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Chidambaram's fly in the Budget ointment

March 1, 2005

Our beloved Finance Minister, Mr. P Chidambaram, has a habit of generally presenting sensible budgets for the country, but always introducing some small measure which acts like a bad itch after a mosquito bite. While not that harmful, it tends to irritate the hell out of you anyway - the SAD (Special Additional Duty), the transaction tax on trades in equities, and yesterday, his imposition of a withdrawal tax of 0.1% on cash withdrawals of more than Rs. 10000 in a day.

This is a silly idea for so many reasons. PC, as he's called, actually believes that his proposal will prevent tax evasion by leaving a "tax trail" on cash transactions. He wants to move towards a "cheque economy".

PC, under which rock have you been living? You think this will flush the "black" money out of the system? All it does is piss off the regular middle class and salaried tax payers. Rs. 10000 is hardly a large sum of money to be withdrawn at one shot. Many people withdraw around that much for their monthly expenses.

Let's set aside the fact that this measure is double taxation. It's not the amount of the tax that bugs people; it's the idea of our oh-so-honourable income tax department keeping tabs on how you spend your money. As anyone who has ever had the misfortune of sparring with that illustrious wing of our government will tell you, the income tax department is one giant harassment machine. Giving them more ammo to torture us with is not a progressive move, PC!

Moreover, we are incensed that once we've earned our money, you choose to tell us how much we can use at one time. That's too Big Brother-ish for most of us, thanks. Banks too, will be furious about the administrative hassle. Not only do they have to collect the tax and pay it to the government, but they also need to report all these gigantic withdrawals of Rs. 10000 or more.

But what about checking tax evasion? Isn't there a need to keep a tab on people dealing in cash? Again, PC needs to get a reality check. First of all, very little of the "black money" is in the banking system. People who have plenty of it don't go and put it into a nice savings account in their banks. It finds other channels - property, jewellery, lockers, stuffed into mattresses... anywhere but in a bank account. What little of it was left in the system has been practically eliminated by two measures implemented by the previous government - requiring a PAN (your income tax personal account number) to open a bank account, and mandatory quoting of the PAN on cash deposits of Rs. 50000 or more. (Mr. Yashwant Sinha, former Finance Minister, is the bloke who introduced them. He is now being disingenuous in claiming that unaccounted money doesn't flow through the banking channels, yet it didn't stop him from thinking of those two measures that assumed it did flow through banks.)

So, Mr. Finance Minister, you can see that the only people whose money you are trying to track are regular joes like us, who have been paying taxes and don't have much black money to show for it. (Ever tried buying a TV, fridge, mobile phone or music system with a cheque, Sir? Not many shops accept cheques, so please don't try and force a cheque economy on us.)

Second, the way to eliminate unaccounted money is not to try and track it down, but to remove the causes that lead to it. Much of this money originated in the tyrannical regime of the Indira Gandhi government, where tax rates were at such ridiculous levels that only the most saintly people in this country (all five of them) would pay up and lead a completely honest life. You want to get the black money out? Liberate it by lowering income tax rates to such a level that it is no longer economically sensible to evade the tax. If you can't abolish income tax altogether (I have argued for this many years ago), follow the lead of countries like Hong Kong and Singapore. Bring the rates down to a flat 10% on all income above Rs. 2.5 Lakhs per year. Keeping black money is not without its costs. To route it through various channels and keep it in circulation carries a cost of about 5-6%, but people prefer it to paying rates of 30% and above. Bring the rate down to 10%, and it's suddenly not too attractive to hoard money on the side.

Lastly, much of the reason for the existence of corporate unaccounted money is to pay all the "incidental expenses" ("bribes" for the rest of us) incurred in getting government sanctions, licenses, signatures, certificates, and into the giant bureaucratic mess that is the Indian system. (I'll write more about this and my own experiences as a businessman in another article.) Reduce the need to pay so many bribes and you'll reduce the money that goes unaccounted. Unfortunately, dismantling the babu system and the licence raj (which still exists; don't be fooled into thinking it doesn't) is a far more ambitious challenge. Do it, however, and the country will take giant steps forward. Cut the government machinery down to 10% of what it is, and you may find out what "liberalisation" actually means.


(This article was going to talk about the silly "fringe benefits tax" too, but we ran out of space. :)


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