It makes sense to begin comprehensive tax reforms with the abolition of income tax. However, the introduction of a bank transaction tax as replacement is not a good idea. It has failed in other countries, and will fail here too
The proposal to replace income tax, sales tax and excise duties by a single bank transaction tax is being presented as a unique Indian proposal and is stated to simplify tax system. It is neither an ingenious idea nor would it simplify the tax system. The very purpose of checking black money is likely to be defeated. It is likely to put more money out of the system to a parallel one.
Some countries have experimented and did not find it to be a congenial or foolproof system. Argentina introduced the BTT in 1984 before it was abolished in 1992. Brazil implemented its version in 1993, which lasted until 2007. It was introduced in many Australian provinces in 1990s, but quietly given up there too.
Many countries introduced it as financial transaction tax, particularly on equities traded at the stock exchanges. In the UK, it remains in vogue as a stamp duty at the london Stock Exchange since 1694.
In 1936, economist John Maynard Keynes advocated the FTT on dealings on the Wall Street in the US. In 1972, economist James Tobin suggested one per cent currency transaction tax. In 1989, another economist, Edgar l Feige generalised ideas of Keynes and Tobin by a small flat rate tax on all transactions.
The 2007 meltdown led to re-examination of the proposals in response to a request of G20 nations. The International Monetary Fund in 2010 delivered a report, ‘A Fair and Substantial Contribution by the Financial Sector’, which made reference to the FTT and the BTT as a financial option. But the IMF carefully dissociated itself and said, “It was a working paper and should not be reported as representing its views”.
Even the US and the EU have been mulling such a proposal but has deferred decision. Since October 1, 2004, India levies a sort of FTT of up to 0.125 per cent payable on the value of taxable securities transaction made through a recognised national stock exchange.
But the BTT or the FTT is definitely not the way. During 1980s, Ghana had almost implemented what is now being proposed either by Baba Ramdev or Arthakranti of Pune. Ghana had demonetised currency notes of above cedi 50. Transactions above cedi 1,000 had to be done through banks. It led the business community to trade through parallel systems.
Indians are no less ingenious. The tax deduction on bank deposits has led most traders and businessmen to avoid the banks. The 10 per cent duty on gold imports, now it is officially acknowledged, has led to increase in hawala operations and smuggling. It also increases cost of policing.
Bank is not devised as tax generation systems. It is aimed at mobilising the people’s money for growth and equitable development. If the deposits itself are taxed as the the BTT proposes, it would be disincentive for all. Those who could avoid would take to many available devious means, including hawala.
Even otherwise the antique ‘hundi’ — a parallel bank draft — remains in vogue. In earlier times, the mahajans issued hundis and these were accepted at par value everywhere. If the BTT is imposed large houses would issue their own hundis to keep off the banking system.
A cash transaction would be preferable. It would require either a large inspectorate or enforcement agency to check evasion at different points. Has anybody calculated the cost not only in terms of revenue burden on the state but also in terms of corruption and harassment of almost everyoneIJ
Every commodity is sold at multi-level — manufacturer to dealers, to many sub dealers, to wholesalers, to retailers and customers. Each would be required to pay the BTT. The retailer might like to have a direct payment to the manufacturer so that his purchase cost remains low and tax paid at the lowest level.
It would create a complex trading system and cause enormous problem for the business leading it to become more inefficient. A tax on bank deposits is likely to see larger funds being turned into ‘black money’. It would also lead to a repressive tax raids and further rise in corruption.
If the Government migrates to the BTT as a sole source of revenue, cyber security of banking system as a whole becomes vital. This point must be judged in light of Chinese capability in cyber-cum-financial warfare, an Indian Defence and Strategic Analysis report says. Also the BTT will result in loss of sovereignty over tax collection as tax collection process gets outsourced to banks. In 2012, eminent lawyer Nani Palkhivala said, “Today the monster of our direct tax structure has become more monstrous than ever before”.
It cannot be replaced by a more monstrous system. Nor is demonetisation a solution. India had done it in 1946 and 1978. It has not solved the problem. Myriads of other issues surrounding the BTT have not yet received full attention. A beginning at tax reforms could be made with abolition of income tax.