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BANKING TRANSACTION TAX
AUTHORED BY - RITWICK MAJUMDER
ABSTRACT
IN THE PREVIOUS SEVERAL DECADES, the Indian economy has undergone a
shift that has made the country's tax system overhaul necessary. It is vital to
have a functional and streamlined tax system in the period of accelerating
globalisation in order to boost revenue, decrease economic imbalances, and
foster a competitive economic climate.
With the requirement of tax reforms,
a recommendation for the implementation of a single tax known as the Bank
Transaction Tax (BTT) was suggested.
In this essay, the implementation of
the bank transaction tax in India is critically evaluated. The study makes an
effort to examine the difficulties and possibilities facing the government with
regard to the ramifications of BTT, as well as its effects on those who are
paid a salary, businesses, and industry.
LITERATURE REVIEW
The Rates and Revenue of Bank
Transaction Taxes authored
by Jorge Francisco Baca Campodonico, Luiz R. De
Mello, Andrei A. Kirilenko highlights
the concept of banking transaction tax. This research paper provides nationwide
concrete evidence of the effectiveness of bank transaction levies. The date of
sis South American countries have been considered who have implemented the
concept of BTT in their economic system. The study shows that the revenue
decreases over time for a certain tax rate. Consequently, the tax rate must be
hiked continually in order to achieve a set revenue objective in real terms.
This is true regardless of how high the tax rate is raised. We come to the
conclusion that BTTs, particularly over the longer term, do not provide a
stable source of revenue.[1]
14 Impact of The Bank Transactions
Tax on Deposits in Argentina authored by Ricardo Fenochietto, Carola Pessino, Ernesto
Crivelli highlights the implications of Banking Transaction Tax system in
Argentina specifically which introduced the system in late 1980s. This tax was
introduced during a crisis with an objective to boost revenue collection. This
study uses several cointegration-based econometric models to assess how the BTT
would affect savings and checking account deposits in Argentina. The results
show that the tax will have a considerable negative impact on the amount of
deposits.[2]
RESEARCH QUESTION
·
Whether
Banking Transaction Tax system can suitable for a developing nation like India
or not?
·
Whether
the concept Banking Transaction Tax was successful in other developing
countries or not?
·
Whether
BTT can replace Income Tax in India or not?
RESEARCH OBJECTIVE
The
objective behind writing the research paper ‘Banking
Transaction Tax: A Critical Appraisal’ is to understand
a) The concept of banking
transaction tax
b) To provide the reader with a
basic understanding of the advantages and disadvantages of
BTT in Indian Scenario.
c) To determine the practical
aspect of BTT system.
INTRODUCTION
‘There are only two things in life
that are guaranteed: death and taxes.’
- Christopher Bullock
INDIA'S TAX STRUCTURE has to be reformatted as a result of
the dramatic upheaval the Indian economy has seen in recent decades. An
efficient tax structure is necessary for the development of a nation. In Kautilya's
Arthashastra, a sound state treasury is advised. It is significant since
economic growth heavily rely on it.
Tax reform is urgently needed in
India due to the complicated tax system there. The main concerns with tax
changes include lowering the intricacy of the current tax system, the expense
of tax levy and collection across various tiers, and offering solutions
for tax dodging. A proposal to impose a single tax known as the BTT was
made in response to the need for the aforementioned tax reforms.
It is not a novel notion to push for
a single tax. For the first time, France proposed imposing a single tax.
Brazil, nevertheless, also suggested single tax in a different structure,
called BTT, in the 1990s, along with discussion on single tax in the 19th
century between Canada and the United States. In the fiscal year 2005-06,
the concept of single tax was brought with a purpose of eliminating the
creation of black money. The concept, nevertheless, was divisive and received
harsh criticism. After a long absence, the idea of a single tax was revived and
made more extreme. As per many leaders the present tax system act as a burden
for common citizen.
The Pune-based research
organization Arthakranti is well-known across the nation for its advice to
the Prime Minister. It asserts responsibility for last year's historic
demonetization of Rs. 500 and Rs. 1000 notes. It serves to offer well studied
methodological approaches intended to totally alter the existing socio-economic
situation in India.
BANKING TRANSACTION TAX
BTT is founded on the concept that, in a "monetized
economy" like the one we live in, banking transactions, including
credit and debit ones, serve as the foundation for all value exchanges. As a
result, the tax can be charged by introducing a charge to all financial
transactions. Every type of financial transaction, including paper checks
and electronic ones, will have a two percent fee, as according Arthakranti.
In varied amounts, the centre, the states, and the local governments might be
held responsible for this fee.
