Banking Transaction Tax

Will it or will it not see the light at the end of the tunnel?

What may be the chances?

On 01st of July, 2017 a new indirect tax regime in the form of Goods and Services Tax (‘GST’) was enacted which subsumed in itself many central and state level indirect taxes like value added taxes, sales taxes, excise duties, entertainment taxes, Octroi tax and others. This kind of integration in federal structure of government taxes has set a precedent for the next level of integration whereby indirect and direct taxes may also be subjected to same kind of treatment. It will not be news that conception of this idea has already been put on paper by the Government in the form of Banking Transaction Tax (‘BTT’)

Banking Transaction Tax

In fact, most of us would not know, but India has already tested the effectiveness of BTT from 01st July, 2005 till 31st March, 2009 in a very limited manner though, through the implementation of Banking Cash Transaction Tax during that period. Not to mention that the results were encouraging enough to widened the scope of that tax, it had its drawbacks as well. Nevertheless, the idea of BTT has never left the minds of the revenue authorities. Following developments may suggest a trend in itself.

1. Demonetization of high value currency notes overnight in November 2016.

2. Implementation of GST followed by e-way bill generation and now e-invoicing.

3. Reduction in the amounts of cash limits for payments of expenses and settling loans through amendments in income tax.

4. Introduction of TDS on transactions which are not in the nature of income or expense for anyone – TDS on withdrawal of cash from Banks.

5. Reporting of specified transactions related to cash by all types of persons through tax audit reports or annual information reports.

6. Linking of all bank accounts with PAN and Aadhaar mandatorily.

7. A specific scheme for opening of bank accounts – Jan Dhan Yojna.

8. Introduction of Unified Payment Interface as a mode of instant payment.

9. Regularising co-operative banks through various measures.

Expectedly or unexpectedly, but we are moving towards a phase where by the introduction of BTT may become inevitable at a stage. The above trend shows an intention of discouraging cash transactions through penalising high transactions, levy of additional compliances and encouraging digital and electronic transactions with respect to payments and receipts through financial inclusion policies, incentives and legal amendments.  We will discuss below what this tax may be like.

How may it be levied?

Banking Transaction Tax as the name suggests, is a revenue system that proposes to tax every transaction routed through banks most probably as a percentage of receipt amounts. The tax amount gets deducted as soon as the account is credited with any receipts.

What may be the features?

BTT shall be a part of a big whole reform. Following may be the further proposals that may be:-

1. Scrapping all direct and indirect taxes excluding import and customs duty;

2. Recalling and scrapping high-denomination currency notes;

3. Ensuring that all high-value transactions are made only through banking systems like cheque, DD, online and electronic;

4. Fixing the limit of cash transactions and stopping taxation on cash transactions;

How may it work?

BTT may work in the following way:-

1. A single-point tax in the form of tax deduction at source by single person – Banks.

2. A deduction to be effected on receiving or credit of amount only.

3. Deducted tax to be credited to different government levels like central government, state government and local governments at specified frequencies, which may be as short as daily.

4. The transacting bank to also get a share as the banks performs a key role.

What may be the advantages?

Crackdown on Black Money

Since all the taxpayers which would include the maximum population be required to switch to electronic methods of transaction, the scope of hoarding of wealth in the form of cash and evading taxes through loopholes would not be available.

More people within taxation ambit

In India, less than 10% of the population pays direct taxes. By scrapping the current tax regime and imposing a tax on all banking transactions, large number of people would come within the tax ambit. This would result in increase of revenue for the government.

Increase in disposable incomes

The slab of tax increases with the increase in income. Disposable income out of one’s income may get directly reduced by 20-30% under direct taxes once their income exceeds the basic exemption limit. However, say a 2% of BTT would allow 98% of the income to remain as disposable income. 

Cashless economy

Shifting towards electronic modes of transactions and cheque payments would lead to greater transparency and accountability. Also the benefits of government policies would face fewer leakages and be utilised judicially.

How may it be disadvantageous?

Although BTT primarily appears as a simple, less compliance, fully automated, efficient and cost effective tax system, there are a number of drawbacks as well. Some of them may be the following ones.

Cripple rural economy

The rural economy of India largely deals in cash. The mainstream banking system has reached rural India in a very staggered manner, keeping majority of India still not connected with the Banking Operations. Right from seeds to fertilizers, the whole agrarian sector is largely dependent upon hard cash for day-to-day transactions. Hence, BTT will be a harsh move as far as rural India or agrarian sector is concerned.

