Sunday, July 9, 2017

Taxes and Tax Regimes

Most citizens consider taxes as burden in any country. More so in India. The reason is very simple: Our taxes keep changing with every budget each year. We also have moved from several tax systems to single but difficultly layered taxation. We are told that that even after nearly half of the month since its start, many businesses - especially small, micro and medium businesses are not ready. The reason for complexity is simple: whatever we have done, we just have no clue on how to simplify things.

There are more than seven slabs, and some items that are beyond the grasp of taxation in the country, although one can count on just three types of goods and services: Essentials, Non-Essentials but useful, and Non-Essentials / Harmfuls. Bringing goods and services into simplified procedure would have benefited the most and built transparency and accountability within the tax regime. Essentials should be taxed at 2%; Useful may be taxed at 8% and Non-Essentials to be taxed at 18%. 

I feel that one of the items that must be some how taxed is the Cash Transaction per se. Since small cash transactions will continue to hold forte in country with huge rural economy and unorganized economy (e.g. most grocery stores in small towns and rural areas never give out vouchers even if their turnover is more than 50,000 each day). Since cash cannot rotate unless it is withdrawn from a bank, I would go for a straight taxation of 2% on cash withdrawals. Now the fear is, people may not like to deposit what they have withdrawn! To incentivise it, give a 1% bonus on every cash deposit. In other words, when I withdraw INR 100 from bank, I pay 2% tax to the government. So, effectively, my account is debited 102 rupees. But, when the fisherman from whom I purchased fish deposits the money with the bank he/she gets 101 rupees. 

The government must remove banking charges on electronic transactions except for amounts more than INR 5,000. This would ensure that the banks get their service cost, while the poor who use the lower amounts are not virtually discouraged from using electronic medium of transactions.

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