In the run up to the last Lok Sabha
elections- a novel idea was floated by a
Pune based NGO- Arthakranti, for
a radical change in our existing tax regime with a new ‘ Banking Transaction Tax
(BTT)’ on all payment made by banks to replace all existing taxes such as
income tax, excise duty, sales tax and all other taxes collected by both
Central, state and local governments.
The idea of BTT is incredibly simple.
Banks would collect a small tax (2%) on all payments made by them and deposit
the share of different levels of Government- central, State and Local (say
0.7%, 0.6%, 0.35% respectively) in separate accounts.
With the current level of technology-
collection of the tax can start immediately with some minor changes in the
computer software of banks. The collected tax can be tracked daily and there
would be no need for complicated tax returns, thick books of tax compliance
rules, huge multi layered tax bureaucracy, complex processes for tax compliance
that intimidate tax payers and yet it is estimated that more tax than received now
could be collected with much lower administrative cost because people with fear
of complex tax compliance rules and procedures would feel free to transact
through banks.
Let us make a back-of-the-envelope
calculation with the latest available figures to check Arthakranti’s claim. The total tax collected by central and state
government during 2012-13 at Rs.17,51,123.51 Crore (Source: Statistics from Ministry
of Finance website) is roughly 1.33% of
the total value of payments
(including transfers) made by India’s banking system in 2012-13 which was
Rs.1,312,47,090 Crore (Source: Statistics from RBI’s website). In other words-
a banking transaction tax (BTT) of 1.33% on all bank payments would generate tax
revenue equal to revenue collected by current taxes of both central and state
governments. Compare this low rate BTT of 1.33% with income tax rates (10 to
30%+cess), excise and sales taxes (up to 50%) that you pay on your purchases
and freedom from filing returns. The potential benefits for salaried wage
earners that make most of the country’s earning population, are hard to ignore.
Yet Arthakranti’s proposal while received some attention in the press
but no serious consideration of government, as could be expected for any new
idea. A new idea is unlikely to be accepted immediately.
The idea of the NGO however is hardly
new. Exactly the same idea was proposed by an American economist Dr.Edgar
Feige, Professor Emeritus of University of Wisconsin, Madison, USA in his
October 2000 paper- “Taxation for the 21ST
Century: the automated payment transaction (APT) tax”.
In fact, even prior to Dr. Feige, others
well known economists had recommended a similar financial transaction tax to
prevent volatile behaviour in financial markets that could land the economy in
a financial crisis as we saw in 2008. They include J. M. Keynes (Securities
Transaction Tax) and James Tobin (Currency Transaction Tax- also popularly called
Tobin Tax). Most G-20 countries had at one time or the other have tried with
some form of such taxes though not particularly being successful in terms of
tax revenue collection perhaps because the rates have been extremely low.
However post 2008- the idea received serious consideration of developed
countries and several countries in the developed world are reintroducing or reorganising such taxes on
transactions in their financial markets to prevent any likely future crises.
While Dr. Feige has drawn the idea of
transaction tax from Keynes and Tobin but his focus is not particularly
financial markets- but introducing a low ‘Automatic Transaction Tax’ (APT) as
an alternative to all existing taxes and to cover the entire economy including
the parts left out by current tax regime and thereby collect as much tax
revenue or even more. The foundations of APT according to Feige, ”involve
simplification, base
broadening, reductions in marginal tax rates, the elimination of tax and
information returns and the automatic assessment and collection of tax revenues
at payment source.”
According
to an estimate referred to by Arthakranti-
67% of India’s economy is cash economy that pays no tax. A simplified and
low rate BTT regime is expected bring them under tax net by eliminating the
need for complex compliance procedures.
BTT will
make many winners and some losers. Winners will be salaried wage earners.
Losers will be financial institutions and those engaged in high volume of
transaction of financial assets- stocks, shares and those properties that are
currently not taxed or minimally taxed. Naturally- the potential losers are
expected to oppose such a tax tooth and nail.
The idea
of ‘Transaction Tax’ and its experience in some South American countries have
been examined in several organisations including World Bank, IMF etc. Arguments
against BTT point to several weaknesses of the tax. One is that BTT will
encourage cash economy. BTT supporters say- it is high rate of taxation and
complex compliance procedure that encourage cash transaction. BTT would rather
encourage cash economy to move to the mainstream
with its simplified tax regime and extremely low rate.
Cascading
of taxes is another suspicion. For example- take a loaf of bread. There are
several steps from growing of wheat to the final product- the bread. In the
entire process- many transactions will take place and each will be taxed under
BTT leading to piling up of all taxes in final product and thereby making it
terribly expensive. True, say BTT lovers, but the tax rate is so small that
cascading will not make it more expensive than now. Besides- current taxes
treats different product differently. You pay up to 50% taxes (in case of petroleum
products). By paying a uniformly low rate on every transaction, on the average
you are much better off, they contend.
The secret
of BTT’s high revenue is much larger tax base than of the existing taxes and
therefore despite low rates it is expected to collect same revenue as by
current taxes or even more.
Another
weakness that was actually observed in Latin America was multiple endorsement
of cheques to reduce bank transaction and avoid paying BTT. This however can be
corrected by treating each endorsement as a transaction for tax purposes, say
BTT supporters. Dr. Feige also foresees that there may be attempts to create
private digital monetary systems to evade BTT and he feels such situations
could dealt with legal provisions.
The
argument of financial business community against BTT would be that such a tax
would discourage trading activities and restricting their ability to generate
capital for investment. For example, a trader of stocks would not be willing to
sell his shares/ stocks if his profit after paying BTT is zero or negative (a
loss). It may however be boon to the economy in general that BTT will
discourage high volume trading of volatile nature triggered by a variation by a
tiny fraction in prices. This is why since last financial crisis, several
countries are now favourably disposed towards taxing financial transactions.
In any
case, considering the benefits to most people in the country who are wage
earners- BTT deserves a relook. Will Finance Minister do it?
