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How To Abolish All Taxes And Keep The Economy - BMR Advisors

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How To Abolish All Taxes And Keep The Economy Ticking
Source: Business World
January 18, 2014
Radical versus Simplifying; Quixotic versus Fantastic; Far-fetched vs Forward-looking. These are
just a few of the pros and cons used to describe an alternate tax proposal that had caught the
imagination of the Bharatiya Janata Party (BJP), though briefly.
The proposal, which preferred the withdrawal of the 32-odd taxes levied across the country
(except import duty) in return for a standard 2 per cent banking transaction tax (BTT) on every
banking activity, had the blessings of some top BJP functionaries, though it did not gain traction
among the majority.
To be fair, the proposal was originally mooted by an unknown Pune-based NGO Arthakranti
Pratishthan some 12 years ago. It was one of the several proposals BJP received as it sat down
to prepare its economic agenda. Spiritual guru Ramdev was excited about it, so was Art of Living
Foundation chief Sri Sri Ravi Shankar.
Their interest was an indication of the layman’s interest in seeing a simplified tax structure where
one could take home 98 per cent of one’s salary, against the 67 per cent (in case you are in the
higher income bracket) today! Further, there will not be any hidden (indirect) tax component in
what you buy using that money. Because, the 2 per cent BTT is to be paid by the receiver of
money, not the payer.
Utopian, Right?
Anil S Bokil, a Maharashtra-based engineer, who chairs Arthakranti and headed the committee
that fathered the proposal, is obviously convinced it’s the best way to simplify our frustratingly
complex tax network. Especially, since he claims it can potentially double the central
government’s tax earnings from the current Rs 12 lakh crore and eliminate black money in the
system. He has a healthy pool of both believers and disbelievers.
Since only a fraction of the current day-to-day financial transaction happens through the banks,
the success of the scheme depends on diverting all monetary transactions through the banking
system (Arthakranti proposes withdrawing all bank notes above Rs 50). Besides, a complete
financial inclusion (RBI has proposed a mandatory bank account for all adult Indians by 2016)
becomes the basic framework that needs to be in place before the proposal succeeds.
Experts doubt though. “In a country where 2-3 times of the GDP is black money, how can you do
this? Any abolition (of tax or bank notes) takes 4-5 years. It will encourage black money” Girish
Vanvari, Co head of tax, KPMG India says. Rahul Garg, leader, direct tax
PricewaterhouseCoopers (PWC) feels that the idea is not at all feasible. “Businesses need
stability and moderation in tax system. This proposal topples it upside down. So there is
uncertainty”, he points out.
Bokil and the 13 other AKP trustees, however, believe that the adoption of BTT, along with a
series of additional measures will make generation of black money “technically impossible”, result
in the disappearance of the existing black money and elimination of corruption in the taxation
system. Undeterred by the skepticism expressed by experts, the trust, chaired by Bokil, is today
spearheading a movement with country wide volunteers initiating dialogues with policy makers,
industry representatives and public at large to fine tune the Arthakranti proposal.
The Proposal
AKP believes that the problems affecting Indian economy are all related to the flawed taxation
system, irrationally high currency denomination and distribution and under developed banking
practice. It argues that once all transactions are routed through banks, and high denomination
notes (Rs 100, Rs 500 and Rs 1000) are withdrawn, there will be no scope of malpractices in
financial transactions.
Arvind Virmani, a former chief economic advisor to the central government and president of the
think-tank, Chintan, feels that it would be close to impossible to replace all taxes by any one
single tax. “Transaction taxes were widely prevalent 50-75 years ago. They were gradually
replaced by retail/final sakes taxes and then by Value Added Taxes, because these are more
efficient and equitable”, Virmani points out.
Bokil feels otherwise. “It is a correction programme, not a new tax proposal. We are identifying
the cause and effect of corruption and attempting to correct the situation. In that sense, we are
talking about sustainable development, not just financial development”, he says.
Philosophy, Economics Or Both?
The Arthakranti proposal, a curious mix of philosophy, ideology and economics, has found
acceptance by the Maharashtra Knowledge Corporation Ltd (MKCL), a state government
promoted entity meant to encourage e-tools. “MKCL believes that solution to complex and chronic
challenges have to be fundamentally knowledge based and hence decided to support this
(Arthakranti) research work”, Vivek Sawant, managing director MKCL notes.
“I am seduced by the suggestion of a flat single point tax that has zero compliance cost and zero
scope for corruption. At the same time, I am scared by the mammoth task (that is needed) to
implement it effectively”, Rajiv Kumar, senior fellow, Centre for Policy Research says.
