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Saturday, March 20, 2010

If I were the Finance Minister Of India...

I aim to be the Prime Minister of India. Recent history, however, guides me to be the Finance Minister first and then only can I aspire to be the Prime Minister. Also, I have to offer something extraordinary to the people of India as a Finance Minister to gain a credible pro-poor, pro-development image which would impress my high command and select me for the coveted job.

I met Mr. Anil Bokil one day and he told me a way to heaven. Yes, a path to heaven. But is it a practical idea? Frankly, I don't know. Is it possible? I don't know. Is it fiction? I don't know. Is it worth considering? Yes, why not? All other questions could be discussed and debated. I think India has plenty of intellectuals, experts and economists to debate on that and decide. Well, well, but let me tell you the way first, the way to heaven!

What will it be like in a situation where there is no tax, no octroi, no VAT, no excise, no income tax, no corporate tax, no stamp duties, no wealth tax, nothing! It will be like living in heaven! But, there will be something that will be simple, possible and easier! Say, if two per cent was charged at the end of every transaction. Would any one ask, WHY? What is it going to solve? What are the problems that this will address? We will see them one by one.

The present taxation system has two types of taxes: Direct (tax on income) and Indirect (taxes on consumption). The principle of equity in economics implies that the direct taxes should be more than the indirect but presently the ratio is reverse, 28 per cent to 72 per cent. The canon of simplicity demands the system to be very simple so that even a layman could understand the implications without the need of an expert. But the system is too complex and complicated. The current system of multiple point tax rates, multiple rules of exemption, constantly changing policies completely confuses a tax payer and this leads to the violation of the principle of certainty. The tax-payer never knows exactly how much he needs to pay and how much is extracted from him. The cost of tax collection also has to be minimum. Presently, the tax collection infrastructure costs itself are extremely high for the government.

The Union taxes as per the 7th Schedule of the Constitution range from income tax to the inter-state taxes covering 12 types of taxation. The taxes within the state jurisdiction as per the List II in the 7th Schedule cover 17 various types of taxation from sales tax to octroi. The existing problems of multiplicity of taxes, complex nature of taxes, heavy reliance on indirect taxes, arbitrary nature of taxes has led to various far-reaching serious problems. The scope of evasion, creation of narrow base of taxation and limited coverage and rise in the generation of black money have been the major problems. The Indian Economy by Ruddar Datta claims that the black money in the country was 11 lakh crores in 1998 and was increasing at a rate of 13 per cent per annum. At the same time, the white money was only 8.5 per cent with an increase of 7.5 per cent per year.

Well, there are many more details and problems of the present system. But then what is that way to the heaven?

1. Abolition/withdrawal of the present taxation system, except customs and import duties. Instead, every transaction routed through the banks will attract say a 2 per cent deduction at the receiving end, to the credit accounts only. The deduction will be automatically credited to different government levels like Central, state and local. Additionally, certain share will be credited to the bank. Say, 0.7% to the central, 0.6% to the state, 0.35% to the local government like Municipal corporation or ZP and 0.35% to the transacting bank account. Total 2% of the transaction amount.

2. The RBI and the government should abolish all the denominations above Rs.50/- in one year. With only low valued currency, the tendency to adopt cash transactions for high values will stop.

Country
Per capita income

(A)

Highest Denomination (B)
A/B =
USA
30,000 USD
100 USD
300
UK
18,000 pounds
50 pounds
360
Japan
40,00,000 yen
10,000 yen
400
India
Rs. 16,000
Rs.1000
16

The availability of higher denomination currency, leads to avoiding bank transactions in India.

3. Cash transactions will not attract any transaction tax. But the government should make legal provisions to restrict cash transactions upto say Rs.2000/- only. Transactions in cash of Rs.2000/- only should be treated as LEGAL and no legal umbrella should be provided for anything above that.

4. The banks will need to modernize and work round the clock. For that, they will be receiving adequate revenue also.

For example, in 07-08, the revenue of the Mumbai Municipal corporation was Rs. 8,550/- crore. The bank transactions in Mumbai during that year were of Rs. 36,85,000/-. So considering the proposed 0.35% share of the local self government, the revenue to the Mumbai Municipal Corporation will be Rs.13,000 crore.

The proportion of the annual transactions to the GDP in various countries is as below ..

Country
Annual transactions & GDP ratio
USA
50
UK
70
Japan
110
India
20 (assumption)

As for India,

20 = Annual money transaction / GDP.. so as per the figures of 2007-08, the GDP was Rs.47,00,000 crore. Hence, the annual money transactions would be Rs.9,40,00,000 Crore. Now, the government calculates its revenue as

Government Tax Revenue = Annual money transaction x banking transaction tax / 100... so the banking tax in % will be...

Bank transaction tax in % = 8,74,120 x 100/9,40,00,000 = 0.93%

And, we are proposing, 2% transaction tax... This means that the government will easily be able to generate more revenue than it's collecting now.

This will lead to the complete eradication of black money. The revenue collection will be very simple, hassle free and the cost of collection of taxes will be the most minimum. The unproductive time spent with tax collection authorities will be saved and more productively used. The revenue collection will be every day and very simple. Hence, the government will always have money in hand whenever needed. The stabilization of prices will happen in all the states and will help the manufacturers. The tax collection will be corruption free and the banks will also earn more money to avail credits at lower interest rates.

I know, there would be many opinions and views of the experts but at least a good debate can be initiated... But if it is practical, it will be of benefit to the last man and if it's not practical, then what is wrong in dreaming of living in heaven?

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