Narendra Modi govt mulling revival of estate duty, BCTT: Banking transactions should be encouraged with incentives
Banking cash transactions should be encouraged and correspondingly cash transactions discouraged through incentives for the former and not through tax on the latter.
The truth is the Wealth Tax Act, 1992 targeted just six assets whereas it should have been comprehensive
During BCTT'S short existence from 2005 to 2009 it imposed a 0.1% tax on cash withdrawals from accounts other than savings
Tax sleuths and banks should put in place software that flags abnormal cash withdrawals
The new Narendra Modi government that is all set to take office on 30 May 2019 is mulling a series of steps on the economic front. The important ones are the revival of estate duty and banking cash transactions tax (BCTT). P Chidambaram, the then Finance Minister had launched with a lot of fanfare in 2005 and which ended up in a whimper in 2009. Estate duty was suspended in 1985. It needs to be revived either as a pristine estate duty on the estate of a deceased or as an inheritance tax on the inheritors.
In the US, some states levy a stiff tax of about 50 percent on estate or inheritors. The Netherlands imposes a fairly heavy inheritance tax too. These are dyed in the wool capitalistic nations and free societies, and if they can consider estate duty kosher so can India. India is increasingly becoming a welfare state with an accent on ameliorating a lot of the economically weaker sections (EWS) of the society which calls for Robinhood taxation.
The estate duty and wealth tax are its essential components. It is sad that Finance Minister Arun Jaitley abolished wealth tax with effect from the financial year 2016-17 on the specious ground that the cost of administering it was more than collections therefrom. The truth is the Wealth Tax Act, 1992 targeted just six assets whereas it should have been comprehensive. Both estate duty and wealth tax need to be revived comprehensively without too many exemptions.
The revival of banking cash transactions tax, however, is retrograde. During its short existence from 2005 to 2009, it imposed a 0.1 percent tax on cash withdrawals from accounts other than savings with banks in excess of Rs 50,000 per day by individuals and Hindu Undivided Families (HUFs) and Rs 1 lakh by others.
Ditto for the withdrawals from fixed deposit accounts. The idea was to discourage black money transactions. More specifically, it was designed to stop the abuse of banks for money laundering purposes. Chidambaram said it was being abolished as the objectives for which it was introduced were fulfilled. Touché.
Now that the know-your-customer (KYC) norms are in place and better enforced, no one dares to open fictitious and fleeting accounts. In September 2017, the Modi government froze some 2 lakh shell company bank accounts reportedly thus immobilising a whopping Rs 37,500 crore. Shell companies sprung up like spring chicken during demonetisation for depositing black money. The government got wind of it and its promoters have come under its lens. It is still a work in progress.
BCTT is not only futile as crooks now know better than to tangle with the government by trying to make their black money legit through bank deposits and post-haste withdrawal but also burdensome for banks. Instead, tax sleuths and banks should put in place software that flags abnormal cash withdrawals. In fact, they are already in place; only they need to be fine-tuned periodically to catch up with the crooks’ designs.
It can also be a nuisance for businesses which perforce have to withdraw more than Rs 1 lakh per day (under the BCCT 2005) due to remoteness of their locations away from banks as well as due to reluctance of financially illiterate employees in plantations, mines etc, though their number is coming down with Jan Dhan Yojana.
Banking cash transactions should be encouraged and correspondingly cash transactions discouraged through incentives for the former and not through tax on the latter. Nearly 6 percent of the turnover through the banking channels instead of 8 percent being deemed as business profits under the presumptive taxation scheme for small traders is a case in point. BCTT is bound to make crooks look for alternatives including hawala.
(The author is a senior columnist and tweets @smurlidharan)
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