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.

Bangladeshi Immigrants and Swachchh Bharat

A few days ago we had a meeting of the local Residents' Welfare Association.  One member observed that an order has been promulgated by the government for penalizing burning of garbage as a mode of disposal.  Of course, nobody knew of any initiatives for improvements in the current pathetic state of garbage collection and disposal to supplement this notification.  In the absence of such improvements, the notification looks like just cynical buck passing.

At our place garbage is not collected by the corporation directly but by a private agency called "Chamacham Lucknow."  I think most other cities too have similar arrangements.  Chamacham fellows are supposed to take all the garbage to the nearest designated garbage dump from where corporation collects it, though not on a daily basis. The Chamacham people do take the household garbage away once in two days.  However, the fallen leaves, plant trimmings from houses as also the neighborhood park are bulky and Chamacham workers refuse to cart it away.  Instead they collect it in a heap, leave it to dry and then set fire to it.  Often this burning mass also includes bits of plastic and wrappings lying on the road and roadside. This is a major source of air pollution in the city.

As an aside, we all have read in the newspapers that these days the farmers too set fire to the dry plant stalk remaining in the fields after harvesting. Thus burning of plant stalks in villages and garbage in cities have raised air pollution levels to a new high all around.

After the meeting I chanced to meet the local Chamacham supervisor and interviewed him briefly.  This is the picture that emerged from the interview.

He said that there are well paid municipal employees under a supervisor who are supposed to sweep the streets and take away all the swept-up garbage.  Instead they are made to work as domestic servants at bureaucrats' and politicians' homes.  Then many of them do not work themselves.  They hire another person to whom they pay a fraction of their wages.  They also pay another small fraction to their supervisor and then splurge the rest.  After all, why should they work once they have become a government employee: never mind if it is just the LSG (Local Self Government!)  Chamacham people rightly thinks that compensating for such shirking by people who are extremely well paid entitles them to separate payment for sweeping the streets.

Then again, the number of garbage dumpsters has been steadily declining as nobody wants one near his house.  To be sure, it really is a big nuisance.  It will overflow before it is emptied by the autonomous employees.  Dogs and cows will be rummaging through the overflow and adding their own poop to it.  Now who wouldn't mobilize all his resources to ensure that he is as far away from such a place as possible?

Thus inadequate deployment of dumpsters and infrequent emptying of these few dumpsters force burning of garbage as the only means of disposal.

He concluded by adding a note of caution, "People resent the Bangladeshi immigrants. But it must be said that but for them our cities would have by now turned into garbage mountains."

Unless Municipal Corporations are overhauled, rid of corruption and their employees made to work, merely exhorting and goading the citizens will not get us any closer to the Swachchh Bharat of our dreams.  And if we cannot make the employees work, we may have to encourage Bangladeshi immigration, political posturing notwithstanding.

Internet Banking and Travelling Overseas

With steady increase in the NRI numbers, many parents make yearly trips abroad to spend some time with sons, daughters and their "grand" versions.  One issue that inconveniences them is the use of internet banking while abroad. They have to use it for payment of bills as also checking their accounts.

All banks impose use of use-once-only OTP (One Time Password) under certain conditions though the usage is not uniform.  The use is for ensuring that the action is being performed by the genuine account holder who is in possession of his registered mobile number.  The OTP is sent as an SMS on this registered mobile number.  Some banks initiate OTP at the time of login itself if they find that it is being done from an unfamiliar device and location.  While some banks may just have a second password for transactions, others insist on use of OTP for all transactions irrespective of device or location.

The point is that unless international roaming is activated on your Indian mobile number,  you may not be able to make use of Internet banking.  International roaming is not only expensive but also not as easily available as national roaming.  BSNL does not provide international roaming to its prepaid customers.  Airtel does, but not to customers in East UP circle: This gets my goat as I reside in this circle.  And then this roaming can prove to be very expensive if you were to respond to an incoming call by mistake.

I had found a solution for this.  I put an app 'Relay ME' on my phone.  Then I would leave my phone in India with someone who could ensure that it is kept charged and connected to the network.  The app relays all received SMS to an email address configured in it.  This did the job without having to go for international roaming.

Now many banks have introduced 'active token' for generating the OTP instead of receiving it from the bank.  It is done through an app on customer's smartphone.  The OTP can be generated whether or not you are in the coverage area of your GSM operator.  However your SIM which has the mobile number registered with the Bank, must be present in the phone. Presto! carry your SIM with you and forget about international roaming.  As long as you have a wi-fi connection you can carry out Internet banking unhindered.

Activating the "Token" app is just a little bit tricky.  For this purpose you have to log into your Internet banking account, preferably on another device while activating the app on your smartphone.  Also you must install the app on the phone which has the SIM for the registered mobile number.  You will receive an SMS which will have an URL for activation and you have to click on this URL on the phone having the app and the SIM.  However all the hassle is worth it.

Finally, having your Bank's mobile banking app on your phone also helps.  It allows you to login and transfer funds without OTP.  However when you are being redirected to bank's Internet banking site by an online merchant, you may have to resort to the "Active Token."

Do share your experience if you have been using an active token for banking transactions.