Banking on a new tax regime

Maharashtra-based organisation ArthaKranti has called for a single BTT at a rate of about 2%, replacing a host of levies. But, will it manage to address the existing loopholes of the system? The question remains unanswered.

business Updated: Jan 15, 2014 01:55 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times

The proposal to replace various taxes on income, wealth, imports, sales and others with an uniform banking transaction tax (BTT) has been doing the rounds recently. HT explains the positives and negatives of the implementation of BTT.

How does a BTT work?

The proposal, formulated by Maharashtra-based organisation ArthaKranti, calls for replacing a welter of levies on income, wealth, imports, sales and others, with a single banking transaction tax at a rate of about 2%. The proposal has generated widespread debate in recent weeks.

How will it be structured?

It will be a flat single-point tax collected every time a bank transaction is conducted. The tax will be paid by the recipient of the credit. In other words, each time you receive money in your account, you will liable to pay tax.

How would cash transactions be taxed?

Cash transactions, ArthaKranti has argued, should be kept outside the tax net, but this exemption comes with a set of stringent riders. Cash transactions, according to ArthaKranti, should not be allowed beyond `2,000 and anything above this threshold will not enjoy any legal sanctity. For instance, if a property is sold only through cash, the transaction will remain illegal. The property cannot be registered and there will be no documents to back the transaction. ArthaKranti has also called for withdrawal of currency notes higher than Rs. 50. This would significantly prohibit transactions in the parallel market used to obscure the source of slush funds.

What is the rationale for a BTT?

The primary argument in favour of a BTT is that it is simple to administer, has negligible compliance cost and will simplify the existing complicated tax structure. It is argued that the current tax structure with a web of levies and duties leaves enough holes for evasion, avoidance, corruption and leakage. A BTT, on the other hand, which is collected at every transaction carried out through banks, will significantly remove tax officials’ arbitrariness and sharply bring down the number of disputes and litigations in tax-related matters.

What are the arguments in favour of banning currencies of higher denominations?

It is argued that prohibiting the use of currencies with higher denominations will act as a disincentive for the use of black money. It will make it logistically difficult for people to carry large bundles of notes of smaller denominations to carry out transactions and keep them outside of the banking system. There has been growing demand from several quarters including yoga guru Baba Ramdev who has advocated an overhaul of India’s tax structure to clamp down on the parallel economy that continues to thrive outside the formal banking system.

About a third of India’s black money transactions are believed to be in real estate, followed by manufacturing. A significant amount of black money is also used for shopping for gold and consumer goods. Property deals, bullion and jewellery purchases, financial market transactions, rigging of markets through foreign entities thorugh instruments such as participatory notes, manipulative practices by entities claimed to be constituted for non-profit motive, differing tax rates in various tax jurisdictions, under-invoicing and money-laundering using the hawala or the informal banking route are among the common methods used for generating black money.

What are the drawbacks of BTT?

More than four out of 10 adults in India still do not have a bank account. There are about 120 million borrowing accounts in India or about 10% of the total population. In the absence of an universal banking coverage, a BTT will leave out a large proportion of population outside the tax net. There is also a risk that such a tax will create incentives for vertical integration among companies just to avoid paying taxes. Companies will seek to control and own as much of the production value chain as possible to avoid paying taxes. This will make production processes inefficient. It is also not quite clear, whether it will enhance or reduce the government’s earnings.

First Published: Jan 14, 2014 23:17 IST