Economic Highlights

New Delhi, 31 January 2014

                                                                     BTT Proposal

                                                         MORE MONSTROUS THAN I-T

                                                                  By Shivaji Sarkar

The proposal to replace income-tax, sales tax and excise duties by a single bank transaction tax (BTT) is being presented as a unique Indian proposal and is stated to simplify tax system. It is neither an ingenious idea nor would it simplify the tax system.

The very purpose of checking black money is likely to be defeated. In fact, it shall put more money out of the system to a parallel one. Simply put there would be more money in the black domain, though it does not mean it would be generated through illegal means.

Some countries have experimented and did not find it to be a congenial or foolproof system. Argentina introduced BTT in 1984 before it was abolished in 1992. Brazil implemented its temporary "CPMF" in 1993, which lasted until 2007.  It was introduced in many Australian provinces in 1990s but quietly given up too.

Many countries introduced it as financial transaction tax (FTT), particularly on equities traded at the stock exchanges. In UK, it remains in vogue as a stamp duty at the London Stock Exchange since 1694. In 1936 economist John Maynard Keynes advocated FTT on dealings on the Wall Street in the US. In 1972, economist James Tobin suggested one per cent currency transaction tax. In 1989, another economist, Edgar L. Feige generalised ideas of Keynes and Tobin by a small flat rate tax on all transactions.

The 2007 meltdown led to re-examination of the proposals in response to a request of G20 nations. The International Monetary Fund (IMF) in 2010 delivered a report “A Fair and Substantial Contribution by the Financial Sector”, which made reference to FTT and BTT as a financial option. But IMF carefully dissociated itself and said, “It was a working paper and should not be reported as representing its views”.

Even the US and EU have been mulling such a proposal but has deferred decision. Since October 1, 2004 India levies a sort of FTT of up to 0.125% payable on the value of taxable securities transaction made through a recognized national stock exchange.

The Indian tax system is complex. It is oppressive and based on distrust. The rates are oppressive. Total taxes – direct and indirect – rob people 70 per cent of their income. So a drastic overhaul is the need.

But BTT or FTT is definitely not the way. During 1980s, Ghana had almost implemented what is now being proposed either by Baba Ramdev or Arthakranti of Pune. It had demonetized currency notes of above cedi 50. Transactions above cedi 1000 had to be done through banks. It led the business community to trade through parallel systems.

Indians are no less ingenious. The tax deduction (TDS) on bank deposits has led most traders and businessmen to avoid the banks. The 10 per cent duty on gold imports, now it is officially acknowledged, has led to increase in hawala operations and smuggling. It also increases cost of policing.

Bank is not devised as tax generation systems. It is aimed at mobilizing the people’s money for growth and equitable development. If the deposits itself are taxed as the BTT proposes, it would be disincentive for all. Those who could avoid would take to many available devious means, including hawala.

Even otherwise the antique “hundi” – a parallel bank draft – remains in vogue. In earlier times, the mahajans issued hundis and these were accepted at par value everywhere. If BTT is imposed, possibly large business houses may be a Birla or a Tata, would issue their own hundis to keep off the banking system.

Even people can consider sending cash by road. If one has to pay say Rs 5 crore it would require about ten large boxes with 1000-rupee notes. A 2 per cent tax on it would cost Rs 10 lakh. A road transfer would cost about Rs 20,000.

It would make purchases also expensive. If one has to buy a fridge or TV say costing about Rs 20,000, the buyer, if he pays through cheque, would have to pay Rs 400 as tax. So a cash transaction would be preferable. It would require either a large inspectorate or enforcement agency to check evasion at different points. Has anybody calculated the cost not only in terms of revenue burden on the State but also in terms of corruption and harassment of almost everyone?

This apart every commodity is sold at multi-level – manufacturer to dealers, to many sub dealers, to wholesalers, to retailers and customers. Each would be required to pay BTT. The retailer might like to have a direct payment to the manufacturer so that his purchase cost remains low and tax paid at the lowest level. It would create a complex trading system and cause enormous problem for the business leading it to become more inefficient.

So a tax on bank deposit is likely to see larger funds being turned into “black money”. It would also lead to a repressive tax raids and further rise in corruption.

If the government migrates to BTT as sole source of revenue, cyber security of banking system as a whole becomes vital. This point must be judged in light of Chinese capability in cyber-cum-financial warfare, an Indian Defence and Strategic Analysis report says. Also BTT will result in loss of sovereignty over tax collection as tax collection process gets outsourced to banks.

Besides, it would add to cost of bank operations. It is already expensive. If it becomes more so it might lead to an impending collapse. High banking costs might lead people to shun it. It cannot be an immediate solution either. It would require amendment and annulment of many tax laws. Consensus with States and industry would require long negotiations as in the GST.

In 2012, eminent lawyer Nani Palkhivala said, “Today the monster of our direct tax structure has become more monstrous than ever before”. It cannot be replaced by a more monstrous system. Nor demonetization is a solution. India had done it in 1946 and 1978. It has not solved the problem. Myriads of other issues surrounding BTT have not yet received full attention. A beginning at tax reforms could be made with abolition of income-tax. ---INFA