Q. Because of high illiteracy, is it possible that general public will transact through banks?
A. 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.
Q. A vast majority of our population does not use the banking system. How can this proposal work effectively in this situation?
A. It is estimated that 30% of the country's 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 rural areas, additional revenues will start coming in and could actually result in the reduction of transaction tax.
Q. What will be the fate of manpower engaged in the present tax collection mechanism, which may prove to be redundant because of introduction of Transaction Tax?
A. A well thought out Voluntary Retirement plan will have to be offered to all officials presently involved in the collection of revenue. Full salary payment up to retirement and above that, all retirement benefits can be offered to such employees. Since there will be a direct curtailment in all expenses expect human resource cost being paid presently, this is quite feasible/practicable.
Q. Does 'ArthaKranti' propose to demonetize Indian economy?
A. 'ArthaKranti' does not propose to demonetize the economy. It proposes to limit currency to face value of Rs.50/-. It further proposes not to tax any cash transactions, which will in effect free the weaker sections of society who will transact in low denomination currency, from all tax liability. The affluent class (transactions of which are considerably large) will have no substitute but to go for bank transactions, since it is inconvenient to transact high value transactions in low denomination. A salient feature is that every large transaction will have accountability, which will check corruption.
Q. Will Transaction Tax cause a price hike of commodities/services because of multifold tax effect?
A. In comparison to the existing tax pattern Transaction Tax will have little effect on price rise of commodities/services; rather, Transaction Tax is in tune with accepted principle of Value Added Taxation (VAT) by government, which is now implemented in the coming year. Transaction Tax has a merit that, it does not require any administrative work or paperwork on account of tax payment. Moreover, in the 'open market' era, the price structure of commodities and services is determined largely by natural competition. This will ultimately lead to a shift from 'affordability' to 'quality'.
Q. Does Transaction Tax follow principles / canons of taxation?
A. Yes, the way in which it is proposed here, it does.
Q. How will 'ArthaKranti' affect hand loans and small amount dealings?
A. 'ArthaKranti' does not restrict any cash transaction within the frame of the decided legal cash transaction limit and denominations.
Q. What will be the effect of 'ArthaKranti' on Stock / Capital market?
A. 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.
Q. Why has the 'Transaction Tax' concept not been implemented by Economically developed countries so far?
A. 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 penalized for evasion of tax in Germany, this indicates that to evade tax is a general tendency all over the world.
Recently, similar proposal has been adapted by a US Senator and has been put up for a feasibility study in the U.S. (Ref - www.theorator.com and www.heartland.org/pdf/15849.pdf.) Another similar-sounding proposal has been put up by an American Professor, Dr. Edgar Fiege, primarily aimed at reducing complexities of the taxation system. ( www.apttax.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 Twenty first 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 and boost to capital formation process.
Q. Will Transaction Tax force people turn to barter exchange, since it is a normal tendency to evade tax?
A. In the twenty first 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.
Q. What will be Transaction Tax's 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 debtor's 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 debit effect to particular bank account which 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.
Q. 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?
A. The TT effect will be factored automatically into sales price by businesses since it is only natural and logical to protect one's 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.
Q. 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?
A. It is true that TT will not distinguish between loss making and profitable companies, just as it will not distinguish between tax-paying entities on any other grounds. It proposes taxing money - not people.
- 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 AK?
- 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.
- 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.
Q. How can we overcome resistance from political and bureaucratic forces, which are based on the present corrupt system?
A. Please Refer to section (add link here) for the strategy of 'ArthaKranti'.
Q. What will be the effect on the phenomenon of corruption? Can it be tackled effectively?
A. Arthakranti proposal attempts to address the motive behind the corruption and tool for the same(high denomination notes). 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.
- Corruption at the micro level is likely to take some time to disappear since it is also linked with moral standards of society. However, a number of steps can be recommended to introduce an element of deterrence and ensure accountability:
- Every bank account could be linked to a unique identification number like PAN
- It can 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 Government, duly certified by Accounting Professionals.
- Every individual could be required to disclose the source of receipts above a pre-determined limit once a year to the Government, duly certified by Accounting Professionals as required by law.
Through such means, all dishonest and anti-social elements can be effectively tracked and charged under strict laws of the land.
