Indian demonetisation may clear the way for radical tax reforms

By on 18/11/2016 | Updated on 24/09/2020
On 9 November Indian premier Narendra Modi announced that 500 and 1000 rupee banknotes would no longer be legal tender

A think tank linked to the Indian government’s ‘demonetisation’ initiative is in talks with government figures over a radical set of taxation reforms, Global Government Forum has learned.

On 9 November, Indian premier Narendra Modi announced that 500 and 1000 rupee banknotes in the ‘Mahatma Gandhi series’ – which represent over 80% of the total value of banknotes in circulation – would no longer be legal tender.

Smaller denominations remain valid, and the government is releasing new 500 and 2,000 rupee notes – but the unexpected announcement has caused huge queues at the country’s banks, as millions of people try to trade in their cash for new notes. With 1,000 rupees trading at USD 14.70 or GBP 11.80, these larger denomination notes are essential for any substantial cash transaction.

The Indian government announced the surprise move in a bid to tackle the black economy – squeezing counterfeiters and tax evaders. But the think tank which originally advocated the move, Arthakranti, envisaged it as half of an over-arching strategy which involves a dramatic shift in the tax system. And an expert linked to the think tank has told Global Government Forum that Arthakranti has for some time been in talks with a “centrally funded institute which studies public finance”, covering both its demonetisation and its tax reform proposals.

Arthakranti argues that almost all major taxes, including income tax and indirect taxes, should be abolished and replaced with a Bank Transaction Tax (BTT). Levied on all bank transactions at a uniform rate of 2%, this would be far harder to evade and help tackle the problem of counterfeiting – which is believed to be a major source of funding for terrorism.

“A substantial part of black money is generated, as income tax compliance is poor in the country,” the expert told Global Government Forum. “We do have indirect taxes, but they are considered regressive as both the rich and poor pay them equally. With demonetisation and BTT, all the higher amounts of money flowing through the system will be traceable and this will help check the generation and circulation of black money.”

Global Government Forum understands that Arthakranti and the government-funded finance institute have been in talks for a considerable period of time, and are currently discussing the detail of Arthakranti’s plans for BTT. The expert, who has direct knowledge of the think tank’s proposals, admitted that a “less painful” transition to the new notes would have been preferable.

However, he argued that the demonetisation scheme is already having the desired effects – with businesses starting to shift to online payments, and moving the country towards a cashless economy. “It will surely flush out all the fake currency from the market which is used for criminal purposes and terrorism,” he added.

Before moving to introduce BTT, the government will need to ensure that almost everybody has a bank account – and whilst its banking inclusion programme has led to the creation of over 200m new accounts, about half of Indians still lack access to banking.

Anil Bokil, who heads Arthakranti, did not respond to requests for a comment.

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See also:

India collects $9.8bn in tax evasion amnesty scheme

India moves to protect retired officials from corruption probes

Indian officials challenge civil service leadership review

The remarkable rise of India’s think tanks

Report urges sweeping reforms to reinvigorate India’s ‘stagnant’ civil service

Urjit Patel takes the helm at Indian central bank


About Abhimanyu Kumar

Abhimanyu Kumar is a journalist based in New Delhi, India. He writes on issues related to politics and governance for Indian and foreign media. He was previously with The Hindu and The Sunday Guardian.

One Comment

  1. Harman Sandhu says:

    Would have preferred to see this write-up mention figures! How much black money and fake currency is documented with data? The cost of printing new currency does not seem to show up anywhere. And how many economists in this think tank? What is the bank accessibility for the population?

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