Demonetisation: Prelude To Universal Bank
Transaction Tax?
Into the second week after prime minister Narendra Modi’s
shock demonetisation announcement, the emerging picture is most encouraging.
Kept admirably secret, till 8 pm on November 8th,
despite some opposition insinuation to the contrary, it came as a surprise to
almost everyone.
About rupees four lakh crores has been deposited into the
banking system, since. The banks, flush with money, have cut their deposit and
lending rates spontaneously, without prompting from the RBI. Early movers in
this regard, include the SBI and Axis Bank.
Veteran banker KV Kamath expects the RBI to also cut its
repo rate by 100 bps within 3-6 months, as inflation comes down further.
An estimated Rs.10 lakh crores is expected by December 30th
, out of the Rs. 15-16 lakh crores of the demonetised notes in circulation. And
more to come in, funnelled directly into the RBI, by March 31st , 2017.
However, the government is not keen to reward those who
cannot explain where the money came from. In tandem with the frenetic banking, there
are stepped up income tax raids on those suspected of hoarding large tranches
of black money, indulging in hawala, counterfeiting, terrorism, money-laundering,
extortion, drug and arms smuggling etc. These too have been yielding satisfying
results.
Some reports suggest, a little improbably, that as much as
Rs. 4 lakh crores of the demonetised currency won’t be deposited at all,
resulting in extinguishing of the equivalent liability at the RBI.
That terrorism financing has been badly hit is also
immediately evident, in Kashmir, the bad-lands of Bengal, and the Maoist
jungles of central India.
Good as all this sounds, this gargantuan exercise involving
millions of citizens and massive disruption, would not have been undertaken at
all, if it wasn’t part of a bigger plan.
The Modi government knows full well that one time demonetisation
is not a permanent solution for black money, counterfeiting, or corruption.
The history of demonetisation, here in India, and elsewhere,
tells us as much.
Chief Minister Akhilesh Yadav, of election bound UP, has
made the valid point that the Indian cash economy did cushion the impact of
global recession after the crash of 2008.
More so, because the RBI then, reacted to the global stress
and local boom conditions, by raising interest rates, and compressing all
official liquidity. It was afraid of the Indian economy over-heating at the
time, and ended up slowing it to its lowest level in a decade.
Happily, the policy situation today, is almost the opposite of
that time.
Indeed, if this demonetisation stays the entire action, then
we can safely expect redoubled activity on all pernicious fronts, after a pause
to regroup.
Meanwhile, it appears to be wildly popular. Initially, the
approval-rating was at 82%, in an urban opinion poll conducted on the 8th
and 9th November.
Another poll, conducted at the beginning of the
new week, shows 86% in favour.
The downside, of opposition political protests, would have
you believe that it is a backfiring, chaotic, disaster. It is painted out to be
anti-unorganised sector worker, daily wagers, the poor, the farmer, anti-old
people, uncaring of the marriage and crop planting season, and so on.
There are indeed long queues outside banks. Many ATMs are non-functioning,
others can disburse only a paltry Rs. 2,000. And yet, the public understands
that the dislocation it is suffering will contribute to the greater good.
Scrapping the Rs. 500 and Rs. 1,000 currency notes,
audacious as it seems, comes as the latest in a series of actions. It started
with the SIT on Black Money stashed abroad, and the Jan Dhan Yojana for the
great unbanked, yielding over 25 crore new accounts, the authentication and
linking with Aadhar cards, the introduction of universal insurance and pensions for the poor, the direct
transmission of subsidies where applicable.
Then came the great push to harness multiple indirect taxes,
largely evaded, into a hard won single GST, administered online, that will be
very difficult to dodge when it becomes operational, by April 2017 or so.
A certain Anil Bokil, a sixty something engineer turned
economist and his organisation from Pune, Arthakranti, is frequently mentioned
as the inspiration for the demonetisation.
Arthakranti first came to the fore for its advocacy, not
only of a cashless economy, but the abolition of income, corporate, and related
direct taxes too, in favour of a universal bank transaction tax of 2%. An
earlier advocate of something similar is the Harvard economist and Rajya Sabha
MP, Subramanian Swamy.
Will the future therefore see all the direct taxes replaced
too?
The demonetisation, big as it is, with its multiple
objectives, may be no more than a crucial pit-stop, towards getting the entire
money using population into the banking universe, that currently has Rs. 100
lakh crores in deposits.
Arthakranti’s ideas,
proposed as early as 2013, were, significantly, also included in the BJP
2013/14 election manifesto.
The government has, we know, long been struggling to expand
the income/corporate tax base, without
much success. To abolish these, and related taxes, in favour of a single bank
transaction tax, would therefore qualify as a major overhaul of the system.
If direct taxation is abolished, all money will be equal,
readily banked, and productive. Tax evasion would become a thing of the past. And
transaction taxes would actually garner much more from the entire bank using
population.
Prime minister Modi’s related proposals, aired afresh at an
all-party meeting on the eve of the winter session of parliament, a couple of
days ago, revived the idea of state-funded elections, and holding all of them- state/municipal
elections, simultaneously, with the general elections.
Prime minister Modi may well be keen on scrapping direct
taxes, sometime before the code of conduct kicks in before the 2019 general
elections.
The drive to gather black money from abroad however, an
early initiative of this government, has been a damp squib so far. The domestic
effort to get people to declare concealed wealth, the Income Declaration Scheme
(IDS), did very much better.
At Rs. 65,000 crores declared, it has been the most
successful scheme of its kind in India, even at a tax hit of 45%.
Still, it left a lot of money out there, if various
estimates on domestic black money are to be given credence.
Clearly, despite the administrative glitches being
experienced currently, the boost to the banking system, and the influx of cash
into the official economy will, in the medium term, also boost the GDP.
With the advent of GST in place of multiple indirect taxes, and
abolition of direct taxes in favour of a transaction tax, if it comes, India is
sure to experience a decade or more of double digit growth.
This, backed by reduced inflation, low fiscal/current
account deficits, no incentive to hold or hoard cash, and a stable currency, as
contributing factors.
For: The Nationalist
(1,134 words)
November 17th, 2016
Gautam Mukherjee
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