Friday, February 25, 2011

A new Tax Regime

A New Tax Regime?
A single point taxation as a response to poverty, corruption and inequality

As the budget nears, we ready for one more round of tinkering with taxation. All the while, crores continue to suffer the pain and misery of abject poverty, which flourishes in the midst of great wealth. Opulence and misery live side by side.

Budgets have become meaningless rituals as most of the public finance controlling tools like taxes, subsidies have become ineffective to meet its desired goals. Contradictorily, they are boosting inflation, black money and corruption. Several propositions for tax reforms have been introduced, but not much headway has been made as poverty, corruption, inequality and its consequences keep on increasing geometrically. Has the model, standing on orthodoxy, based on traditional concepts of public finance and on conventional canons of tax law, been effective? 

No. It is time to remodel taxation. Let us recognize that the traditional models have outlived their utility and in light of the recent technological advances, propose a better model. Let us structure for the elimination of declaratory taxes and for their substitution by electronic taxes operating through the bits and bytes of clearinghouses of the banking system.

India needs an innovative and anti-dogmatic model which proposes the elimination of conventional tax models - a model that epitomizes the resurgence of the age-old concept of the Single Tax. A single tax, which in its modern version makes extensive use of non-declaratory taxes such as the "Bank Transaction Tax" (BTT).

BTT is a single point tax that is deducted directly by the bank from the credit side on every transaction. Every transaction would entail deduction by a certain amount (say 2%, to be shared between Centre, State, local government and bank in a pre-decided ratio) from the receiver end only. It would replace all existing taxes, direct and indirect taxes - Central, State and Local, with the sole exception of the Import or Custom Duty (to protect local industry from global trade balance). All direct and indirect taxes like Excise, Sales Tax, Corporation tax, Stamp duty, Service Tax, Income tax, Wealth tax etc. would be replaced by a single point BTT.

BTT would have powerful, transformational direct benefits: it would increase tax revenue by multiple magnitude, thereby reducing government debts; it is an evasion-proof tax; it is corruption-proof; it has negligible collection cost; it is simple, non-declaratory, automatically collected, requires no bureaucratic procedures of the taxpayer, and causes no significant distortion in market functioning. The transactions tax would be both a powerful tool for achieving internal tax equity, and a source of solid increased revenue for the government. It would prevent tax evasion and would establish a pattern of tax incidence, that makes everybody pay in an equitable manner. And as all pay their taxes, all would pay less.

The indirect advantage would be that BTT would increase banking transactions - bringing in the large informal sector in the fold of the banks, thus creating credit worthiness for crores, adding to credit expansion, while increasing net banking revenue. Withdrawal of all taxes would reduce the prices of all commodities by around 30%, leading to reduction in poverty and increase in purchasing power of society. A substantial share of the BTT for the banks would create globally competitive interest rates and therefore cheap and easy capital, enhanced market demand and stimulation of industry, trade and supply. This would mean higher employment opportunities and the restoration of social security.

Some cautions need to be exercised and some supplementary measures like "currency denomination compression" to make this India's finest response to poverty and corruption.

Mayank Gandhi