An economic revolution like a miracle

Subject :

Miscellaneous

Month-Year :

May 2005

Author/s :

Anil Bokil

Topic :

An economic revolution like a miracle

Article Details :
Editorial Note :

This article is based on the publication of ArthKranti Pratishthan (Mission : Indias Economic
Rejuvenation), written by the author, Anil Bokil. It is printed here to generate a debate on the issues
involved.
Background of revolution :
One more budget has come and gone. The public mind is still reeling under the month-long
bombardment of hectic financial reporting, endless debates in the media and press about the impact of
this tax or the other, and learned articles by the kilo written by the cream of our economic intelligentsia.
The Government, the supreme ruling body, is the poorest and the most debt-ridden organisation in this
country. The lack of resources is crippling the entire legislative, administrative and judicial apparatus. The
fiscal deficit refuses to go away and the gap between revenue and expenditure continues to widen.
Fifty-eight years after Independence, the number of people and business entities with PAN numbers is
less than four percent of the population. The complex taxation system has frustrated everybody from the
layman to taxation experts. Every attempt to scrape up some more revenue by imposing new taxes is
driving more and more honest citizens to the conclusion that Evasion equals Survival.
This perceived need for evasion is encouraging dishonesty and breeding contempt for the law of the land.
The damage caused to the moral fabric of society is frightening. What we see around ourselves is the
result of a widespread, all-encompassing epidemic of corruption across social divides of every kind,
afflicting all, sparing none.
What can be done to arrest this downslide ? How can we ever regain the strength of character that our
forefathers had ? Most importantly, how can we nourish and build our economy to a position of solvency
and self-sufficiency ? Can malaria be treated with a colds tablet ? Can cancer be cured with an antacid ?
Why then are we still trying to tackle new diseases with outdated medicines ?
I believe that it is possible to devise a solution fundamentally different, starting afresh from the ground
upwards, based on a clear vision of the world as it stands today. It is necessary to design a solution
keeping in view our society, our economy and our present status.
Banking, capital formation, the system of taxation and the
existence of a parallel economy :
These are extremely important aspects of the economic scenario in our country today. It is all very well
known that deposit in a bank has a multiplier effect and the entire banking system is based on the
concept of credit creation with appropriate safeguards. The statistical data and other relevant information

however prove that credit creation in our country is very poor.

Current scenario : A statistical look :
As per the data available on the money supply, from www.rbi.org.in
Currency money = Rs. 3,35,844 crores
Bank money = Rs. 2,40,658 crores
The figures clearly show that the Bank Money is less than the Currency Money. Because Bank Money is
scarce, money itself has become the most valued commodity. The economy forever faces a scarcity of
money.
Money that has come into existence merely on the strength of the statutory powers of the
Government is less credible than, say, a cheque backed by an adequate deposit in the account, or a loan
granted against a tangible asset. When money is printed without the blocking and backing of equivalent
assets, it has a direct inflationary effect on the economy. It is observed and can be proved with tangible
figures that the banking infrastructure in India is very poor in terms of effective operations. Even the
cooperative banking nets in taluka and district levels have taken the role of the erstwhile moneylenders
and the availability of risk capital is very poor. Bank loans are available mostly against a tangible security
rather than the credibility of the customer.
Reason for underutilisation
of the banking system in India :
The table on the next page displays the disparity between India and top world economies as regards
ratio of Per Capita Income to Highest Denomination.
Because of the easy availability of high denomination currency, the trend in India is to avoid bank
transactions. This practice has a very adverse effect on Credit Expansion Capability of economicsystem
and is a major hindrance in adequate capital formation.
The system of taxation in India :
It is the primary duty of a Govt. to provide a stable, peaceful and secure social and economic
environment to its citizens. Every Govt. needs a source of revenue to enable it to discharge its duties of
governance effectively. The logical source of this revenue is the citizens of the country that receive the
benefit of the efforts of the Govt. This is why the System of Taxation has been accepted over the
centuries as a tried and tested method of raising revenue for the business of governance.
The Indian civilisation is considered to be one of the oldest on the earth. There exists in our country a
storehouse of knowledge and thought on a wide range of subjects, written thousands of years ago. There
are a number of highly respected works on the art and science of governance, public administration and
management of society. Here is what one of them says about a System of Taxation :
Source Vidur Niti
(The Mahabharata) :

Yathaa Madhu Samaadatte rakshan pushpaani shatpadaaha;

