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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.