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 The Finance Act,2005 introduced a Banking Cash Transaction Tax which was repealed in 2009.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.
