A Fair Taxation System

The word "taxation" originates from the Latin word taxationem (nominative taxatio), which means "a rating, valuing, appraisal." This comes from the verb taxare, meaning "to evaluate, estimate, assess, handle," and also "to censure, charge". Over time, the meaning of "taxation" has broadened to encompass the imposition of taxes by a government or authority. The Sanskrit word ‘Kara’ means hand, meaning lending a hand towards maintaining a nation.

Ancient Egypt, around 3000 BCE, is often cited as having one of the earliest taxation systems. Taxes were mainly collected in kind, such as grain, due to the agrarian economy, and were used to fund monumental projects like pyramids and temples. Scribes and officials managed the collection, with penalties for non-payment, reflecting a centralised power structure.

Mesopotamia, from around 3500 BCE, also relied on agricultural surplus for taxation. The "bala" system, particularly during the Ur III dynasty, involved provinces contributing goods like grain and livestock, funding essential projects like canals for irrigation, showcasing a regional approach to resource management.

In ancient China, starting from the Xia dynasty (c. 2070 BCE), taxation was based on land use, with peasants paying a fixed portion of their harvest. This system evolved, with the Zhou dynasty introducing community-based contributions, reflecting changes in governance and economic needs over centuries.

Taxation Measures in Ancient India

Taxation measures in Book 2 of the Arthashastra were implemented through various superintendents, ensuring systematic collection and enforcement. Below is a detailed breakdown of key taxation measures:

Agricultural Taxation. The Superintendent of Agriculture ensures farmers can pay taxes by maintaining productivity, with implied taxes likely being a share of produce, such as 1/6th, as mentioned in other parts of Arthasashtra. The Superintendent of Crown Lands collects direct revenue from state-owned lands, ensuring no tax evasion.

Mineral and Forest Taxation. The Superintendent of Mines collects royalties or taxes on mineral extraction, with fines for illegal activities, such as theft, to ensure compliance. The Superintendent of Pastures and Forests and Forest Produce collect fees for usage or extraction, regulating forest resource taxation.

Commerce and Trade Taxation.

The Superintendent of Commerce collects taxes from merchants, including sales tax and transaction fees, ensuring fair trade and revenue. The Superintendent of Weights and Measures supports accurate tax collection through standardised measurements.

Superintendent of Tolls (Chapter XV): Collects tolls on goods and services at city gates or on roads, with specific rates for different types of goods and vehicles. For example, imported commodities may have a toll of 1/5 value, while certain goods like flowers and vegetables have a 1/6 toll, ensuring systematic revenue from trade.

Superintendent of Foreign Trade (Chapter XVI): Manages customs duties on imports and exports, with higher taxes on foreign goods to protect local industries and generate revenue, ensuring economic stability.

Other Taxation Measures.

Superintendent of Liquor (Chapter X): Collects taxes or licenses from liquor dealers, with fines like 600 panas for offenders, ensuring revenue from this sector.

Superintendent of Prostitutes (Chapter XIX): Collects monthly fees, such as twice daily earnings, and fines for offences, contributing to state revenue from regulated activities.

Superintendent of Mint (Chapter XII): Manages coinage, collecting fees for minting and preventing counterfeiting, ensuring monetary stability for taxation in cash.

Superintendent of Treasury (Chapter XXV): Manages all state revenues, including taxes, ensuring proper collection and recording, with the Superintendent of Accounts (Chapter XXVI) preventing corruption and ensuring accuracy.

Ancient Greece, particularly Athens, had a unique system where the wealthy competed to pay higher taxes, known as "eisphora," especially during crises like wars. This voluntary aspect was driven by social honour, contrasting with the lack of regular income taxes for most citizens, highlighting cultural values of prestige.

Ancient Rome developed a sophisticated taxation system, including direct taxes like land and poll taxes, and indirect taxes like customs duties. Collected by local aristocrats, these funds supported the military, public works, and trade networks, illustrating a decentralised yet effective fiscal strategy. Tax policy in ancient Rome became skewed over time. Following are the details of roman Tax system.

Types of Taxes: There were several types of taxes in ancient Rome, including:

Tributum: A direct tax assessed based on a census. This included the tributum soli (land tax) and tributum capitis (poll tax).

Vectigalia: Indirect taxes, such as customs duties and port taxes.

Cattle Tax: A tax on livestock.

Land Tax: A tax on land ownership.

Customs Duties: Taxes on goods imported and exported.

Professional Tax: A tax on the profits of various professions.

