Author: Sai Darshan Patra, IV year of B.A.,LL.B from Galgotias University.
Progressive taxation is based on the idea that the wealthy should bear a more significant burden than the poor. However, in the case of the Banking Transaction Tax, a uniform tax rate will be applied to all transactions, irrespective of the income bracket of the recipient of the funds. It was suggested to use this technique of tax imposition, but it was declined. There are many cash transactions, and since the bank does not handle them, no records exist, and taxes cannot be charged to them. This is one of the reasons this cannot be done.
There are numerous ways for tax defaulters to avoid paying taxes in this system, even if it is intended to serve the greater good. Many individuals don't even have a bank account. Therefore, this procedure cannot be fully utilized in India, at least not now. This article will cover every facet of the subject and explain how and why a banking transaction tax was introduced. In addition, this article will discuss whether or not the banking transaction tax benefited all socioeconomic strata and, if not, why. This article aims to explain, determine, and provide a conclusion on my perspective for the average person to understand, be informed, and form their own opinion because an informed and intelligent public can help to develop India and to take it to the next level to a developed nation from a developing country.
The Goods and Services Tax (also known as GST) was introduced on July 1, 2017. It replaced several state and federal indirect taxes, including value-added taxes, sales taxes, excise charges, entertainment taxes, and octroi taxes. This level of integration in the national tax system has paved the way for further integration, where indirect and direct taxes may also receive the same treatment. It is hardly surprising that the government has already put this concept on paper in the shape of the Banking Transaction Tax (or "BTT").
Most of us are unaware that India tested the BTT's efficacy from July 1, 2005, through March 31, 2009, albeit in a minimal capacity, thanks to the adoption of the Banking Cash Transaction Tax during that time. The results were positive enough to expand the reach of that tax, but it also had disadvantages. However, the revenue authorities have never forgotten the concept of BTT. Observing developments could point to a trend on its own.
In November 2016, high-value currency notes were demonetized overnight.
The introduction of GST, followed by the creation of e-way bills and now e-invoicing
Lowering the cash restrictions through changes to income tax for making loan instalments and paying expenses.
The implementation of TDS on bank cash withdrawals, which are not considered to be anyone's income or expense.
The disclosure of specific cash-related transactions by all categories of people via annual information reports or tax audit reports.
Mandatory PAN and Aadhaar linking for all bank accounts.
The Jan Dhan Yojna is a specific programme for creating bank accounts.
The launch of the Unified Payment Interface as an instant payment method.
Regulating cooperative banks using a variety of strategies.
The seemingly extreme notion to replace the current tax system with a "Banking Transaction Tax" was developed by "Arthakranthi," a think group based in Pune (BTT). Now that the Union Government has made a decisive move towards a digital/cashless economy, a prerequisite for the imposition of BTT, the think tank's idea or proposal may move from merely academic discussion to something more serious. Intriguingly, according to news reports, Arthakranti proposed abolishing currency notes of higher denominations. But before we get to that point, the BTT concept must be critically discussed and debated to avoid replacing the current system, which has served us well despite its flaws, with a worse one. India cannot afford to fail on this crucial issue at this stage of its national development.
We are compelled to provide the following even though most readers are likely already aware of them because the suggestion for a "Banking Transaction Tax" has been made by the think above group without any discussion of the principles that govern/should control taxation.
Consumption of public goods is directly correlated with the income earned by the citizen or user of public goods; in other words, the higher the payment, the greater the number of public goods consumed. As a result, there is a need to implement a progressive tax system, in which a person with higher income or earnings pays tax proportionately more elevated than the tax payable by a person with a lower payment. Herein are why people with high incomes pay more excellent tax rates than people with lower incomes.
Given the nature of people, especially the more resourceful ones, the risk of evasion when collecting tax at source or on income is significant; as a result, the risk must be reduced by taxing multiple events, such as expenditure, property, consumption of luxury goods, etc., rather than attempting to collect all the taxes due at source or on income. The reader may question whether we shouldn't abandon income tax and use transaction taxes in such cases. The answer is yes, but doing so would result in a regressive form of taxation, with poorer people paying more tax as a percentage of their income than more affluent or high-income earners. This is because more impoverished people spend more of their income than richer people, and as a result, they pay a higher percentage of their income in taxes. Thus, dividing the taxes owed on income and expenses is necessary. It should be highlighted that doing so does not constitute double taxation; instead, it divides the entire tax liability between the two streams, which has proven more effective and equitable in actual use. So those are the reasons why we have many taxes. In India, the requirement for several taxes also results from the federal structure, which distributes taxing authority among the federal government, the states, and local governments.
Since Arthakranthi has not presented any evidence challenging the integrity of the assumptions above, we will have to assume that they have nothing against it. Any attempts at tax reforms or proposals to replace it with one that is more efficient or effective, however, would have to be evaluated against the touchstone of the assumptions mentioned above/postulates. To assess whether a BTT alone would be progressive, effective, and cover the risk of evasion, Arthakranthi's proposal does not even address the presumptions mentioned above. They only seem to have done the math, considering the most recent financial transactions' value, attaching a percentage to it, and comparing it to the most recent tax collections from other sources. This approach to discussing this crucial topic is somewhat flippant and reductionist.
Whether planned or unexpected, adopting BTT may eventually become necessary as we move forward in this period. The pattern above indicates a desire to promote digital and electronic transactions concerning payments and receipts through financial inclusion policies, incentives, and legal amendments while discouraging cash transactions through high transaction fees and additional compliance requirements. We will go into what this tax would look like below.
