One of the demands of Artha Kranti and Swami Ramdev ji is Transaction tax and another is recall of large notes.

While we support recall of large notes, since it will reduce fake currency problem and problem of terrorism, there are major flaws in the Transaction Tax proposal.

(This is the Arthkarnti proposal–
Withdrawal of existing Taxation System completely (except customs i.e. import duties).  
Every Transaction routed through a bank will attract certain deduction in appropriate percentage as Transaction Tax i.e. Single point tax deducted at source. (say 2 %).This deduction is to be effected on receiving/credit accounts only. This deducted amount will be credited to different Government levels like Central, State and Local (say 0.7%, 0.6%, 0.35% respectively). Transacting Bank will also have its share in this amount as the bank has a key role to perform (say 0.35%).  
Withdrawal of High denomination currency (say above Rs. 50).  
Cash transactions will not attract any transaction tax.  
Government should make legal provisions to restrict cash transactions up to a certain limit (say Rs. 2000).  )

Outlining some doubts/flaws of Transaction Tax-

1) Promise-to-pay account loophole-

Promise-to-pay is new type of account that I will provide my bank. Basically each person wil have two types of account – savings account and promise-to-pay account.
 In Arthkranti proposal, does a promise to pay fetch Transaction Tax? If yes, then please provide the DRAFT of the law which says which classifies promise to pay as payment.
 
If not, then tax collection will be too low … . How?
 
I will open a bank and ask people to put deposit in savings. I will open two accounts — actual savings and promise-to-pay. The promise-to-pay will also have promised-to-receive entries. So when X has to pay Rs 1000 to Rs Y, he will just make promise-to-pay transaction in my bank. So I will add -1000 in account of X and 1000 in account of Y. So all payments will be promise-to-pay.
 
And since this was promise-to-pay and not actual payment, no TT will apply.'
 
Now I will ensure that negative balance in promise-to-pay account of A does not exceed balance in his savings account and hence there will never be a default.
 
Now on 1-jan or some fixed date, I will do all settlements. if A's promise-to-pay balance is positive it will be added to savings account and if negative, it will be subtracted from savings account. So now transaction tax will apply only at this point.
 
 
So effectively, if TT is 2% it will become 2% of (Money received in one year – Money paid in one year) or (Money paid in one year – Money received in one year) , whichever is positive. It will not be not 2% of all money paid plus 2% of all money received.
 
All in all TT will be 2% if positive difference between opening balance on Jan-1
 
2) Transaction tax will kill small scale industries-

As of today , there is no tax on unprocessed food items in India. So, after transaction tax comes, food items will be 1-20% costlier depending on the number of points in the supply chain if the TT is 1% per point and will be 2-40% if TT is 2% per point. So, as it is , it seems food items will be costilier when transaction tax comes and items made in small scale will be more costlier than in large factories. The small scale food industries will be out of business , in competing with large factories. Since the small scale factories are mostly swadeshi, this proposal seems anti-swadeshi.
Transaction tax of 2% will become sales tax of 20% to 50%. eg consider following chain.
 
Farmer sells Wheat of Rs 1000 to wholesaler in mandi
wholesaler sells wheat of Rs 1050 to retailer
retailer sells wheat of Rs 1100 to Atta maker
Atta maker sells Rs 1150 of Atta to bakery
Bakery sells Rs 1200 of bread to wholesaler
Wholesaler sells Rs 1250 of bread to retailer
Retailer sells Rs 1300 of bread to end user
 
Now if 2% transaction tax is added at each level, final tax at end user will be about 12% to 14%/. Not that I mind, such tax will create a chain of "transactions without bills". So it is lose-lose situation.

Arthkrati proposal of transaction tax favors big companies at the cost of small. eg say 5 people do business wheat -> mandi -> wholesaler -> retailer -> bakeri -> retail bread shop -> customer. Then tax is about 12% of wheat price as there are 6 levels. Now if a big company buys wheat and directly sells to end customer, tax is only 2%.
 
I dont oppose big companies, but tax laws shouldnt favior big at the cost of small.
The small companies have to pay more taxes comparatively to the big companies. This will lead them to go out of business. And since most small companies are swadeshi. So, arthkranti proposal of transaction tax is anti-swadeshi.

