Recently many people have been suggesting radical ways to
reform the Indian economy. A famous babaji ("Yoga Guru") has
suggested doing away with all taxes except a flat 2% transaction tax on all
bank transaction. He has also suggested to withdraw all 1000 and 500 rupee
notes and demonetize them. In his defense he is not an economist and this idea
is pushed by many think tanks and economists too.
But even a superficial examination will reveal that this
will be extremely regressive step. Many point can be put forth:
1.Most of the Indians have no access to formal credit and
banking services, so the transaction tax may not be such a good idea as
sufficient revenue will not be generated(figures are available but I am not
going into that here)
2.It will push money out of banking system into informal
economy also known as black market as there will be a disincentive in having
money in banks.
3.Although there will be only one tax("Transaction tax")
and other taxes gone this will seemingly make tax assessment easy and improve
tax return(as allegedly, there will be no complexity in finding out one's tax
liability).But it can also be argued that, now as opposed to earlier, one has
to skip only one tax and the whole money is gone(in the black economy).
4.Its patently unjust and iniquitous as the rich and poor
will have to pay the same rate of tax and the rich will end up paying much lesser tax relative to
income. The middle class will be worst hit.
There are many more flaws but the followers of a particular
political economic ideology will keep
making noise in favour of this ridiculous idea.
I on the other hand propose something different, although I
don't lay any claim to its originality the idea must still be propagated so
that a more informed discussion can take place.I propose to move toward a cashless society with the current
tax structure intact(perhaps with a little decrease in tax rates so that
compliance and resultant revenue increases, refer Laffer curve)
WHY CASHLESS
In a cashless society transactions take place using only
bank instruments (debit/credit cards, demand drafts, cheques etc). Also cash
cards /prepaid cards can be used ( but to recharge/pay for them you will have
to use bank instruments). And finally e-payment modes (net-banking etc) which
can be thought to be an extension of banking instruments. Bitcoins are not
allowed due to their abuse potential(money laundering, anonymity of user,
hawala etc)
As every transaction is done through banks:
1. Every single paisa can be traced to its origin.
2. It will lead to more use of banking facilities thus strengthening
of banks which can then take a greater part in the local and global economy.
3. Curbing black economy and stopping black money generation
to a large extent.
4.Tracking every transaction in the economy thus putting an
end to sale of illegal items (atleast to some extent) like drugs, country guns
to items like Shahtoosh shawls, ivory and Javan monkeys!
5. Formalization of economy and growth of credit as banks
will have more "money" with them.
6. Subsidy targeting will be more focussed as cash is not being used(although this has
started under thr the DBT scheme)
7. Investment in more productive assets than gold and land.
8. Greater financialization and integration with global
economy(this however can be a double edged sword and requires fine regulation)
HOW CAN IT BE DONE & PRECONDITIONS FOR A CASHLESS
SOCIETY
I realize cashless-ness will not be easy to implement. So
the whole thing must be done in phases and some preconditions need to be there .
That is:
1.Making it illegal to transact over a certain limit using
cash
(I suggest 2000 Rupees because this won't hurt the daily
wagers, small shopkeepers, street vendors etc as their individual daily
business transaction rarely crosses 500 rupees as of today). Babaji had also
suggested this so this is probably our point of convergence.
Doing this will ensure that all transaction except the bare
essential and small ones will come under
the govt scanner. If need be a person will be able to show a record for every
paisa earned and spent (assuming s/he wants to).
As each paisa spent over this limit is tracked tax evasion
will become difficult (even if one has "earned" the money dubiously,
because when one has to spend this dirty money one has to go to the clean
establishments i.e. restaurants, car showrooms, jewellers, designer couture etc
and to protect their own skin these
establishments won't accept cash because then the liability shift to them).
This leaves the "dirty" establishments- those
willing to accept a cash or whose products are such that they help in money
laundering(e.g a bike store owner in Karol Bagh who charges 1500 Rupees for a
50 rupee tail reflector) this is dealt with later in the article.
2.Demonitization of 500 and 1000 rupee notes after a set
date.
As it becomes difficult to physically carry money alternate
sources will be sought and this is where the bank instruments come into picture.
Although it will not 100% curb the tendency to pay black money cash, it will certainly
make it very cumbersome and prone to detection.
3 Financial inclusion
It means giving access to banks to the millions who don't
have bank accounts. This is the most daunting and complex step. However some
beginning has already been made in the form of UEBA(universal electronic
banking account number). An idea generated by the Nachiket Mor committee of RBI,
it involves giving a UEBA to the unbanked people on the basis of UID(Aadhar)
and making it illegal to deny opening a bank account if UID is produced as a
form of identification(a deplorable practice rampant now).
