A couple of years ago, while reviewing the second NDA II budget, I made a case for a more imaginative initiative to reduce the burden of taxation on a ‘chosen’ few and to spread the tax net wider. In fact, I calculated that a Banking Transaction Tax (BTT) of just 1.1 per cent on all banking transactions covered under NEFT, RTGS and ECS would be adequate to get rid of all other taxes including GST.

The idea of BTT was mooted by a Pune-based think-tank called Arthakranti. It was made popular by Baba Ramdev. The details of their proposal have been covered later in this article.

Some of the arguments against BTT are as follows:



-Indians prefer to deal with cash



-Most people would avoid the banking system to bypass BTT, and pay cash for property deals, large purchases and so on



-This would put a huge burden on the underprivileged and those below the poverty line who are in the banking system. Bad optics.



-If BTT is so good, why has it not been tried elsewhere?



-How would one distribute taxes collected under BTT. Would it be by way of amounts proportionate to BTT collected in states, or any other way?

There were other arguments too, not worth recounting.

However, with great sagacity, this government has been working towards it and there is a pattern to it. Here is the sequence of events that have lead to the present moment:



1. Opening of Jandhan accounts: At present count, around 26 crore or 260 million accounts have been opened. To facilitate ease of operation, the government has allowed these accounts to be opened with zero balance and with no charges. Aadhar cards are being used for identification purposes.



2. Direct Benefit Transfer of subsidies: Many subsidies are going directly to beneficiaries’ accounts. This appears to be a sweetener to get everyone into the banking system.



3. Tax amnesty schemes with a fairly liberal deadline: This was to make people get into the habit of paying taxes on income not declared in their returns or those who had not submitted their returns.



4. Demonetisation of high value rupee notes: This is resulting in people paying their undeclared income into their bank accounts and being forced to draw their needs from their accounts. The collateral benefit is that people who had earned their money through illegal means would also be forced to declare their income and explain how it was obtained or would simply dispose of it by burning or shredding it.



5. After demonetisation, there has been a shortage of the new high denomination notes. The people have adapted to the change by using mobile-linked payment systems that allow them to pay each other even small amounts.

Overall, the government has tried to create a financial infrastructure covering all people or at least all earning members.

It is interesting to see the figures for taxation in the Union Budget for 2016-2017. The total tax revenues estimated to accrue to the government in the current fiscal year is Rs 1632771.90 crores.

After making huge efforts to raise taxes, the equivalent of peanuts by way of tax relief to the populace, was provided. An example of two ‘concessions’ is provided here: -

“Raise the ceiling of tax rebate under section 87A from

2000 to 5000 to lessen tax burden on individuals with income upto 5 lakhs.

Increase the limit of deduction of rent paid under section 80GG from

24000 per annum to 60000, to provide relief to those who live in rented houses.”

The question that begs to be asked is, how many people stay in houses with a rent of less than or equal to Rs 5000 per month?

It’s time to completely overhaul the way tax is levied and collected. In order to spread the burden of taxes to everyone in the system and in a very equitable manner, the only way out is by imposing a Banking Transaction Tax or BTT. I will get to the possible objections to the tax and the answers a little later.

Here are my calculations for how much BTT can be collected and a comparison with the actual budget estimates for revenue collections including non tax revenue.