The AAP was sworn into power in Delhi on the 28th of
December, 2013. I was left delightfully amazed about this brilliant marketing
master-stroke by AAP to be sworn into power at the Ramlila Maidan rather than
at the state assembly. Never before has a Chief Minister's swearing-in been
such a publicised affair, and even the BJP's PM-candidate Mr. Narendra Modi's very
recent 3rd term swearing-in as the Gujarat Chief Minister did not get this kind
of media and pan-India attention. Also, if I am not much mistaken, even the
outgoing PM, Dr. Manmohan Singh was not accorded this kind of attention at both
his swearing-in ceremonies.
The strategy of taking oath publicly was fabulous on two
counts. One, it showed the public that the AAP members are one of them, who would
much rather take charge publicly in front of the common people than amidst privileged
few in the closed doors of the assembly, truly showcasing that this is a "government
of the people, by the people, for the people". Two, it allowed all the common
people across the nation witness the phenomenal rise of the AAP and its true ability
of being able to provide a credible alternative to the thus-far bi-polar
politics of India, which the general public is so fed up of. What would
otherwise have been relegated to a 60-second news item at best on all news
channels, with one master-stroke became the most-viewed event and the biggest discussion
point of the nation. Suddenly, without any big announcement or spend from their
party, very intelligently, the AAP used the might of the media and went
national on a 'zero-budget'. To my mind, this is marketing at its very best.
The AAP had surely played a brilliant opening gambit in its
preparation for the forthcoming 2014 general election, and I called up my
closest friend and somebody whose opinion I value immensely, Varun Khanna, to
discuss the same. Amongst various things, we also discussed that if it nurtured
national ambitions (and both of us think it should), the AAP would need to go
beyond anti-corruption as its sole/primary agenda and define for the nation its
stance on various issues - local, national, and international. On the
corruption front and possible ways of curbing black money, we discussed four
things which could help the nation weed our corruption - one, doing away with
large currency notes at least in the short term; two, land reforms focusing
upon taxation; three introduction of a time-bound tax-free/minimal-taxation
amnesty scheme for bringing back the black money into circulation; and four, abolition
of multiple taxation and replacement of the same with a simple banking
transaction tax.
Both of us were extremely surprised and yet glad to notice a
similar discussion on two counts (about abolition of large currency notes and
introduction of a banking transaction tax) emanating from Baba Ramdev just a
week later. Before I go further to define what we feel can work to free the country
of black money at a large scale, let me on the outset state very clearly that
though my family and I do use Patanjali's products (which we do believe are
very good), I have no personal affection for Baba Ramdev as a person or as a
protestor or as a politico. At best, I think he is an FMCG major who is
providing good quality products. Unlike him, I do not support Mr. Narendra Modi
or the BJP; my political beliefs and support are with the AAP right now. To
think that Baba Ramdev should define the national politics and play a crucial
role in who will become the PM - because of his mass following as a great yoga
guru (please don't mistake that for a spiritual guru) or as the principal guiding
force of a good ayurveda pharmacy - is immature, at best. Nonetheless, he has
enough supporters - many of who are far more educated, experienced and
enlightened than me - who can surely help define the discourse for him as a
person, and the direction for India as a nation. So, some things that he said
recently find complete resonance with me. Having defined my opinion of Baba
Ramdev, let me now elaborate upon how the abolition of large currency notes and
a banking transaction tax can work better instead of the current multiple
taxation regime in curbing black money, and yet generating revenue for the
government. And how the other two things that Varun and I discussed can make a
huge difference as well.
The root cause of black money - as we all know - is
corruption, and the ill-gains are mostly taken in cash... cheques and banking almost
never play a role in the same. Also, such large funds are normally parked in
real-estate though cash deals and benami transactions, and some of this is transferred
abroad through hawala transactions. This results in easy give-n-take of money in
cash. Now, suppose that the government decided to do away with not just large
currency notes but cash altogether to curb such practices! No, no, hold your
horses for a minute - what I am suggesting is not a wild fantasy; it is
actually feasible, albeit in the long run. Let me first explain how this can
happen, and then get onto explaining what could be the road to this utopia.
Just remember one word as you read on - 'mCommerce' - and you'd understand
everything thereafter.
