Bank transaction tax – a revolutionary Idea or tax reform mirage
Is Bank transaction tax just an idea whose time may never come?
John Maynard Keynes once argued that
The master economist must possess a rare combination of gifts….He must be mathematician, historian, philosopher – in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thoughts. He must study the present in the light of the past for the purpose of the future. No part of man’s nature or his institutions must lie entirely outside his regard.
Baba Ramdev, who is a spiritual leader best known for his contribution in Yoga and Ayurveda, seems to have taken a leaf out of Keynes thoughts. Being one of the early Anti-Corruption Crusaders Baba Ramdev has now thrown his weight behind Bank transaction tax and is looking up to BJP to implement should come to power in Centre, Baba Ramdev tried selling bank transaction tax to BJP PM Candidate Shri Narendra Modi during one of the events last week. Whether Baba Ramdev followed decorum of the stage by insisting Shri NarendraModi to endorse or commit to bank transaction tax is to be judged by the political commentators
I respect Baba Ramdev’s efforts to support initiatives of public good and issues of national interest,but idea of single bank transaction tax has not given me much confidence. CRI commentator Rightwing Indian wrote two posts (Part 1 and Part 2). There is an event organised on January 19 2014 in Mumbai to discuss this proposal. I hope my concerns raised in this blog will also be taken in to the account by the Core committee of the event.
Constitutional Challenges and Encroachment on Federalism principle
Bank transaction code is posed as single tax which can replace all taxes imposed by the Central, State and other municipal corporations in India. Bank transaction tax revenue is proposed to be shared between Centre, State and the local government. While Income tax is a centre subject, seventh schedule list II to article 246 of the constitution provides state rights to raise taxes. Each state is responsible for managing its own finances.
As proposed, the finance ministry or RBI will be responsible for determination of Bank Transaction tax; states might or might not have any say in the determination of the bank transaction tax. Fiscal federalism is one of the reasons why GST (Goods and Service Tax) is not yet implemented in India. If Government of India is not able to implement GST due to state pressure, I wonder how BTT will be different. Each state in India is unique and each has its own financial requirements, pegging their finance requirement to the number of bank transactions, takes away the freedom of the state to manage its own financial affair.
States use taxes for a variety of reasons ranging from attracting investments, discouraging consumptions and use of cost effective environment friendly products etc. Now assuming that all other taxes are abolished, states will be dependent on their share of Bank transaction tax which are directly proportional to state’s volume in banking. This is a classic chicken and the egg situation i.e. whether the state GDP encourages usage of banking or increased usage of banking will stimulate the state GDP? If the states are not a part of decision making process on the bank transaction tax we are in a way allowing encroachment on principle of federalism.
Do we have sufficient banks? Is BTT appropriate for new age banking?
Bank transaction tax puts onus on banks to deduct BTT. Backbone of the proposed implementation is a bank. While the number of commercial bank branches per 100000 adults in India is almost same as the world average. But, in comparison with the other developing countries in Europe, Central Asia and Latin America, India has a long way to go.
Within India, bank penetration has not been even across states; Chandigarh has one branch per 3000 adults while Manipur has one branch per 33000 while overall India average stands at a branch per 14000 adults.
Many critics of the Bank transaction tax have highlighted cascading nature of the tax and it provides undue advantage to big corporations, specifically vertically integrated corporations.
In the new age banking, most of us hardly visit banks. Most transaction are done online, a person might be resident of Mumbai but can operate bank account in Pune or Bangalore or anywhere in India for that matter. Bank transaction at a particular branch may or may not have anything to do with the place of business. Hence a purchase made for a manufacturing facility in the remote town of Gujarat might be paid from a bank in Delhi or Mumbai or any other place in India. How would one determine the jurisdiction in such situation?
Isn’t Bank Transaction tax representing socialism?
Arthakranti which has propagated the current proposal of bank transaction tax in their proposal mention
The system can be brought into force without any major change in the constitution. It is truly benevolent and fair system, in line with the basic socialistic philosophy of nation.
If the current taxation systems are perils of socialist policy, why should we adopt one more system which is built on the socialist question – of whether bank transaction tax rates are progressive or flat? Although there is minor progressiveness is embedded in the proposed tax, yet in my opinion BTT remains primarily a flat tax. Under progressive tax regime there is a constant temptation to raise tax on rich to pay and whereas flat tax rate ‘BTT’ is applicable to everyone at the same rate.
Why is ‘Socialist’ mentioned in the proposal? Did Arthakranti refer ‘socialist philosophy’ to please incumbent centre government and state government in Maharashtra? I don’t know. I am not saying that everything associated with socialism is bad but to use it as one of the selling points to appease target audience is certainly not a good idea.
Bank transaction tax is essentially central imposed tax. Why should we view bank transaction tax different than five years central planning imposed on the nation?