However this would also require integration of NPR and UID
data de-duplication and giving UID a statutory status. Steps which are not impossible
and require but just a little political nudge.
4 POS (Point of sale )machines to be made more popular and
the cheaper.
Already in place and going on
5 Reducing card transaction charges.
This can be done by using a domestic payment gateway like
RUPAY instead of visa and mastercard which have higher transaction charges.Thus
making card payment acceptable to all i.e. merchant customer and the bank
CHALLENGES
Even after following these steps some more may be required
but demonitization of high end notes and cash spending limit are essential. However
many challenges may be posed in the implementation.
First, the mere demonitization will not deter black money generation.
Black money is that income on which tax is not paid that is why any formal
financial instrument or mechanism can't be used with it. This money is used
mostly of consumptive spending(jewels, expensive art, food expensive
accessories cars etc). And even though most(and with time many) establishments
and shops will insist on non cash payment to comply with the law, some
dishonest people will still want to push cash for high purchases. This is where
a couple of our laws come in handy. The PMLA(Prevention of Money Laundering
Act), various IT acts, IPC, the PCA(Prevention of corruption Act).
Why should we assume that these acts which are so
lackadaisically applied now will become tougher, let me explain how.
Imagine a dishonest shopkeeper(s/he could be in any part of
the country urban or rural and be engaging in any activity i.e. sale of service
or goods) for the sake of this example let's assume s/he is grocer. So this
person makes a sale above Rupees 2000 and tells the customer he s/he will waive
some amount if the customer pays in cash(even though the statutory limit of
2000 is breached).Now this is practice is not unheard of and shopkeepers rarely
give you a bill which means all that money is untaxed as its not accounted for.
So by avoiding a small tax the shopkeeper converts the entire sum into
black money and stashes it in the form cash or gold or real estate purchase.
The difference now will be that on one side the customer
will insist on a bill because in its absence his/her purchase(whether it's a
can of ghee or a laptop) will become illegally obtained and he can be
prosecuted under money laundering act. On the other side one will be willing to accept the shopkeeper's
cash because of the same reason. So we have a situation where a dishonest
person has money but no avenue to spend it.
Also using cash to
buy gold and/or real estate is not possible because these items easily cross
the 2000Rupee barrier and naturally every sale has to be through cashless
means.
Money laundering and stashing it abroad, though not
impossible, will become difficult as(now this is important and purely
contingent on the govt) now the govt will be expecting a rise in money flow in
economy and will be more alert and (hopefully) conduct more seizures and raids.
It's simple logic, if few people do a particular crime fewer get caught but if more
do the same crime many more are captured. So if we change the perception of the
severity of the same crime , it will get
more prompt punishment.
To explain further take this example: Compared to the no. of
people on at any given time very few indulge in drunken driving or DUI(driving
under influence). Compare this no. with the people spitting on the road or
jaywalking or any such "minor" offence. Now if the perception of
crime change(as matter of policy not in the people, because that takes time and
is difficult to achieve) and jaywalking/spitting on road is equated to DUI it
will be a cake to apprehend any no. of offenders and penalize them.This serves
as warning for other and slowly leads to change in action and behavior.
What I mean is the money laundering is a criminal offence
with much stricter punishment and very low govt tolerance for it compared to tax evasion which is a civil
offence and people can get out by paying a small fine. So a shopkeeper or any
individual who would have earlier paid a small bribe or a mediocre fine to get
away from charge of tax evasion will now either have to pay a huge bribe or go
to jail for a criminal offence both of which are strong deterrents.
Also as the risk of detection increases and people are
caught (govt here needs to make an example out of those who are caught by
giving swift and exemplary punishment) it will act as huge social deterrent.
Nowhere am I assuming that
there will be some change in the ethics and morality of the people in
general and law enforcers in particular. My attempt is to just convert a hitherto
"benign" offence to a more grave one thus ensuring greater compliance.
The counter point raised here is that it will need an army
of inspectors to see who is paying in cash. It's an exaggeration as most daily
essential transactions will still be in cash and under limit me transactions
need not be covered. The govt will be more than happy to have more law
enforcers of that sort (IT sleuths, EOW officers SFIO officers) to net the big
fish as the expenditure incurred on such officers will be more than compensated
by the revenues they bring in.
It all sounds very Machiavellian because he believed that
humans are intrinsically dishonest and fearful. Two tendencies which we exploit
here. If there is a threat of a swift and severe punishment people resort to
not doing the said activity, not from some inner belief in goodness but sheer
selfishness and fear. The behaviour then percolates and gets established in
society. Imagine the Danish as Vikings and how they are today.
DISCLAIMER: Article was written in a hurry as a result some
grammatical mistakes may be there.
Also this article is in the nature of a general idea and a
more nuanced debate is welcome with other experts.
