Chidambaram’s fly in the Budget ointment

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 Rs. 10000 is hardly a large sum of money to be withdrawn at one shot.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. 🙂

27 thoughts to “Chidambaram’s fly in the Budget ointment”

  1. i dont know.. it’s a lot simpler and more sensible than the previous one. yes, the 10k withdrawal sounds demented, but the whole point of this budget is focussing on rural efforts – i think he played a good game out there

  2. A good point was buying white goods. Most of the dealers give discount when you pay the entire money in Cash. So, If I have to buy a home theatre system for 50K, I should start putting trips to the ATM everyday and draw Rs 9,900. In 5 days I will have the money. Not everybody would be fortunate enough to have an ATM in office. If you drive down to the ATM the petrol bill will offset the savings from tax, so most people will probably not take the headache to do such stunts and would rather pay up to PC.

  3. I agree with you, the measure is totally frivolous and will in no way actually make any difference in deterring black money. But I don’t think it would stop people from withdrawing 10k and above, really.
    So all and all if government spends the money wisely well it seems ok in the end.

  4. You missed the habit that PC has of “creative accounting” or Enronitis. In his “dream” budget of 1997, he had neatly removed the grants that the central govt makes to states from the “small savings” collection — arguing that this should be not part of central finances; this helped cut the fiscal defict number by over a per cent; not wrong accounting but completely misleading when the no. is compared with the previous year’s without the adjustment. This year, 29K crore of the plan expenditure will not be financed by the centre but directly by the state. This shifts fiscal deficit worth 0.8% of GDP from the centre to states. If the states stay at the same level as last year, consolidated deficit rises by 0.8% of GDP. Or in other words, an honest FM would have explained that without a change in accounting method, fiscal deficit has risen from 4.5% of GDP to 5.1% (instead of the claimed 4.3%). This is a rewind button, not a pause button on the FRBM act.
    — Madhavan
    btw: I have also been called “madman” for the last 15 years but you are the blog senior!

  5. Chidambaram cant be that stupid. Swaminathan Aiyar: “Some will call this the face of the blunderer. Others will call it his Machiavellian face, deliberately creating a financially meaningless rumpus that diverts flak from other imposts…..” emphasis mine, more here

  6. A cash economy is just a total nonsense and there is no need to use it. People need a kick up the backside to move into a cheque based economy. In the UK here cash is a somewhat foreign concept and black money is much reduced

  7. Hi madman: U R not a bad man! U said it right on P.C.But one thing not all the 3 Gods can draw all tha black money into Govt kitty. As U rightly said it is an itch.We have myriads of ointments and we R used to itches and stitches ,
    Parthakrish a 75 year old blogger from Wahington D.C area

  8. I wanted to write this comment for two reasons.
    1. Madhu, how does your trackback work? I wanted to trackback to your post and clicked on the trackback button. However I did not get any edit box to add my url too. I use Blogger. I would leave my site address in the comments but just thought I would get you permission first.
    2. Ram speaks about UK having a no-cash economy. I do see the plus points. However there is one very important ingredient in a non-cash based economy – TRUST. If you want to convince Indians to move into a direct-debit/cheque based economy companies have to come forward and convince the people that this is in their benefit. They have to convince them that they their transactions are secure and when something goes wrong it is the onus of the company to prove fraud and not of the consumer to prove his innocence. Only when the consumers can trust the fact that the system is on their side will they stop depending on a cash-based economy.
    I do have more to say on the matter but do not want to use Madhu’s real estate for the same:)

  9. Brij,
    Blogger is a sucky product and doesn’t support trackbacks, so you can’t send one using it. Perhaps they’ll implement it after they implement trivial things like post categories. 🙂
    Actually, you can read up the trackback implementation documentation which tells you how to ping the site. But if you’re not so inclined, now offers trackback for Blogger sites.

  10. I know that Blogger sucks regarding trackbacks:) I used to have haloscan, however I prefer the comments on Blogger to the comments on Haloscan.
    Nonethe less my understanding of trackback was that I need to add my URL to your trackback. Guess I got confused!!!
    Regarding categories hope they never implement it. 🙂
    On a similar thread I am thinking of moving onto a rented server with WordPress1.5. Still working out the pros and cons!!! Maybe i will check in with you sometime if it is covenient for you?(I may be in Bangalore this weekend – in Indiranagar actually)

  11. I totally agree. I am in the process of buying a consumer appliance and PC’s idea of “keeping a tab on black money” was like a tight slap.
    I am furious that he sits there with a smug smile on his face and tells us that he doesnt know what the fuss is all about.
    The worse point of it is, its not just withdrawals from your Savings a/c, but pretty much any account – deposit or otherwise from the bank.
    If I really had to pay a tax to the government to use my money, wouldnt I rather keep it with myself than in a bank? after all the measly interest is much less than the inflation anyway!

  12. Hey, Did you read PC’s i/v in He still could not understand why there is so much noise on the 0.1 levy on the 10k withdrawal. It is so funny.
    Check out my blog, for my thoughts!

  13. paying tax for the money we withdraw everytime is bullshit policy.. our hard earned money which we are already paying tax.. to top it all if we want to send money home we pay tax too… too much.. not happy with the budget… some parts are good but the rest is silly and illogical to say the least..
    by the way.. loved the Chicken Mee Goreng and Singapore black prawns yesterday.. wanted to celebrate so went to your place to have a quiet early dinner … 🙂

  14. hi madman,
    The tax is just 1% of the money they are drawing from the bank.This won’t hurt that much.What is the problem?.I am seeing lot of people opposing this tax.If this does not work,FM will shift the tax to some other place.
    The idea of blocking the spam regarding the comments are good.
    Is it your idea!!!!!.

  15. Jay,
    It is not the tax amount that’s the problem, but the idea of being watched by Big Brother and assumed guilty till proven innocent. My article explains it in more detail. Our income tax department is full of crooks, and honest people don’t want to be on their radar.
    The CAPTCHA block is my idea for this blog, yes, but I can’t take credit for inventing it. Lots of people before me have done it.

  16. hi madman,
    I accept your point “being watched by big brother”.There is a minor(serious)
    error in my previous post.It is 0.1% not 1%.

  17. Well, in US banks do charge people after certain “free” withdrawals. Yes, the withdrawal fee is not a percentage but a flat value (which is better). People usually do not cry while giving money to business, but when it comes to Govt. the dams just burst loose 🙂

  18. Going for a non-cash economy in India is highly laughable. There is so much distrust and threat perceived at the consumer and retailer side that people would rather feed PC than go through all the hazzles. All said and done, as Madman pointed out, the black money rests happily in the mattresses and lockers while the hapless taxpayer now bears the brunt of shelling out money to use his own hard earned money. I guess nobody is laughing all the way to the bank, atleast not the middle class salaried community.
    Madman, would have loved to hear your comments on “fringe benefits” 🙂

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