Tadvadarthaan Manushyebhya Aadadyada vihimsayaa !
Meaning "Just as a honeybee extracts the precise amount of nectar that it needs from a flower without
hurting or dam-aging it, a fair system of taxa-tion should be able to collect revenue without causing pain
or violence to the taxpayer citizen."
In recent history, eminent economic thinkers from the USA and Europe have contributed significantly to
this subject and what they have to say goes hand in hand with what is stated in the Sanskrit verses
mentioned above. Given below are the Canons of Taxation as laid down by the Western experts and a
brief analysis of how the Indian System of Taxation compares with them.
An ideal tax system

An ideal tax system is based on the canons of equity, productivity, simplicity, certainty,
elasticity and economy. Unfortunately, none of the canons of taxation have been properly
fulfilled although periodical attempts have always been made. It is not my intention to go
into these details which are very well known to the professionals.
The complex nature of tax laws enacted by the Central Govt., State Govts. and the local authorities give
more powers to the tax authorities who have been issuing orders interpreting the tax laws differently in
different cases, leading to litigations and delays in collecting taxes. The taxpayer is treated with suspicion
and the honest tax-payers suffer. The taxpayers lose time and money in litigations.
The current taxation system is complex beyond comprehension and makes it a must for the taxpayer to
seek assistance of experts to understand its implications. It arouses fear in the minds of citizens and is

the single largest factor that drives honest people away from the White Economy. This
system is the root cause behind the generation of black money and the rise and
establishment of the parallel economy.
Conclusion :

One has, therefore, to come to a conclusion that the present system of taxation in India remains limited
in scope, irrational in design and ineffective in collecting sufficient revenue. It is the
crying need of the hour to reform the System of Taxation in India.
Remedies which would be effective :
Can there be effective remedies to materially alter the present situation ? Or we have to suffer in the
present system for generations together ? I believe that a change is necessary and it should be made
urgently. My submissions for a radical change in the present system are put forward for your
considerations, critical examination and a debate. Such proposals are as under :
1. Abolition :
Withdrawal of all Direct and Indirect Taxes (except customs and import duties).
2. Single tax on transactions :

Every transaction routed through a bank will attract certain deduction in appropriate

percentage as Transaction Tax i.e. Single-Point Tax deducted at source.

This deduction is to be effected on receiving/credit account only.
This deducted amount could be credited to different Government levels like entral, State
and Local and Transacting Bank (as commission) as follows :

e.g. a 2 % Transaction Tax can be distributed as :

0.70% of transacted amount to Central Govt. Account
0.60% of transacted amount to State Govt. Account
0.35% of transacted amount to Local Govt. (Municipal Corporations) Account
0.35% of transacted amount to Transacting Bank Account
Kindly note that this tax rate of 2% and its breakup is purely notional and has been given to
facilitate a clear understanding of the concept. Ultimate rate could be even lower and its

breakup based on needs could be a subject matter of high-level discussion.

3. Currency compression :

In a given time frame, currency notes of denomination higher than Rs.50/- could be
abolished from circulation. The highest denomination thereafter will be Rs.50/-.

4. Cash regulation :

Cash transactions will not attract any transaction tax.

Cash transactions above a certain limit, say, Rs.2000 will be deemed illegal. This also
implies that cash transactions below this limit will be tax-free and legal.

5. Control and verification systems :

Every bank account must be linked to a unique identification number like P.A.N.

It must be binding by law on all banks in the system to carry out Transaction Audits of all accounts in
each branch and submit them periodically to the Govt., duly certified by the CAs.
Table 1
Revenue of Centre and States taken together
2003-2004 Budgetary Probable tax collection as per present proposal [@0.7% share
estimates
of the Centre + 0.6% share of the States]
Total receipts

8,16,507

8,20,651

10,94,201

13,67,751

16,41,301

Revenue receipts

5,21,691

At 30%

At 40%

At 50%

At 50%

Capital receipts

2,94,816

Transaction Transaction Transaction Transaction

ratio
ratio
ratio
ratio
Currency

Demand

Narrow

money

deposits

money

3,35,844

2,40,658

5,76,502

Considering a Total Narrow Money of Rs.5,76,502 crores with

a moderate assumption of 30 to 60% of this amount to be
active in daily transactions.

