बगुला भगत
We need to examine the concept of taxation, its historical evolution, principles of fairness, critique the current Indian system, and propose a new model.
The word "taxation" comes from the Latin "taxatio," meaning "a rating, valuing, appraisal," which evolved to mean the imposition of taxes by a government. The Sanskrit word ‘Kara’ means hand, symbolising lending a hand towards maintaining a nation.
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In ancient Egypt, Mesopotamia, and China, taxes were often collected in kind based on agriculture or land use. Ancient India's system, as detailed in Kautilya's Arthashastra, involved taxation on agriculture, minerals, forests, commerce (tolls, sales tax, customs duties), liquor, prostitutes, and coinage, administered through various superintendents. Ancient Greece, particularly Athens, had systems where the wealthy paid higher taxes during crises, driven by social honour, while Ancient Rome developed a sophisticated system including direct (land, poll) and indirect taxes (customs), often collected by local aristocrats or tax farmers. The Roman system became regressive, burdening lower incomes more than wealthier classes. Modern taxation began in Britain with income tax and spread globally, with indirect taxes evolving into VAT/GST.
A fair taxation system should adhere to principles of equity (similar incomes pay similarly, higher incomes pay more), neutrality (not distorting economic decisions), transparency, efficiency (low administrative costs), certainty, and convenience for taxpayers.
The source critiques India's current taxation framework, describing it as rooted in a pre-digital era and failing to harness modern financial systems. It notes that the current system targets produce, trade, and miscellaneous levies. The existence of paper currency, overseen by the RBI, facilitates anonymity, fuelling black money, corruption, and a shadow economy, while digital transactions offer traceability and transparency.
The chapter then proposes a new centralised tax system leveraging the RBI’s currency control. This model reorients taxation around currency use.
The key measures of the proposed system are:
A 0.5% tax on all digital transactions. This is a flat rate intended to capture revenue from frequent users, including the wealthy who have high consumption.
A 10-year validity period for paper currency notes. Notes issued for a decade must be deposited in the final year for exchange, incurring a 30% tax over 10 years, which averages out to an effective 3% annual fee.
A 30% tax on cash withdrawals for 10 10-year validity period. This is applied at the source to discourage cash extraction and push funds into digital channels. If the money is withdrawn in the middle say after 5 years the tax cut would be 15%.
This proposed system aims to discourage cash use, reduce corruption, and align taxation with modern economic realities. It is supplemented by targeted taxes on customs, luxury items, liquor, and tobacco, collected at source.
Using data from 2024-25 as a case study, the proposed model projects revenues of approximately ₹19.35 lakh crore, exceeding the current estimated revenue of ₹16.44 lakh crore by ₹2.91 lakh crore. The model is claimed to disproportionately tax the wealthy due to their higher transaction volumes, while penalising cash use to curb black money.
The advantages highlighted for this system include:
Transparency: Digital transactions create an auditable trail, potentially reducing corruption and tax evasion.
Revenue Growth: Projections show increased revenue to fund infrastructure and services.
Behavioural Shift: High cash taxes are expected to incentivise digital adoption, aligning with global trends.
However, the proposed system also faces challenges:
Equity: The 30% cash tax may burden low-income groups who rely heavily on cash. Mitigations could include exemptions for small withdrawals or digital subsidies.
Infrastructure: Rural areas lack sufficient digital access, requiring investment in connectivity and banking.
Resistance: Cash-dependent sectors may oppose the shift, necessitating incentives and phased implementation.
In conclusion, the proposed system aims to modernise India's taxation by leveraging digital finance, curb corruption, and increase revenue, but requires careful implementation to address equity and infrastructure gaps.
