India’s answer to tax-evasion lies in blockchain

Representational Image | Bitcoin | Pixabay

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After recent large purchases by Tesla founder Elon Musk, the cryptocurrency Bitcoin has reached an all-time high, trading at over $61,000. The Narendra Modi government in India, seeing cryptocurrency as a threat, is contemplating a ban on all of them and starting its own: a digital rupee. Whatever the wisdom of this move and its underlying motives, the fact remains that the digitisation, decentralisation and automation of currency are becoming mainstream.

Blockchain, the technology underpinning this trend, is a database that is duplicated across a network of computers. It is designed to reconcile data regularly and constantly across the network. Since the data reside in millions of places, there is no central location or data management service. As a result, blockchain is very difficult to hack. All records in blockchain are public and verifiable. These features suggest there is much to be gained from employing blockchain for digital records and the gains extend well beyond currency.

In India, blockchain and the automation of digital records are now used to settle insurance contract payments in hospitals. Vitraya Technologies has created a product that enables hospitals, insurers and patients to settle many claims instantaneously. That means no need for human coding of ailments or services received, and no tedious and contentious back-and-forth among insurer and hospital and patient — put simply, money exchanged for services rendered. This approach promises to realise significant efficiency gains.

And India stands to benefit considerably from leaning not only towards specific instances of automation but also towards using blockchain more generally.

Also read: Everything will soon be on the blockchain, whatever that means

Automating the tax code

Blockchain could solve some of India’s most intractable and deeply intertwined problems: limited state capacity, poor tax collection and corruption.

Like many developing countries, India’s inability to collect taxes is its most glaring challenge. Without funds, states lack capacity. How can India collect taxes with limited capacity and in a society where many have little to contribute? India has long struggled to implement income and other taxes that would enable it to build the capacity to administer taxation more effectively. Nevertheless, it is caught in a feedback loop.

This is no coincidence. Many who owe taxes do all they can to avoid payment. The recent Netflix drama, The White Tiger, based on Arvind Adiga’s novel of the same name, highlights one of the many ways that wealthy Indians in particular shirk tax responsibilities; the red bag of cash that makes the rounds among politicians and bureaucrats in Delhi is practically a character in the film. There is a lot of money in tax avoidance, both legal and illicit, but there is little that revenue officials can do about it.

Given the Indian State’s lack of capacity to effectively levy taxes through traditional bureaucratic methods, it makes sense to automate the tax code and settle payments via blockchain. Europe is considering blockchain to combat VAT fraud.

India’s recent move towards a centralised Goods and Services Tax (GST), despite the sloppy rollout, is a pragmatic step in the right direction. It is easier to collect taxes from a somewhat limited number of relatively visible entities than from 1.3 billion people. The next step is to put GST tax collection on the blockchain. This would reduce corruption and streamline payments. Limited enforcement resources could then be used to corral the most egregious avoiders. In the end, with more parties paying what they owe, India might even be able to lower its tax rates without lowering its collections. In that case, some tax avoiders might actually owe less than they currently pay in tax-avoidance “fees”.

Also read: India can be the laboratory that leads the world into the Fourth Industrial Revolution

Handle with care

One of the core issues in the adoption of blockchain, however, is the seamless integration of fiat money, like dollars or rupees, with digital currencies. Cryptocurrencies are highly volatile; double-digit swings in value are commonplace in daily trading. Any government-based blockchain implementation must shield taxpayers from such volatility.

One solution might be the use of stablecoins, pegged to the rupee. Backed by reserve assets, stablecoins attempt to leverage the instant processing and security of a cryptocurrency, while guaranteeing volatility-free valuations against fiat currency. Another option would be to integrate a blockchain payment network, such as Stellar, which enables creating, sending and trading digital representations of all forms of money, including rupees. Although Stellar has a token called the lumen, its role is only to facilitate the underlying blockchain machinery and instant transfers. As a result, fluctuations are mitigated.

In either approach, though, exchange from cryptocurrency to fiat money can be expensive. Some infrastructure investment would be needed by the Indian State to enable low-cost on- and off-ramping between cryptocurrencies, and fiat in order to make blockchain cost effective. But, once achieved, the integrity, security and fraud protection of blockchain would far outweigh investment costs.

Importantly, the State need not be at the centre of any such efforts — it merely needs to permit them to proceed. In her 2012 book, Corruption and Reform in India: Public Services in the Digital Age, Jennifer Bussell points out the need for technocratic solutions within the bureaucracy. Blockchain would actually address the next step: bureaucrats rarely have an interest in reforming systems they are themselves profiting from.

Blockchain is a technocratic solution that need not be managed by the State. It would be preferable to have private actors design such a system and stand between the State and society on this issue, in much the same way that tax professionals do in the United States and among the wealthy in India, so long as some kind of accountability could be ensured. The Modi government merely needs to allow this alternative tax collection path to develop.

Susan Ostermann is an assistant professor of global affairs and political science at Notre Dame’s Keough School of Global Affairs

Jarek Nabrzyski is the director of Notre Dame’s Center for Research Computing and concurrent professor in the Department of Computer Science and Engineering. 

Ian Taylor is a computational scientist at Notre Dame’s Center for Research Computing and research professor in the Department of Computer Science and Engineering; he is also a Research Professor at Cardiff University, UK. Views are personal.

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