How is it to be assessed?
As the name implies, the banking transaction tax is a proposed revenue system that would tax every transaction that passes through banks, most likely as a percentage of the reception amounts. As soon as any receipts are credited to the account, the tax amount is subtracted.
What qualities may there be?
BTT will be a component of comprehensive reform. The following are potential additional suggestions: -
Eliminating import and customs duties as well as all direct and indirect taxes;
Ensuring that all high-value transactions are performed only through banking channels, including checks, dd's, internet transactions, and electronic transactions;
Recalling and destroying high-denomination currency notes;
Establishing a cap on cash transactions and ceasing to tax cash transactions;
How might it operate?
BTT might function as follows:
A single-point tax is imposed by a single person - Banks - in the form of tax deductions made at source.
A deduction will only be applied upon receiving or crediting an amount.
Tax deductions are to be credited at predetermined intervals—which may be as little as daily—to various levels of government, including the federal, state, and municipal governments.
Because banks play a crucial role, the transacting bank should also receive a portion.
What possible benefits?
Strikes Against Black Money
Due to the requirement that all taxpayers, or the majority, migrate to electronic transaction methods, hoarding money in cash or evading taxes through legal loopholes would be impossible.
More persons are subject to taxation
Less than 10% of people in India pay direct taxes. The current tax system would be abolished, and all banking transactions would be subject to a surcharge, bringing many individuals under its purview. Government revenue would grow as a result of this.
Salaries with more discretionary spending
One's disposable income may be directly lowered by 20–30% under direct taxes once their income surpasses the basic exemption limit as the tax rate rises with their income. However, let's imagine that a 2% increase in BTT would still leave 98% of the payment as discretionary income.
Moving toward electronic payment methods and cheques would increase accountability and transparency. Additionally, there would be fewer leaks and a more judicious application of the advantages of government policy.
How could it possibly be harmful?
Even though BTT essentially appears to be a straightforward, totally automated, low-compliance, successful, and cost-effective tax system, there are a few disadvantages. These are only a few of them that might exist.
The rural economy in crisis
India's rural economy relies heavily on cash transactions. The mainstream banking system has only gradually made its way to rural India, leaving most of the country unconnected to banking operations. The agricultural industry depends heavily on hard currency for day-to-day transactions, from seeds to fertilizers. Therefore, BTT will be difficult for rural India or the farm sector.
No taxation flexibility
A progressive taxation policy's fundamental goal is to increase the burden on the wealthy while decreasing it for the poor. However, in the case of BTT, a consistent tax rate will be applied to every transaction, regardless of the income level of the individual receiving the money. BTT is, therefore, a regressive tax. BTT will, in some ways, fall short of addressing the rich-poor divide. Additionally, BTT would have the unpleasant cascading effect of taxing the same income twice, which is especially bad for enterprises.
States that put less emphasis on the banking industry will lose money for violating the federal structure. Like the GST, the national democratic concept may not be upheld if a uniform taxing system is implemented across the country.
Issues that could arise, like those in the GST
The consuming states typically make more money under GST, whereas the production states usually lose money. Parallel to this, under BTT, states with many bank branches stand to gain, while states with a low level of development where banking is still in its early stages stand to lose a sizable portion of their revenue.
BTT would be collected and paid by a single intermediary, which in this situation would be banks, just like Securities Transaction Tax (STT), which must be collected and delivered by a single intermediary, such as recognized stock exchanges in the case of shares or fund managers in the case of mutual funds. This well-established system of bank networks may prove to be the ideal pitch to bowl BTT because the Reserve Bank of India responsibly regulates both the public and private banking sectors in India.
BTT was initially intended to replace all taxes (direct and indirect), but how would it be affected if the government elected to implement a GST system instead, which is an actual transaction tax? BTT would be an additional transaction tax in addition to GST. Or would GST be a temporary solution that BTT will eventually replace? Before deciding on one side, we must at least debate all these issues.
Problems with this theory
It should be observed that the think tank has not discussed in detail the risk of having only one taxable event or putting all of one's eggs in one basket. However, it must be acknowledged that opting for a GST regime has significantly reduced this risk. It was believed that moving ahead, all transactions—or at least most—would be made through a bank and that any cash transactions above INR 2000 should be considered illegal. In a nation that is still underbanked and where vast portions of the informal sector are hardwired to cash transactions despite the recent "demonetizing," how accurate and foolproof is this assumption? And what defences exist against hawala and parallel financial activities?
In conclusion, the reasoning behind designating the "receiving of money in your bank account" as a taxable event is flawed. It violates the fundamental tenet that someone with a higher income should pay proportionately more tax than someone with a lower payment. Instead, it creates a scenario where an individual, organization, or enterprise that receives more money in their bank account for any reason ultimately must pay more taxes.
This is not to imply that the current system is complicated, full of holes, and cries out for reforms. But the BTT does not seem to be the solution; instead, the answer might lay in a much more straightforward income tax system with lower tax rates and a nationwide goods and services tax. We observe that taxation systems worldwide are shifting toward a VAT/GST system combined with a sensible Income Tax structure.
In conclusion, it must be shown that the BTT complements the GST regime intended to be introduced in April 2017 and would follow the principles of taxation outlined above before it can be regarded as a suitable substitute for the current Income Tax regime.