1. Why PM Narendra Modi must beware of the breathtaking Arthakranti tax

Why PM Narendra Modi must beware of the breathtaking Arthakranti tax

Though the demonetisation of the 500- and 1,000-rupee notes is widely credited to the Pune-based Arthakranti Prathishthan, the think-tank seems to be distancing itself from the move.

By: | Published: November 23, 2016 6:15 AM
Though the demonetisation of the 500- and 1,000-rupee notes is widely credited to the Pune-based Arthakranti Prathishthan, the think-tank seems to be distancing itself from the move. (PTI) Though the demonetisation of the 500- and 1,000-rupee notes is widely credited to the Pune-based Arthakranti Prathishthan, the think-tank seems to be distancing itself from the move. (PTI)

Though the demonetisation of the 500- and 1,000-rupee notes is widely credited to the Pune-based Arthakranti Prathishthan, the think-tank seems to be distancing itself from the move.

A ticker on the think-tank’s website says banning notes will not help curb black money and, in an interview to The Economic Times, its founder Anil Bokil has said ‘this is not what we had proposed’—and while saying the government has ‘lost the transition plot completely’, Bokil makes a pitch for his big plan, to scrap all taxes and to replace them with a banking transaction tax.

A volunteer spells out the maths. While, he says, the combined tax revenues of all branches of the government added up to around R21 lakh crore in FY16, this has to be contrasted with a 2% banking transaction tax on the average monthly banking transactions of R120 lakh crore—that works out to R28.8 lakh crore.

Literature on Arthakranti’s website talks of how, on a typical day, RTGS transactions are around R270,000 crore—do the math and a 2% tax ends up giving the government R19.7 lakh crore.

If the tax collections for the government are roughly the same under the existing system and the Arthakranti one, the simplicity is breathtaking, since there will be no more personal income taxes, no corporate taxes, no sales taxes, no excise duties, nothing.

Even if you assume that everyone will continue to transact through banks if there is a tax levied, the problem with the Arthakranti proposal is that it does not even consider the impact of cascading that affects all turnover-based taxes of the type it is advocating.

If, for instance, a firm’s profit margin is 5%, this means it is effectively paying a 1.75% tax on its turnover—assuming a 35% corporate tax.

In the case of a banking transaction tax (TT), on the other hand, each time the company pays suppliers, employees, landlords or anyone else, it ends up paying a 2% tax—depending on how many times it makes payments, it can end up paying a significantly higher tax; the problem gets compounded many times over in the case of firms that are engaged in trading activities.

None of this, however, stops Arthakranti from saying that its proposal could result in a dramatic fall in prices—there could be, it says, “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”.

Indeed, while Arthakranti says its transaction tax “is in tune with accepted principle of Value Added Taxation … which is now implemented in the coming year”, it ignores the fact that VAT/GST have input tax credits built-in precisely to avoid the cascading of the transaction tax. Whether or not the prime minister got his plan for demonetisation from Arthakranti as the media suggests, he would do well to avoid this plan.

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