JANUARY 15, 2014

By TIOL Edit Team

YOGA Guru Ramdev, Bharatiya Janata Party (BJP) and a few other entities are talking of Utopian tax regime. They all believe that multiple, direct and indirect taxes levied by the Centre, States and municipal corporations can be substituted by a single banking transaction tax (BTT). Others have restricted this loud thinking to substitution of all taxes under the Income Tax Act with a uniform single tax.

Gujarat Chief Minister and Prime Ministerial candidate Narendra Modi's has shown inclination to study Ramdev's tax reforms proposal. According to a news report, former BJP President Nitin Gadkari had stated that he is contemplating incorporating a proposal to abolish income, sales and excise taxes in the party's Vision Document. The proposed reforms have, of course, been derided by Congress Party and Samajwadi Party.

All this flippant discourse needs to be discouraged without compromising the need for serious tax reforms. The proponents of single BTT have oversimplified the legitimate requirement for tax reforms which is urgently needed to avoid crony capitalism, tax avoidance and evasion.

While pitching for BTT, they have overlooked the fact that subsuming of all taxes into BTT is next to impossible in a federal structure where the Centre and States are locked in endless chase for resources to finance development, honour reasonable political promises and indulge in giveaways.

BTT proponents including Ramdev are tax payers. They thus want to make their life more comfortable through over-simplification. In this process, they should not overlook the fact tax revenue is required for not only governance and development but also for aiding poor people.

When the introduction of truncated goods and service tax (GST) is proving to be herculean job and when three-tariff value added tax (VAT) has morphed into tax jungle, it is downright ridiculous to talk of BTT as substitute for all taxes. How does one ensure that BTT would be revenue neutral? How does one ensure that tax revenue buoyancy through BTT would be same as that achieved through existing taxes?

BTT proposal would require amendment of the Constitution, which neither the Centre nor the States would agree. In the highly fractured Indian polity, no political party or coalition can mobilize overwhelming majority in Parliament and the States to amend the Constitution for replacement of all taxes with BTT.

The Constitution has assigned clear taxation powers to the Centre and the States. Article 246 of the Constitution has specified three Lists -the Union List, the State List and the Concurrent List. The Centre has the exclusive power to make laws for 13 taxes that figure in the Union list. Similar arrangement exists for 19 taxes that figure in the State List.

The Constitution also specifies the mechanism through which the Central taxes are to be shared between the Centre and the States. For this, the Union Government sets up a Finance Commission in accordance with the relevant provisions of the Constitution.

The 14 th Finance Commission, which is required to submit its report by October 2014, has to keep into various issues. These include the taxation efforts of the Central Government and each State Government and the potential for additional resource mobilization to improve the tax-Gross Domestic Product ratio in the case of the Union and tax-Gross State Domestic Product ratio in the case of the States.

Though terms of reference of Finance Commission can't be altered at this stage, Finance Commission can independently commission a research paper on BTT. It can be requested to give its preliminary opinion based on chaotic & shabby infrastructure that exists in the financial services domain.

The pre-requisite for BTT is creation of cashless economy. This is like asking for a moon in a over-populated, poverty and diseases-stricken country, where cash can't be wished away. Does Ramdev expect a well-off person to give alms to beggars through mobile banking?

Forget mobile banking, the servers, network or broadband connections are often not working at different bank branches across the country. Many parts of the country simply do not have electricity supply for several hours in a day.

BTT cannot and would not work in a system that lacks reliable and inclusive banking and allied infrastructure. And as long as cash exists, BTT would be avoided and evaded by dishonest citizens at every given opportunity.

BTT would also encourage tax evasion through barter deals and gift culture. What would BTT proponents do when a citizen pays for car or a house by giving hoarded gold or any other precious commodities that are often acquired with black money or corruption money?

Instead of pitching for over-simplification, we should all demand simple, credible and durable taxation structure that should not be tinkered every now and then. Tariff structure should be altered once in five or ten years after completing public consultation.