In September 2013, the active mobile phone base in India was
738.89 million connections - of which 54% were in rural areas. The resultant tele-density
(number of people owning mobile phones vis-a-vis the total population) was
70.63% - 137.93% in urban areas and 40.97% in rural areas. Assuming an industry
average of 2 connections per user across all geographies, this results in a
teledensity of 35% in urban areas and 20% in rural areas. Taking the average household
size of 5 members pan-India, this translates to at least 1 mobile connection
per household. So, mobile-wise we are already reaching virtually every single
household, and can move to mCommerce completely and abolish cash completely.
Or, can we? One may argue that there are still some back-of-beyond and
extremely impoverished and tribal areas where mobile adoption is very low and it
will take a lot of time to reach a respectable threshold level, but the
impoverished, dying of hunger types are definitely not the people we need to be
concerned about for black money generation, right?
Having defined the mobile penetration in India, let's take
this a bit further. In October 2013, the internet users in India crossed 205 million,
and in December 2013, the number of mobile internet users in India was
estimated at 130 million which is estimated to grow to 155 million by March
2014 and will more than double in one year to over 265 million by 2014-end. This mobile and internet revolution is fuelled by many things happening
simultaneously - availability of good quality, cheaper smart-phones (currently
at sub Rs. 4,000/- mark, which may actually be available at sub Rs. 2,000/-
mark in the second-hand market), cheap and wide-spread internet (a 300MB 3G mobile
internet connection is available for just Rs. 100/- per month and rates are
rapidly going south every month), quick adoption and penetration of google, facebook,
gaming & music apps that are driving smart-phone and internet adoption, and
a healthily growing usage of online banking and eCommerce sites (specially from
smaller cities).
Given all of the above, India already is - or will surely be
- ready for mCommerce within the next 1-2 years. This can eliminate the use of
hard currency. Already most people in urban areas - specially salaried
employees like me - are using their credit cards & debit cards for
virtually every transaction (including grocery purchases at neighbourhood modern
retail stores like Big Bazaar or Reliance Fresh). Still, there are those
occasions when one needs to take out cash for some payments - grocery purchased
from roadside hawkers, salaries paid to domestic help, milkman's monthly
payments, newspaper guy, everyday needs like bread and eggs, children's
coaching classes, public transport tickets, toll tax, home delivery of various items, et al. Apart from
this, one needs to give petty cash to the children for their every needs -
canteen, stationery, chocolates, etc. Other than these, I don't see any need to
purchase anything in cash. All of these don't require large notes and can be
easily replaced by notes with a maximum currency value of Rs. 100/-. In any
case, such payments don't result in creation of black money mostly. The rare
case being the neighbourhood kirana store owner who gets such notes only and
still accumulates huge revenues & profits, and pays virtually nil income
tax in most cases. That is something that I shall also tackle a bit later -
through tax reforms and land reforms. But the larger picture is that most
things can today be purchased using debit/credit card, and I don't really need
cash in my wallet. If I take my own example, my salary gets transferred from my
organization's bank account directly to my bank account, through which I make
most payments using my debit/credit cards or online bill payments - so, for a
large part of my needs I never need cash. I withdraw cash just to meet my
smaller needs - which I cited earlier - and those can be taken care of through
Rs. 100/- notes very easily. My mobile is internet-ready, I have already downloaded
my bank's mobile-banking app and - while I haven't used it as yet - I am as ready
as anybody can be to shift to mCommerce... just like many others who already
have. Doable? I certainly think so!
That can take care of doing away with large currency notes
and curbing black money creation to a large extent. The next thing is to
announce land reforms. Since I do not know too much on this subject, I will
limit myself to professing just one idea here - taxation reform. My advice is
to do away with such high registration charges and capital gains tax. A big
reason why transaction size is suppressed by both the buyer and the seller is that
the buyer has to shell out at least 5% towards stamp duty & registration of
the property in her name (if the buyer is a male, this increases by 2%) and the
seller has to pay capital gains tax (unless he/she purchases property of
similar value within 3 years). Considering that most properties in metros like
Delhi or Mumbai exceed Rs. 1 crore in value, this translates into a payment of at
least Rs. 5 lacs when a property changes hands. So, what do buyers/sellers do?
They simply work on a 50-50 formula - 50% in cheque and 50% in cash, to bring
down the transaction value for registration purposes. Also, this is not a
one-time payment... every time the property is sold & registered (even if
the same is within a single financial year), the new buyer has to pay this 5%!
Now, is that fair? I don't think so. How about introducing a simple and small 1-2%
tax at the time of registration and a fraction thereof every year thereafter (combined
house tax as well as property ownership tax as well as capital gains tax)?
