The Hindu Business Line : Drawing ire

THERE ARE EARLY indications that the new tax proposal on cash withdrawal in excess of Rs 10,000 may not have a smooth passage to becoming a law. After all, this was the only point on which the Finance Minister, Mr P. Chidambaram, had to face some interruption from the Lok Sabha members while presenting the Budget proposals. While the proposal could be fine-tuned so that its harsher features are removed or at least smoothened out, the Minister would do well to resist any pressure to roll back the levy altogether.

Few would quarrel with the Minister's assertion that heavy withdrawals of cash from the banking system are a manifestation of black-money being created in the economy. Economic activities, legal or illegal, result in monies passing through the banking system. To an extent some of these transactions transform the character of the flow. The purist may argue that it would be far better to go after the root causes of black-money than focus on its manifestations such as suspect cash withdrawals. But such systemic changes are hard to implement and even if undertaken would take a long time for their effect to get fully reflected in the economic process. Thus, eliminating political corruption would ensure that those executing government contracts would not have to create layers of sub-contract activities, which exist only on paper to siphon out money from the public sector before eventually ending up — a portion, at least — in suitcases of politicians. Similarly, enforcing law and order in areas where extortion and illegal tributes prevail would bring down the cost of economic activities undertaken by private enterprises so that consumer/producer welfare is maximised. But none of this is going to happen overnight. So it makes practical sense to impound a portion of suspect profits through taxation even as the Government pursues a broader agenda of political and administrative reform.

Even without the connotation of impounding a portion of the black-money that may be created, there is nothing in the tax proposal that is revolutionary or offensive to the principles of public finance. Many countries, including some in the developed world, impose a tax on some or all types of financial transactions. Just because the money that is being withdrawn is one's own does not make the process of a bank keeping it safe and returning it to the customer when needed any less of a service. If a tax on the gross value of service in other sectors of the economy is acceptable there is no reason why this should not be so in the instant case. In any case the Minister could consider enhancing the Rs 10,000 threshold for taxation to a significantly higher sum. There is also a strong case for setting off monies collected under this head against the income-tax dues of a person liable to pay this tax. The proposal is being touted as an anti-evasion (income-tax) measure. The logic of the Minister's own assertion demands that the cash withdrawal tax paid be adjusted against tax due on assessed income.

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