My blogpost on one Banking Transactions Tax replacing all other taxes like Income-Tax, Sales Tax, Excise, Service Tax here >>http://taxanalyser.blogspot.in/2014/01/transaction-tax-replacing-all-other.html did attract comments. Customs duties on imports shall stay. Comments were of both types -favourable and unfavourable. Thats the beauty of public discourse...very enriching due to variety of views. In this post I would like to examine the objections. Objections in italics and my response in ordinary fonts
BTT can lead to downstream effects - suppose a company transfers money from its HO to its regional office and further to a branch to pay salaries - there could be build-up of tax. Further - it pays a supplier, who pays further to his vendors, and so on - there is a downstream effect.
If one cuts down these layers of transfers, the current estimates of potential revenue from BTT will collapse, because it is based on the volume of current transactions, which does include all these multiple levels of payments.
On the face of it, it seems a logical objection...transaction by definition cant be with oneself and there might be a case for excluding transactions between HO and Branch from the scope of the tax. However, the commentator himself cautions us that the exclusion would play havoc as BTT depends on volumes. That precisely is the point. BTT has a very large tax base so that even a miniscule percentage can mop up huge revenues as it is evasion-proof, hassle-free, zero costs of compliance to taxpayers, much reduced fiscal bureaucracy, real-time credit of respective shares of the tax by banks to Central Government, State Government and Municipalities. The tax rates being miniscule, cascade effects will be flea bite. Brazillian economists have calculated that a 1% tax transactions-receipts and payments will lead to a 3% cascade in the 19th downstream stage assuming a value addition of 50% at each stage. The transaction tax should ideally be between 0.1% to 0.5%...not more. In any case, advantages far outweigh the minimal cascade effects. Present indirect taxes have no way mitigated inflation...only fuelled it. Differences in VAT rates havent helped in economic integration of India. BTT replacing other taxes will remove distortions in inter-state trade
Further - it could encourage a barter system - trying to squeeze cash transactions and bank payments out of the system.Barter system is too inconvenient for modern times. Financial disintermediation..bank payments being replaced by cash transactions is valid objection. This can be taken care of in two ways>>>One disintermediation will take place only when tax rate exceeds costs and risks of cash handling. Miniscule tax rates take care of this aspect. Further, one can provide that if cash payments exceeding certain amount made, the party cannot enforce his rights legally in a court/tribunal. This way financial disintermediation threat can be taken care of. Moreover, black money creation due to abolition of present exhorbitant taxes will stop. More money will come into the system as India will approximate a tax haven.
Even more fundamentally, there is a paradox in the whole discussion on existing taxation system and its possible substitute. Suppose the substitute does not yield adequate revenues at par with earlier revenues, it means the people have been spared additional burden, and the Govt faces a revenue shortfall. If it yields as much or more, effectively there is no relief to the people at all - in some form or the other, they are finally still coughing up as much towards the Govt.
Well, it neednt be a win-lose propositionas suggested. Government will be able to raise much more revenue with flea-bite burden to taxpayer, no compliance costs, time and energies to taxpayers.It will be a win-win situation.
Hence I feel the more fundamental issue to be addressed is how does the Govt reduce its expenditure - obviously by streamlining its grossly inflated activities - it must get out of things it ought not to be doing.
Obviously this needs to be done. New tax will contribute to this by reducing costs of collection.
Also, reduction in welfare schemes is essential - but then that is against popular sentiment, and any party declaring its intent to do so is unlikely to find favour among weaker sections - a part of the reason why BJP was voted out in 2004. So there has to be some better calibrated approach.
In fact, more money will be available for welfare spends. The whole idea of BTT is to get social justice out of revenue side and tackle it better through expenditures
BTT can lead to downstream effects - suppose a company transfers money from its HO to its regional office and further to a branch to pay salaries - there could be build-up of tax. Further - it pays a supplier, who pays further to his vendors, and so on - there is a downstream effect.
If one cuts down these layers of transfers, the current estimates of potential revenue from BTT will collapse, because it is based on the volume of current transactions, which does include all these multiple levels of payments.
On the face of it, it seems a logical objection...transaction by definition cant be with oneself and there might be a case for excluding transactions between HO and Branch from the scope of the tax. However, the commentator himself cautions us that the exclusion would play havoc as BTT depends on volumes. That precisely is the point. BTT has a very large tax base so that even a miniscule percentage can mop up huge revenues as it is evasion-proof, hassle-free, zero costs of compliance to taxpayers, much reduced fiscal bureaucracy, real-time credit of respective shares of the tax by banks to Central Government, State Government and Municipalities. The tax rates being miniscule, cascade effects will be flea bite. Brazillian economists have calculated that a 1% tax transactions-receipts and payments will lead to a 3% cascade in the 19th downstream stage assuming a value addition of 50% at each stage. The transaction tax should ideally be between 0.1% to 0.5%...not more. In any case, advantages far outweigh the minimal cascade effects. Present indirect taxes have no way mitigated inflation...only fuelled it. Differences in VAT rates havent helped in economic integration of India. BTT replacing other taxes will remove distortions in inter-state trade
Further - it could encourage a barter system - trying to squeeze cash transactions and bank payments out of the system.Barter system is too inconvenient for modern times. Financial disintermediation..bank payments being replaced by cash transactions is valid objection. This can be taken care of in two ways>>>One disintermediation will take place only when tax rate exceeds costs and risks of cash handling. Miniscule tax rates take care of this aspect. Further, one can provide that if cash payments exceeding certain amount made, the party cannot enforce his rights legally in a court/tribunal. This way financial disintermediation threat can be taken care of. Moreover, black money creation due to abolition of present exhorbitant taxes will stop. More money will come into the system as India will approximate a tax haven.
Even more fundamentally, there is a paradox in the whole discussion on existing taxation system and its possible substitute. Suppose the substitute does not yield adequate revenues at par with earlier revenues, it means the people have been spared additional burden, and the Govt faces a revenue shortfall. If it yields as much or more, effectively there is no relief to the people at all - in some form or the other, they are finally still coughing up as much towards the Govt.
Well, it neednt be a win-lose propositionas suggested. Government will be able to raise much more revenue with flea-bite burden to taxpayer, no compliance costs, time and energies to taxpayers.It will be a win-win situation.
Hence I feel the more fundamental issue to be addressed is how does the Govt reduce its expenditure - obviously by streamlining its grossly inflated activities - it must get out of things it ought not to be doing.
Obviously this needs to be done. New tax will contribute to this by reducing costs of collection.
Also, reduction in welfare schemes is essential - but then that is against popular sentiment, and any party declaring its intent to do so is unlikely to find favour among weaker sections - a part of the reason why BJP was voted out in 2004. So there has to be some better calibrated approach.
In fact, more money will be available for welfare spends. The whole idea of BTT is to get social justice out of revenue side and tackle it better through expenditures
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