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:
- 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.
- 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.
- 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!