Bank Transaction tax and Principles of ideal taxation
Arthakranti in its proposal has mentioned different principles of taxation which they have applied to current taxation system, I didn’t notice those being applied to their own Bank Transaction tax. Hence I take liberty to judge the BTT after applying those principles. Following principles of ideal taxation
Canon of Equity
Every person should have to pay the taxes to the government proportional to his ability.
Bank transaction tax is neither Income tax nor consumption tax. It assumes that person’s banking transactions determines his ability to pay. This might be true but not always. There are many exceptions; to name a few – loans taken for non-productive usage for example marriage, social gathering, health, education etc.
Under Bank transaction tax loss making business entity has zero respite; Loss making business entity might become history feels Arthakranti. Profit and loss are inherent nature of business; even loss making entity will have to pay BTT. I am kind of bewildered to explain business can make real loss and not an accounting loss. Loss making entities do not have the ability to pay tax but they will not be exempted from payment of bank transaction tax.
Canon of Productivity
According to this principle tax should yield sufficient income to government.
Bank transaction tax is proposed to be distributed in predefined ratio between centre, state and local government. Whether BTT will increase revenue share for each state/local government is to be seen, but with bank transaction tax and abolition of all other taxes, we are certainly talking about limiting option of the states/local government. State government/Local government need flexibility to raise taxation based on need.
At this point, we also have to understand that tax is not only a tool for raising revenue for the government but also a tool to influence consumption, public health, economic conditions, or any such matter. For example government wants to decrease the consumption of tobacco and related products, hence it is charged with heavy indirect tax under the current regime. At the same time, taxes on certain products are either Nil or exempted. Whether these tax exempt products benefits the poor section of the society or saves foreign exchange or generates employment is the government’s prerogative.
Canon of Simplicity
According to this principle, tax should be simple so that tax payer can understand its purpose and implication of the same.
On the first look bank transaction tax looks simple tax without any complication but as people say, the devil lies in the details. What we have seen is the simple high level presentation on the bank transaction tax. What has been surprising is although Arthakranti proposal has been around for a while in the public forum, they have not put up details such as
State wise/Local Municipal level tax revenue comparison, what we have seen is the high level proposed tax calculation and Mumbai Municipal Corporation. I wish they would have given state-wise and municipal wise tax calculation under proposed Bank transaction tax.
BTT has been projected as single ‘Ram Baan – Panacea’ replacement to all taxes in the country, it would be good to still list out all taxes in one place to know which of taxes are going to get replaced.
Model legislation which will bring in bank transaction tax.
Which existing legislation need to be abolished and which need to be changed at Centre/State/Local Government level.
Arthakranti has mentioned that there is no need to change constitution, but then why is the constitution proposed to be changed for the implementation of GST.
If there is no constitution change is proposed, how will the Central government ensure that states and local government will not raise additional taxes?
There are many businesses where security deposit is taken from customer as part of business practice, should those bank transaction also be subject to Bank transaction tax?
What about the business houses which act as clearing houses, stock brokers, or any other business which receives money on behalf of their customer?
What will happen to double taxation agreement with different countries – will BTT be considered as income tax or not? Dividend/Loan or IPO money received from ADR will also be subject to BTT.
Whether intra bank lending will also attract bank transaction tax?
How will law enforcement agencies be structured?
How will law enforcement agencies enforce law? What if people find mechanism to evade this tax?
Will there be any exemption from Bank transaction tax?
Canon of Elasticity
Elasticity means that tax rate should be capable of downward and upward revision. With BTT, when confronted with economic recession or boom, state and local governments do not have this flexibility to revise tax rates.
Canon of Economy
Canon of economy means Cost of collecting tax should be less than tax. We have not seen any cost estimate to implement and collect bank transaction tax. There will be one time cost to switch from current taxation to bank transaction cost and there will be business as usual cost which needs to be estimated. Without having any estimation it would not be appropriate to say BTT satisfies canon of economy.
Will it decrease circulation of black money or increase it?
Arthakranti fears if high denomination currencies are not withdrawn people might turn to cash transactions once BTT is introduced. Arthakranti has recommended withdrawal of high denomination currency (say above ₹ 50). They have also recommended restricting cash transaction up to limit (say ₹ 2000). Comparison has been made between INR and USD denomination. I guess somewhere during this comparison exercise, we didn’t look at the important point, which is purchasing power of ₹ 50 Note and USD 50 note. I understand that restricting Rs 2000 cash transaction is indicative, but it is important to note the purchasing power of ₹ 2000.
In the times of bit coin this measure doesn’t inspire much confidence.
In order to evade bank transaction tax, corporate houses may move their payment hub out of India, and might want to switch to offshore banks. I wonder how new tax enforcement authorities will be able to enforce payments to be made out of Indian banks and not from any of the foreign banks.
I don’t think I can conclude on this topic, I foresee many more discussions on this topic. But I hope concerns I have raised above will be taken in good spirit by the proponents of the bank transaction tax. I do believe in rationalisation of taxes. I think it can very well done leverage existing taxation system rather than the complete overhaul.