The banking transaction tax rumoured to replace existing tax systems in India

By Ritika Chauhan

Arthakranti, the Pune based think-tank, is famed throughout the country for its inputs to the Prime Minister. It claims to have triggered the historical demonetisation of Rs 500 and Rs 1000 notes last year. It functions to provide well-researched scientific approaches designed to completely transform the current Indian socio-economic scenario. What very few people know is that the report submitted by Arthakranti contained another proposal, in addition to ‘demonetisation’. It is rumoured that this other proposal is going to be approved and made public during the announcement of the budget for the upcoming fiscal year 2018-19.

The banking transaction tax

This second proposal by Arthakranti aims to replace all current tax systems (except customs) with what is widely known as BTT or the ‘banking transaction tax’. BTT is based on the logic that in a ‘monetised economy’ like ours, banking transactions, of both credit and debit nature, are the base for all value transactions, in one way or another. Thus, the tax can be collected by levying a fee on all banking transactions. Arthakranti has proposed a charge of two percent on all forms of banking transactions, including cheques as well as electronic transactions. This charge can be credited to the centre, the states and the local authorities in varying proportions. The ratio suggested by Arthakranti awards 0.7 percent to the Centre, 0.6 percent to the States, 0.35 to the local bodies. The remaining part of this would also be credited to the transacting bank.

Financial transactions fall within the purview of this system, since any credit or receipt, irrespective of its purpose, will attract tax. Cash transactions have been left out of this system, under the assumption that large value transactions will move through banks and use of currency will be limited to the poor. Other exceptions include the transfer of money from one bank account to another, both belonging to the same person. In such cases, the tax may be refunded by way of a direct payment route. It is also proposed to link Aadhaar or PAN cards to one’s bank accounts, so as to give a single unique identity to individuals, in order to prevent the misuse of exceptions to BTT.

Incentives for this tax

Banking transaction tax was first introduced in the United States in the 18^th century. In recent times, some of the South American countries have also attempted to include this system. The difference between the system proposed by Arthakranti and the system in force in the above-mentioned countries is that Arthakranti proposes to replace the current tax system and have a single simple system. In other countries, it is being used as a means of collecting additional revenue and is used to complement the existing systems.

One of the most important incentives for introducing BTT is the elimination of black money. This is facilitated by the removal of currency denominations above Rs 50. All players of the market will be forced to resort to banking transactions and primarily, electronic methods of transactions, which reduces the scope of unaccounted wealth and hoarding.

Advantages of BTT

By being able to monitor all transactions through banks, more and more people will be subject to taxation, which means an increase in revenue for the governments. As per data from 2013, roughly one percent of the people pay taxes, given the percentage of people transacting is much higher. With the introduction of BTT, all who enter into transactions will be subject to taxes.

Another advantage that Arthakranti has for the people is an increase in their disposable income. A minimum of 10 percent tax is payable on an income above Rs 2,00,000. As the income increases, the tax that is payable also increases. With BTT in force, only a two percent charge would be made on one’s income and the rest 98 percent could be enjoyed by the payer.

It is also claimed that the effectiveness of any tax system is judged on the basis of its simplicity: The ability of a layman to understand it. BTT is relatively a simpler method and more convenient approach as it requires the taxpayer to only transact through banks, and nothing more.

Shortcomings of this tax

The National Institute of Public Finance and Policy (NIPFP) presented a report in June 2017 assessing the utility of BTT in India and came to the conclusion that Arthakranti is not as superior as it claims itself to be.

According to the institute, BTT fails to fulfil an important principle of taxation, that is, equity. The current system follows progressivity. In it, the taxes for goods and services consumed by the poor a is a little lesser, as compared to other goods and services. The income is also taxed progressively. The principle of equity is enshrined in our current system and would be difficult to incorporate in BTT. NIPFP also believes that BTT may not be as evasion-proof as it seems. With more and more exceptions, some transactions could bypass the system. The report also reveals that a two percent charge would actually increase the effective tax payable. Further, it is estimated that due to a cascading effect, for every one percent tax on a turnover, there will be an additional 0.75 percent.

All in all, NIPFP believes that conceptually, the BTT may seem to be simpler and a less complex choice and hence, more attractive. While BTT performs well on certain principles, it does not have a superiority over the current system. It might even appear that the current taxation performs better in some aspects. In other words, NIPFP does not believe that BTT is the ultimate solution to hoarding of black money in our country.

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