The Loss Frame Paradox: Examining the Psychological and Economic Determinants of Tax Compliance in India Through the Lens of Behavioural Nudges

Abstract

This study examines the intersection of psychological biases and economic behaviour, mainly concentrating on how loss aversion impacts tax compliance in India. The primary research question focuses on the role of perception in tax compliance when taxation is understood as a "loss" rather than a civic duty, which is in line with loss aversion. Secondary questions probe the impact of cultural and socio-economic factors in India that moderate the loss aversion effect on taxation compliance and how some form of nudging behavioural biases can be leveraged for greater compliance. Through a literature review, this research proposes a framework for behavioural nudges, informed by the principles of behavioural economics, that can be adapted to India's diverse demographic and cultural profile. By incorporating psychological heuristics into the design of tax policies and communication strategies, the study highlights the importance of leveraging behavioural insights to create more effective tax strategies that may help reduce tax evasion and promote civic engagement. Given the limited research investigating the psychological determinants that affect tax compliance in India, this study addresses a critical gap in the literature.