Banking Transaction Tax

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

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’) 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 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. Email: info@masd.co.in Web: www.masd.co.in
9. Regularizing 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 penalizing 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.

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.
Email: info@masd.co.in Web: www.masd.co.in
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 utilized 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-da 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.
(This article represents the views of the authors only and does not intent to give any kind of legal
opinion on any matter)
Authors:
CA Hardik Patel,
Manager | Email: hardik.patel@masd.co.in
Rishabh Jain,
Associate Consultant | Email: rishabh.jain@masd.co.in