According to Kumar, a shift from physical cash economy to bank transaction based economy is
not easy in Indian situation. “Apart from the stock a farmer sells to the government, almost all
transactions in agriculture are in cash today. You cannot change that overnight, he says.
Similarly, the attempts to withdraw high denomination currencies could back fire if people decide
to convert their currencies into dollar or gold. “It is a huge step, you should never take it in a
hurry. It is better to go for a simplified (version of existing) tax system”, he adds.
AKP itself is not pushing for an overnight reform. The current document brought out in
collaboration with MKCL is considered only as a concept paper. “This document will become both
a basis for further research and a possible bridge to the subject matter experts whose role will be
crucial in realising the dream of implementation of the Arthakranti BTT”, AKP points out.
Interestingly, the Arthakranti document cites instances of similar taxation in at least 17 other
countries. However, nowhere it was tried as an alternative to other taxes, but it was as an
additional tax along with the existing taxation system. On the other hand, there are also examples
of how tax relief on bank transactions helped cough up more revenues. For instance, in South
Korea, merchants got tax breaks for terminalisation. In 2002, the e-payments industry added
$1.75 billion to its economy. It led to significant increases in transaction transparency, tax
revenues and deposits. It has a private consumption expenditure of 57 per cent. If we are to do
the same as South Korea -- be it on credit cards or plastic – it immediately becomes an assault
on black money.
While Arthakranti wants black money to disappear as a result of increased banking transaction, it
wants that to happen alongside the abolition of all other taxes, the key point of contention.
According to PWC’s Rahul Garg, withdrawal of high denomination notes will have only a one time
effect of eliminating black money from the system. “Once people realise that bank transaction
attracts tax and leave a trail, they will shift to barter”, he opines.
Garg suggests that the use of information technology tools and linking every transaction to the
person’s unique identity itself can do a lot to reduce the black money or parallel economy
The Inherent Inequality
The fundamental problem with a uniform tax on all bank transactions is that it doesn’t differentiate
between the rich and the poor. While the current taxation system follows a progressive pattern,
thereby taxing the rich more than the poor, or determining the tax slab on the basis of one’s
income, BTT does not call for such segregation. “Income Tax is to bridge the gap between the
rich and the poor. Whether it is fair or not to tax everybody is a big debate. Nobody has abolished
income tax in any part of the world. KPMG’s Vanvari says.
“Other than the Middle Eastern countries, there is no economy of any size that functions without
income tax. All governments require funding to function, and how this funding is raised must be
guided by considerations of equity across differently placed citizens and other entities. The
abolition of taxes could lead to inequities in public policy,” Bobby Parikh, chief mentor, BMR
Advisors says.
AKP’s argument that the poor does not use the banking system and cash transaction will not be
taxed has not found takers among economists and experts.
The 2 per cent of tax on a small income has greater impact on the welfare of the poorer people
than 2 per cent imposed on a large income, Kumar says.
Even with all the differences, most experts feel the need for a modification in the current tax
system. “The tax should be on shares and real estate rather than all transactions. It's important to
tax certain asset classes instead of changing the tax system. If you link tax on real estate to fair
value at the time of registration, that's possible”, KPMG’s Vanvari says. “A single rate National
VAT with exemption for food would, be more efficient and equitable than a BTT”, Virmani opines.
Even if the central government is to propose such an idea, getting all states to agree to stop
levying state level taxes, will be a herculean task. Considering the fact that the empowered group
of State Finance Ministers has not yet been able to reach at a consensus on the implementation
of a uniform Goods and Services Tax (GST), taking away the power of the state to levy taxes will
be extremely difficult. Even if they agree, the revenue sharing of BTT through automatic
devolution will remain a contentious issue. “All those supporting decentralisation have argued that
this needs automatic devolution of funds to local level. Most States have resisted strongly”
Virmani says.
AKP is aware of the complexity of its proposal. Its implementation plan is in several phases. “The
plan starts with changes to the central government taxation and concludes with full replacement
of the current tax system with AK-BTT. The withdrawal of high denomination notes is also to be
done in phases”, it states. The organisation also calls for more studies to establish the workability
of each phase of its proposal.
AKP is currently busy educating the public at large. While Bokil is making presentations to
industrialists in Andhra Pradesh, his fellow trustees are addressing similar gatherings in other
states. Even if the proposal doesn’t get the traction AKP hopes for, its call for financial inclusion
will have its impact in the near future.
As Virmani asks, “Everyone supports inclusion; (the) question is how to bring it about?”
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