Mr Nitin Gadkari, former President, Bharatiya Janata Party (BJP) – principal national opposition party – has mooted an idea of banking transaction tax (BTT) in substitution of all extant taxes – direct and indirect except customs duty.
Mr Gadkari exudes confidence that BTT to be levied @ 2% of the value of each transaction will generate far more revenue than the amount Government currently gets from all taxes put together. This will substantially improve fiscal position, he argues.
All payments in excess of Rs 2000/- will have to be made through cheques or electronic transfers. Further, all currency notes of Rs 500/- and Rs 1000/- denominations will cease to exist. The implicit logic is that cash payments up to Rs 2000/- can be managed with notes of Rs 100/50 denominations.
Prima facie, idea carries lot of appeal (in fact, the leader of opposition in Lok Sabha, Sushma Swaraj finds it too tempting). It sounds like killing two birds with a single stone. Apart from garnering more tax revenue, it will also make a dent on the menace of black money.
All that is fine so long as one remains within boundary of contemplation or shall we say, wild imagination where things happen the way he/she constructs the imaginary world. But, moment you face real world, the edifice will collapse like a bundle of pins!
In a country where a large chunk of population is not covered by banking and hundreds of thousands habitats are yet to be touched by bank network, it is wholly impractical and preposterous to even suggest that persons would make payments vide cheques.
An argument that payments up to Rs 2000/- is permitted in cash to address regular needs is seriously flawed. Millions of normal transactions involve cash payments in excess of Rs 2000. This is inevitable for keeping business running. To interfere with this and force them all to switch over to cheques (when such facility is not available) will tantamount to bringing all normal activities to halt.
Even if banking infrastructure expands (on fast track mode, it will take decades) to embrace entire population and every nook and corner of the country, it would be impossible to handle trillions of cheques or electronic transfers? Banks will simply crumble under gargantuan load and only god can tell how many of them would survive.
At present, there are millions who by virtue of their low income do not pay income tax. But, with BTT in place they will un-justifiably come under the tax net. It may be argued that with all other taxes viz., excise, VAT, service tax etc gone, they would benefit by way of lower cost of goods and services!
That all taxes will disappear sounds ‘Utopian’. These taxes are major source of revenue to both central and states. Until they get full sense of security that implementation of BTT would yield the desired revenue (modalities for sharing – to the full satisfaction of all – need to be worked out, a Herculean task!), it is too good to believe that these would be withdrawn.
A likely scenario is one where extant taxes would co-exist with BTT. The proposed tax is reminiscent of a tax levied by Mr Chidambaram imposed about a decade ago on cash withdrawals from bank above a specified limit. This had to be withdrawn as collections were meagre but attendant cost heavy.
With BTT in place, more and more persons will tend to conduct most of their transactions in cash. This will lead to proliferation of black money. Far from making a dent, this menace will only get aggravated. Perhaps, to countenance this, Mr Gadkari has mooted dispensing with Rs 1000/- & Rs 500/- denomination notes.
This again is a dangerous proposition. These currency denominations have got so much assimilated in the economy that without these, one cannot even contemplate normal functioning – business and other activities. It is like blood running through human body.
It would be preposterous to link possession of notes in these denominations ‘allegedly’ only to black money. True, their existence may make the job of hoarders a tad easier. But, there are umpteen ways of tackling that menace. You can’t kill a person just because a body part is mal-functioning!
There is no doubt, tax to GDP ratio in India at around 10% is much less than the potential. It is also not denied that people are suffering from cascading effect of a plethora of taxes and duties. That, there is dire need to lower these so that people can get relief.
But, the bizarre idea of BTT (and no other tax) is surely not the way improve things. Even within extant dispensation, there is tremendous scope for improving tax collections and moderate the inflationary effect of various duties.
Given India’s population of around 1250 million and working persons of over 300 million, the number of tax payers at nearly 35 million is woefully low. Even among taxpayers, only 48,000 declare income of over Rs 1 crores (impossible to relish in a country that boasts of lakhs of super-rich). Only 1.7 million (less than 5%) declare income of more than Rs 10 lakh. An overwhelming 89% of tax payers declare income of less than Rs 5 lakh.
These numbers pertaining to IT assesses as also those declaring income in different ranges unambiguously point towards the existence of a huge un-tapped potential.
Through proper monitoring and surveillance and meticulously chasing all high value transactions – with full support of available IT infrastructure and banks – and credible action on ground zero, it should be possible to increase tax collections manifold.
As regards giving relief to public from the cascading effect of indirect taxes and service tax, the best way to forward is to implement the Goods and Services Tax (GST). Originally slated 2010, this has already missed three deadlines.
The new Government post-General elections must take it up on ‘top priority’ and ensure that the constitutional amendment bill – pending in the Parliament – is passed within current year.
It is hoped that BJP will dismiss the idea of BTT outright and avoid needless confusion.