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january 25, 2014
Economic & PoliticalWeekly EPW JANUARY 25, 2014 vol xliX no 4 7
A Hare-brained Proposal
A bank transaction tax to replace all taxes will have a disastrous impact on the economy.
Some of the most outlandish suggestions are made ahead of
elections. But perhaps nothing in recent times approaches
the suggestions of some in the Bharatiya Janata Party (BJP)
to do away with all existing taxes other than customs duty and
in their stead introduce a single tax on all bank transactions.
This proposal has not yet been formally articulated. But the
former BJPpresident, Nitin Gadkari, who is supposed to be pre-
paring a vision document for the 2014 elections has spoken
about it. And the partys prime ministerial candidate, Narendra
Modi, has as the price of support from yoga-teacher-turned-
politician Ramdev agreed to a similar proposal to replace
income tax with a bank transaction tax.
The BJPwhose original core support base consisted of urban
traders and the salaried has always espoused one concern dear
to these groups: the burden of personal income tax. But India now
has one of the lowest incidences of income tax among countriesof comparable size and at a similar stage of development. The tax
kicks in at an income of Rs 2 lakh a year, or as high as 34 times
per capita annual income and if one assumes a family size of five
then at almost seven times the average family income. There are
now as few as three slabs of rates, easing the burden over large
ranges of income. A number of exemptions further lighten the
burden of income tax. Of course, all this has not prevented large-
scale tax evasion. As is well known, only 2% of Indians now pay
personal income tax, while it is 20% in China and 8% in South
Africa. None of this has prevented the BJPfrom continuing to think
of how to further reduce the incidence of personal income tax.
The proposal on the partys drawing board is to abolish all direct
taxes (personal income tax, corporate tax and wealth tax) and all
indirect levies other than customs duty (excise duty, value-added
tax, sales tax and cesses) and have a single tax of 2% on all bank
transactions. Simultaneously, high denomination notes will be
demonetised and it will be illegal to have any cash transaction
larger than Rs 2,000. In the BJPsinternal estimate, a 2% bank
transaction tax will yield as much as the central governments
current gross tax receipts of Rs 14 lakh crore though Gadkari has
claimed that the receipts could even go up to Rs 40 lakh crore a year.
However, there are many basic problems in this poorly thought-
out proposal. First of all, like the sales taxes and excise dutiesbefore the era of value-added tax (VAT), a single bank transaction
tax would be a cascading tax that would have distortionary
effects on the economy. An additional fallout could be the genera-
tion of a parallel currency or a series of IOUnotes between busi-
nesses that can be used to avoid the bank tax. The non-business
entities in the economy like households and other non-business
institutions will also move away from the banking sector.
If so much of the economy now revolves around the cash (illegal)
economy and evasion, how will a ban on cash transactions of
more than Rs 2,000 possibly persuade the entire economy to
route most transactions through the organised financial sector?
Indeed the opposite may happen. What the central government
will then find to its horror is that an even larger part of the eco-
nomy will have shifted to cash to avoid the new tax and with
that tax revenues will plunge.
Second, the proposed levy will also be regressive. Since it will
be a cascading tax, its actual incidence on any good or service
would depend on the number of stages of production the goodpasses through. If the poor make their purchases from small out-
lets that cannot afford to vertically integrate, the tax would be
even more regressive. Such a regressive tax may appeal to the
likes of the business-politician groups pushing the BJPand that
may indeed be why they are thinking of it, but it goes against the
basic tenets of taxation and is not in the interests of the majority.
A third major problem with the BJPproposal is that it will play
havoc with centre-state financial relations. The party should surely
be aware that there is a constitutional division of responsibilities
between the centre and the states and so also a division of powers
of taxation. The proposal to abolish all taxes, including sales tax,
means that the one major independent source of revenue for the
states will be taken away. One must also note that, side by side,
the transition to the goods and services tax, on the introduction of
which so much hope has been placed, will have to be abandoned.
