Banking Transaction Tax Pdf : advantages, disadvantages -BTT

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Banking Transaction Tax Pdf : advantages,disadvantages -BTT

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What is BTT?

  • BTT, or Banking Transaction Tax is a proposed method of taxation which would be charged on all forms of bank transactions – credit and debit.
  • Arthakranti has proposed a taxation rate of 2 per cent on all forms of banking transactions. The tax would be charged on both – cheque payments and electronic methods of transactions.
  • The tax would be collected by government and equally distributed between Centre and the respective state where transaction took place.
  • The BTT as proposed by Arthakranti aims to abolish all other forms of taxes, except customs on imports.

What are the advantages of Banking Transaction Tax?

The implementation of BTT could lead to several positive outcomes. While some of them are populist in nature, others tend to eradicate the menaces which have plagued the Indian economic system since decades. Here are the merits:Bank Transaction Tax Pdf -Banking Transaction Tax: advantages,disadvantages

  1. Crackdown on black money: Since all currency denominations above Rs 50 would be scrapped, all players in the market would be forced to switch to electronic methods of transaction. The tax would be deducted straightaway with every transaction at a nominal rate of 2 per cent. Thus, the scope of hoarding wealth in form of cash and evading taxes through the loopholes in Income Tax would be avoided.
  2. More people within taxation ambit: As per data for the year 2013 accessed by CNBC, only about 12.5 million people pay taxes, which is roughly 1 per cent of the population. By scrapping the current taxation mechanism and imposing a tax on all banking transaction would naturally bring large number of people under the taxation ambit. This would result in massive increase in revenue for the government, which in turn could be used on schemes of social welfare.
  3. Increase in disposable incomes: At present, the salaried class of India pays at least 10 per cent as income tax on earning more than Rs 2,00,000 per annum. The slab of tax increases with the increase in income above Rs 5,00,000. The disposable income out of one’s salary gets directly reduced by 10-20 per cent at source. However, the 2 per cent BTT would allow 98 per cent of the salary to remain as disposable income.
  4. Cashless economy: Shifting towards electronic modes of transactions and cheque payments would lead to greater transparency and accountability. It would eliminate the scope of hiding unaccounted wealth.

What are the disadvantages of BTT in Indian economy?

Although Banking Transaction Tax primarily appears as a utopian policy, there are a number of drawbacks as well. Here are the demerits of imposing BTT in India:

  1. Cripple rural economy: The prerequisite to implement the BTT as proposed by Arthashastra, is to completely abolish notes of denominations above Rs 50. The move would spell a disaster for the rural economy, which largely deals in cash. Mainstream banking has reached the rural heartland of India in a staggered manner, with majority of Indians still not connected with the banking operations. From seeds to fertilizers, the agrarian sector is largely dependent upon hard cash for its day-to-day transactions.
  2. No flexibility in taxation: A progressive taxation policy is designed in a manner which creates the minimum burden on the poor and maximum liability on the rich. However, BTT would impose a uniform tax rate of 2 per cent, irrespective of the income under which a person falls. Apart from failing to tackle the rich-poor divide, the taxation mechanism under BTT would create a cascading effect, which is most undesirable for business. After 20 sequences of transaction related to same business operation, the total tax component would add up to 16 per cent.
  3. 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. In the case of GST, the manufacturing states are bound to lose revenue, whereas, the consuming states are set to gain.

Under BTT, the states with massive amount of bank branches are about to gain, whereas, those backward states where banking is still at its nascent stage is bound to lose a major part of the revenue which they collected as taxes.

For example, Chandigarh has a bank branch per 3000 adults, on the other hand, Manipur has a bank branch per 33,000 citizens. The latter is expected to lose revenue in unprecedented manner if the mainstream process of taxation is abolished.

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Bank Transaction Tax Pdf -Banking Transaction Tax: advantages,disadvantages

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