Recently, there were press reports to the effect that BJP, the main opposition party in India, if voted to power in 2014 elections has proposed to scrap all taxes such as Income-Tax, Service Tax, Excise, VAT etc and replace them with a @2% Banking Transaction Tax. The details of the proposal will be part of the party's Vision Document which is not yet available in the public domain. It is too well known that state cannot be run with empty coffers. So question arises whether this proposal will yield enough revenues to justify the scrapping of all other taxes?
The Revenue Potential of the Banking Transaction Tax is immense and sky is the limit.
This will not be my last blogpost on this issue. Will deal with this issue in greater detail in further blogposts
The Revenue Potential of the Banking Transaction Tax is immense and sky is the limit.
Ever heard of the fraudster who tampered with
bank's program so as to deduct one cent from each transaction in customer's account and credit his[fraudster's]
a/c and made billions?A one cent deduction didnt rile the
customers (they let it pass as rounding off errors) . But made the
fraudster filthy rich!!!!! The tax seeks to take advantage of this very thing but for legitimate purposes.
Advantages of Banking Transaction Tax
(i)Small insignificant amounts collected from large volumes of transactions. The taxpayer wont feel the pinch !
(ii)This tax will be collected by the banks and paid over to the Government. All the formalities and hassles like filing of returns, assessments, scrutiny etc transferred from millions of tax-paying citizens to few banks. Thus, its hassle-free for the tax payer. PAY YOUR TAX AND RELAX
(iii)This tax is not inflationary. It is not passed on further downstream through the prices of goods and services
(iv)This tax is economical for the government. It will not require a large army of personnel to administer it and collect taxes.
(v)There will be savings in interest cost to the Government. Government can make arrangements with banks to get monies transferred to its account on a daily basis through ECS, NEFT etc
(vi)Tax evasion will be practically zero. No one will waste his time in evading such miniscule amounts of taxes
Banking Transaction Tax-not a new experience- was there from 2005 to 2009
It is not the first time India will be imposing a BTT is BJP does win the elections and impose it . The Finance Act,2005 introduced a Banking Cash Transaction Tax which was repealed in 2009. The rate of tax was only 0.1% of cash withdrawals in the aggregate exceeding Rs.25,000 in day from an account. Savings Bank Accounts were exempted. The proposed BTT will be on all banking transactions in all accounts and not merely on cash withdrawals exceeding specified amount on accounts other than savings bank account. Needless to say, BCTT was not a success as its focus was not raising revenues as it should be with a good tax policy! Its focus was to collect intelligence on large cash transactions! Needless to say, it flopped and was scrapped in 2009
Doctrinaire objections to replacing Income-Tax with BCTT
Income-Tax has the theoretical merit of being compliant with the "ability to pay" principle. Fact is those with larger ability to pay taxes pay their tax lawyers well and manage to get out of the tax net. Income-Tax, in fact, achieves the Reverse Robin Hood effect of putting more burden on small/middle-class people who cannot hire top tax lawyers to keep out of tax net. Tax evasion in turn creates black money and capital flight from India.
Direct and Indirect taxes in India are 32 types which is levied on all people from birth to death.If we calculate how much taxes we are paying we will see that we are left with nothing in comparision to the taxes we pay.In an aggregate we pay 50% taxes on our real income. ED -10 to 15%,Vat-10 to 15%,Octroi 2 to 3%,Service tax 10%,Incometax 30% so we are paying 70% more.If we will pay only 2% as BTT which will eb legal,open,transparent and honest and then all incomes are free from any liability why not honest tax payers enjoys his freedom.BJP must declare this at once earn goodwill of all people.
ReplyDelete100% agree!!!!!
DeleteHello Sir!
ReplyDeleteWill be looking forward to further light being shed on this subject as promised by you at the end of the article. In the interim, a few queries, in brief, as space is limited:
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.
Further - it could encourage a barter system - trying to squeeze cash transactions and bank payments out of the system.
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. 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. 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. More on that later.
In the interim, I hope what I have expressed has some substance in it. Will be happy to receive scrutiny of these views.
"Transaction" requires two distinct parties. I agree that transfer from HO to Branch should be excluded. Modalities will have to be worked out
DeleteAs regards your second point, Larger revenues neednt necessarily be larger burden. Small fleabite amounts from large volumes will be win-win for both taxpayer and Govt. In fact, this tax can raise larger amounts for Govt while putting very small burden on individual taxpayers!!! Thanks for your valuable inputs
here is whole concept www.arthakranti.org
ReplyDelete