Collection Methods: Taxes were typically collected by local aristocrats or tax farmers known as publicani. These tax farmers would bid for the right to collect taxes in a particular region and pay the state in advance. They would then collect taxes from the provincials and keep any excess over their bid amount.

Use of Taxes: The revenue from taxes was used to fund the military, create public works, establish trade networks, and support the cursus publicum (the state-run courier and transportation service).

Provincial Taxes: As the Roman Empire expanded, taxes were increasingly levied on the provincial populations rather than on citizens in Italy. This shift allowed Rome to enrich itself through its conquests and reduce the tax burden on its own citizens.

Tax Burden: The Roman tax system was regressive, meaning it placed a heavier burden on lower-income individuals while reducing the tax load on wealthier classes.

Modern Taxation System

Modern taxation began with Britain's 1799 income tax for war funding, spreading globally by the 20th century with progressive rates. Indirect taxes evolved with France's 1954 VAT.

Goods and Services Tax (GST), a specific form of VAT, was first implemented in New Zealand in 1986, aiming to unify taxation on goods and services. Canada adopted GST in 1991, Australia in 2000, and India in 2017, each adapting the system to their federal structures. GST seeks to eliminate the cascading effect of taxes, reducing compliance costs and enhancing efficiency. India's federal system has central taxes like income tax and GST, introduced in 2017 to replace state sales taxes, creating a dual GST (CGST, SGST, IGST) for efficiency.

The five most taxing countries (high tax-to-GDP) are Denmark (46.3%), France (45.9%), Belgium (44.6%), Italy (43.1%), and Germany (39.6%). The five least taxing are Mexico (19.9%), Chile (20.2%), Turkey (21.2%), South Africa (22.5%), and Brazil (23.2%).

Designing a Fair Taxation System

A state can introduce a fair system by ensuring equity (similar incomes pay similar taxes, higher incomes pay more), transparency, and efficiency. The ideal structure includes progressive income tax, broad-based GST, sin taxes, property taxes, and possibly wealth taxes, balancing revenue needs with social equity.

A fair taxation system must adhere to principles ensuring equity, efficiency, and transparency. Drawing from economic theories and Adam Smith's principles in "The Wealth of Nations," as outlined in Economic theories, the following are key:

Equity: Horizontal equity ensures individuals with similar incomes pay similar taxes, while vertical equity means higher incomes pay more, promoting social justice.

Neutrality: The system should not distort economic decisions, minimising deadweight loss.

Transparency: Clear and understandable tax laws enhance compliance.

Efficiency: Low administrative costs and compliance burdens, ensuring economy in collection.

Certainty: Clear payment schedules and methods, enhancing predictability.

Convenience: Easy payment methods for taxpayers, improving the user experience.

New Proposed Tax System

India’s taxation framework has evolved over centuries, targeting produce (income), trade (tolls and customs), and miscellaneous levies to fund public expenditure. This distributed model, administered through multiple agencies, was designed for an era predating advanced financial systems. Today, the RBI oversees a dual currency ecosystem: paper currency, which facilitates anonymity and fuels black money, corruption, and the shadow economy, and digital transactions, which offer traceability and transparency. As of 2024, paper currency in circulation reached ₹35,53,378 crore, while digital transactions in 2023-24 totalled ₹3,658 lakh crore. This shift in financial behaviour suggests an opportunity to rethink taxation.

Modern taxation is a result of years of experience and tweaks, yet it is based on an old system of collection where commodities were valued against commodities (metal coins). Since the advent of a dynamic value currency, a new variable haas entered the equation and since the government has a total control over this variable, it doesn’t need to collect any commoditiy because this variable is deeply integrated in our financial system and there is no way the society will go back to barter trading. The current tax brackets are arbitrary and not based on a fair principle. The proposed system can be considered as a facilitation charge for the usage of currency, both digital and paper currency, and the charge is both transparent and proportionate.

The new centralised tax system leveraging RBI’s currency control: a 30% tax on cash withdrawals and a 10-year validity period for paper currency (effectively a 3% annual fee), paired with a 0.5% tax on digital transactions. A case study for 2024-25 compares this model’s revenue potential against the current ₹16.44 lakh crore. The system aims to discourage cash use, reduce corruption, and align taxation with modern economic realities, supplemented by targeted taxes on customs, luxury items, liquor, and tobacco.

Methodology. This analysis integrates data from RBI reports on currency circulation, World Bank insights on digital economies, and government budget figures. Assumptions include full compliance and static transaction volumes, with qualitative assessments of equity and infrastructure needs drawn from global examples like Sweden’s cashless transition. The proposed system’s revenue is calculated using:

Paper Currency: ₹35,53,378 crore × 3% annual fee.

