Banking on tax reforms PDF Print E-mail
Tuesday, 07 January 2014 00:00
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Careful on that banking transaction tax proposal

Given that over R1,000 lakh crore—that’s 10 times India’s GDP—is transacted electronically through banks each year, over 95% though RTGS transactions, a 2% tax on this would add up to more than the total taxes collected across the country by both the Centre and the states. It is not surprising, then, that the BJP’s brains trust should veer in favour of this. At a function organised by yoga guru Ramdev, BJP prime ministerial candidate Narendra Modi has said the present taxation system is a burden on the common man and needs revisiting. The elegance, the simplicity and the progressivity of a banking transactions tax—the rich, axiomatically, do more such transactions—is seductive, but Modi would do well to have it examined by tax experts across the country, not just chartered accountants in the party’s brains trust.

For one, the banking transactions tax is an input tax, and is therefore cascading in nature. A company buying and selling inputs will enter into multiple transactions and end up paying 2% on all of them, eventually adding up to perhaps more than the tax it pays at the moment. Indeed, the very principle of taxation over the last few decades of tax reforms has been to eliminate cascading of taxes, so it comes as a surprise that anyone should even want to change this. It is also worth considering that such a tax would likely result in a situation where people simply stop using the banking system for as many transactions as possible.

Given that R5.7 lakh crore of taxes were given away in FY13, the BJP’s position should be to eliminate as many of these as possible—these added up to 53% of total central taxes in FY13—and then lower the rate of taxation, perhaps move towards a single rate of taxation to remove arbitrage opportunities. In the case of corporation tax, around 15% of assessees pay under 20% tax and another 17% between 20-25%—only 27% pay at between 30-33% which is the prescribed rate. A flat 20% rate, chances are, would net more taxation as it would improve compliance. In personal income taxes, similarly, those earning between R10-20 lakh a year pay an average tax of 8.6%, suggesting huge tax evasion as compared to a tax rate of 23% for those who declare annual incomes of over R20 lakh. Once again, a flat tax would result in more compliance since, right now, as the tax rates rise as income levels do, the incentive to report lower incomes is very high. As for the view that taxation has become very onerous, the BJP is right and the sharp hike in tax arrears—from R2.48 lakh crore in FY11, direct tax arrears alone were up to R4.8 lakh crore in FY13—demonstrates this. The taxman losing the bulk of appeals suggests the demands are often frivolous. Fixing this is important, and a low, flat tax will play a big role in this. Replacing all taxes with a banking transaction tax is akin to throwing out the baby with the bathwater.


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