There is, in short, nothing at all going for what can only be
called a hare-brained idea. No country anywhere in the world has
chosen such a course of action. Some countries have attempted
to introduce a bank transaction tax but mostly as a substitute for
VATon financial services. A couple of South American countries,
which introduced a variant in periods of fiscal stress to augment
their revenues and not to replace existing sources of revenue,
withdrew it later.There is indeed much that is wrong with the existing tax
system of both direct and indirect taxes. In spite of many years
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EDITORIALS
JANUARY 25, 2014 vol xliX no 4 EPW Economic & PoliticalWeekly8
After successfully eradicating smallpox in 1980, India has
now gone three straight years without reporting any
new case of poliomyelitis infection (polio). This qualifies
it to receive the World Health Organisations (WHO) certification
for being polio-free. Undoubtedly, this is a victory that has been
fought every inch of the way by myriad agencies on a number of
fronts and against what seemed like insurmountable odds. The
lessons learnt are precious beyond words and the expectation is
that these will be harnessed to fight other infectious diseases that
plague the country. In fact, the how of the war on polio for a
war it was is as fascinating as educative. There is though some
controversy about whether polio really has been eradicated in
India and there are warnings about a possible return. There is
also the remaining challenge of treating and rehabilitating
those who have already been crippled by the disease.
In the mid-1990s the vaccination programme that was under-
taken involved the government, United Nations bodies, charitable
organisations and private donors. While coordinating the acti-
vities of all these agencies was a humungous task, the vaccination
programme itself called for dealing with fears and prejudices
social, religious and cultural and the physical logistics ofreaching every nook and corner of a vast country. The task was
even more difficult in the high-risk states of Bihar and Uttar
Pradesh which also witness large-scale outmigration. Nearly
two million vaccinators not only went to slums and villages but
also provided their services at railway stations, bus terminals
and construction sites as well as at fairs and other public gather-
ings, apart from making house to house visits. Religious and
community leaders were persuaded to preach and cajole where
parents were afraid of vaccination even as the media, college
students, volunteers, film stars and celebrities were roped in to
popularise the campaign. The expectation now is that this
strategy and the mechanisms that have been put in place can be
used to tackle other diseases like measles which claim thousands
of under-five lives and even to push for 100% immunisation of
children against the major infectious diseases. Of course, vacci-
nation is not a cure-all solution for all infectious diseases. There
are other aspects of public health like provision of sanitation
and supply of potable water that need to be addressed and are
as important as, if not more so than, vaccination.
There are alarming signs, however, in reports that a suspected
increased dosage of polio drops in India has given rise to cases
of non-polio acute flaccid paralysis (NPAFP). While the cause of
the NPAFP cases is disputed, a number of doctors and health
activists have pointed out that the governments surveillance
data shows that in the past 13 months, 53,563 cases have been
reported. The government attributes this to more sensitive and
vigilant surveillance and not to the increased vaccination
dosage. The fact remains that along with those who are already
the victims of polio, this huge number of NPAFP-affected need
treatment and rehabilitation.
In 1985 there were 1,50,000 reported cases of paralytic polio,
whereas in 2009 the fresh cases numbered 741 (half of the
worlds number). This came down further to 42 in 2010 and the
last reported case was in 2011. Indias achievement in eradicat-
ing polio provides hope for other countries where the socio-economic conditions are similar. But Indias victory is fragile for
until polio is eradicated from every region in the world, there
remains a constant risk of a return. Going by the experience of a
number of countries, it is easy for polio to be imported from
neighbouring countries even after it is completely eradicated at
home. At present, Afghanistan, Pakistan and Nigeria are the
polio-endemic countries while previously polio-free countries
like Syria and Somalia saw an outbreak last year.
As the battle against a number of other health issues, notably
the fight to bring down the maternal mortality rate shows, the
link between increased public awareness and discourse and the
political will to deal with them is a strong one. For the well-
being of its children, India simply cannot afford to forget the
lessons it has learnt in its battle against polio.
We Have Overcome
India wins the war on polio; now it needs to be extra vigilant.
of tax reform, the system remains extremely complicated,
opaque and discretionary. The tax bureaucracy uses its powers
of discretion and the only groups to benefit are the lawyers and
accountants. But the solution lies in doing the hard work required
to reform the tax code and administration, and not in pursuing
an idea whose only appeal is its supposed simplicity.
Can AAP Slay the Dragon?
AAPwants to slay the dragon of crony capitalism, but the problem is all capitalisms are crony.
It is just as well that the self-proclaimed non-political Gan-
dhian Anna Hazare did not go along with Arvind Kejriwal.Hazare is no Jayaprakash Narayan (JP); neither does he
have the stature of JPnor the Lok Nayaks political vision. But
the Janata Party that evolved from the JP movement, with
politicians from the right of the political spectrum to the social-ists joining the bandwagon, soon began to emulate what the
movement had fought against in Gujarat and Bihar in 1974.