Taxes: Keep it Simple

Published: 01st March 2016 06:00 AM  |   Last Updated: 01st March 2016 08:14 AM   |  A+A-

This Budget is unreal. It does not address the problems of the real economy, business activity and the international financial crisis. Our banks and their corporate borrowers are both technically bankrupt (non-performing assets of Rs 1.74 lakh crore plus), the rupee’s external value has fallen by half over the last 10 years, government debt is Rs 62 lakh crore (with annual interest of Rs 4.27 lakh crore), government salary bill huge (Rs 1.16 lakh crore) and subsidies at Rs 2.61 lakh crore, a scam. Instead of boldly addressing the decade-old crisis, the 2016-17 budget disappoints.

The NDA government led by Prime Minister Narendra Modi was expected to radically change the tax system. A scheme was mooted by ArthKranti of abolishing all central and state taxes and replacing them with a simple 2 per cent banking transaction tax, which was expected to yield as much or more, than the current complex system. Presentations about this were made to important politicians. Responses from the BJP’s Big Three were: Modi (“The present taxation system is a burden on the common man. There is a need to introduce a new system”), Nitin Gadkari (“Those 3.5 lakh people (tax officials) will not be required anymore”), party president Rajnath Singh (“Why should we pay income tax?”). There was excitement and hope in the air.

For 2014-15, the central direct and indirect taxes were estimated at Rs 13.5 lakh crore while all states taxes gathered were estimated at Rs 8.40 lakh crore taking all-India taxes to Rs 22 lakh crore. The national income for 2014-15 was Rs 124 lakh crore (for 125 crore citizens), thus the taxes collected were 18 per cent of income — near the Mahabharata rate of one-sixth!

The 2016 Economic Survey said, “In the Receipts Budget for 2014-15... the aggregate revenue foregone (due to exemptions) from central taxes (both direct and indirect is Rs 5.66 lakh crore for 2012-13 and is projected to be Rs 5.73 lakh crore for 2013-14” (p.31). So, as much escapes the central tax system as is collected by it! The state figures would be similar. If the system is so flawed, with such large exemptions legally available, apart from the taxes lost illegally, then radical change is needed. What is to be done?

First, we must give up the notion that we ushered in socialism by taxing the rich and providing for the poor. In the past 68 years, all that we have done is to impoverish the “old” rich and create a class of “new rich”. Despite what the Preamble of the Indian Constitution says, we are not a “socialist” republic but a capitalist one!

Second, the idea that the poor are not taxed is false. Half of central and all of state tax revenue comes from indirect taxes on products and services paid by every consumer, including the poor. 

Third, for December 2015, the Reserve Bank of India reported electronic bank transactions of the value of Rs 68,92,400 crore (Rs 10,21,100 crore between banks and Rs 58,71,200 crore by bank customers). Multiplying only the customer transactions by two (payer and receiver) and by 12 (months) you get an annual estimate of Rs 1,409 lakh crore of electronic transactions (this does not include cheque and draft transactions which could be much more than this figure). Even 2 per cent of only electronic transactions could yield Rs 28 lakh crore annually. On all bank transactions it could yield Rs 50 lakh crore or more.

If this were implemented, we would have huge budget surpluses, be able to pay off public debt and be able to invest in infrastructure. To implement this tax, only software is needed to deduct it from bank accounts and credit it to the exchequer. We could then dispense with paper work, tax deductible at source (TDS), tax returns, accountants and 3.5 lakh income tax, sales tax and excise officials!

Fourth, 500 and 1000 rupee notes worth Rs 5 lakh crore and Rs 3.5 lakh crore respectively, together constitute 82 per cent of the total currency and should be withdrawn. This would make the system more robust, destroy black money and end counterfeiting of our notes by Pakistan’s Inter-Services Intelligence.

With the growth of banking, credit card usage and organised markets, cash transactions are fast declining.

Only those who take and give bribes, spend in elections, perform lavish weddings, buy or sell real estate among other such activities need to deal with ‘black’ money. This scheme would bring black money hoards into the banking system. Agriculturalists, who are not taxed by states on their income, would pay the 2 per cent tax on their bank transactions and join the rest of us. The contested Goods and Sales Tax would not be needed.

Transaction tax receipts would grow as the economy grew and as cash transactions decreased. The states would get their taxes from the banking system, automatically after their shares were determined by a Finance Commission. This would be the Second Liberation — after India’s Independence — and drive the economy and people forward towards higher growth and welfare.

Does the BJP have the guts to do it?

 

Former Dean, Research & Consultancy, Administrative Staff College of India

E-Mail: gautam.pingle@gmail.com

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