BANKING TRANSACTION TAX

A bank transaction tax is a tax levied on debit (and/or credit) entries on bank
accounts. It can be automatically collected by a central counterparty in the
clearing or settlement process. Thus, a bank transaction tax is simply a tax of a
certain percentage levied on transactions that happen on a bank account. This
tax is usually collected by some central counterparty, for instance, a countrys
Central Bank, during the equities clearing procedures.
The proposal for a single tax is not new idea. Long back Physiocrats, an
economic school of thoughts that originated in France, mooted the idea of
levying a single tax on land. While the present tax system, comprising the
income tax, sales tax, VAT etc. are Anglo-Saxon in origin. In the 19th century,
Canada and the United States also discussed single tax. France discussed a
single tax in the post-war period, and in the 1990s, in Brazil this same proposal
reappeared in a new format, as a BTT. Battle lines are clearly been drawn
between two schools of thoughts in the annals of economic history.
Taxes are collected by governments to meet the expenditure of governance. The
tax income is used to pay for the salaries of government functionaries, other
operating expenses of the state, carrying out devolvement work and providing
public goods, such as law and order. However, the choice of taxes for different
governments at different times differ. India, for example, has a range of direct
and indirect taxes which, depending on the jurisdiction, are collected by both
the state governments and the central government. There has been a talk for
simplifying the tax structure and the tax administration in the country. Proposals
for a new Direct Taxes Code (DTC) in case of direct taxes and Goods and
Services Tax (GST) in case of indirect taxes are at different stages of
consultations.
KEY ISSUES IN TAX REFORMS, THE FOLLOWING FOUR ARE THE
MOST CRUCIAL:
1. Simplification of tax codes, getting rid of the problem of multiplicity of
objectives assigned to tax codes and multiple taxes.
2. Rationalisation, modernisation and human capital building of existing tax
collection machinery. Our present system still carries the remnants of the
old British and Soviet style tax systems which are divorced from the
ground realities of our market based economy.
3. Rationalisation and modernisation must be undertaken with objective of
reducing cost of collecting the taxes, compliance cost so as to minimise
distortions in resource allocation and reduce harassment.
4. The fourth and perhaps the most crucial, resolving the tensions between
Centre and States governments on matters of taxation.
IDEA OF BTT IN INDIA
The idea of the BTT first started when ArthKranti, a Pune-based non-
governmental organization focused on socio-economic issues, first proposed the
levy Interestingly, Arthakranti, a Mumbai-based non-governmental
organization, in a proposal (which is being widely discussed) calls for scraping
of all the existing taxes, except customs duties and replace it with a single tax
on banking transactions.
Arthakranti has proposed that all taxes, except customs duty, should be
withdrawn and be replaced by a single tax on banking transactions. The tax will
be deducted every time an account is credited. The BTT should replace every
single tax in the country barring customs duty. Apart from this, all cash
transactions above Rs 2,000 should not be legally valid (one cannot issue an
invoice on the same) though not criminalised. The government should also
withdraw Rs 500 and Rs 1000 currency notes from circulation.
For example, if the limit is set at Rs.2,000, any transaction valued above this
done with cash will not have any legal protection. So if people buy property by
paying in cash, they will not be able to legally transfer it in their name. This is
expected to bring in most transactions into the banking system and eliminate the
scope of black money. However, there will be no tax on cash transactions. It is
argued that this will simplify tax collection and tax administration processes,
and the numbers put out show that a transaction tax of less than 2% will be
sufficient to fulfil the revenue needs of the country. However, it will not be easy
to implement because of several difficulties such as lack of banking penetration
in the country. Also, a transaction tax will not be progressive. Further, every
stage of production, which involves transaction between two parties, will get
taxed and have an implication on total cost. Critics also argue that this will
undermine our federal system.
The proposal, abolishing of direct and other taxes and levy of single Banking
Transaction Tax (BTT) by Shri Baba Ramdev Ji (BRD) has reopened a very
important and forgotten chapter in the history of Indian economic reforms.
Reforms started in 1992 when the country first resolved to move towards a
democratic market based economic system from a democratic socialist
economic system. Tax reforms were a logical corollary of this commitment to
market based system. Tax reforms since 1992 were centred around two
important issues rationalisation of tax structures (both direct and indirect) and
fiscal federalism (sharing of tax revenue between Centre and states) in new
economic order. It not the purpose here to trace this history, but it will suffice to
say that progress made on both the issues was visible till 2001 after which it
ceased to gather much attention.

According to ArthKrantis calculations, at the rate of 2 percent per transaction,
this can result in net tax collections of Rs 40 lakh crore for the government,
compared to about Rs 10 lakh crore currently. The NGO says this could be
distributed among the central, state and local governments.

The could be the positives for such a tax

Firstly, the proposal aims to simplify (or, oversimplifies, according to
critics) Indias complicated tax system, and if nothing else, brings into
public conscience the need for reforms in the current tax system.
Second, it could potentially directly kickstart consumer spending by
doing away with income and a host of other taxes while also eliminating
the need to set up several layers of government machinery employed to
collect taxes.
Third, the BTT would help fight black money, money laundering and tax
evasion.


