Susmit Kumar, Ph.D.
After proclamation of demonetization, Arthakranti proponents have been claiming that the government has taken the demonetization step due to the Arthakranti proposals. It is a wrong claim. The demonetization step taken by Prime Minister Modi has nothing to do with Arthakranti. In the early 1970s, the Wanchoo committee on black money had recommended withdrawing high value banknotes. Although the then Indira Gandhi administration did not implement the findings of the Wanchoo committee report, Morarji Desai government withdrew Rs 1,000, Rs 5,000 and Rs 10,000 notes from circulation in 1978. The present NDA government has no plan to implement the two percent bank cash transaction tax, after eliminating all present taxes except import duties, which is the very fundamental of Arthakranti.
We will see in this article that Arthakranti would transfer money from poor to the rich and also it would result in bankruptcy of the country. Due to a similar flat tax slogan by ultra-rich people in US, the tax rate is going down in last 30 years in US, resulting in huge tax saving by ultra-rich and causing US debt to rise to an unsustainable level.
(1) Without providing any data, Arthakranti proponents are claiming that their flat 2% cash transaction tax would result in the same amount of tax collection currently by the government.
(2) Under Arthakranti, rich will pay very small amount as compared to an average income person. As shown in table below, rich people will save a lot of money than an average income person. Under Arthkranti rule, people in top bracket (100 crore – 500 crore) will be charged only 6 crore when they will get the paycheck in their bank account whereas they are paying 145.80 crore income tax right now, and hence they will pay 139.80 crore less tax under Arthakranti. One needs to keep in mind that a person has to pay 2% cash transaction tax, under Arthakranti rule, when money will be deposited in his account and thereafter he would be just spend this money and people getting money from him would have to pay Arthakranti’s 2% tax and not him. Same is true with next higher tax bracket (10 lac to 100 crore) in which a person would pay only 1.01 crore Arthakranti tax whereas right now he is paying 12.16 crore in income tax. For the 5 lac-10 lac bracket also, a person would pay only 15,000 rupee Arthakranti tax whereas they are paying 74,250 rupees income tax right now.
(3) Instead of lower interest rate claimed by Arthakranti, the tax rate would actually increase. Right now if you get a 100 rupee loan at 10% interest rate, the loaner gives you 100 rupee, you get 100 rupee and at the time of payback, you give to loaner 110 rupee and the loaner gets entire 110 rupee. But suppose you need 100 rupee loan, then
(i) The loaner will give you 100 rupee; then you will get 98 rupee in your bank account after 2 rupee Arthakranti cash transaction tax.
(ii) While refunding the money you have to give 112 rupee to the loaner so that he would get 110 rupee (for 10% interest rate) in his account after 2% Arthakranti tax.
Hence under Arthakranti rule, the effective interest rate, you would pay, will be 14% and not 10%. It is worth noting that even one percent increase in home or auto loan increases the monthly payment by significant amount.
(4) India is getting about 5,000 crore US dollars a year in Foreign Direct Investment (FDI) which is one of the main reasons that the country has been able to pay for its trade deficit. For last few years, the trade deficit was about 13,000 crore dollars a year which the country was able to pay due to 5,000 crore dollars FDI and 7,000 crore dollars NRI remittances. During 2011-13, trade deficit was in the range of 18,000 crore dollars and 20,000 crore dollars and as the country was not able to pay it by FDI and NRI remittances, rupee nose-dived from 44 rupee a dollar to 62 rupee a dollar. The FDI would reduce drastically if Arthakranti rule of 2% cash transaction tax is enforced because the moment a FDI is deposited in a bank in India, it would lose 4%. For an example if a $100 is deposited in India, the recipient will get only $98 and if this same $98 is given to the FDI sender, he would get only about $96. Hence rupee will witness steep devaluation each year if Arthakranti proposals are enforced.
(5) As Arthakranti charges tax on only cash transaction, people will resort to barter trade to dodge the 2% tax. Suppose I have gold and I want to buy a car, then I will find someone, who will sell his car, for equivalent amount of gold. As there will not be any cash transaction, there will not be 2% tax in this transaction whereas right now I will have to pay tax when the seller would transfer the title of his car to me. Suppose a person, with 3 bags of cement, wants 10 kilogram rice, then he will try to find a person who would sell rice in lieu of cement bags, dodging 2% Arthakranti tax. This barter can involve any number of people, so that each of them can sell their item for the item, they desire. Several websites would come up to do the barter trade among people. Even large firms would be able to dodge 2% Arthakranti tax by using barter trade with other firms. This will lead to steep drop in tax collection and in no time, the country would be bankrupt.
(6) According to the Credit Suisse Global Wealth Report, India now has some 2080 ultra high net worth individuals with wealth of at least $50 million (3,25,00,00,000 rupee or 325 crore rupee) and 940 who have more than $100 million (6,50,00,00,000 rupee or 650 crore rupee) of assets. The Wall Street Journal reported that India currently has about 1,85,000 millionaires (having income above 65,00,00,000 rupee or 6.5 crore rupee). Under Arthakranti rules, there will be large scale tax dodging, leading to steep decline in tax collection.
(7) Without providing any data to back up their claim, it is wrong for Arthakranti to claim that total amount of tax collection, based only 2% tax on bank cash transaction, will be same as the current amount of tax collection. As per table in section 2 above, tax collection from rich people would nose-dive and also due to tax dodging by using barter trade, the bank cash transaction tax to match the current tax collection would be much more than 2% and finally an average income family would have to pay a lot more tax than what they are paying right now.
(8) Economy is a complex subject and one cannot solve an economic issue by just making a naïve rule of 2% bank cash transaction rule. Their claim is nothing but a claim to build a spacecraft to go to Mars based only on Newton’s Laws of Motion or claim by a car mechanic that he can do the brain surgery also.
Hence Arthakranti proponent are nothing but for enrichment of rich people at the expense of an average person. It is socialism in reverse.