So the transaction tax benefits big corporations more , and adversely effects small companies !! In fact, if whole economy comes under one company, transaction tax except on final retail sale will be nearly zero because all transactions except final retail sale are all internal transfers only !! If a tax law favors big over small/middle, then it will lead to inefficient consolidation. And all small-middle companies will be forced to sell their business to giant companies for pittance. And giant will grow bigger not because it is more efficient in terms of productivity, but it has to pay less taxes than two-more smaller companies doing same activities.

Also, the chain of manufacturing is not due to economic inefficiencies — it is due to technical specialization. eg a company which is good in making car doesnt know how to make rubber tires and so they buy from other company. The chain was small, just one person long, when man was hunter and gatherer . And the chain has been growing ever since technology advanced and more specializations came. So transaction tax will discourage specialization and thus retard technological growth.

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How Transaction Tax will destroy Small Scale Jewellery Industry, who Trade for Jewelleries in White (By Check).

We have considered Transaction Tax as 2%per step  
In Jewellery, there are 3 layers in 90% cases of small jewellery show-room.
…
1st layer is Jewellery Menufacturer. Such jewellers menufacture jewellery in their factory.
 
2nd layer is Jewellery Wholeseller. Such traders invest in jewellery and deal in wholesale trading. 90% small jewellery show-room buys from such wholesellers.
 
3rd layer is retail Jewellry Show-room you can see on road. 90% small show-rooms buys jewellery from Jewellery Wholesellers.
 
Now let us understand the effect of Transaction Tax. Say 1st layer sold jewellery worth 1 lakh to 2nd layer and price comes to 1.02 Lakh. And 2nd layer sold jewellery worth 1.02 lakh to 3rd layer and price comes 1.042 lakh. When 3rd layer sold jewelery worth 1 lakh to retail user price comes to 1.0642 lakh, FINAL PRICE WILL BE 1,06,420.
 
Now considering same case, MNCs & Big Corporate Jewellery House menufacture jewellery in their own factory outlet. So, MNCs will save 6420 Rs Transaction Tax

Transaction Tax is open loot of 6.042% for Small Jewellery Industry and the day Transaction tax will be implemented, small scale industry will be destroyed.
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now this is simple item. Take items like car. From rubber plant to tyre, there are 5 people. From metal to transmission, there are 10 factories and 5 traders. Please ask any of your friend in manufacturing. A metal piece goes through 10 manufactures and 5 traders before it comes into consumer items.

3) TT will kill short-term borrowings or lead to collapse of economy-
 
Say a person X borrows Rs 1 crore and repays Rs 1.01 crore 1 month later
with 1% per month interest. Then will transaction tax be 2% of Rs 100,00 or 2% of Rs 1 crore or 2% of Rs 1.01 crore or 2% of Rs 2.01 crore . If it is 2% of Rs 200,000 , then it is income tax of 2% and not really transaction tax. And governmentt cant run with 2% income tax. And if tax is 2% on Rs 2 cr, then whole economy will collapse. Because even wealthy companies like Reliance have to sometimes borrow 100s of crores of rupees for 1-2- weeks to meet day-to-day requirement . There is a whole area called "over night borrowings" where Rs 1 cr is borrowed for 1-2 days and returned with interest of mere Rs 2000 to Rs 3000 !! Paying even 0.1% on whole transaction will just kill whole business.

Even is transaction tax is 0.5%, then also, the transaction tax on Rs 1 cr borrowed and returned Rs 1 cr + Rs 3000 interest will be Rs 10000 , which will kill all short term borrowing business. Industry today lives on short term borrowing. It is not just dishonest industrialists, even honest ones have to borrow now and then.