No flexibility in taxation

The basic nature of a progressive taxation policy is to create more liability on rich and less on poor. But in case of BTT, a uniform rate of tax will be levied on all transactions irrespective of income bracket under which a person receiving the money falls. This makes BTT a regressive taxation. In a way, BTT will fail to tackle rich-poor divide. BTT would also create a cascading effect that is taxing the same income twice, which is most undesirable for businesses.

Violation of Federal Structure

States with less emphasis on banking sector will lose revenue. Similar to GST, the implementation on uniform taxation mechanism across the nation could violate the federal principle of the democracy.

Problems that may be faced similar to that in GST

Under GST, the manufacturing states tend to lose revenue, whereas the consuming states set to gain. Similarly, under BTT, the states with massive amount of bank branches are about to gain, whereas, those backward states where banking is still at its ordinary stage is bound to lose a major part of the revenue.

As it happens in case of Securities Transaction Tax (STT), where it has to be collected and paid by a single intermediary, like recognized stock exchanges in case of Shares or Fund Manager in case of Mutual Funds, BTT would also be collected and paid by a single intermediary that is Banks. As public and private banking sector of India are prudently regulated by Reserve Bank of India, this well-established system of bank networks may prove to be a perfect pitch to bowl BTT.

Authors:

CA Hardik Patel | Manager | E-mail: [email protected]

Rishabh Jain | Associate Consultant | E-mail: [email protected]

(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)

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8 Comments

  1. n s chauhan says:

    pl wake up all good people in this country
    The only way to do away with tax terrorism is to implement BTT.why 2% even .5% will create revenue multifold.limit cash transaction to 2000 rs only
    this will not create a rich and poor devide as if a rich person transact 50 limes he would still pay higher tax and apoor will hardly pay once or twice
    Siglemindedly this system to be implemented as soon as possible without further dalay
    traders may .25% as they transact more and more
    if nation gets revenue 3 to 4 times without direct affecting people it is fine
    we dont have to misguide the people by so callex ” progressive^ or ” regressive” terms
    what india achieved by this so called progressive taxation concept in last 7 decades.it has olnly abeted corruption ‘political vendetta ‘poverty ‘and put democracy at stake
    pl support BTT

  2. Janardhan says:

    There is one major problem with BTT.when you send money to family and friends and receive it back later.this will be taxed twice . This is neither income nor spending. Will this be taxed.if so this is extremely dangerous. Suppose you do this in a couple of times with different people say 2 times with 2 people @2 % this will erode your money 8% a year and in 10 years you will loose 80% of money with no reason. This will make the people not help each other. You cannot send money to your spouse and parents for their or house expenditure.
    Pls clarify the proposed btt wet to this point

    1. MASD & Co. says:

      Hi Janardan,
      As we all know that transfers to family is exempt under The Income Tax Act, 1961.
      So, we can safely expect that transfers made to family under BTT law would be exempt.
      However, as per the assumptions, transfers made to friends would not be considered as exempt transfers and therefore, there might be taxability on the same.
      Let’s wait for the BTT to be implemented in the near future.

    1. MASD & Co. says:

      Hello Mr. V Patil,
      We would advise to you to get thorough with the taxation laws first, and you can update yourself with the recent amendments, which can definitely help you to have a grip on it.

  3. krishnakant says:

    I concur with this article,and request the author to refer article” Arthkranti”(easily available on Google) this was suggested by group of CA’s in 2014 to our Honorable PM.

  4. n s chauhan says:

    BTT would certainly would increase revenue. why 2% it can very well work with 1% and revenue will be doubled. on the the basis of current transaction data .There will not be any rich and poor divide as rich would pay more and many times on frequent transaction.poor will hardly pay oonce or twice in a year
    The most paying divident of this system is that black money will autumatically done away with and whole hidden money will be in system
    If there is any issue it can very well be addressed laterby systemic analysis
    This is only way to stop tax evasion and tax terrorism as well
    I wish the writer should have written this article singlemindedly and in support of this system
    furthe benefits of this system reducing so many NPAs , trackin curruption trail high rate of saving and investment and many more
    Dr s swamy and airtkranti have been calling for this system right from 2014

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