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Is There A Legitimate Case For A Banking Transaction Tax? 

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Is a banking transaction tax (BTT) really a win-win idea for both the government and the citizens?

A couple of years ago, while reviewing the second NDA II budget, I made a case for a more imaginative initiative to reduce the burden of taxation on a ‘chosen’ few and to spread the tax net wider. In fact, I calculated that a Banking Transaction Tax (BTT) of just 1.1 per cent on all banking transactions covered under NEFT, RTGS and ECS would be adequate to get rid of all other taxes including GST.

The idea of BTT was mooted by a Pune-based think-tank called Arthakranti. It was made popular by Baba Ramdev. The details of their proposal have been covered later in this article.

Some of the arguments against BTT are as follows:

-Indians prefer to deal with cash

-Most people would avoid the banking system to bypass BTT, and pay cash for property deals, large purchases and so on

-This would put a huge burden on the underprivileged and those below the poverty line who are in the banking system. Bad optics.

-If BTT is so good, why has it not been tried elsewhere?

-How would one distribute taxes collected under BTT. Would it be by way of amounts proportionate to BTT collected in states, or any other way?

There were other arguments too, not worth recounting.

However, with great sagacity, this government has been working towards it and there is a pattern to it. Here is the sequence of events that have lead to the present moment:

1. Opening of Jandhan accounts: At present count, around 26 crore or 260 million accounts have been opened. To facilitate ease of operation, the government has allowed these accounts to be opened with zero balance and with no charges. Aadhar cards are being used for identification purposes.

2. Direct Benefit Transfer of subsidies: Many subsidies are going directly to beneficiaries’ accounts. This appears to be a sweetener to get everyone into the banking system.

3. Tax amnesty schemes with a fairly liberal deadline: This was to make people get into the habit of paying taxes on income not declared in their returns or those who had not submitted their returns.

4. Demonetisation of high value rupee notes: This is resulting in people paying their undeclared income into their bank accounts and being forced to draw their needs from their accounts. The collateral benefit is that people who had earned their money through illegal means would also be forced to declare their income and explain how it was obtained or would simply dispose of it by burning or shredding it.

5. After demonetisation, there has been a shortage of the new high denomination notes. The people have adapted to the change by using mobile-linked payment systems that allow them to pay each other even small amounts.

Overall, the government has tried to create a financial infrastructure covering all people or at least all earning members.

It is interesting to see the figures for taxation in the Union Budget for 2016-2017. The total tax revenues estimated to accrue to the government in the current fiscal year is Rs 1632771.90 crores.

After making huge efforts to raise taxes, the equivalent of peanuts by way of tax relief to the populace, was provided. An example of two ‘concessions’ is provided here: -

“Raise the ceiling of tax rebate under section 87A from

2000 to 5000 to lessen tax burden on individuals with income upto 5 lakhs.

Increase the limit of deduction of rent paid under section 80GG from

24000 per annum to 60000, to provide relief to those who live in rented houses.”

The question that begs to be asked is, how many people stay in houses with a rent of less than or equal to Rs 5000 per month?

It’s time to completely overhaul the way tax is levied and collected. In order to spread the burden of taxes to everyone in the system and in a very equitable manner, the only way out is by imposing a Banking Transaction Tax or BTT. I will get to the possible objections to the tax and the answers a little later.

Here are my calculations for how much BTT can be collected and a comparison with the actual budget estimates for revenue collections including non tax revenue.

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Kindly note that the BTT calculated is merely for transactions made through RTGS/ EFT/ NEFT and through mobile banking. If the tax were to be made applicable for all banking transactions, we would end up with a much higher figure. Further, these are transactions made only in customer accounts. Apply the BTT to inter-bank transactions and the collections would be higher.

What are the pros and cons in respect of BTT?

Pros:

  1. Painless tax recovery. Requires a small tweak in the software of banks to collect tax directly from the account holders the moment they make a debit or credit to their accounts.
  2. Replaces all taxes in the system reducing complication in taxation administered by an army of tax collectors, who can be employed gainfully elsewhere.
  3. Removes corruption almost totally as there would be no discretion available to anyone for tinkering with the system
  4. Reduction in the cost of collecting taxes would leave a whole lot of money available for infrastructure development, rural roads and for anything else needed to make India much better.
  5. Movement of goods would be far easier and since tax has already been collected at source, there would be no hindrances
  6. The reduction in pain of not having to deal with different tax agencies, harassment in the hands of sundry crooks masquerading as tax collectors and the constant fear of getting something wrong in the tax return is priceless.
  7. Tax collection would be automated and revenue can reach the government in real time. This would be a far cry from the time when the tax amounts could not be estimated accurately due to lack of data or delay in dispatch of challans. (My experience in SBI has demonstrated how difficult it is to reconcile revenues and payments of the government by the Bank. We had a dedicated officer merely for reconciliation of government accounts in almost all our larger branches, (in addition to all those who were required to handle the daily transactions.)
  8. A lot of national time would be saved as this is now being diverted to the wholly unpleasant task of manipulating accounts to reduce or completely avoid taxes.
  9. An equitable system of taxation that allows all people to contribute to the national exchequer. At present, the salaried are the only ones who pay taxes correctly, just because they have no choice. We have a number of people in India who drive around in BMWs and still pay no income tax.

