If you have reached this page I assume that you too are fascinated by a workable scenario for India with ZERO tax on income.
There has been a lot of talk about radically reforming the tax system in India most notably by Arth Kranti based out of Pune which like the tweaked proposal I am presenting under can free India totally from any sort of Income Tax, Corporate Tax, Excise, Sales Tax and Service Tax etc.
To put things in perspective various taxes collected by the government are as under (figures are rounded off for ease of calculation)
Corporate Tax: Rs.4,50,000 crore
Income Tax: Rs.3,00,000 crore
Wealth Tax:Rs.1000 crore
Excise Duties: Rs.2,00,000 crore
Customs Duties: Rs.2,00,000 crore (proposed to be retained for domestic protection)
Service Tax: Rs.2,15,000 crore
Other Taxes: Rs.4,000 crore
Total Government revenue apart from Customs duties : Rs.11,70,000 crore. This is the sum the government earns from ALL taxes in India and approximately 27% goes to the states and 73% is with the centre which remains constant for this model too.
There would be a simple one point Banking Transaction Tax (BTT) at a minimum rate of 0.7% of all transactions through banking channels at the receipt account only which is credited into the government treasury immediately.
To illustrate : If you were to receive a sum of Rs.1,00,000 in your bank account Rs.700 would be transferred as BTT to the government. That’s it. No Other Taxes At All.. No Income tax,no corporate tax, no excise duties, no VAT, no service tax of any kind at all.
Any amount of cash deposited into any bank would attract the same 0.7% from the recipient account and the balance becomes legitimate “white” money.
For this proposal to be successful we need a total dismantling of all government taxes at all levels state and centre with NO direct or indirect taxes at all on any transaction/service/manufacturing. The only exception being import duty of customs to protect domestic industry.
All receipts to be routed through banking channels including cheques,payorders,debit and credit cards,net banking and mobile payments. Minimum dependence on cash with a maximum bank note of Rs.100 and no legal sanction to any cash transaction over Rs.5000 (ie no ownership rights or legal status to any payment made in cash over Rs.5000). All single cash transactions below Rs.5000 exempt from BTT or any other levy.
No Income Tax scrutiny or questions and a definite time frame to citizens to deposit any amount of cash into their bank accounts with a flat 0.7% BTT and “clean” their money with full legitimate status.
The Revenue Generation
The sum total of narrow money M1 in India is the total of floating printed currency and money that can be converted almost instantly into currency like savings/current bank accounts, credit limits by banks etc. M1 is the narrowest or most restrictive idea of money that is the basis for the medium of exchange within the economy. This category of money is considered to be the most readily available for transactions and commerce.
The M1 in circulation in India is Rs.20,00,000 crores which is the basis of all transactions in cash and banking channels in the country.
In India only 20% of all transactions take place through banking channels and the rest 80% in cash. Now assuming a very conservative rate of 20% of this Rs.20,00,000 crores is moved through banking channels every day and attracts a BTT of 0.7% only at the recipient level the total tax collection of the government would be as under:
M1 transacted every day: Rs.20,00,000 crore x 25% =Rs.5,00,000 crore
BTT generated every day: Rs.5,00,000 crore x 0.7% = Rs.3500 crore or Rs.12,77,500 crore annually which is far more than what the government generates presently (Rs.11,77,000 crores)from all tax sources.
The Benefits to Citizens
1) No Income Tax, Corporate Tax, Wealth Tax ,VAT or Service Tax
2) Substantial savings in terms of accounting manpower and costs.
3) No tax on Savings or interest thereon
4) Black Money generation curbed and corruption becomes inconvenient
5) More disposable incomes . Substantial savings in terms of indirect taxation being removed.
6) One point tax. Prior tax calculation easy and sure.
7) Secure transactions with money trail all through the chain.
The Benefits to Corporates
1) No Corporate Tax, No excise, No Service Tax, No Dividend Distribution tax equates lower costs and lower selling prices and higher demand.
2) Substantial savings in terms of manpower and records.
3) No corruption scams and cash transactions which may be dubious.
4) Cheaper finance available due to adequate availability if funds in the banking system.
The Benefits to the Government
1) Instant Credit of Tax monies
2) Check on corruption due to no cash transactions
3) Man power savings with no tax collection and scrutiny required
4) Recovery of Government debts
5) Options for Fake currency eliminated being unviable for small denominations
6) Definitive Money trail for checking terrorism activities etc.
7) Across the board increase in purchasing power and growth stimulated.
8) Elimination of Fiscal Deficit- As transaction and compliance increases and the amount of money M1 through banking channels increases to 40 or 60% the revenue generation would be exponential exceeding over Rs.40,00,000 crores for the government per year turning it revenue surplus.
The Arguments against
It may be argued that the system is flawed as it requires
1) Elimination of high value currency transactions
2) Revamp of the Tax system totally and empowering the banking system much more for a population dependent on cash transactions.
3) That the system is not progressive and taxes rich and poor alike at the same level.
4) That gold or foreign currency may be used for black money transactions
5) That transactions between family members would attract the BTT too taxing inter family transfers.
6) That financial transactions would become unviable with a BTT at every step basically eliminating any arbitrage business or financial investments especially very short term borrowings like overnight calls or 1-2 week corporate borrowings.
The Net Effect
The removal of all indirect taxes will lead to much lower domestic prices and higher disposable incomes propelling demand and growth of the country.
The exclusion of savings including Fixed deposits in banks from taxation will give higher incentives to save and in turn lead to lower borrowing costs for industry and higher capital formation.
The attractive rate of taxation at only 0.7% would make black money redundant and people insist on having above board transactions. A deposit of Rs.1 crore would entail a tax outflow of only Rs.70000 compared to about 35 lacs as of now. The tax payout will be too small and painless to even bother to evade. Compliance will be far more convenient.
The governments monitoring would only be to ensure that the growth in M1 money supply is restricted to the growth in GDP and that would restrict inflationary pressures on the economy while promoting growth.
Finally, to facilitate and protect very short term financial borrowings, the banks would need to deposit the collected tax to the government on the 30th day from date of collection thereby giving them access to FREE funds for 30 days to be given out for short term borrowings at interest rates of 0-0.3% which even after accounting for the BTT would be viable for any transaction at interest rates lower than those prevalent today.
While its revenue replacement proposal might seem radical please do not approach it superficially and fail to account for lower collection expenses, freeing of government capital resources and the gains that accrue to individuals and small businesses freed from filing returns and maintaining accounts, not to forget the transparency and encouragement to those in the lower spectrum to enter the banking system.
If you find any flaws or have any questions please do not hesitate to ask or criticize in the comment box below as that will enable this system to be fine tuned till it is perfect.