The Hindu Business Line : What's so BAD about the cash withdrawal tax?

CAUGHT between a mandate "to introduce special schemes to unearth black money and assets" and the fear of "giving undeserved relief or an amnesty", Chidambaram has brought in a tax on cash withdrawal.

News reports suggest that the Minister is already suffering from `withdrawal' syndrome, as if on course to match the record of Sinha's reputation for rollback. We're quite concerned that Chidambaram is "concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amounts of cash."

Troubled that these cash withdrawals leave no trail, and suspecting that these presumably become part of the black economy, he has slapped a 0.1 per cent tax on withdrawals of over Rs 10,000.

In the Finance Bill, chapter VII is on `Banking Cash Transaction Tax'. The chapter defines taxable banking transaction as not only "withdrawal of cash (by whatever mode)" but also "purchase of a bank draft or banker's cheque or any other financial instrument on payment of cash exceeding ten thousand rupees", and receipt of cash "on encashment of term deposit, whether on maturity or otherwise."

Not a new idea, again. Disconcertingly, the concept has been copied from some of the troubled places. In November 1998, the Colombian Government levied a tax on bank withdrawals to ward off a financial sector catastrophe, but people protested that bank account-holders were being burdened with bank bailout.

Argentina began its experiment with a tax on financial transactions in 2001 and used the collections to shore up its fiscal imbalance. Ecuador's banks have lived through crises such as tax on bank transactions, freezing of accounts, and bank failures; as a result many of its citizen don't view the institutions with trust, and so, `chulqueros', the local moneylenders (who also offer to hold savings) run a thriving business.

The tax has an appropriate name in Australia: BAD tax, for bank account debits tax. The States have agreed to abolish this by July 1. The tax was on the value of withdrawals from accounts with a cheque drawing facility. The site http://debittaxglobal.org of the Debit Tax Global in Australia informs that "Debit Tax is a new tax system for the world," and that Leonard C. Crisp is the founder of the concept.

Opposite of BAD is not good, but FID, or Financial Institutions Duty, a tax on deposits made to savings accounts, cheque accounts and credit cards, at a flat percentage on the deposit amount.

A report on www.bankboston.com.pe, while discussing Peru's move to tax bank transactions, notes that such a measure is usually implemented "in times of fiscal stress" since "it is easy to manage and works effectively in the short term."

Though perceived as a "progressive" tax because it affects more the wealthy, the site points out that the tax can work against "the Government's efforts to decrease the informal economy." A black tax that can make the economy blacker, one may say.

"Stabilisation and Reform in Latin America: A Macroeconomic Perspective on the Experience Since the Early 1990s," is a February 2005 paper by Anoop Singh et al, on the IMF's site. It discusses `financial transactions taxes' or FTTs, as these taxes are otherwise called.

The authors point out that such taxes are introduced "in the context of serious fiscal stress where short-run considerations related to the need for a quick source of revenue and ease of collection outweighed concerns about the efficiency of the tax." Also, FTTs are likely to be "highly inefficient, inequitable, and subject to diminishing returns," states the paper. It lists the rates for 2004 (see table).

If you dig deeper the IMF side to the story, you may stumble on www2.lanka.net where you'd find a Letter of Intent of the Government of Sri Lanka, describing policies that "Sri Lanka intends to implement in the context of its request for financial support from the IMF." Accordingly, its 2002 Budget simplified the tax system by eliminating "all stamp duties levied by the central government".

However, "to guard against revenue loss, we are introducing a bank debit tax of 0.1 per cent on travellers checks and bills of exchange, credit cards, and debits of bank accounts for a temporary period," reads the letter. That's BAD, isn't it?

ExParte@TheHindu.co.in

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