Cashier counts currency notes inside bank in Lucknow
A cashier counts currency notes inside a bank in the northern Indian city of Lucknow July 16, 2009. REUTERS/Pawan Kumar/Files
Kalpesh Chavda
Bank Transaction Tax – Few more concerns
This article originally appeared in CRI content has now been subsumed in The views expressed here are personal and do not necessarily reflect those of the editors of

During June 1935, Bureau of Sugar experiment stations in Australia introduced quite unusual step to control menace of Cane Beetle. Back then conventional method of pest control was found unsatisfactory. They introduced Cane Toad to Australia. Cane Toads were native to Central and South America. More than 102 young were released in northern Queensland.

Since their release, toads have rapidly multiplied in population and now number over 200 million and have been known to spread diseases affecting local biodiversity. Unfortunately, the introduction of the toads has not only caused large environmental detriment, but there is also no evidence that they have had an impact on the cane beetles they were introduced to predate. [1]

I hope bank transaction tax proposal isn’t similar to introduction of Cane Toad. Cane Toads were introduced to predate Cane Beetle. Cane Beetle exists in Australia even today and that to also sufficient numbers. I just hope, in order to control menace of black money, measures like bank transaction tax does not become epidemic like Cane Toad.

Let us look at some additional issues and thoughts pertaining to the bank transaction tax.

Bank Transaction Tax and impact on GDP growth

Do the proponents of bank transaction tax feel that the ‘Current tax regime has not helped the government to raise sufficient revenue to fuel growth?’ I might be wrong, but this is one of the underlying grievance most of us have and this belief very much exists amongst proponents of bank transaction tax. While this might be true, but is the increase in tax revenue in direct correlation to GDP growth? Following is comparison between BRIC nations with respect to tax revenue to GDP ratio.

Data from here.

You might be surprised to know that tax to GDP ratio of China and India are almost similar. Simple point which I am trying to make here is that for better GDP growth, equitable distribution of development, wealth and efficient social welfare, tax revenue is just one of the determinants.

“Bank Transaction tax is simple” is myth

For a layman, proposal looks very simple; however it is far from simple. In the absence of model act, I would take current proposal by Arthakranti as base for my critics. I am of the opinion that the proposal in its current form is prone to legal disputes between tax enforcement agencies and tax payers let me give couple of examples.

  1. Role of tax enforcement agencies: -Assumption that tax enforcement agencies will become redundant is misplaced. In my opinion in any taxation system, tax enforcement agencies will always have role to play and bank transaction tax will not be any different.

    There are a few good suggestions been made by my fellow commentator Rightwingdian with respect to revenue sharing between centre, state and local government.However I would like to go back to original proposal by Arthakranti, under which revenue will be shared between centre, state and local government in a fixed percentage.

    I highlighted in my previous post that today most business operates their bank account from a head office or a centralised payment location. Under this scenario state or local government can only maximise tax revenue if they somehow make sure that each economic operations under their local area is cash settled. What does it mean? It means that a local Municipal corporation and state government might want to create law which can force business to cash settle all economic activity. Let me give you an example

Company A has factory in Maharashtra under Pune Municipal Corporation and sales depot in Chennai, Tamilnadu. Goods are transferred from Pune factory to Chennai sales depot, sales to external customer is done via Chennai sales depot and payment for the same is received in Bangalore, Karnataka.

Under BTT as proposed, sales proceed received in Bangalore will be taxed in Karnataka. Centre (India), State(Karnataka) and local government(Bangalore Municipal Corporation) will get tax revenue. What about Maharashtra/Pune and Tamilnadu/Chennai get? Answer is that they get nothing. In order to get their share of revenue what Maharashtra/Tamilnadu can do? They can make law to make sure that all economic activity is cash settled.

Under this arrangement, Chennai sales depot has to pay to Pune factory. And Bangalore payment processing centre of a company has to pay to Chennai sales depot. What are we saying here, this is like a company within a company, this method of accounting is called as profit centre accounting. Most company use this accounting but they does not cash settle balance between profit centres. Profit centre accounting is currently used as management accounting tool.

  1. Bank Transaction tax is Income tax or consumption tax?

    My fellow commentator Rightwingdian felt that I should not be comparing bank transaction tax against profit. I agree that Bank transaction tax is not income tax, but at the same time BTT isn’t consumption tax either. In the absence of any form of taxes, it is but natural for business to compare BTT against profit margin. I would also like to highlight that BTT isn’t revenue expenditure, BTT will be charged on Capital receipt and on revenue receipt. Hence it would be inappropriate to compare BTT as revenue expenditure same as audit fees or any such expenditure.

    If we take in to account BTT on capital receipt, effective rate of tax will substantially change. Effective rate of taxation is important barometer for government and business. Coming back to simplicity principle of BTT, most proponents of BTT has argued that they would consider BTT as pass through tax, something like VAT/sales tax. I am asking readers how much that pass through percentage will be. If your answer is 2% or 2.04%, I am sorry to say that your understanding of the business is too simplistic. What we are missing is that BTT paid on capital (Equity, Long term loan, short term loan, bank credit etc.) rose. In order to start business you need capital and this capital is raised from various sources.

    Whenever you raise capital, there is bank transaction associated with it. You may argue that those costs should be considered as cost to the business. I might agree with that argument as well but let’s be honest, what figure of pass through percentage you had in mind? If it was 2% or 2.04%, you clearly are not considering BTT as pass through percentage. Besides BTT paid on capital will be way higher than BTT paid on revenue receipt. Economic research repeated highlighted that taxing capital is counterproductive. It discourages fresh investment and innovations.

Bank Transaction tax and Accounting Principles

It was highlighted in one of the presentation of BTT that BTT does not have any impact on accounting practices. Person giving statement was part of the Arthakranti group. I would like to point out few accounting issues BTT will generate. BTT will not only be charged on revenue receipt but capital receipt as well. Capital receipts includes initial capital introduce by entrepreneurs, short term capital etc.

Accounting standard AS 22 deals with differed taxation, with BTT AS 22 may become redundant or it has to be changed accordingly. BTT will require accounting guidance as to how BTT paid on capital receipt should be treated in books of accounts and annual reports. BTT paid on capital receipt cannot be considered as revenue expenditure, because cost incurred isn’t for one financial year. So how many years bank transaction tax should be amortised?

I would like to apologize to my reader for having used technical references such as accounting standards and issues associated with it, but I could not restrain myself to respond to a sweeping statement such as BTT will not have any accounting policy impact. I would not shy to admit that accounting issue highlighted is peripheral; I am sure required accounting policy changes will be and can be done. Moot point is how many more such issues are yet to be identified and how many of such issues are show stopper. Impact of BTT at different point of supply chain cycle is difficult to estimate, realistic evaluation can only happen if we introduce BTT on pilot mode at any one SEZ (I heard from one of the Arthakranti member that they want to make whole India SEZ by introduction of BTT).


I continue to hold reservation about amateur tax regime like bank transaction tax. I would be interested to look at a watertight proposal of bank transaction tax. As I mentioned earlier in my blog, we should try this concept on pilot basis, let us implement in one or two SEZ. Let us evaluate the results and validate whether tax regime such as bank transaction tax will make any sense and how businesses will react to it.