In prelude to General Elections, several radical ideas are being circulated. Baba Ramdev is believed to have propounded this idea, supported by Gadkari and finally, endorsed by Modi, though they have not committed to it as yet. Let us examine the merits of the idea. Government never tweaks a tax law unless it expects to get more revenue out of it. Therefore, such experiment must yield higher revenue to the government, and also it should sound simple and fair for the tax payer to warrant any public support.
The rate of banking transaction tax is proposed to be 2%. Our current tax to GDP ratio is about 12%. For a 2% transaction tax to yield at least as much revenue as currently being realized by the government, the velocity of money has to be at least 6, that is, money has be rotated at least 6 times during a year. Is that happening? Most businesses are forced to extend credit ranging from 60 to 120 days, and their rotation is not more than 2.5 in a year. Agriculture doing about 2 crops a year, cannot expect more than 2. Thus, an expectation of 6 times rotation of money is far too unrealistic which should be around 3 for the economy as a whole, considering 90 days cycle on an average.
Soon, we will see rolling out of exemptions for poors, farmers, dalits, minorities, political parties, charitable trusts and so on. One could imagine that these privileged exempt categories will size upto about half the transactions if not more. This will require higher tax on others who will end up bearing the brunt for the entire revenue-thirst of the government. This will force the starting rate itself to be 3% instead of 2%.
Considering the realities of money-rotation ratio, the rate will be pushed upto 6% quickly. Consider 6% tax on investment of savings, 6% tax on transfer of money from father to his son, 6% tax on transfer from savings account to fixed deposit account which will become meaningless because a 6 months fixed deposit will yield interest not even sufficient to pay the transaction tax. In fact, bank deposits will completely disappear as they will leave nothing for the depositor after paying this transaction tax. This will force people to avoid short term transactions and be compelled for long term transactions. This will hurt their liquidity and many other plans, disturbing their peace and happiness tremendously giving rise to massive public unreast.
Naturally, everybody will attempt to avoid banking, and rely on cash as much as possible. This is already guarded against by proposing complete illegality of any cash transaction, and demonetization of currency notes exceeding Rs 100 in denomination. On one hand, we will have complete criminalization of the society like a de facto ban on gold import has made people gold smugglers. On the other, people will still indulge in cash transactions even if it is completely illegal, like they still do property transactions in cash knowing that it is illegal. Murder and rape are illegal, but that does not matter to a society which is far more practical than lawmakers expect them to be.
As regards demonetization of currency notes exceeding Rs 100, the idea sounds like a benign joke indeed. Rupee has lost so much of value that a 100 rupee note is not sufficient even to buy vegetables. One needs 25 such notes for one time petrol refill, 5 such notes for one time cooking gas refill, 25 such notes for buying one quintal of wheat and so on. The logistical problems of managing with so much of currency notes will remind people of Germany of 1929 when people used to carry currency notes in bags for their daily shopping.
Finally how will netas and babus manage their bribing with such a small currency note? Surely, bribe is not going to be legalized to allow its payment by cheque or through debit/credit card.
Since turkeys are not going to vote for an early Christmas, and this idea will never be implemented. But it has been considered worthy of serious consideration by those staking claim for ultimate power in the country, and major newspapers have been compelled to come up with editorials. This does not sound good for times to come. However, Europe and USA may relax and need not be afraid of India which we are told, is going to become an economic giant soon after Modi has taken over, such that dollar will cost just Rs 10 and India will be able to repay all its foreign currency loans like petty cash and so on.
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Tags :Taxation
There is no limit to what level stupidity can go. First problem: Take a look at what percentage of total GDP the bank transction is. So me are saying only 20% and that is why fist any transaction in cash above Rs.2000 to be banned. Here again everybody is saying that it will criminalize the entire society but two things should be taken in account. Just like RBI GUV have said every adult must have a bank account may be he not holding aadhar or ration card but bank account is must. Then there be a cashless payment system. In this a mobile costing not more than 1000 Rs. but will have optical communication at near field range. The mobile have applets with own number, bank account number and other information to transmit. Purchase will have similar mobile and will accept information for the transaction to be made and after checking he will transmit the info to his bank server which will deduct money from his account to seller's bank account. Sellers bank will inform him by SMS and transaction will be complete. Once this system implements all ATMs to restrict cash disbursal only to Rs. 2000 per day. Moreover anyone tries to hoard notes the max note value will be Rs.50/- so he has to carry suitcses. Why people should resort to hoaring cash if they can purchase vegetables bus ticket, groceries and everything with cashless system? So say 90% of transactions will be thru bank only then with 2% tax there will be enough revenue same as that present system. There will be no exemptions on the transactions tax but those individuals (not companies) having annual income more than 30 Lakhs will be subjected to Graded income tax starting with 5% and upto 45% those having more than than 100 Crores. Also corporates with more than 100 Crore or above will have minimum alternative tax just like present. Moreover all group companies from which few have defaulted on loans with Govt banks will pay all taxes just as present till they make up for the defaulted amount. Nobody wants to have smuggler or other anti-social tag but some crooks do lure innocent people to become smugglers. That is not the reason that India should continue to have unrestricted gold import and thus lose all benefits of changing monetary system. So customs and other duties for imported products will continue till the time India reserves and balance become comfortable. Indian people need to switch over to ETF and Gold bonds which generate some interest and not hoard the metal which doesn't give interest other than increase of market rate. Compulsory dehoarding of gold from temples and other religious places is a must thing. Here one should ask those glamorous and Hi society people why they smuggle the gold and jewelery even when their lockers are full. An employer will be compulsorily require to open bank account for new employee if s/he doesnt have one already. Hence no bags will be required to carry for salary purpose. Also people will not be required to carry loose change or haggle for it. The leeway of Rs.2000/- cash is for many places which are not covered by network so may not be possible cashless transaction. Lastly for bribing with cash one will have to carry huge bags and so everyone will know what the purpose bags serve. BY cashless system if somebody bribes with roundabout payments still every transaction can be tracked and will lead to giver and taker. If in USA and Europe you can give personal cheques and servicemen accept the same why cashless system will be not accepted by them? It is a social stain that everybody wants to have money in black mode to save something little on taxes. But if you are goingto be taxed only 2% then who will bother to pay in cash and save measly 2%. Stockbrokers do have reason for this 2% but they can find out alternative way for STT. Even if it remains as per present system there is no scope for black money introduced or generated from STT. People areoptimistic and pessimistic. If you are having less taxes and more GDP obviously the Rs is bound to appreciate. FIIs will surely try to get in with less taxes but there may be regulation for taking profits back with lower taxes than their principal country. In and around 2004 Re was up to 40 Rs / dollar and all cotton exporters were crying and shutting shop. So you can make out how the system which encourages the black money out of country makes the Re go high upto 68 and progressive policies which make Re to 40a dollar. May be it will not go to 10 Rs level yet there is some scope. You can have turkey to see or you can have turkey to enjoy in Christmas. But those who have deep pockets of of black money will always oppose to the scheme.