Banking Transaction Tax (BTT) - The Most Revolutionary Reform Waiting to Happen

It is quite some time since Arthakranti.org put forward a proposal to replace ALL taxes by a single tax levied on credit turnover in bank accounts.  As pointed out by them, along with this the amount of currency in circulation has to be drastically curbed to minimise tax evasion.  It has earlier been shown by an IIM professor that even at 1.5% the BTT yield will exceed the total current tax revenue.

In the present system, the vast army dedicated to tax collection notwithstanding, there are serious leakages.  People evade tax either by simply not declaring the correct base figures for taxation at the lower rungs, or through creative accounting coupled with exploitation of all the fine prints at the top rungs.  The cost of maintaining the army of tax assessors and collectors is humongous.  The cost of compliance, maintaining records and reporting too is mind-boggling.  Though, to be fair, it must be said that till now there was no practical alternative to this cumbersome way of taxation.

Today taxes are divided into two categories, direct and indirect. The Arthakranti website prominently displays a cartoon depicting a man carrying two loads at the two ends of a stick balanced on one of his shoulders.  One load labelled Indirect Taxes is much heavier than the other load labelled Direct Taxes.

Will you agree if I contend that this division of taxes between Direct and Indirect is quite artificial and useless?  Any taxes levied on corporates, or any productive entity for that matter, would ultimately get reckoned towards overheads and factored into the prices.  And, in this sense all taxes are indirect and borne by whoever the consumers are.  There are cases where employees negotiate for a salary net of Income Tax and this makes even the most direct tax an indirect tax.  Taxing the credit turnover in bank accounts, BTT, explicitly does away with this artificial classification of direct and indirect.

As collection costs are eliminated, banks can be given a small percentage of taxes remitted by them as commission.  This will have far reaching implications for the banking industry by substantially boosting their fee-based income.  This can help them lower lending rates, something that all governments have been hankering after, by boosting their non-interest income.  This will help commerce and industry without compromising interests of depositors.

Above all, the energy and qualified human resources that are currently committed to discovering and plugging loopholes in taxation laws, and the so-called creative accounting, reporting and compliance, are truly mind-boggling.  All this can be released and can do wonders by being deployed into productive and meaningful work.  This alone is worth a dozen good enough reasons for implementing BTT.

Some objections that may possibly be raised against this novel way of taxation that has the simplicity of genius, will go like this:

• Taxation is presently used as a tool to encourage or discourage consumption of a product by reducing or increasing tax rate on that particular item.  This also comes handy for raising additional revenue from products with inelastic demands.  This can still be done in BTT but would detract from its fabulous simplicity.  Also, taking the example of curbing smoking, prohibition of smoking in public places has been far more effective a deterrent than sustained price rise year after year.  Thus government should use its legislative powers to discourage or ban use of harmful products instead of exploiting public's addiction for enhancing revenue.
• A fear that people my engage in barter is baseless at this level of economic advancement.
• Taxes on imports and exports are also used as tools to promote/restrict exports/import.  I am not fully aware of what the international trade agreements have to say on this.  Exports will, of course, get taxed when proceeds are received in exporters' account. Imports may be taxed whenever an importer's account is debited towards import and the complication of different rates for different items may remain here.  This will be an instance where a debit entry in an account has to be taxed. It will be recalled that BTT is essentially for taxing credit turnover in bank accounts.
• It may be argued that a single rate on all and sundry is iniquitous.  This may be corrected by specifying amount ranges for credit turnover and applying differential rates.
• To avoid multiple taxation, transfers between different accounts belonging to the same customer-id may be excluded from the credit turnover.  To effect it across banks an universal customer-id, such as Aadhaar number, could be used by all the banks.
• Again, it may be argued that not only revenue but capital transactions, like borrowing and repayment, too, will get taxed under BTT.  However, as BTT is very likely to bring about reduction in lending rates by banks as argued in the beginning, this small burden on capital transactions is likely to be more than set off.
• A serious objection to BTT comes from the concomitant demand for drastically reducing currency in the system.  Lower reserve requirements may enable banks to create too much money.  But then this can always be controlled through capital adequacy norms and reserve requirements imposed by the Monetary Authority.

It cannot be emphasized enough that the entire success of BTT depends on drastic reduction in use of currency in the economy.  All notes above ₹50/= must be discontinued.  

There may be some apprehensions against bringing down use of currency in the economy.  One is that in their quest to avoid taxation, people may create alternate currencies or start using precious metals and stones.  It is not very likely to happen in a big way as all ultimate uses will have to be only in proper currency and bank balance only.

What may not be immediately obvious is that unless the cost of electioneering is reduced and funding of political parties is made absolutely transparent, politicians will resist these proposals tooth and nail.  For it is bundles of high-denomination notes, mostly unaccounted money, that are used for these two purposes.

An examination of tax data shows that when it comes to direct taxes, total Income Tax paid by corporates is hardly 1.5 times the total Income Tax paid by individuals. And the whole of indirect taxes, which far exceed the direct taxes, is ultimately borne by individual consumers only.  Thus corporates pay very little tax and almost the entire tax burden falls on individuals only.  Hence it is likely that corporates may raise all kinds of objections to BTT.  However all such arguments will be fallacious because in the final analysis all taxes on a productive entity are indirect only (as long as it is a going concern.)

To conclude, it is currency that facilitates most evils including crime, terrorism and drug trade.  It also facilitates the kind of expensive politics that makes it near impossible for an ordinary citizen to get into it.  The elimination of currency will curb these evils and BTT will release unbelievable amounts of energy and manpower currently committed to the process of tax collection, payment (and evasion) and compliance requirement.  These two can be the biggest game changers for the human race.

Thus there is a need to start a public movement across the globe so that all countries take to BTT and minimal currency use.

Comments requested.