Given that this would result in small payment (EMI-like annual payments), one
won't mind revealing true value of the transaction and transacting completely
in white. Also, if one has already taken step one above (of doing away with
large currency notes), cash won't play any role in such transactions. Imagine
someone having to pay/receive Rs. 50 lacs cash in Rs. 100/- currency notes - that's
500 bundles of Rs. 100/- notes. An average person would never be able to carry
or store it easily and safely (not in a bank locker, not at home). Also, if we
look at the seller's perspective, the primary reason why people refuse to sell
their properties wholly in white is because of the 20% capital gains tax in
long term and up to 30% tax in the short term. If capital gains tax on property
is abolished completely, then we won't have a problem of suppression of price
by the seller - who would want the entire payment in white only - and we
would've nicked the problem of black money transaction in the bud itself.
Radical? Yes. Workable? Surely yes!
Next thing to do - announce an amnesty scheme for tax
defaulters to bring back the black money. This is not a new suggestion; in
1997, the then-government announced VDIS (Voluntary Declaration of Income
Scheme), which was as a very unconventional but hugely successful step in
mopping up black money. It provided an opportunity to all income tax/wealth tax defaulters (individuals as well as
corporates) to disclose their undisclosed income (total of all previous years)
at the prevailing (and till then the lowest ever at the highest slab) tax rate
of 30%. 3,50,000 people disclosed their income & assets under this scheme, and declared assets
worth Rs. 26,000 crore which bought an additional revenue of Rs. 7,800 crore to India - a good 20% more than the previous
financial year. Introduce the same yet again - either at an even lower rate or,
if possible, at zero-rate, to bring back the money into circulation. Also, replace
at least 50% of the money thus unearthed with Government of India bonds (since
currency notes of large denomination wouldn't be available anymore), to ensure
that the general public of India can benefit from the money collected, without causing
too much heart-burn to the persons disclosing such income in the scheme. What
do you say?
Last, but not the least, let's visit my final point -
something that Baba Ramdev also propagated last Saturday. Currently, there are
far too many direct and indirect taxes - the income tax, the sales tax, the
service tax, excise duty, custom duty, entertainment tax, wealth tax, gift tax,
corporation tax, stamp duty on property transfer and what not. In 2012-13, the
government collected a total of Rs. 10.36 lakh crore through various taxes.
Compare this to the Indian banking industry, which has a turnover of Rs. 77
lakh crore for 2012-13. If one were to simply replace all taxes by a simple 10%
banking transactions tax, the government would've garnered Rs. 7.7 lakh crores
and saved huge monies in salaries, infrastructure and related expenses in
collecting taxes. Additionally, assuming that currency transactions are
abolished or are negligible and small in nature, all transactions henceforth will
be through banks only. One can safely assume that at least 20% more will be
added to the current taxes (based on the VDIS learning of 1997), which would
swell up the kitty by another 1.54 lakh crore to take tax collection to 9.24 lakh
crore (at base value of 2012-13). This is just 1.12 lakh crore less than the
total tax collected in 2012-13 (about 10%), and it may be safely assumed that
this would be close to the savings in terms of employee and other related costs
for tax collection. Now, it may be argued that this would result in taxation of
everyone, including those with minimal income who need to be given a respite
from taxes. The argument against this is quite simple in my mind. They are
already being taxed in any case - through sales tax, through road tax, through
vehicle registration tax, through excise, through service tax, etc. - and they
will save on those taxes (which will result in bringing down the cost of goods)
and end up paying a banking transaction tax only, resultantly having the same
spending power. If one still has a problem with this, the government can
establish a minimum benchmark for banking transactions which will not be taxed
- say, all transactions up to a transaction value of Rs. 2.5 lakh per annum (the
current Income Tax waiver limit) will not be taxed. Thereafter, all
transactions will be taxed @ 10% flat. Also, all large transactions (say,
single transaction value of Rs. 50,000/- or above) should also be taxed @ 10%
flat. This should pretty much do the trick, in my very humble opinion.
These are some suggestions from two very humble common people
with a slightly more than fertile imagination. We do think they're a good
starting point, but don't know how much of this is really workable... economic
gurus will need to think this through. Just hope all political parties will at
least give an ear and a thought to the suggestions made by two aam-aadmis, and
define a road ahead for this country to prosper.