2003-2004 Budget

Probable Tax Collection as per ArthaKranti Proposal [0.6%

Share of the States]

Total Revenue

37000

Tax Revenue

29000

Capital Revenue

8000

49,200
Given that in Mumbai alone cheque
clearances worth Rs. ~82,00,000 crores took
place in 2001-02, 0.6% of this amount itself
[share of State] would surpass the
Maharashtra Government Revenue.
0.006*82,00,000 = 49,200

Revenue of Mumbai Municipal Corporation

2003-2004 Budget

Probable tax collection as per ArthaKranti Proposal

[0.35% share of local body]
28,700

3000

Cheques worth Rs. ~82,00,000 crores were cleared in

Mumbai in the year 2001-2002.
0.0035*82,00,000 = 28,700

Note : All values are in Rupees crores unless otherwise specified.

The equity, simplicity and economy of this system are self-evident at the conceptual level
itself. Some calculations are given below to demonstrate the productivity, certainty and
elasticity of the proposed system.
The tomorrow of our dreams . .
The implementation of this theory is nothing short of a revolution. It will result in the transformation of
the very pattern of economic existence as we know it today. Resistance to change is natural, but with
understanding and awareness, it will give way to heartfelt support. This effect will be seen in all
categories of people all except certain cases who are attuned to other income, and who will not want
to even imagine an existence without it.
This system is in best interests of every citizen of this country, who wants nothing more than a good
standard of living, all essentials of life provided for and a fair chance of realising his potential honestly,
without discrimination of any sort.

The introduction of a comprehensive Social Security Scheme which will ensure social
stability and a dignified existence to the weakest of our citizens .

A corruption-free society will no longer be an utopian dream. We could well be on our

way to it.
Since democracy is our accepted and favoured system of government, it is the need of
the country to hold periodic elections. The government can allocate adequate
funds/loans to all candidates contesting the elections, whereby they will not need to look
to sources of cash for their election campaigns.

The correct image of the Government as of the people, for the people and by the people
will be restored. The political class will be able to show real achievements to the people
rather than unviable promises which need to be broken soon after the election. They will
have a chance to establish their standing as genuine and efficient leaders of the society.

The primary aim of this article is to generate discussion and study of the proposals very critically. An
improvement can take place by positive inputs from all concerned. I have, however, a firm belief that in
case these things are considered in the right earnest, it would lead to an economic revolution of the 21st
century and India could be a very strong economy and world leader, not only in economy but also in
economic thought. Some of the frequently asked questions and the answers which I thought could be
appropriate are given hereunder.
Some frequently asked
questions :
1. Because of high illiteracy and poverty, is it possible that the general public will transact through

banks ?

Such people can transact in currency of face value less than or equal to Rs.50/-. Since the volume of
such transactions is quite less, this is convenient and it is also feasible to waive any tax on such cash
transactions. This is in tune with the socialistic philosophy of our country.
2. A vast majority of our population does not use the banking system. How can this proposal work

effectively in this situation ?

It is estimated that 30% of the countrys population is concentrated in urban areas but uses 70% of the
banking system, and vice versa. In the initial period after implementation, this will ensure adequate
revenues through urban bank transactions alone. Later, as banks spread out in the rural areas, additional
revenues will start coming in and could actually result in the reduction of transaction tax rate.
3. What will be the fate of man-power engaged in present the tax collection mechanism, which may

prove to be redundant be-cause of introduction of Trans-action Tax ?

A well thought out voluntary retirement plan will have to be offered to all government officials presently
involved in the collection of revenue. Full salary payment upto retirement and above that, all retirement
benefits can be offered to such employees. Since there will be a direct curtailment in all expenses except
human resource cost being paid presently, this is quite feasible/practicable.
4. Does Transaction Tax follow principles/canons of taxation ?
Yes, definitely.

5. How will ArthaKranti affect hand loans and small amount dealings ?
ArthaKranti does not restrict any cash transaction within the frame of the decided legal cash transaction
limit and denominations.
6. What will be the effect of ArthaKranti on stock/capital market ?
When ArthaKranti comes into effect, the stock/share market will need to take into consideration the
fixed rate of Transaction Tax while dealing. The greatly improved business environment can only mean
well for the capital markets.
7. Why has the Transaction tax concept not been implemented by economically developed countries so

far ?

