Bibek Debroy: Black cash transacting travails

The origin of, or the solution to, black economy doesn't lie in tax policy.

As citizens, we are stupid. That's the general message coming out of North Block after Budget 2005-06. With reforms in personal income taxation (PIT), you no longer require chartered accountants (CAs).

That's supposed to be good news. But you don't understand the need for the fringe benefit tax (FBT) or banking cash transaction tax (BCCT) because you aren't a lawyer.

Unlike CAs, requirement of lawyers is supposed to be a good thing. And on BCCT, you aren't privy to information that North Block possesses on cash transactions.

Otherwise, you would have welcomed BCCT with open arms. That citizens aren't privy to information, especially when it concerns the political system and politicians, is obvious.

Look at what is going on in Bihar, Jharkhand or Goa. We only get to know when TV channels have hidden cameras. That there is a substantial amount of black income parked in official banking channels is also obvious.

One doesn't know whether the three Kelkar reports are part of the official reform agenda any longer. They may have been shelved like recommendations of the Expenditure Reforms Commission (ERC).

But here is a quote from Kelkar's report on direct taxes. "Hence, the Task Force is of the view that this (tax exemptions) is not an efficient way of achieving the developmental objectives and that there are better and more efficient alternatives to achieve these goals."

The context was different. But the moral remains. The origin of, or the solution to, black economy doesn't lie in tax policy. For instance, electoral funding reform is likely to be far more efficient.

There are two elements to BCCT, as proposed. First, there is an audit trail through information collected. Second, there is a tax (more appropriately, a fine) of 0.1 per cent.

The audit trail already exists for transactions more than Rs 50,000. And if wonderful things are indeed happening through the tax information network (TIN) and computerisation, surely we need no more information.

Or perhaps, with inflation declining, we will soon have reverse inflation creep. And the threshold needs to drop from Rs 50,000 to Rs 10,000.

But that's not how BCCT is being projected either. There is the fine element of 0.1 per cent. It should certainly be called a fine. Because the tax has (or should have) already been paid.

In history, governments have resorted to bizarre means to raise revenue. Emperor Vespasian imposed a tax on urine. Peter the Great imposed a tax on beards.

There is international best practice or, perhaps, we should call it international worst practice. For every odd policy, there will always be historical precedent somewhere.

In this case, we are told the international best practice comes from Brazil. Brazil is a good example. Importing Brazilian policies will contribute towards improving the quality of our football and dancing.

Certainly, the former should make the Left happy. Whether we should also import the Brazilian track record on inflation is a moot point. However, importing Brazilian policies will help cement the G-20 consensus.

That itself justifies BCCT. But the Brazilian tax was on all transactions and was a revenue-generating measure. As a digression, this is a Keynesian budget if Keynesianism is equated with public expenditure.

And we should certainly remember a quote from Keynes. "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."

To come back to Brazil, if we tread the Brazilian path, 0.1 per cent is too low, as North Block spokespersons have ceaselessly pointed out. How many individuals withdraw more than Rs 10,000 a day? Very few. Although, if you factor in cash withdrawals through ATMs abroad, the figure might be larger than you think.

But the corporate sector needs cash withdrawals because of labour laws. Here's a quote from the Payment of Wages Act, 1936. Section 6 states, "All wages shall be paid in current coin or currency notes or in both." The Second National Commission on Labour completely ignored amendments of such legislation.

Before criticising BCCT, we should, perhaps, recognise it as the finance ministry's attempt to trigger changes in labour laws by pushing for monetisation of the economy.

Mentioning labour laws upfront would have been a violation of the Common Minimum Programme. This sleight of hand is better. Now that we are bracketed with G-8, we must push credit cards and cheques.

By the way, Section 10-A of the Indian Stamp Act of 1899, has similar cash provisions and in passing, rational stamp duties will remove the black element from real estate.

However, as a disincentive, 0.1 per cent is too low. Other than triggering efficiency improvements in banks, by burdening them with greater compliance costs and forcing them to revamp ATMs, it doesn't achieve much.

Far better to be direct. And we have international best practice, not from Brazil, but India. In 1971, the Jha Committee highlighted black income through foreign exchange transactions.

FERA 1973 resulted. Following that tradition, let's insist you won't be able to withdraw more than Rs 10,000 a day without a licence from RBI. And such licences won't be granted unless they are in the public interest.

That will solve the black cash transacting problem.