Sucheta Dalal :Dissecting the Finance Minister's transaction tax
Sucheta Dalal

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Dissecting the Finance Minister's transaction tax  

Mar 7, 2005



 

In his budget speech, Finance Minister P. Chidambaram said: ‘‘I am concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amounts of cash. These cash withdrawals leave no trail, and presumably become part of the black economy. Therefore, I propose to introduce two anti tax-evasion measures: Firstly, I propose to levy a tax on withdrawal of cash on a single day of over Rs 10,000 or more from banks at the rate of 0.1 per cent. Thus, a person withdrawing Rs 10,000 in cash would have to pay a small sum of Rs 10. Secondly, I propose to require banks to report to the government all deposits, which are exempt from TDS on interest.’’

The first measure, the ‘cash withdrawal tax’ created a furore in Parliament, presumably because our public representatives expected to be personally affected by this tax. However, the tax doesn’t seem quite what it is made out to be. As an ‘anti tax-evasion’ measure, it will certainly impose a teeny-weeny tax on those who use the banking system to stash undeclared wealth, but it is not quite clear how it will create audit trails.

The ‘cash withdrawal tax’ is structured like the Securities Transaction Tax (STT) imposed on stock market transactions (STT) by requiring banks to deduct the tax and pass it on to government.

However, the STT also doesn’t create audit trails that give the government any indication of the stock market earnings of any particular investor and whether or not these are correctly reported to the tax authorities. All that the STT does is to collect a small transaction tax on every trade.

The cash withdrawal tax will do exactly that. It will let the government collect money on every tax withdrawal of Rs 10,000. That is nice and neat; and if the finance minister had merely said he wants a transaction tax, he would merely have outraged economists and cause all others to grumble.

Instead, the post-budget debate on television and the media seemed to suggest that several senior bureaucrats as well as television anchors seem to believe that black money is stashed under beds and in cupboards or at best invested in property. What they do not seem to know is that significant chunks of black money is safely using the banking system.

Anyone connected with the capital market will tell you that so long as a good chunk of our banking system is not computerised, banks are the safest place to stash unaccounted income. Investors in the capital market hide hefty profits generated in the market, by simply omitting to declare the bank accounts used to log some of their trades. Until a sophisticated Tax Information Network (TIN) is put in place, there is no way that audit trails will smoothly lead to every bank account opened by an investor.

Moreover, multiple depository accounts also ensure that trading operations are distributed among multiple accounts and blur the audit trail. Another routine precaution is to transfer money out of accounts with banks that have computerised systems and move them into safer cooperative banks (safer in the sense that the trail gets more blurred when money moves out to such accounts) with a low level of computerisation. Most people who avoid paying taxes also ensure that they close out old accounts and open new ones every few months. To this again, a naive question that I heard on television was — ‘‘don’t they need photo identities to open bank accounts?’’ Sure they do. But most regular market traders route their trades through investment entities, which have multiple signatories.

In any case, by simply changing bank accounts every few months, sometimes within the same branch, they blur the audit trail quite effectively.

Incidentally, banks are usually quite clear that they are neither law enforcement agencies nor the moral police. So long as the deposits are safe and earn them returns, they don’t ask too many questions — often they don’t even verify the photo identity or the address of the depositor. After all, why worry about an address when a person is depositing his money with you? The most unquestioning banks are of course single branch outfits and cooperative banks controlled by politicians. But again, they don’t need to worry as yet, do they? Many politicians claim that they often have to withdraw lakhs of rupees to pay party workers, especially when the organise rallies. Well, the finance minister is doing nothing to hurt them as yet. All he wants is a tiny tax of 0.1 per cent.

Given that much of this money does not pay any tax at all, one would argue that nobody has any business complaining. If the finance minister wants audit trails, he needs to close down some cooperative banks, encourage the takeover of tiny private banks, get a single regulator for the cooperative banking system and push for bank automation on war footing.

The problem is that in trying to collect a tiny tax from evaders, the finance minister is antagonising honest tax payers as well. The finance minister and his babus seem to think that Rs 10,000 is such a big sum that only tax evaders make withdrawals of that amount. Untrue. Check with any new private bank or foreign bank, which has the payroll accounts of most large companies and they will tell you that most people withdraw their cash requirements at Rs 10,000 each time. They will have to visit their ATMs twice as many times.

As for businesses — large and small — they usually have to withdraw large quantities of cash only to pay bribes or even government levies. While the banking system is considered safe to salt away unaccounted income, most bribes are still paid in cash, kind or in terms of junkets or as highly profitable stock market investments.

In fact, if the finance minister forgets about frightening politicians and hoarders of black money by talking of audit trails and merely claims he is collecting a transaction tax, there will be very few protests. Also, instead of reducing the tax to 0.05 per cent, it would make more sense to raise the withdrawal limit from Rs 10,000 to around Rs 25,000, so that he does not burden genuine taxpayers with another levy.

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-- Sucheta Dalal



 



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