Digital Transactions: ₹3,658 lakh crore × 0.5% per transaction.

Current Revenue: ₹16.44 lakh crore for 2024-25.

Proposed Taxation Model. The proposed system reorients taxation around currency use:

30% Tax on Cash Withdrawals every 10 Years: Applied at the source, this discourages cash extraction, pushing funds into digital channels.

10-Year Currency Validity: Notes issued for a decade (e.g., 2026-2035) must be deposited in the final year for exchange, incurring a 30% tax over 10 years, averaging 3% annually.

0.5% Tax on Digital Transactions: A flat rate on all digital payments, capturing revenue from frequent users, notably the wealthy, who exhibit higher consumption.

This model simplifies collection, reduces evasion, and aligns taxation with financial modernity.

Case Study: Revenue Projections for 2024-25. Using 2024-25 data, we compare current and proposed revenues. Income from Taxes (2024-25) is given below.

Personal Income Tax: ₹8,03,491 crore.

Corporate Tax: ₹6,60,354 crore.

Goods and Services Tax (GST): The total GST collection for 2024-25 is estimated to be around ₹1,50,000 crore per month, totalling approximately ₹18,00,000 crore annually.

Other Taxes: This includes Securities Transaction Tax (₹35,923 crore), and other minor taxes (₹2,394 crore).

Total Expected Amount of Transactions (Turnover). The total value of digital transactions in India for the financial year 2023-24 was approximately ₹3,658 lakh crore. This includes all forms of digital payments such as UPI, credit/debit cards, and other electronic payment methods.

Expenditure on Income Tax Collection. The total expenditure incurred by the Indian government on the collection of income tax, including maintaining staff, was ₹8,634 crore for the financial year 2023-24.

Total Amount of Circulation Currency. As of January 2025, the total currency in circulation in India was ₹35,53,378 crore.

Current Tax Revenue: ₹16.44 lakh crore.

Proposed Revenue: Digital Transactions: ₹3,658 lakh crore × 0.5% = ₹18.29 lakh crore. Paper Currency: ₹35,53,378 crore × 3% = ₹1.06 lakh crore.

Total: ₹18.29 lakh crore + ₹1.06 lakh crore = ₹19.35 lakh crore.

Old Taxation System

New Taxation System

Crores

Crores

Income Tax

803491

Total Digital Transactions

36,58,00,000

3658 L Cr

Corporate Tax

660354

Currency in Circulation

3553378

35.53 L Cr

GST

150000

30% Every 10 Years Replace Currency Notes

Others

35923

Proposed System

Minor Taxes

2394

Introducing 0.5% Digi Tax

18.29 L Cr

Expenditure

8364

Paper Currency Tax

1.0659 L Cr

3% Every Year

Net

1643798

Total

19.3559 L Cr

Round Off

16.44 L Cr

Round Off

19.35 L Cr

This yields a ₹2.91 lakh crore surplus, excluding additional customs and commodity taxes. The model disproportionately taxes the wealthy, whose transaction volumes dominate, while penalising cash to curb black money.

Supplementary Taxes. Customs duties and taxes on luxury items, liquor, and tobacco would persist, collected at source to augment transaction-based revenues. These targeted levies ensure flexibility for specific policy goals, such as discouraging harmful consumption.

Advantages

Transparency: Digital transactions create an auditable trail, reducing corruption and tax evasion.

Revenue Growth: The ₹19.35 lakh crore projection exceeds current figures by ₹2.91 lakh crore, funding infrastructure and services.

Behavioural Shift: High cash taxes incentivise digital adoption, mirroring global trends toward cashless economies.

Cash flow can be controlled and tracked for ensuring a corruption free society.

Challenges

Equity: A 30% cash tax in one go may burden low-income, cash-reliant groups. Exemptions for small withdrawals or digital subsidies could mitigate this. Farmers who sell their produce at the government centres can be paid in cash to ensure their produce is not taxed.

Infrastructure: Rural areas may lack digital access, requiring investments in connectivity and banking.

Resistance: Cash-dependent sectors (e.g., informal markets) may oppose the shift, necessitating incentives and phased implementation.

India’s distributed tax system, rooted in a pre-digital era, fails to harness modern financial systems. By leveraging RBI’s currency control, a transaction-based model can outpace current revenues. This reform enhances transparency, curbs corruption, and modernises taxation, though equity and infrastructure gaps must be addressed. With strategic implementation, India could lead in aligning fiscal policy with 21st-century economics.