Tuesday, March 01, 2005

India budget - Withdrawal Tax

The Indian budget was presented yesterday and it had a curious proposal within it.
A new tax, withdrawal tax was announced. This tax is a tax of 0.1% (Rs 10) tax on cash withdrawals exceeding Rs 10,000 a day.

It is even touted as an anti-tax evasion measure. The black or parallel economy in India is estimated to equal the size of the white or legal economy in India. The black economy comprises, among other things, of semi legal cash transactions and unbilled transactions to illegal hawala ( routing of foreign exchange), smuggling etc. These transactions and the cash generated from them are usually in property, as cash itself, jewellery and rarely in banks. Therefore, taxing withdrawals from banks doesnt make sense at all.

On the other hand, with the prevalence of plastic money, people would be tempted to withdraw less and less cash. But will that reduce the dominance of the "black" economy? Probably not by much.

So what is a better solution? A tax on cash deposits into banks might be a better way to start. Plugging the loophole on cash purchases (how?) might also be a way out.

1 comment:

Anonymous said...

Even if they put a tax on withdrawals people would simply withdraw Rs9999 and evade the tax. I actually came across an article where the finance ministry was actually considering negating the Rs100 note as it is mostly used in the black economy. This might be too far-fetched a step but the attempt at VAT seems to be a step in the right direction. Its the fourth attempt hopefully it will be successful. The government really needs to increase its tax revenues since we have a deficit as large as 10% of the GDP. A tax on cash deposit will probably be impossible to be put in place since the mere mention of a withdrawal tax made such political hoopla. They really need to get aggressive with tax evaders and plugging loopholes on cash purchases through mandetory reciepts for everythin could be first step.