It was a busy day at Income Tax Office. Pressure was palpable on the Officers’ as they had an enormous task of completing the Income Tax Assessments due on 31st December 2016. Me and my manager were waiting for our turn, and after an hour or so, were inside the cabin of the Income Tax Officer. The case was discussed and at the end, on a lighter note, the Banking Transaction Tax (‘BTT’) found its place into the discussion. And it was then, we thought to pen down a material on the same, analyzing its plausible implications and hurdles in near future as well in the long term.
The demonetization policy by government was and is a severe blow for those who possess black money in the form of cash. Demonetization process is going on with somewhat lethargy as we can see long queues for ATMs and in bank branches in the country. It would take 2-3 months for things to return to normalcy .In midst of this,there’s the news floating around that the next crucial move to clean our economy is BTT. There’s no official statement on the same by the Government and the emergence of this tax seems to be difficult in the near future, we thought to analyse the same and present it before you.
Before we continue towards the impact of such tax, it’s prerequisites and other implications that it would follow, we would have a brief visit of what exactly is the concept of BTT.
BTT is a tax levied on either credit/ debit in bank account as a certain percentage on the total amount credited/debited. So lets visit an example to understand the same:
|Total Balance in Bank||10,000|
|Payment to be made by A to B||5,000|
|Payment received by B||4,900|
(Assuming BTT @ 2 %)
This would be when the tax would be charged on receipts and deposits.The logic behind the same would be the receipt could be the income of the person so receiving and the deposits could be the cash income of the person so depositing. This sounds like Tax Deducted At Source , isn’t it?
|Total Balance in Bank||10,000|
|Payment to be made by A to B||5,000|
|Payment made by A||5,100|
|Payment received by B||5,000|
This would be when the tax woulds be charged on payment or withdrawals. The logic behind the same would be the payment made would be someone’s income which is assumed to be chargeable to tax. This sounds same like Tax Deducted At Source (TDS), but grossed up but more simpler as grossing up in TDS would compel A to pay Rs. 5102.04 (reverse calculation) unlike 5100 in the BTT regime.
There is news in the air that it intends to replace the current complex Income Tax Act. Further, once the BTT is in place, there is also a possibility of restricting cash economy and encouraging people to transact through bank.
Let’s quickly have a glance through the history of BTT in other nations:
Australia has witnessed a regime of Banking Transaction Tax vide its introduction in the year 1982 and was called as Bank Accounts Debit Tax (BADT). It was levied on the customers withdrawing the amounts from the bank through cheque and it also included withdraws by other means .viz EFTPOS (Electronic Fund transfer at the Point Of Sale. The power to levy the same was later on transferred to the states and the tax was abolished as a part of the package of reforms for the introduction of Goods & Service Tax between the dates of 1st July 2002 to 1st July 2005. According to the Australasian Bankers’ Association a total of about 1 billion $ per year was collected near the end of its full operation in the year 2001.
2. Latin American Nations
According to the report of IMF published in May 2001 six of the Latin American Nations have taxed withdraws from bank accounts. This was the consequence of globalization era wherein efficiency of conventional taxes like VAT did erode.
Let’s vet the benefits of imposing such a tax on the developing economy :
- Cashless clean economy-
The prerequisite to implement BTT is to bring down denomination. Hence if government is wilful regarding BTT then first demonetization up to 50 or 100 rupee notes is must. Demonetization to such extent would surely curb black money circulating in the economy as it’s not easy to store piles and piles of notes and the present demonetization era is experiencing the same.
- High Revenue Generation
Lesser the black money more the bank transactions. So governments from local level to central level will get a fair share of revenue which will be more than enough for implementing projects announced during annual budget. This in turn would accelerate our growth rate and sooner achieve double digit GDP rate. According to a study, out of all citizens who file for income tax, 54% of the people don’t pay taxes as they are categorized (most of such people show their income less by doing some gimmics) below the required slab. Imposing tax on all bank transactions, anyone transacting from his or her bank account must pay BTT.
3. Finance would be easily available:
In BTT regime when cash transactions would be restricted and majority of the transactions would be routed through bank, banks would be in possession of surplus funds making them possible to advance the same in the form of loans, with probably lower interest rates ( Demand – Supply effect). This would in turn boost up the business sectors and also increase the standard of living of the people.
4. Parallel economy, what was that?
With BTT regime dominating the discussions, parallel economy would have to pack its bag and leave for a journey never to return,. Its obvious that this is not very quick to happen, but as BTT starts to show its power, parallel economy would be hampered on a large scale and the same money would in turn make way into the white economy boosting India’s economic performance. But a possibilty of people hoarding high amount of cash if effective check is not put on restricting cash transactions or implementing a barter system to run from bank transaction can’t be avoided.
- Impact on rural areas
When going through some details of this issue, we came across some facts. Rural economy of our country is based on hard cash. As banks haven’t reached in extreme rural areas of our country, many people do not even hold a bank account. Therefore most of their dealings are done with cash. As the prerequisite for implementing BTT is demonetization to 100 or even better 50 rupee notes, it would be a disaster for rural people.
- Uneven distribution of tax share among different states
As we saw, BTT is fully dependent on bank transactions the states where banking sector has flourished will get large piece of cake while the others would get very small share. We can easily understand it with an example. There is a bank branch per 3000 citizens in Chandigarh, while Manipur has a branch per 33000 citizens. Therefore the latter won’t get enough share which they need for their development.In such a case, the feasible option would be to collect the tax centrally and then re-allocate the same as per necessity.
3. Social Unrest
Regardless of all the advantages of BTT, BTT will only be successful when there is emphasis on banking instead of cash transactions. Considering the percentage of illiteracy as well as financial illiteracy not just implementation but even conception of such tax may lead to social unrest.
4. Everything is taxed
BTT won’t bifurcate between capital receipt, revenue receipt if the tax is imposed on receipt basis.Even there would be tax on funds transferred to family members.We opine that there has to be a PAN based bank linking system wherein a proper tax exemption on payment to certain institutions/persons .viz trust, senior citizens be in place subject to checking and eliminating all the possibilities of routing taxable receipt through such bank accounts by taxing the payments made by such persons/ individuals.
So, as every coin has two sides, every thing has a positive and negative side!
And here we conclude,stay connected for more to come!!!
©Shreyas Godbole ©Anup Shaha
Pic credit: Google Images