Friday, February 25, 2011

A new Tax Regime

A New Tax Regime?
A single point taxation as a response to poverty, corruption and inequality

As the budget nears, we ready for one more round of tinkering with taxation. All the while, crores continue to suffer the pain and misery of abject poverty, which flourishes in the midst of great wealth. Opulence and misery live side by side.

Budgets have become meaningless rituals as most of the public finance controlling tools like taxes, subsidies have become ineffective to meet its desired goals. Contradictorily, they are boosting inflation, black money and corruption. Several propositions for tax reforms have been introduced, but not much headway has been made as poverty, corruption, inequality and its consequences keep on increasing geometrically. Has the model, standing on orthodoxy, based on traditional concepts of public finance and on conventional canons of tax law, been effective? 

No. It is time to remodel taxation. Let us recognize that the traditional models have outlived their utility and in light of the recent technological advances, propose a better model. Let us structure for the elimination of declaratory taxes and for their substitution by electronic taxes operating through the bits and bytes of clearinghouses of the banking system.

India needs an innovative and anti-dogmatic model which proposes the elimination of conventional tax models - a model that epitomizes the resurgence of the age-old concept of the Single Tax. A single tax, which in its modern version makes extensive use of non-declaratory taxes such as the "Bank Transaction Tax" (BTT).

BTT is a single point tax that is deducted directly by the bank from the credit side on every transaction. Every transaction would entail deduction by a certain amount (say 2%, to be shared between Centre, State, local government and bank in a pre-decided ratio) from the receiver end only. It would replace all existing taxes, direct and indirect taxes - Central, State and Local, with the sole exception of the Import or Custom Duty (to protect local industry from global trade balance). All direct and indirect taxes like Excise, Sales Tax, Corporation tax, Stamp duty, Service Tax, Income tax, Wealth tax etc. would be replaced by a single point BTT.

BTT would have powerful, transformational direct benefits: it would increase tax revenue by multiple magnitude, thereby reducing government debts; it is an evasion-proof tax; it is corruption-proof; it has negligible collection cost; it is simple, non-declaratory, automatically collected, requires no bureaucratic procedures of the taxpayer, and causes no significant distortion in market functioning. The transactions tax would be both a powerful tool for achieving internal tax equity, and a source of solid increased revenue for the government. It would prevent tax evasion and would establish a pattern of tax incidence, that makes everybody pay in an equitable manner. And as all pay their taxes, all would pay less.

The indirect advantage would be that BTT would increase banking transactions - bringing in the large informal sector in the fold of the banks, thus creating credit worthiness for crores, adding to credit expansion, while increasing net banking revenue. Withdrawal of all taxes would reduce the prices of all commodities by around 30%, leading to reduction in poverty and increase in purchasing power of society. A substantial share of the BTT for the banks would create globally competitive interest rates and therefore cheap and easy capital, enhanced market demand and stimulation of industry, trade and supply. This would mean higher employment opportunities and the restoration of social security.

Some cautions need to be exercised and some supplementary measures like "currency denomination compression" to make this India's finest response to poverty and corruption.

Mayank Gandhi


Anonymous said...

Dear Shri Gandhi,
There is no doubt that making the economy totally cashless and introducing BTT while abolishing all other taxes (may be except customs) will reduce the corruption and increase tax collection to 99.9999% efficiency. But the issue is why IAC is not proposing this solution as a long term measure by their party if voted to power, apart from short term measure i.e. Lokpal. I am sure in next 2 years Mr Kejriwal and Co can convince the people about this economic reforms. Wish you all the best.

Anonymous said...

