Often we are too busy mopping the floor to turn off the faucet. We get busy in solving the manifestations of the problem rather than looking at the cause.

A problem well stated is a problem half solved. We never look at the problems afresh - right from ground up. Surprisingly, attempts at identifying the root causes often leads to solutions so simple that you may even fear to express them.

I better dare to be naïve.

Sunday, April 11, 2010

Look beyond GST - Make it less "taxing"


A common Goods and Service tax that Government of India trying to implement is a great step in the right direction. However, I would like authorities to see beyond it.

The entire process of tax imposition, tax collection, tax payment and tax returns, etc is really "taxing" the resources of the country. When I say resources here, I mean human capital. Too much of corporate time goes into maintaining tax related accounts, audits and compliances. Similarly a lot of government machinery is wasted in ensuring compliance.

And this activity is totally non-value adding. Businesses should spend most of the time in value addition and creating wealth. Not wasting countless hours in book keeping and compliance.

I propose a simpler solution, instead.

Just have one single tax. I call it a transaction tax. There will be no separate excise tax, sales tax, income tax, octroi, etc. Keep this transaction tax not more than 1%. Impose this tax on every transaction.

How do you define a transaction and how do you monitor every transaction?

In any business money is exchanged when a sale is made, or service is utilized or salary is paid.
Now the person or a business which receives this money, what do they do with it. They have to deposit the cheque or cash in the bank.

Now when that happens tax it at that point of time. Charge 0.5% for a cheque deposit and 1% for cash deposit. It is like TDS - Tax deduction at source.

For transfer of money within the same company accounts do not apply this transaction tax. Companies have to declare to banks where all they have their bank accounts.

By implementing this transaction tax, you can totally do away with 80% of tax machinery and you can deploy them for more value added activities this country badly needs. You free up around 10% of businesses' time that goes into these.

You may ask what's so big deal about it. This 10% of additional time that is available to businesses can result in 20% increase in country's GDP. A freed up mind can be doubly productive. A good percentage of top management's time in any company goes in tax compliance.

One may argue that the proposed transaction tax is too low. Yes, it is too low. A low tax always results in better compliance.

And other associated benefits too will be there such as no black money, no under reporting of assets like lands, houses, etc. And the freed up black money will come into mainstream and will help in growth of country's GDP.

This may also free up a significant amount of judiciary's time too. A good amount of cases in courts are related to tax disputes or wrong interpretations of our ambiguous tax laws.

One may ask if this is going to be fall in tax collections. It should not as TDS is done at every transaction.
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