The could be the negatives for such a tax
Critics say the first and potentially the most drastic negative consequence
of such a system would be to force people away from banking
transactions. The various possibilities include people starting to hoard
cash, emergence of parallel systems such as barter trade or dealing in
alternative payment systems such as gold, etc.
Critics add the moves radical nature could even give rise to
unpredictable shifts in the economy such as companies wanting to move
toward inhouse manufacturing rather than dealing with others in order to
save on tax.
The move, as it caps cash transactions at Rs 2,000, would need to
develop robust electronic payment systems in a country where 60 percent
of people do not have a bank account.
The BTT also produces a cascading effect on economic activity (leading
to an effective rate that would be higher than the headline 2 percent) as
repeat transactions to complete a single activity such as production
would lead to multiple levies. Finally, the tax would charge the same rate
on the rich and the poor, thereby potentially widening the inequality gap.
A stand-alone BTT will see a flight of deposits from banks. People will
hoard cash to escape paying the levy that will be charged every time a
person deposits money in a bank or withdraws/spends it.
India will then have a permanent and thriving parallel economy. A flat 2% BTT
will be regressive and iniquitous: the poor with meagre incomes will pay a
larger proportion of their income as tax than the rich. It will hurt industry too.
Manufacturers will not get credit on taxes they pay on inputs, unlike, say, the
value-added tax. This will raise the cost of production and make products more
expensive for consumers.
The levy will cascade and render our exports uncompetitive. Exemptions, if
any, will make it even more messy. BTT will be an inefficient tax. No country
in the world has a stand-alone BTT. Only Brazil experimented with the levy,
and that too as an extra tax
In globalised world where labour mobility is opposed as it becomes an
immigration issue while capital mobility is encouraged, BTT proposal in some
ways is migration from taxation of labour to taxation of capital. Hence,
controllers of capital will not like BTT. Besides controllers of capital, tax
accountants, tax lawyers and tax collectors will also oppose BTT as they go out
of business. Some opposition is expected from political fraternity as after CBI,
IT Department is second tool in the armoury to subdue a political adversary.
SEQUENCING OF TAX REFORMS
In theory, implementation of BTT will require two preconditions:
1. A digitalised and nationwide banking coverage.
2. A cultural predisposition with the society not to use paper currency i.e.
use more cheques, debit cards, NEFT, RTGS etc. There is lot of scope for
improvement on this in India and depends on [1] above.
In the Indian context there are additional preconditions, these include:
1. Efforts on financial inclusion expansion of banking network- should
precede BTT.
2. The efforts to clamp down parallel economy which includes
dismantling the grey market in rupee and addressing black money
problem, must go before BTT.
3. When Government migrates to BTT as sole source of revenue, cyber
security of banking system as a whole becomes vital. This point must be
judged in light of Chinese capability in cyber cum financial warfare. [See
IDSA report on cyber warfare]. Also BTT will result in loss of
sovereignty over tax collection as tax collection process gets outsourced
to banks.
4. Further in BTT regime, the role of Enforcement Directorate and Financial
Intelligence Unit will increase because any slippage of transactions in
parallel economy will mean loss of revenue. The capabilities of these
agencies will have to be augmented.
5. Building a consensus on BTT because such tax will require Constitutional
amendments and negotiations on share of tax revenue between Centre and
States.
6. Abolition of many taxes will precede BTT. During the transition revenue
foregone due to abolition of taxes must be made good with some other
sources. Auction of resources for commercial exploitation is good source.
But the process must be transparent and again involves Centre-State
cooperation.
CONCLUSION
In a nutshell the proposal for tax reforms which includes abolition of direct
taxes and gradual migration to BTT is need of the hour. However a very
detailed groundwork is required before such a migration. BTT is definitely a
medium to long term proposition. If done it may bring long term benefits. It is
impractical and cannot be implemented within the existing framework of the
constitution. Taxes are levies which enable the government to meet its social
obligations and create infrastructure. You cannot substitute that with a
transaction tax. That will create a parallel economy and encourage people to
stop banking.

Globally, the goal of governments has been to increase taxes. India too joined
the bandwagon by levying a surcharge on the rich in the budget last year and the
consensus among experts seems to be that swimming against the tide will be
difficult. Moreover taxes on incomes have risen from less than 1% of the
population 10 years ago to about 3% of the population today and income tax as
a component of the overall tax revenue has been growing even as other taxes
have fallen below budget estimates. In FY13, the centre managed to collect Rs
10,309 Cr more through taxes on income even as other items like corporation
taxes, customs and excise duties fell short of budgeted estimates.
The idea might sound simple to many but there are practical issues in
implementing it. For now, the purpose of strengthening of tax administration
could be served if necessary steps are taken to implement the DTC and the
GST. The objective, rather than eliminate taxes altogether should be to
rationalize rates and widen the tax net by improving compliance. A midway
compromise could also include eliminating tax on incomes below 20 lakh in
order to boost sentiment among the middle classes, spur growth and improve
demand .
Money cannot be replaced by numbers stored in bank accounts without giving
up on the definition of money. One of the prime characteristics of money is that
it should be durable and should not deplete in value. Today, people seek shelter
in real estate and gold when irresponsible governments increase the supply of
paper based currencies. In a cashless society, people will become utterly
helpless as they watch themselves and their family members reduced to misery.
Proponents of the transaction tax have appealed to emotions by framing the
arguments as a fight against black money. They hide the fact that the banking
transaction tax is merely the first step in the creation of a global taxation regime
combined with a cashless society. Their arguments must be rejected as their
system combined with restrictions on gold and a ban on other forms of trade,
including barter, would usher in totalitarian rule.




BIBLIOGRAPHY
http://economictimes.indiatimes.com/topic/banking-transaction-tax
http://centreright.in/2014/01/banking-transaction-tax-some-perspectives-and-
thoughts/#.Uygh04Wzjk8
http://www.business-standard.com/article/economy-policy/bjp-s-tax-abolition-
dream-is-impractical-114010700445_1.html
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