4) Recall of large notes and Transaction tax will not reduce black economy or reduce corruption-

Please note that 90% of corruption happens with white money. Please see these links for more information-
 
a)Thousand ways for noteless and white ways to take bribes-
https://www.facebook.com/groups/rrgindia/doc/181369795245803/
 
b) 0088 : रिश्वत लेने के लिए,बिना नोट के , हजार अप्रत्यक्ष वैध तरीके-
https://www.facebook.com/groups/rrgindia/doc/191952767520839/

If the final tax is 10% to 50% of item cost, then there will be parallel "without bill" economy, where good will be 10% to 50% cheaper. And this economy can function with gold, silver or dollar as medium. A cost difference of 5% is sufficient to generate "without bill" economy.

It is not just the final seller who will evade taxes, but whole chain. Thats what happens even today — there is whole with bill chain and a whole without bill chain. With tax on transactions, there is more reason to keep transaction off the bills and thus create without bill economy

One gram of gold can be used for Rs 2000 transaction, 1 gram of silver as Rs 10 note and for smaller transactions, there are notes anyway. And Gold and silver can be easily tested by cheap, easily available machines , etc . Well, gold can be stolen, but then even Rs 1000 note can be stolen. Still people use Rs 1000 notes because chances of theft are less than tax one has to pay if transaction is on-book. So the manufacturers, assemblers, traders etc can use cheque for billed transcations, and use gold/silver for off-bill transaction. What will stop them?
 
c) All transaction tax supporters rule out possiblity of dollars as alternate use of currecncy being used. But this has actually happened in countries like Russia in 1990s. What if people in our country also start using dollars with coming of transaction tax ?? I will give one link here –
 
http://www.google.co.in/url?sa=t&rct=j&q=use+of+dollars+in+russia…+in+1990s&source=web&cd=10&ved=0CGEQITAJ&url=http%3A%2F%2Fwebcache.googleusercontent.com%2Fsearch%3Fq%3Dcache%3AIs3voPJxABIJ%3Asitemaker.umich.edu%2Falainalemon%2Ffiles%2Fdollars.pdf%2Buse%2Bof%2Bdollars%2Bin%2Brussia%2Bin%2B1990s%26cd%3D10%26hl%3Den%26ct%3Dclnk%26gl%3Din%26client%3Dfirefox-a&ei=fWWyTs_ZFIjtrQeGwdDoAw&usg=AFQjCNG_ZbauyWG9SOqTOGEUVfGKv5r4og&cad=rja

Say I do a business. Then-
1) Only 50% or so of my transactions will be non-rupee transactions.
 
2) If I fall short of rupees, I can go to the unauthorised money changer and exchange my dollars, gold, etc. Similarly this will work in the reverse also. I can get gold, silver, dollars also from the money lender if I need that.
Thus I can evade tax in 50% or so of my business transactions.`

This tax evasions wil set up a parallel economy. Similar things have already occured in other countries, so this is not unrealistic and dollars I can change even today.

Lastly, whatever tax structure should come , should come via the knowledge and approval of 120 crore citizens of the country. , For getting the opinion of the people, the best procedure is Transparent Complaint / Proposal procedure. Please see this procedure in chapter 1 of www.righttorecall.info/301.pdf

and tax proposals in chapter 5 of same document.(Please find the same also in attachment)

Please give your reply at-  MehtaRahulC@yahoo.com

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Some important Links-
 
a)CENTRAL EXCISE TARIFF 2011-12-
 
http://www.cbec.gov.in/excise/cxt-2011-12/cxt1112-idx.htm

http://centralexcisemadurai.tn.nic.in/what_central.html
 
b) Schedule of Vat 2011-
 
http://docs.google.com/viewer?a=v&q=cache:ytRwL2qWumcJ:tripurataxes.nic.in/ScheduleofVAT.pdf+list+of+items+under+VAT+in+india&hl=en&gl=in&pid=bl&srcid=ADGEESgtjEqDbCiOiOndL-89B32CWXu7U0nx84dqCGW2jTvfMdF10DbmHGRCFZxy8Hnh7eBCJKV4EdvCP4pcC0tXQEflGZv6dkNb3vB9u8mvr3p05vluk5o1pSuZ_HH0Pp0H0E-2mUf-&sig=AHIEtbQiGa9QkbJtdeXD5xspd8r3YF2Niw
 
http://taxworry.com/list-goods-exempt-sales-tax-vat-bihar/