According to Arthakranti's formula,
local bodies receive 0.35 %, the States receive 0.6 %, and the Center
receives 0.7 %. The remainder of this sum would likewise be credited to the
bank doing the actual business.
This approach applies to banking
transactions since all credits and receipts, regardless of their intended use,
are subject to tax. Assuming that high value transactions will be processed
by banks and that only the impoverished will utilise money, cash payments have
been excluded from this system. The transfer of funds between two bank
accounts that belong to the same individual is another exemption. In certain
circumstances, a direct payment mechanism may be used to repay the tax. It is
also suggested that, in order to offer people a single, distinct identity and
avoid the abuse of exclusions to BTT, Aadhaar or PAN cards be linked to
people's bank accounts.
THE PROPOSAL OF BANKING TRANSACTION TAX
OPPORTUNITIES AND LIMITATIONS OF
BTT SYSTEM
|
OPPORTUNITIES
|
LIMITATIONS
|
|
The complex tax structure in India would be made
simpler with the adoption of BTT.
|
The inequality gap would expand if taxes are levied
on the wealthiest and the poor at the same rate.
|
|
It will simplify
and streamline documentation while removing opportunities for financial
crimes, exploitation, and evasion.
|
Because it would need many taxes to
accomplish a single operation, the BTT also has a cascading impact on
economic activity.
|
|
The BTT's ability to filter high-value transactions
exclusively via banks would contribute in the battle against black money and
money laundering.
|
Additionally, if the same amount of money is
transferred across several family accounts numerous levels of taxation will
be applied to the transaction.
|
|
It will
encourage individuals to pay taxes fairly.
|
Businesses could relocate their
payment centre out of India and consider using offshore bank accounts in
order to avoid paying bank transaction tax.
|
|
It will alter the way that individuals do business,
moving away from cash transactions and promoting a check-based economy that
encourages more accountability.
|
BTT being a flat tax is regressive in nature.
|
BTT’s CONCEPT IN LATIN AMERICAN
COUNTERIES
SIX LATIN AMERICAN COUNTRIES SUCH AS
BRAZIL, ARGENTINA, ECUADOR, BOLIVIA at the end of 2004 introduced the concept of BTT. When there
is an economic crisis or in reaction to one, BTTs are typically adopted as a
last resort to raise money. All of the taxes were implemented temporarily
before being, in some circumstances, further expanded. Tax rates have varied
greatly throughout time and among countries, ranging from 0.2% to 2.0%.
In addition, most nations have not consistently imposed BTTs.
Additionally, each nation has a
different list of banking transactions that are taxed. Most of the time, only
bank debits—including check clearance, withdrawals, and debt payments subject
to taxes.
From 2001-2004, both Ecuador and
Argentina taxed the
bank credit. The same practice was followed in Columbia during 1990-2004. Most
nations have tax exemptions for specified organization (such as government
entities and nonprofits) and transactions (such as those with the central bank
and between federal agencies).
BTTs' revenue results have been
highly variable. With yearly revenues between 0.6 and 1.6% of GDP and effective
taxes ranging between 0.2 and 0.38 %, it has been notably significant in Brazil
and Colombia. However, BTT productivity has generally been on the decline, as
indicated by the magnitude relation of revenues to GDP to the average statutory
rate.
|
COUNTRY
|
YEAR
|
EFFECTIVE RATE
|
COLLECTION IN % OF GDP
|
PRODUCTIVITY
|
|
ARGENTINA
|
1988
1989
1990
1991
|
0.70
0.70
0.30
1.13
|
0.83
0.66
0.30
0.91
|
1.18
0.94
0.99
0.81
|
|
COLUMBIA
|
1999
2000
2001
2002
|
0.20
0.20
0.30
0.30
|
0.71
0.60
0.75
0.71
|
3.54
2.89
2.50
2.37
|
|
BRAZIL
|
1994
1997
1998
1999
|
0.25
0.20
0.20
0.38
|
1.28
0.86
0.89
1.40
|
5.10
4.28
4.44
3.69
|
|
VENEZUELA
|
1994
1999
2000
|
0.75
0.50
0.50
|
1.30
1.13
0.89
|
1.73
2.26
1.78
|
|
PERU
|
1990
1991
|
1.42
0.81
|
0.89
0.58
|
0.63
0.71[3]
|
PRACTICAL IMPLICATIONS OF BTT
The practicality of Banking
transaction tax system in modern economy is shown below with the help of a
table:
|
COST PRICE
|
PROFIT %
|
SELLING PRICE
|
BTT (2%)
|
TAX AS % OF PROFIT
|
|
200
|
5
|
205
|
4.1
|
82
|
|
200
|
10
|
210
|
4.2
|
42
|
|
200
|
20
|
220
|
4.4
|
22
|
|
200
|
100
|
300
|
6
|
6
|
|
200
|
200
|
400
|
8
|
4
|
*All the data are in rupees &
hypothetical
Calculations:
SP= CP+ PROFIT %
BTT= 2% OF S.P.