All existing taxation systems of the world, including our own, have evolved through the efforts of
economists with similar training from the same school. Their beliefs and methods are rooted in the old
economic theories, which have been accepted without question and then distorted for reasons of political
expediency.
The ArthaKranti (Transaction Tax) concept has been designed for India, in India, by an Indian.
Nevertheless, looking at the superlative merits of this proposal over all existing tax systems, it is likely
that, most countries of the world may adopt Transaction Tax system. It is interesting to note that the
father of tennis superstar Steffi Graff was penalised for evasion of tax in Germany. This indicates that to
evade tax is a general tendency all over the world.
Recently, this proposal has been moved by a US Senator and has been put up for a feasibility study in
the US (Ref. www.theorator.com and www.heartland.org/pdf/15849.pdf.). Another similar-sounding
proposal has been put up by an American Professor, primarily aimed at reducing complexities of the
taxation system. (www.apttax.com). An interesting Transaction Tax proposal can be seen on
www.taxmoney-notpeople.com. It is clear that thinkers across nations are beginning to acknowledge the
necessity of designing a fresh and radically different method of revenue collection for the 21st century.
The most important thing to remember here is that while a developed country like the US will benefit
from the simplification of taxation systems, a country like India will undergo a complete transformation
because of the eradication of the parallel economy.
8. Will Transaction Tax force people turn to barter exchange, since it is a normal tendency to evade tax ?
In the 21st century, there is a very remote possibility of people turning to barter exchange. It is not only
tedious, but merely impossible to establish exact barter exchange standards, because of the variety of
range of products and services to be exchanged. However, in a small spectrum, barter exchange is
possible even today. The most important part is that the unbelievably small tax rate and painless method
of collection hardly leaves an incentive for tax evasion.
9. What will be Transaction Taxs effect on bank interest while disbursing loan to the loan account ?
The Transaction Tax will have an effect of certain deduction when loan amount is credited to loan
account. To avoid this, loan can be disbursed directly to debtors expenditure account. It means that
capital/term loan will have to be disbursed like cash credit disbursement procedure. However, bank may
have an effect of Transaction Tax when loans are being recovered. It means, except bank share, rest
three allocations of Transaction Tax will automatically have debt effect to particular bank account that will

be a net revenue loss to the bank. To avoid this, RBI has to consider this effect while deciding prime
money lending rate or Bank rate considering 2% or 3% (the Transaction Tax rate) as a reference.
10. Trading of all kinds is an important and widespread economic activity. Usually the volumes here are

high and the margins low, at times a fraction of 1%. There is almost no value addition happening. Will
the Transaction Tax on all receipts increase the tax burden on traders ?

The TT effect will be factored automatically into sales price by businesses since it is only natural and
logical to protect ones margins. So, for a particular product, there could be a downward revision of say,
30% due to abolition of all current taxes and an upward revision of 2% (notional TT factored into selling
price). This means a net reduction of 28% anyway. And then there is no income tax to be paid at the end
of the year.
11. In the present system, loss-making companies do not pay any income-tax. But according to the

ArthaKranti proposal, all receipts will be taxed, irrespective of whether a company is loss-making or
profit-making. Is this fair ?

It is true that TT will not distinguish between loss making and profitable companies, just as it will not
distinguish between taxpaying entities on any other grounds. It proposes taxing money not people.
(a) A thought will have to be given on why companies make losses. Burdensome and complex taxation,
unequal markets, corruption, lack of infrastructure, lack of capital are some very valid reasons of business
failure. Will it be wrong to imagine that the very phenomenon of real business failure would reduce
significantly post-implementation of ArthaKranti?
(b) A poorly managed company will fail anyway despite everything else being in its favor. Since TT can
be easily passed on to the customer, the issue of specifically taxing a loss-making company does not
arise.
(c) Then there is the question of how many companies really make losses and how many show losses to
evade tax. Manipulating depreciation and expenses is a routine method to show losses on paper. This is
pure evasion, and can only be triggered by high rates of income-tax and nothing else. Why on earth
would a businessman willingly push his balance sheet into the red ? Post implementation of the
ArthaKranti proposal, the incentive for tax evasion disappears totally. We could very well see this
phenomenon becoming a history.
12. What will be the effect on the phenomenon of corruption ? Can it be tackled effectively ?
Implementing the ArthaKranti proposal will deal lethal blows to the parallel economy by bringing it back
into the fold of the banking system and removing its favored currency of high denomination. Strong
governance and the traceability of transactions coupled with these factors will ensure very unfavorable
conditions for corruption at the macro level.