Usher In A Universal Bank Transaction Tax...

Usher In The Universal Bank Transaction Tax To Liberate The Poor And Rich Alike

Those who think a universal Bank Transaction Tax is unfair to the poor need to realise the quantum of indirect taxes everybody who lives in this country actually pays. Every item and service is loaded with unavoidable taxes unless, as in some cases, one pays for it in cash and refuses a bill. Most things, from toothpaste to TVs are ‘tax paid’ already and cannot be sold for very much less than MRP. The dealer margin is the only narrow variable left to the seller despite the competition.

Petrol and diesel at the retail pumps, crippling the country for its knock-on effect on all prices, could be half the rate without all those indirect taxes. Our cars and motorcycles could cost half too. Every item used in construction is loaded with indirect taxes. Our clothes, our processed foods, our merest purchase, even our medical treatment, are all riddled with taxes. Anything imported, with rare exceptions, has large taxes on it. 

All raw materials used in manufacturing have taxes on them at every stage of value-addition, and there are more taxes on the finished product too. Is it any wonder that we are internationally uncompetitive in all our export efforts without duty drawbacks and exemptions?

Despite this reality of a nation groaning under some of the heaviest indirect taxation in the world, irrespective of income levels, most people focus on and associate taxation with Income Tax. But Income Tax is actually paltry in terms of overall yield, a little sliver of the tax pie, and is extracted from just 1% of the total population. And even taxing the very rich, today mostly also the most productive people in the country, and their profitable companies, has no great impact on the total amount needed.

We need trillions of rupees to run the country, our gargantuan Government which employs millions, as well as pay for its growth and betterment. It is the last that suffers in the consequence, with State after State in gross debt, technically bankrupt for long, and unable to spend on infrastructure after paying out the establishment costs and salaries. Even subsidies are paid on borrowings at State level and via deficit financing by the Centre. The truth is, this is, and has been unsustainable, for quite some time, but the Government has been brushing this unpleasant truth under the carpet for future successors to deal with when the unavoidable tipping point of a crunch comes.

This proposal of a universal Banking Transaction Tax is something of a panacea, and is not coming to merely serve the interests of the elite. There is no right-wing Swatantra Party’s Minoo Masani or eminent jurist Nani Palkhivala advocating abolition of general taxes in 2014 to serve their capitalist ideology. Today its votaries are practical people who are keen to stem the unsustainability of the present taxation regime.

They include popular Yoga Guru Ramdev, Harvard Professor and B JP ideologue Subramanian Swamy,  BJP prime ministerial candidate Narendra Modi, BJP President Rajnath Singh, former BJP president Nitin Gadkari, Senior BJP leader and top lawyer Arun Jaitley, various taxation experts who consider the idea thoroughly feasible, some prescient economists and journalists, representatives of key trade bodies and chambers of commerce,  foreign professors and economists in the US and EU who are also coincidentally thinking of reforming their own tax regimes along the same lines. The New York Times, notorious for its left-wing views, has been airing the notion on its Op-Ed Page too. 

The Congress, the SP and the AAP are not for this, because their constituency, the great poor masses will disappear and so will their raison d’ etre. As long as the current tax regime sustains, the status quo will remain, and this suits the professional Socialists as opposed to Nationalists, who want to be seen as pro-poor and feast off the stance. If everyone benefits, the  social liberation it will engender will change the equation. The new situation cannot sustain povertarian politics with its emphasis on welfarism and freebies and concomitant mai-baapisms.

Reserve Bank of India Governor Raghu Rajaram is making efforts to extend banking services to the under-privileged and poor at the bottom of our very wide pyramid. Banking itself is poised to grow substantially with the imminent issue of many new banking licences, and the nexus between PSU bankers and their corporate clients under political pressure, resulting in the highest ever NPAs, is also likely to change for the better as a consequence.

Most financial corruption is a result of unreasonable and restrictive laws and punitive tax rates. It is seen all over the world that no amount of surveillance and strictness has been able to eliminate it. But by the same token, it is evident that if the financial laws and processes are simplified and rendered transparent, the need to conceal income and avoid taxes also sharply reduce as the incentive to do so becomes unattractive.

Tax administration and compliance in this country has a chequered record, and the Government suffers routine shortfalls against budgeted collections. A Bank Transaction Tax, applied automatically, can eliminate this chronic inefficiency once and for all, while increasing the yield at least four fold, even on the basis of just the 20% of transactions that are conducted via the banks at present.

Without indirect and direct taxes there is little or no need to conduct cumbersome transactions in cash. An entire shadow economy can thus join the mainstream domestically, and trillions of dollars stashed abroad can come back to help develop our economy.

Not everyone wants this kind of radical change, as it will mean a loss of power for some. But for the country, this kind of worthwhile and bold tax reform by a victorious BJP/NDA Government could transform the Indian economy.

(958 words)

January 9^th, 2014

Gautam Mukherjee