A time for radical tax reform – Sanjeev Sanyal

There was a column by Sanjeev Sanyal in Business Standard, dated January 28, 2014. Here is response to the article.

First of all, good to see that the author taking whole Arthakranti proposal in consideration. The author has simply put forth his views with 2 separate dimensions, one of merging cash economy and the other of BTT. Sanjeev has appreciated the merging of cash economy aspect and has raised some concerns about BTT, along with note that ‘it has triggered a much-needed debate over tax reform‘.

Sanjeev mentions “Shifting everyone to an electronic payments platform is technologically simple – even the ubiquitous mobile phone can be harnessed for this purpose”.

About BTT what Sanjeev mentions as fatal flaw is ‘BTT triggering vertical integration of businesses’ (the change of behavior) i.e. to void transaction tax companies might start doing everything in house or manipulate book keeping in a way to show that everything is being done in house.

The point about possible attempts to evade BTT, using vertical integration & similar means, is logical. However the consideration should also be given to a point that such evasion would happen only if the BTT rate is more costly than the gains of specialization, in many cases this is unlikely. The international economists and experts like Edgar L. Feige & Marcos Cintra have not only studied this in greater details, however they have also simulated such scenarios and have confirmed the same with their experience. One can read their comments from their researches at http://arthakranti.org/proposal/objections-and-positions/75-incentive-to-excessive-vertical-integration

Due to above mentioned concern Sanjeev seems to suggest that why don’t we go ahead with currency compression along with existing proposals like DTC.

We would like to bring attention to few more aspects, where Arthakranti BTT proposal has important impact:

  1. The banking in India is facing international competition and the interest rates here are not reasonable, in terms of the cost burden and also from international competition’s point of view. For availability of adequate capital at cheaper rates, expansion of banking is must. The clause of paying part of BTT to the bank is going to incentivize spread of banking, which is very much needed if cash economy is to be merged in formal system.
  2. Secondly the current model of governance, tax revenue collection & distribution is resulting in pocketed (only few places getting developed) model which is leading to issues like sever migration and its consequences for metros as well as for small towns and villages. The decentralized tax distribution, as proposed in Arthakranti proposal should help bringing in development across the nation.
  3. There is big problem of indirect tax system as well, it is detrimentally complex and burdensome in terms of compliance. Even if we consider GST proposal, which is better than current system, however it is again a declaratory system. A declaratory system is inherently weak, because then again you are not sure how many people would really declare all of the income honestly, due to whatsoever reasons. BTT is almost compliance free and even tax rate is very small, compared to the benefits it fetches.

Sanjeev has raised concerns even about federalism – here one can find answer to that


About pricing impact due to cascading of tax:

  • We agree that VAT is modeled to avoid cascading. However rates for both CenVAT and state VAT are significant, about 12% and about 4% to 5% on many of the commodities. Also there is service tax of 12.36% => This overall burden of current taxes on prices of commodities on average is definitely above 20%. And one can observe that even today some taxes are cascaded like service taxes on inputs, taxes on petrol/diesel etc
  • However with BTT the overall tax component will be less than 10% of price, so there is straightforward reduction in tax burden, we will soon release more details about this.

Of course, author’s efforts to throw light of these different aspects of the debated proposal are appreciable!

2 thoughts on “A time for radical tax reform – Sanjeev Sanyal”

  1. The high inflation rates in our country and the size of the “black economy” which are themselves interrelated have made investments in land , property and precious metals the most attractive investment. Insofar as the economy is concerned such investments are ” dead investments ” and result in reducing the availability of funds for productive and employment generative purposes. This results in high interest rates – making it impossible for many desirable investments to be taken up. In order to increase the flow of funds for productive purposes there is need to have disincentives , making dead investments less attractive. One way to do this would be to retain wealth tax on property and strongly peruse its collection. Not only will this reduce the channelising of corruptly gained wealth which harms the economy but also subdue the speculative investments in land by the general public into landed property ( most of such property is not likely to be put to any use in their lifetime and beyond.) This will tax the rich who will need to defend their assets by paying from their income . It would thus try and reduce the inequalities in in society a slow and non aggressive manner while at the same time generating income for the state. Some exceptions – particularly for agricultural land where it continues to be used for agricultural purposes , or property owned by philanthropic/social bodies – will need to be allowed. A similar logic can be advanced for retaining ( in a manner in line with WTO requirements ) for continuing with import duties so as to nurture domestic industry and provide a level playing field to it.

    1. There is no doubt and we completely agree that the dead investments should be discouraged and productive investments must be encouraged!
      Several different ways can be aimed at this. One such way attempted by RBI during last 2 years was to increase interest rates for arresting long dwelling inflation. While revising interest rates upward continuously for 13 times, at several instances RBI emphasized dissatisfaction towards actions on fiscal and supply side, also warned the Government that monetary tightening alone is not arrest the inflation.
      We know that there was not much progress in addressing the fiscal and supply side issues. In fact the Government did raise import duties on gold to discourage dead investment in gold. Though it resulted in reduction of official gold imports, but consequentially it increased gold smuggling. Also there are many other factors operating in background which favors continuous hike in prices of reality sector.
      So if we want to encourage investments in productive investments, like the growth of businesses, entrepreneurship, farming, service sector etc., the effective way is to really encourage those by removing the bottlenecks on fiscal and supply side. And that is what Arthakranti aims at, by bringing in transparency and accountability in the Government and in whole economy, expanding the credit basket and making loans cheaper, simplifying taxation and removing compliance burden, encouraging infrastructural growth, merging black economy into white and founding ONE strong economy etc.

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