Arthkranti proposals – a panacea for money laundering and other financial crimes?

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Imagine, you purchase your favourite mobile brand without any sales tax, your restaurant bill does not include a Value Added Tax, and best of all you do not file an annual income tax return!

Well, all this is possible.  ArthaKranti Sansthan is a Pune-based Indian group of accountants and engineers.  The word Artha translates to economic and Kranti to revolution and their proposals are nothing short of revolutionary.  Radical, Simplifying, Quixotic, Fantastic, Far-fetched, Forward-looking, Utopian etc are few of the adjectives used to describe them.

Lets look at their proposals

  1. Withdrawal of existing Taxation System completely (except customs i.e. import duties).
  2. Every Transaction routed through a bank will attract certain deduction in appropriate percentage as Transaction Tax (TT). Single point tax deducted at source. (say 2 %).
  3. Withdrawal of High denomination currency (say above Rs. 50).
  4. Cash transactions will not attract any tax.
  5. Government should make legal provisions to restrict cash transactions up to a certain limit (say Rs. 2,000) according to ArthaKranti ’s website.

The first step as suggested involves in removing all kinds of direct taxes in the country as it exists now. There are some 25 odd taxes in the country imposed by the central and state governments including income tax, excise, service tax, value added tax (VAT), etc.  All these are to be scrapped except perhaps the customs duties or import duties which might be required to work as an international trade balancing mechanism.

Transaction tax would be levied at 2%. The receiving party would be taxed and the revenue would be shared by the central, state and local governments and the transacting bank.

Lets look at the pros and cons

Pros

  • Strong governance and the traceability of transactions coupled with these factors will ensure very unfavorable conditions for corruption at the macro level.
  • All commodities and services in India would immediately become cheaper by 32% to 55%.
  • All income tax payers would find their incomes rise. This would lead to increased spending and hence increased revenue for the government.
  • The more the transactions, the more the government would earn. Currently, this is just a fraction of the total money transactions in India due to the existence of the parallel economy which transacts money outside the banking system. Again, the government can take steps to enhance more economic activities and money transactions which would give more money to its coffers as TT. If it so feels, it could either reduce or increase the TT percentage marginally as per requirement.
  • This way all cash hoarded as unaccounted money would either come to accounted money or vanish as useless. India’s corruption avenues would dry up. All financial crimes would simply vanish. Elections, a major source of unaccounted money would now become properly accounted. Even for those who prefer to do cash transactions, it would not be done easily as lower denomination currency notes would be available. This step would also enhance the banking transactions immediately.
  • The government no longer would need to maintain a huge bureaucracy which consumes most of the taxes collected as salaries and perks.
  • Tax return filing and the harassment faced by the common man would all be a thing of the past.

Cons

  • India’s banking penetration is only about 50% of the population. For such a system to succeed, there should be complete banking coverage.
  • It does not differentiate between the rich and the poor. Everyone would pay the same amount which is unfair.  In fact, the rich will pay much less than they do today,
  • It will create a massive black money/underground economy using hawala/ gold/ cryptocurrency.
  • It will harm India’s banking system by preventing it from providing a range of innovative products.
  • Businesses need stability and moderation in tax system. This proposal topples it upside down.
  • If people realize that bank transaction attracts tax and leave a trail, they will shift to barter.
  • There has been no nation in the world which has relied solely on a bank credit tax. The countries which did use bank/transaction taxes have mostly abandoned/replaced them with more efficient and progressive taxes.

Experts are still debating on these set of proposals.  A lot of dialogue is necessary before these can be implemented. The dilemma can be best summed up in a tax expert’s words  “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.”

Amen.

By Nagulakonda Raj Gopal