Contents:

1. Purview
2. Need of reforms and Current Tax System
3. What will happen if India does introduce BTT
4. Advantage
5. Disadvantage
6. Conclusion

Purview: 

BTT, abbreviated as Banking Transaction Tax, is the tax levied on debit or credit entries on banking transaction made by any account holder. In other words, each time an account holder withdraws from or deposits money in his account, it will be taxed.

Need of reforms and Current Tax System

The current scenario of tax in India is complicated and sophisticated and various ideas and proposals are brought to simplify it. But the paradox is that the more simple we want to make it, the more complex it gets. Assessee are always keen to get concession by each year, where as government are looking for new tax segment to launch on.

The question of fiscal sustainability and tax reforms is not a new thing. If one were to summarize key issues in tax reforms, the following four are the most crucial :-

• Simplification of tax codes, getting rid of the problem of multiplicity of objectives assigned to tax codes and multiple taxes.
• Rationalization, modernization and human capital building of existing tax collection machinery. Our present system still carries the remnants of old British and Soviet style tax systems which are divorced from the ground realities of our market based economy.
• Rationalization and modernization must be undertaken with objective of reducing cost of collecting the taxes, compliance cost so as to minimize distortions in resource allocation and reduce harassment.
• Resolving the tensions between Central and State governments on matter of taxation.

At current BJP Government, has proposed BTT as replacement of the ongoing tax system, to simplify it. The BJP senior leadership has considered the option of introducing Bank Transaction Tax (BTT), and simultaneously abolishing all 32 direct and indirect taxes, while leaving the import taxes/custom duties at place.

The present income tax, is a declaratory tax, where the entity subjected to tax has to declare the income (tax base) and pay tax accordingly. Declaratory tax system therefore requires a lot of record keeping i.e. paper work. As BTT is also termed as non- declaratory tax system, hence, the proposal of BTT is migration to non-declaratory tax regime from a declaratory tax regime. This is crux of BJP’s BTT proposal.

What will happen if India does introduce BTT?

Any tax should be on income or production in an economy. BTT is on neither, and simply taxes movement of cash within the same recipient. So it penalizes movement of money and consequently impacts the efficiency of money. In the Indian economy the total volume of tax deposits is about Rs 70,60,182 crore as per latest RBI figures. To generate the current tax of Rs 24,71,740 crore (Center and State combined) from that sum would mean a tax rate of close to 35 % across the board on everyone with a bank account. Even after taxing credit, it would need a 20 % flat rate of tax. It would be highly regressive, subsidizing the rich at the expense of poor. Schemes such as direct cash transfer, where the amount of subsidy is directly transferred into bank accounts of beneficiaries, will be the first casualty of this plan as the poor will pay a disproportionately high tax.

What are the Advantages of BTT?

The advantages that the tax experts see are as follows:-

• The collection of taxes will be speedy and transparent.

• The possibility of corruption and harassment and outright prosecution of the taxpayers will be low.

• Being non-declaratory in nature, BTT will prevent evasion and the cost of administering will be possibly low.

• BTT, as being contemplated by BJP, will generate the required tax revenue and has buoyancy.

• BTT is simple and has practically zero compliance cost.

What are the Disadvantages of BTT?

Obviously, there are some of Dis-advantages too, some of them are:

• BTT envisages a ban on cash transaction above Rs 2000. This is unfeasible as it would require an army of inspectors even in a market size of one decent mall.

• Since the tax department will have no data to assess tax paid beyond examining bank accounts, there is no way to track the parallel economy.

• As the penetration of banks in India is very low, having BTT will ensure that many taxpayers go out of tax net.

• BTT will scare the investors as it is an unstable tax regime

• BTT will be regressive and iniquitous: the poor with meager incomes will pay a larger proportion of their income as tax than the rich.

• If BTT is levied, manufacturers will not get credit on taxes they pay on inputs. This will raise the cost of production and make products more expensive for consumers.

Conclusion

In my view, the proposal for BTT which includes abolition of direct taxes is based on sound economic footing and tax reforms are the need of the hour. However, a very detailed groundwork is required before migration to BTT. As of now, BTT will be an inefficient tax. So, The the governement should support the adoption of Goods & Services Tax (GST) , that will also subsume many indirect taxes. The point is we need an efficient tax system and GST fits the bill.

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