TAX AS % OF PROFIT: BTT/ PROFIT *100
CRTICAL ANALYSIS
The following table is used to
examine the effects of the proposed BTT, and it reveals that different
industries have varied profit margins for various products.
As from the table one can easily
deduce that a product with less profit margin were taxed as higher rate while
products with high profit margin they are taxed less. For example: Product with
profit margin of 5% are taxed at 82% while product with a profit margin of 200
% are taxed at 4%.
OPINION
Economy
is the foundation of a strong nation. A sound tax system
contributes a lot to the economy. Any taxation system must accomplish the
following fundamental goals:
1. It
must adhere to the law, as our constitution prohibits the accumulation of money
and power and is inherently socialist.
2. It must guarantee the government receives
enough revenue.
3. It
needs to be durable and evolve over time.
4. In
an automated tax collecting system, there cannot be a sizable, ineffective
bureaucracy.
5. If BTT is implemented, all transactions must
be subject to the same tax rate in order for it to be administered.
We
have a significant cash economy, with over 70% of our economy being
unorganized. The organised sector just pays the BTT, which is the first
negative effect. If using bank for transaction cost more, then people might
choose to switch to cash transactions. It is not possible to outright
prohibit cash transactions. Even if the government does that, it will collapse.
Unlike income tax, BTT is not subject to discretion. Rich individuals pay a
higher income tax rate than poor ones do. All parties pay equally under BTT. As
a result, discrepancies will grow fast and drastically.
BTT
is calculated based on the number of transactions. In a struggling economy, it
may be extremely detrimental if cash flow becomes constrained and payments are
delayed. It is challenging to predict what will happen to global trade,
which accounts for a sizable share of total trade. BTT will destroy global
trade. Another problem with BTT system is that, it is inflammable in nature and
will hike the price immediately. BTT is indeed a very radical shift which is
not suitable for India right now.
Until
the majority of the population (over 90%) in India joins the organised sector,
in my opinion, BTT may not be currently relevant or a practical option. This
too solely pertains to the topic of how taxes are collected. A
one-size-fits-all approach would not be wise as a volume game-based method of
tax collecting.
CONCLUSION
The National Institute of Public
Finance and Policy
has already evaluated the efficiency of BTT system in a report and concluded
that the system doesn’t look promising. The report contends that BTT does not
uphold equality, a crucial taxation element. The existing structure values
progress. It has somewhat lower taxes on products and services used by the poor
than on other commodities and services.
Additionally, the income is gradually
taxed. Incorporating the equality concept into BTT would be challenging because
it is ingrained in our existing system. NIPFP also feels that BTT may not be as
impenetrable as it appears. Earlier attempts at implementing such a tax were
made in Argentina, and Brazil, where the flat tax system temporarily increased
income but had to be eliminated. Even if BTT system is adopted a highly thorough
foundation and clearly specified control mechanisms are needed.
SUGGESTIONS
1. India should work to convert its
large unorganized sectors into organized ones. With the dominance of organized
section BTT will be useless.
2. Along with the introduction of BTT system,
the government should promote digital methods of payment.
3. Government should develop a mechanism
to the citizens from using off-shore accounts for payment methods. If this is
not controlled, then the government will suffer a lot after the implementation
of BTT.
4. The BTT should be revised as the
current system has a number of flaws in it. The inequality gap it creates
should be addressed.
5. The banking industry need to be more
technically refined and computerized. A nationwide mechanism for clearing checks
and other papers should also exist.
[1] Luiz
R. de Mello, Andrei A. Kirilenko, The
Rates and Revenue of Bank Transaction Taxes, OECD, Economics Department, OECD Economics Department Working Papers(
2006).
[2] 14 Impact of The Bank Transactions Tax on
Deposits in Argentina, Ricardo Fenochietto, Carola Pessino, Ernesto Crivelli
[3] Luiz
R. de Mello, Andrei A. Kirilenko, The
Rates and Revenue of Bank Transaction Taxes, OECD, Economics Department, OECD Economics Department Working Papers(
2006).
Article Information
BANKING TRANSACTION TAX
Authors: RITWICK MAJUMDER
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/04/14
- Volume 2
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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