I am in 100% agreement with you.
This is very simple solution to eradicate corruption totally. This is not an alternative to Lokpal but addition to it. To cure cancer of corruption, Lokpal is immediate surgery that is needed and this one is a post operative and pre operative preparation to keep the country fit. The solution goes like this.
1. Let all people of this country have bank accounts. This is popularly known as Total Financial Inclusion (TFI). This programme is already started by GoI and RBI and in many districts rate of Total Financial Inclusion is more than 90% now. It is not impossible to do this. Imagine, even GoI makes NREGA payments only through bank accounts. So if govt can manage to get accounts of poorest of poor people from far flung areas to be opened up, there is no reason why this movement of TFI can be extended to cover the whole population.
2. Aadhar/UID scheme can be made best use of to ensure that all people have either one or more bank accounts. Cross verification can be done in many ways. By cross tallying with voters’ list or municipality house list or something similar.
3. Increase mobile towers to such an extent that 100% of villages are covered.
4. Now simultaneously, start developing and increasing the mechanisms/systems to allow account to account transfers. Apart from cheques which are really not that reliable due to risk of bouncing, following options should be developed in a big way.
5. Simultaneously start mobile banking in big big way. Have an application developed where anyone can transfer money to anyone else’s account using sms in shortest possible time. These applications are already there. But make it more user friendly and fast.
6. Further, make machines which allow money transactions using biometrics (thumb impressions). This should be similar to credit/debit card swipe machines but where instead of card, thumb may be used. So you put a thumb, enter the amount and press enter.
7. Make small electronic instruments which can be used to transfer money to other instruments. Imagine a small I pod like thing with socket and also wireless technology to allow it to pair with similar instrument. This instrument should work as your mechanized wallet. This instrument shall be connected with central server and should keep real time information of the amount of money in your account. When you pair this machine with another one, it should be possible for you to transfer money from your account to the other one’s account.
8. So ultimately, the people will have following choice to transfer money from one account to the other.
a. Cheques, DDs and such other traditional “paper” mechanisms.
b. E banking or net banking or online transactions.
c. Credit/debit cards.
d. Biometric bases transaction machines.
e. Special mechanized wallets.
9. If mass production of biometric bases transaction machines and mechanized wallets is taken up, it shouldn’t cost more than a few hundred rupees due to economy of scale.
10. Now with such launch pad available, remove the cash totally from circulation. Except may be coins of upto 10 rupees. No note/coin of higher dominion should be available in the economy. This means, with this system in place, all are now forced to go for e transactions.
11. Foreigners entering into India for short trips can be given such machines on rent with minimal formalities.
12. If this is done 99.99% corruption will end.

Anonymous said...

Why corruption will end with this?
1. Money or cash is the only thing which can be used for personal benefit. Even gold can’t be used as such. If people do transactions in gold due to absence of cash, first they risk themselves to impure gold. Secondly even if they get gold, they can’t use it because they will have to sell it to someone who will give them cash in return which is not possible because we don’t have cash in the system now.
2. Secondly, investment in the real estate etc will be dead wood. What will any politician can do of these thousands of acres of land or hundreds of flats if he can’t convert them into liquid cash on the eve of elections for his election expenses?
3. No one can seek illegal gratification. Imagine, a patwari or police constable asking for money. Will he be giving his account number to the other person to allow him to deposit money into it. And even at higher end like ministers or senior IAS officers, how are they going to receive the bribe?
4. Quality of administration and life will also increase substantially. For example, if you can’t take bribe there is no incentive for engineer of PWD to allow the contractor to go ahead with sub standard work. Police will have incentive for doing shoddy investigation. So qualitative aspect of administration will improve.
5. There will not be any robbery or dacoity or theft. Yes, not even of gold ornaments. Where are these dacoits going to sell them otherwise? In fact all crimes will decrease. Ultimately, except crimes of passion, most other crimes are committed directly or indirectly for money.

Anonymous said...

6. There won’t be any chance of tax evasion. Everything is on record. Each and every transaction. So how can you evade the tax?
7. Doctor can’t take cut percentage from pharmacist or laboratory for referring his patients there. So he will prescribe only those drugs and tests which are really necessary.
8. Election process will be cleansed up. No more money distribution. People will vote without getting bribed. And those who still want to go ahead with distribution of money will have to deposit into the bank accounts. Who is going to do that?
9. Even rickshaw walla or taxi walla can’t charge more. Whatever charge he is taking is taken through transaction on record. So the complaint against him can now be made with proof that he charged a larger amount than allowed.
10. No pilferage in schemes like PDS or NREGA or any other scheme. How are they going to sell food grains from PDS in black market when there is no cash in the system?
11. Adulteration of food etc will come down drastically. For example, to sale adulterated milk, you have to purchase adulterating substances like starch. These transactions will be on record. Even if you just add free water to the milk, even then it can be proved that you sold more milk than what you purchased and inference can be drawn against you.
12. Terrorism will be controlled to great extent. Terrorism is not possible without money. If there is no money to be given for purchase of say bicycle for planting bombs, how do you plant them? Even if you dare to do so, money trail makes it so easy to catch you. How are you going to purchase train tickets or air tickets or rent a flat without leaving a trace? How are you going to lure unemployed youth for money in absence of liquid cash in the system.
Think of any sphere of life. It is bound to improve with this system.
Western and developed economies have a lot to do with less amount of cash in the economy. Ratio of average per capita GDP to the currency note of highest dominion is one of the highest in India and it is very low in developed world. So is true about actual cash pumped into the economy as a percentage of total GDP of the country. Less amount of cash and more of banking transaction is not the end result of the development and decreased corruption. Infact, it is the mean to achieve this.
Yes, the solution suggested is an uphill task. But I couldn’t think of any simpler solution which will come even close to what this is going to achieve.
Please think of all pros and cons of this system and give it a thought.