january 25, 2014

A Hare-brained Proposal
A bank transaction tax to replace all taxes will have a disastrous impact on the economy.

ome 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 BJP president, Nitin Gadkari, who is supposed to be preparing 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-turnedpolitician Ramdev agreed to a similar proposal to replace income tax with a bank transaction tax. The BJP whose 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 countries of 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 monthly income and if one assumes a family size of ve then at almost seven times the average monthly 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 largescale 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 BJP from 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 BJPs internal 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 thoughtout proposal. First of all, like the sales taxes and excise duties before the era of value-added tax (VAT), a single bank transaction tax would be a cascading tax that would have distortionary
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effects on the economy. An additional fallout could be the generation of a parallel currency or a series of IOU notes between businesses 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 nancial sector? Indeed the opposite may happen. What the central government will then nd to its horror is that an even larger part of the economy 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 good passes through. If the poor make their purchases from small outlets 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 BJP and 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 BJP proposal is that it will play havoc with centre-state nancial 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 VAT on nancial services. A couple of South American countries, which introduced a variant in periods of scal 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 7

Economic & Political Weekly

JANUARY 25, 2014

vol xliX no 4

EDITORIALS

of tax reform, the system remains extremely complicated, opaque and discretionary. The tax bureaucracy uses its powers of discretion and the only groups to benet 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.

We Have Overcome
India wins the war on polio; now it needs to be extra vigilant.
fter successfully eradicating smallpox in 1980, India has now gone three straight years without reporting any new case of poliomyelitis infection (polio). This qualies it to receive the World Health Organisations (WHO) certication 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 ght 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 undertaken involved the government, United Nations bodies, charitable organisations and private donors. While coordinating the activities 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 of reaching every nook and corner of a vast country. The task was even more difcult 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 gatherings, 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, lm 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-ve lives and even to push for 100% immunisation of

children against the major infectious diseases. Of course, vaccination 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 accid 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 eradicating polio provides hope for other countries where the socioeconomic 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 ght 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 wellbeing of its children, India simply cannot afford to forget the lessons it has learnt in its battle against polio.

Can AAP Slay the Dragon?

AAP wants to slay the dragon of crony capitalism, but the problem is all capitalisms are crony.
t is just as well that the self-proclaimed non-political Gandhian Anna Hazare did not go along with Arvind Kejriwal. Hazare is no Jayaprakash Narayan (JP); neither does he have the stature of JP nor the Lok Nayaks political vision. But 8

the Janata Party that evolved from the JP movement, with politicians from the right of the political spectrum to the socialists joining the bandwagon, soon began to emulate what the movement had fought against in Gujarat and Bihar in 1974.
JANUARY 25, 2014 vol xliX no 4
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