Age Debate: The tax of all taxes

The poor will end up paying a lot more
The idea that all taxes in India should be abolished, except import duty, and replaced by a bank transaction tax (BTT) is a deeply flawed one for a number of reasons. First, there are only few countries in the world that do not have income-tax — oil rich countries like Saudi Arabia, Qatar, the UAE, Bahrain or tax havens like Cayman Islands, Bermuda, Bahamas, etc., fall in this category. India does not have a revenue source like the oil-rich Gulf countries nor can it afford to be a tax haven given its huge population and welfare commitments. Do we want to convert India into an emirate or a tax haven and become a global centre for money-laundering?

In the advanced capitalist countries within the OECD group, the average tax-GDP ratio is 34 per cent (in 2014), with Denmark (50.9 per cent) topping the list, followed by France (45.2 per cent) and Belgium (44.7 per cent). The US, which is the largest free market economy in the world, has a tax-GDP ratio of 26 per cent. In contrast, the tax-GDP ratio in India (Central and state taxes combined) was only 16.6 per cent in 2015-16.

When the tax-GDP ratio in India is so low, the emphasis of tax reforms should be on widening the direct tax base and effectively taxing corporations and the rich by doing away with myriad exemptions and avenues for tax evasion. The proposed BTT militates against this objective because it proposes a total switch from taxing income and profits to taxing expenditure, and that too through banking transactions. This goes against the very principle on which modern taxation systems have been based — the ability to pay. The BTT would levy the same rate of taxes on transactions, irrespective of whether the transaction is being conducted by the rich or the poor. This is highly regressive because the consumption propensity of the poor is much higher and hence the poor would end up paying more taxes than the rich.

Moreover, the BTT proposal suffers from the same utopian vision of a “cashless” society, which also underlies the recent decision to demonetise Rs 500 and Rs 1,000 currency notes. Various estimates suggest that not more than half of the country’s population has a bank account. India is very far from attaining the level of financial and digital literacy required to channel bulk of the country’s market transactions through bank transactions. Seven decades after Independence, we have failed to even provide electricity or primary education to a large section of our population. And yet we are dreaming of 1.25 billion people conducting much of their day-to-day businesses through online transactions.

Imposition of BTT will also have very perverse implications in terms of squeezing expenditure, which will deflate the economy and can actually end up pushing people out of the formal banking system to escape taxation. The rights of states will also get severely jeopardised, since they will lose all their powers in deciding tax rates for different kinds of economic activities. It will therefore constitute an assault on the federal character of the Indian Constitution.

Subhanil Chowdhury is an economist and is currently an assistant professor (economics) at the Institute of Development Studies, Kolkata

Commodities will become cheaper for all
The government collects tax to run the administration. At present, it levies indirect taxation to the tune of 35 per cent on every commodity. This year, the government was estimated to collect Rs 10.54 lakh crores out of a total Budget of Rs 19.78 lakh crores. The government is facing a fiscal deficit of Rs 5.33 lakh crores in this year’s Budget. To reduce the deficit various committees have suggested an increase in the tax base. But surprisingly, when it comes to tax base, everybody talks of only income-tax, which is a direct tax.

Arthakranti proposes that in order to increase the tax base, the government must reduce the tax rate as well. If the country works in digital currency then all financial transactions can be taxed. Looking at the present banking volume as per the calculation of Arthakranti, the government is expected to recover more revenue than it does currently if it attracts only two per cent banking transaction tax.

To make this possible, the proposal says that all taxation, except import duties and customs duties, needs to be removed. Customs duty and import duty is required to protect domestic industry and control imports. This will immediately make all commodities cheaper due to the absence of taxes. We can even think of petrol at Rs 42 per litre, to give an example.

In the second step, taxation of two per cent is attracted on the amount deposited in any account. This two per cent is divided into the shares of Centre, state and local taxation system. To avoid flaws, high denomination notes should be removed. Various reports have suggested that more that 70 per cent of the population is earning less that Rs 25 per day. So that 74 per cent population is not affected by tax collection but gets the benefit of removal of indirect tax and gets cheaper commodities. This confirms that only the population having bank accounts will be taxed, but that too only two per cent.

Any cash transaction is exempted from tax, that means there is simply no question of maintaining sales tax, invoice, etc. Thus, the businessman is free from tax saving/tax evasion process.

Lastly, it is suggested that transactions above a fixed amount in cash should not have legal protection. This is to make more people go digital.

Akodara in Gujarat has transformed into a completely digital village that confirms there is no problem in making a village cashless, but Arthakranti moves on low cash rather than no cash, which is still more practical.

The requirement of implementation will be more banks in operation. With the present demonetisation, card usage has doubled and transactions through digital wallets have increased manifolds, which confirms people will convert in no time. We have been working on cash for 70 years, to change the mentality of people will take time; and there is no impracticality in this transaction tax.

When the government changed securities transactions via Demat accounts, people took time and today transactions have become safer. Similarly, when online booking for trains, airlines and buses started, people took some time to adjust but today more transactions are done online. So this is extremely easy and doable, but the only thing needed is accepting it as a policy.

Adarsh Dhawan is a member of think tank Arthakranti, which is credited to be the brain behind the demonetisation move