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Last Updated : Jan 31, 2014 09:34 AM IST | Source:

Flat banking transaction tax: What it means for economy

The so-called banking transaction tax that has been proposed to eliminate all other taxes in the economy has caught people's fancy. We investigate its merits and demerits.

As the Indian state heads into elections in a few months, there has been a steady buzz over a proposed so-called banking transaction tax (BTT) that could potentially replace all other taxes that are currently levied.

The idea of the BTT first started when ArthKranti, a Pune-based non-governmental organization focused on socio-economic issues, first proposed the levy.

Yoga guru Baba Ramdev, who has been vocal about his views on corruption, picked up the gauntlet and the issue entered mainstream public discourse when the BJP’s prime ministerial candidate Narendra Modi called for a complete tax reform, with several other BJP leaders hinting they were seriously considering giving BTT due thought.


Also read: Indian Tax Structure: 10 Dos & 10 Don'ts

Here’s an FAQ to help give you a complete lowdown on the proposed banking transaction tax:

Q: What is the complete proposal?

A: 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.

Q: What will this achieve?

A: According to ArthKranti’s 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.

Q: Has such a proposal been tried in history?

A: While a tax on all banking transaction was put in effect in some countries such as Brazil (and later withdrawn), it was just another tax rather than a standalone intended to replace other taxes.

Q: What could be the positives for such a tax?

A: Firstly, the proposal aims to simplify (or, oversimplifies, according to critics) India’s 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.

Q: What do the critics say?

A: 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 move’s 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.

Q: What is the BJP’s official position on the BTT?

A: The BJP has so far remained non-committal on whether it would include BTT as a focus area in its election manifesto.

In an interview with CNBC-TV18, party leader Arun Jaitley said: “The BJP has not accepted the concept of a banking transaction tax. There have been suggestions made by ArthaKranti to the BJP. The proposal, on the face of it, sounds very popular and attractive. However, I am conscious of the huge number of difficulties which are there in implementing such a proposal. Therefore, the BJP as a responsible party is not going to accept it without going through such a proposal, without figuring out the consequential spiral effects of this.”

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First Published on Jan 30, 2014 04:03 pm
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