Am sure readers can come up with some more reasons.

Cons of BTT:

  1. Since there is no restriction of movement of goods, it could lead to proliferation of illegal businesses like drugs etc.

The regulatory supervision of businesses would continue. There would be no let up in vigilance against drugs, illegal businesses and so on.

  1. People would still try to avoid even BTT by continuing with cash transactions.

Not happening! After the demonetization, public will become wary of cash transactions. Secondly, the pain of paying 2% as tax is far less than that of going through financial gymnastics to avoid taxation.

  1. Poor and marginalized people would have to pay tax on their income credited in their bank account.

As it is they pay sales tax and service tax on goods and services they receive. The BTT would be less than that. However, one can exempt items like DBT of subsidies, credit to own accounts, e.g. transfer of amounts from savings account to FD, transfer to loan accounts and so on. Alternatively, BTT may be made payable only on debits to accounts.

  1. With a lot more money in the hands of people, the rate of inflation would go up

The reason for a lot of expenditure is conspicuous consumption by a set of people who spend cash for buying jewellery, real estate and so on. This is directly a result of black money. The government can make cash transactions above an amount of say Rs 10,000 illegal. Since a lot of people from the tax collection system would be free, they could be used to audit jewelers, car showrooms, large malls and other establishments where cash is used for purchasing high value items. However, the pain value of avoiding a 2 per cent tax is too high to violate the limit on cash transactions.

  1. If BTT is so great, why has it not been attempted elsewhere?

No ready answer is available for this. There have been instances where Securities Transaction Tax has been imposed. It is likely that nobody thought of it earlier. While I heard of this only when Baba Ramdev mentioned it, the idea has come from Arthakranti based out of Pune, who suggested BTT with demonetisation of high value notes. The second part has been done and it is too early to comment on its efficacy. It may be added that the banking sector is far more IT-enabled than what it was only four years ago. With core banking systems in place, it is possible to create a robust, secure and efficient collection mechanism for BTT.

Some other contentious points still exist and need to be solved creatively. There is the vexatious question of how to determine the distribution of taxes collected. Would it be based on total transaction volume in a particular state? In such a case, the account could be in one state but the transaction takes place in another, e.g. an ATM used in Bengaluru for a Mumbai account. This is not an insurmountable obstacle. The centre could use a formula where say 40 per cent of BTT collected in a state goes to that state and a buffer of say 20 per cent is used to fund special infrastructure or other contingent requirements, such as flood relief, drought relief and so on. The rest can be used to fund central government projects.

BTT should replace all other state taxes, except stamp duty for transfer of property. However, sales tax could continue only in respect of items such as cigarettes, alcohol and any other substance harmful to health. This should be pegged at a maximum of 15 per cent of value.

Overall, the pros outweigh the cons by a huge margin. Secondly, the energy released by allowing people to go about their lives without worrying about paying taxes and doing a lot of unproductive paperwork involved would be hugely beneficial to the economy. All the objections to BTT should be handled carefully and removed. One needs to manage the transition to BTT. It is suggested that a period of two months be allowed for banks to get their systems in place to start collection of BTT. A UAT phase of one month needs to be allowed for ascertaining tax revenue under BTT. During this phase, the BTT may be pegged at a low rate of say, 0.025 per cent of debit transaction volume. This will give a correct idea of what the tax collection will be over a year for the normal rate of say, 2 per cent of transaction volume. BTT can commence thereafter at the pre-determined rate.

There is just one problem. We have an army of tax lawyers, chartered accountants and tax calculators who would be jobless over a period of time. Actually chartered accountants will have to audit banks for ascertaining that the particulars submitted are correct. NPAs will not right themselves automatically. So they will continue to find work.

Overall, one has to guard national interests and BTT is very much in the national interest.

Over to you Mr. Jaitley! Please get over your GST hang-up and steam ahead with BTT. Next fiscal, you will not have to worry about money for the government.

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