; officials. and medium to large, those with turnover above 4 million rupees. The proposal was to simplify taxation for small businesses to increase formalization, while providing larger firms with user-friendly online payment options. The government adopted a new taxpayer regime based on IFC proposals. It includes the following elements: • Small firms are required to make an annual tax payment of $225 and fill out a simple one-page return. • Medium and large firms use e-filing and e-payment systems to file their taxes. Media coverage of the tax simplification program in Forbes India. The team also recommended a series of mechanisms for improving registration, filing and payment systems in order In addition to reforming tax payment options and creating to increase their efficiency. online payment systems, the project also recently helped improve the taxpayer education system. The investment climate team worked with local governments in seven districts in India to roll out a communications campaign “It’s common sense that many more supporting the small dealer taxpayer regime. It consisted of entrepreneurs will register and come open houses, mass advertisements and hand bills as well as forward to pay taxes if procedures were a broader communications plan for border checkposts. simplified and well-communicated.” Pramod Kumar Clothing Retailer Danapur district, Bihar Contact Rajul Awasthi | Senior Private Sector Development Specialist | Investment Climate Email: RAwasthi@worldbank.org | TEL: 1-202-473-1229 | www.wbginvestmentclimate.org