ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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A Hare-brained Proposal

A bank transaction tax to replace all taxes will have a disastrous impact on the economy.

Some of the most outlandish suggestions are made ahead of elections. But perhaps nothing in recent times approaches the suggestions of some in the Bharatiya Janata Party (BJP) to do away with all existing taxes other than customs duty and in their stead introduce a single tax on all bank transactions. This proposal has not yet been formally articulated. But the former BJP president, Nitin Gadkari, who is supposed to be preparing a “vision document” for the 2014 elections has spoken about it. And the party’s prime ministerial candidate, Narendra Modi, has as the price of support from yoga-teacher-turned-politician Ramdev agreed to a similar proposal to replace income tax with a bank transaction tax.

The BJP whose original core support base consisted of urban traders and the salaried has always espoused one concern dear to these groups: the burden of personal income tax. But India now has one of the lowest incidences of income tax among countries of comparable size and at a similar stage of development. The tax kicks in at an income of Rs 2 lakh a year, or as high as 34 times per capita monthly income and if one assumes a family size of five then at almost seven times the average monthly family income. There are now as few as three slabs of rates, easing the burden over large ranges of income. A number of exemptions further lighten the burden of income tax. Of course, all this has not prevented large-scale tax evasion. As is well known, only 2% of Indians now pay personal income tax, while it is 20% in China and 8% in South Africa. None of this has prevented the BJP from continuing to think of how to further reduce the incidence of personal income tax.

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