Banking Transaction Tax better or worse?

There is indeed a case for tax reform that brings in simplification and rationalization in the tax system by eliminating unwanted distortions and multiplicity of taxes. The middle class has been reeling under high inflation for quite some time and the proposal to abolish income tax is likely to generate excitement.

However, abolishing the taxes and replacing them with alternatives like the banking transaction tax would need to be examined more deeply to fully understand its impact.

“Last year, taxing the super-rich was the subject of debate, this year the discussion is on the possibility of abolishing income tax.” If not anything else this at least proves that our country is trying to improve and implement a better system. It has been proposed that income tax be removed and replaced with a banking transaction tax (BTT) of 2 per cent on the money that is credited to a bank account. The argument is that the BTT would be more simplified and easy to collect. It would reduce the tax burden, prevent tax evasion and, therefore, generate additional revenue for the government.

India is a country with huge income disparity, where less than 1% of the population earns more than 90% of the total income. In such a scenario the system should be such that the rich pay more, while the poor pay less or no tax at all.

India, had a 0.1 per cent BCTT on cash withdrawals between 2005 and 2009, but the annual collection never exceeded Rs 600 crore. This tax was levied only temporarily and wasn’t seen as a replacement for the income tax.

The BTT, does not differentiate between the rich and the poor. Anyone with money flowing into his bank account will be charged a 2 per cent tax on this amount. Whether it is a businessman, who makes Rs 1 lakh a day, or a humble peon, who earns the same amount in a year, will be subjected to the same tax rate.

A possible explanation to this would be that the poor people would not have the same amount of bank transaction as that of the business men, that is true but still there are various other factors which would prove detrimental to the common man.

For instance if you take a loan or receive money from a relative, 2 per cent of the amount will go into the deep pockets of the government. Think of the impact on people from the poorer sections, who are being paid government subsidy that goes directly to their bank accounts. Or senior citizens, who get a small pension and have an income that is below the taxable limit.

They will also be slapped with the BTT even though they are not required to pay tax. It won’t stop there. If you pay an EMI on a home loan or your child’s school fee, the bank or school may want to pass on the 2 per cent tax back to you. One of the basic arguments in favour of introducing the BTT is that it will help eliminate black money. What about the citizens who do not have a bank account?  The tax will only affect those who have bank accounts, and to escape the tax net, they will start avoiding banking transactions as far as possible. This might bite back, and defeat the whole purpose of eliminating black money. India might become a tax haven for foreign companies.

What about the people who are incurring losses? And industries that enjoy tax-free status? They would end up paying tax. How can this promote growth or employment?

The biggest issue is sharing of the BTT revenue between the states and centre. It has taken years of discussions to arrive at an understanding for the segregation of tax between state and centre. If the BTT is being conceived as an alternative to income tax, it is important to see the blueprint to analyse the pros and cons, and the likely impact. We have to wait, and watch whether the proposal can become a reality.

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