Table of contents

  1. What is Banking Transaction Tax?
  2. What are the advantages of Banking Transaction Tax?
  3. What are the disadvantages of BTT in our economy?
  4. Summary

  1. What is Banking Transaction Tax?

BTT, or Bank transaction tax is a method of taxation which would be charged on all forms of bank transactions – credit or debit. Arthakranti  has proposed a taxation rate of 2% on all forms of Banking transactions. The tax would be charged on both – cheques payments and electronic methods of transactions. The tax would be collected by Government and equally distributed between Centre and the respective state where transaction took place. The BTT as proposed by Arthakranti aims to abolish all other forms of taxes, except Customs on imports.

2. What are the advantages of Banking Transaction Tax?

The implementation of BTT could result in several positive outcomes. While some of them are populist in nature, others tend to eradicate the menaces which have ultimately plagued the Indian economic system since decades. Here are the advantages:-

Crackdown on the black money: Since all currency denominations above Rs 50 would be scrapped, all players in the market would be forced to switch to electronic methods of Transaction. The tax would be deducted straightaway with every transaction at a nominal rate of 2%. Thus, the scope of hoarding wealth in form of cash and evading taxes through the loopholes in Income Tax would be avoided.

More people within taxation ambit: As per data for the year 2013 accessed by CNBCabout 12.5 million people pay taxes, which is roughly 1% of the overall population. By scrapping the current taxation mechanism and levying a tax on all Banking transaction would naturally bring large number of people under the Taxation ambit. This would result in great increase in revenue for the Government, which in turn could be used on schemes of the social welfare.

Enhancement in disposable incomes: At present, the salaried class of India pays at least 10% as income tax on earning more than Rs2,00,000 per annum. The slab of tax increases with the increase in income above Rs5,00,000. The disposable income out of one’s salary gets directly reduced by 10-20% at source. However, the 2% BTT would allow 98% of the salary to remain as disposable income.

Cashless economy: Shifting towards the electronic modes of transactions and cheque payments would result in greater transparency and accountability. It would ultimately eliminate the scope of hiding unaccounted wealth.

3. What are the disadvantages of BTT in our economy?

Although BTT primarily appears as a utopian policy, there are a number of drawbacks as well. Here are the demerits of levying BTT in India:

Cripple rural economy: The prerequisite to implement the BTT as proposed by Arthashastra, is to completely abolish notes of denominations above Rs 50. The move would spell a disaster for the whole rural economy, which largely deals in cash only. Mainstream banking has reached the rural heartland of India in a staggered manner, with majority of Indians still not connected with the Banking operations. From seeds to fertilizers, the agriculture sector is largely dependent upon hard cash for its daily transactions.

No flexibility in taxation: A progressive taxation policy is designed in a manner which ultimately creates the minimum burden on the poor and maximum liability on the rich. However, BTT would levy a uniform tax rate of 2%, irrespective of the Income under which a person falls under. Apart from failing to tackle the rich-poor divide, the Taxation mechanism under BTT would create a cascading effect, which is most undesirable for business. After 20 sequences of transactions related to same business operation, the total tax component would add up to 16%.

States with less emphasis on banking sector will lose revenue: Just like GST, the implementation on uniform Taxation mechanism across the nation could violate the federal principle. In the case of GST, the manufacturing states are ultimately bound to lose revenue, whereas, the consuming states are set to gain. Under the BTT, the states with huge amount of bank branches are about to gain, whereas, those backward states where banking is still at its nascent stage is ultimately bound to lose a major part of the revenue which they collected as taxes. For example, Mumbai has a bank branch per 3000 adults, on the other hand, Manipur has a bank branch per 33,000 citizens. The latter is expected to lose the revenue in unprecedented manner only if the mainstream process of Taxation gets abolished.

4. Summary

A banking transaction tax replacing the Current tax systems (direct and indirect taxes, except for Customs duty) is not a superior system on all parameters, say economists at the National Institute of Public Finance and Policy (NIPFP) in their assessment of Arthkranti’s proposal which is being made public when the Budget process for 2018-19 was on.

Arthakranti is a Pune-based think tank that ultimately claims to have suggested Prime Minister Narendra Modi  demonetize Rs 500 and Rs 1,000 currency notes in 2016.

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BankReed Admin

Banking Professional with 16 Years of Experience. The idea to start this Blogging Site is to Create Awareness about the Banking and Financial Services.

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