Swap Income-tax, GST for a Banking Transactions Tax To Trigger Growth with Justice
These are unprecedented times as an extremely severe health and economic crisis is impacting our lives to a major extent, courtesy the novel coronavirus (COVID-19). Many distinctive features make COVID-19 a very eclectic crisis. First, it is a highly chaotic and unusual fusion of a deadly disease with an economic calamity. Second, its escalating growth has seen it become a global phenomenon in a very, very short period. Third, as economists would call it, it is an unparalleled supply and demand side (macro-economic) shock with great uncertainty in magnitude and duration. Fourth, its impact is many-sided and includes infection, death and loss of loved ones, severe human suffering in several forms (such as job losses, lack of food and nutrition, loss of education, even if it may be temporary, lack of cash flow for sustenance and livelihoods), greater indebtedness, severe global recession caused by a prolonged (uncertain) contraction in economic activities, brutal individual and corporate (financial) distress, huge stress on the financial systems (thereby exacerbating the supply of credit to the real economy), stoppage of flow of capital due to risk aversion by investors and other stakeholders and so on. Clearly, COVID-19, is a once-in-a-lifetime situation, whose multi-faceted impact will render the world into pre- and post-COVID-19 era’s. 
But there is a silver lining to it: countries that are best prepared to assimilate digitisation are likely to recover quickly (in an economic sense) and India appears to be one of them. In a brilliant recent article titled, “Life in the era of COVID-19”, prime minister Narendra Modi has talked of how the COVID-19 situation can be used as an opportunity to change things for the benefit of the poor and humankind and one theme that he repeatedly emphasises here is the need for and use of increased digitisation. As he so very succinctly argues, one thing becomes clear—COVID-19 has given us a rare opportunity to revolutionise our way of life, especially using digitisation and for the larger benefit of all humankind.   
One direct result of this could be an even greater use of the Reserve Bank of India (RBI) payments system than in the previous years and this precisely provides us with a wonderful opportunity to bring the kind of reform suggested by the PM. Indeed, the present situation provides us with a unique opportunity to reverse what has been happening for the last 72 years and bring in major progressive reforms in taxation. 
Direct and indirect tax proposals have that kind of power over an economy, the power to make or break it. And this is the time to rationalise income and other direct and indirect taxes to usher in a total revolution, whereby it will be easier for the government to maximise revenue while simultaneously reducing the burden on citizens. I think that is a pareto optimal goal. 
Let me quote from the great Indian epic Mahabharata, which offers advice on taxation to the ruler of the day: 
“The king should take wealth from his subjects at the proper time... Like an intelligent man milking his cow every day, the king should milk his kingdom every day. As the bee collects honey from flowers gradually, without causing harm to the tree; the king should draw wealth gradually from his kingdom for storing it.” — Bhishma’s counsel to Yudhishthira. (Mahabharata, Book 12: Santi Parva: Rajadharmanusasana Parva)
So, let us move on to the question of how to rationalize the direct and indirect tax regime and enhance revenue generation for the government while at the same time making it less burdensome for the citizens? We also need to simultaneously ask how India’s tax system be rationalized to eliminate black money generation?  
An answer lies in moving away from the existing complex income-tax system to one that is simple, cost effective and transparent, with lower transaction costs and greater ease of operation for the government and the taxpayer. 
In the long term, taxation laws need to be simplified. Wherever and whenever possible, positive reinforcement rather than the threat of punitive action must be used to influence attitudes and bring about long lasting behavioural changes. 
A transparent and simple tax system can go a long way in helping people negotiate their way through it.
Taxation should be pareto optimal—it should neither diminish the drive for enterprise nor should it result in huge inequities due to the hoarding of money by a select few. An unduly high tax rate and low exemption limits are constraining factors on consumption and enterprise. That is why having a transparent and forward looking tax system is critical for any economy.
What are the criteria that enable a system to be a forward looking transparent tax system?
Transaction Cost. 
Ease Of Implementation. 
In fact, the Nagpur-based economic think-tank Arthakranti, which has reportedly claimed credit for proposing the idea of demonetisation, has proposed a complete abolition of all direct and indirect taxes levied by the Union government, the various state governments and all local bodies across the country, with the exception of customs and import duties that function as international trade balancers. Instead, they propose a banking transactions tax (BTT) at the rate of 2% on all banking transactions, with the exception of cash withdrawals. 
Dr Subramaniam Swamy, a very well-known economist and politician globally, has repeatedly called for the abolition of the income-tax. I have also argued for the same in my recently released book, “Powering India to Double Digit Growth: Five Key Steps to A Robust Economy”, describing in detail the key (additional) steps to be taken to ensure a seamless transition to a more efficient, BTT based taxation regime. 
Given that BTT would be a flat, single-point tax to be levied by commercial banks on all bank transactions, it would be simple to implement and have practically zero compliance cost. With the numbers of those within the fold of the banking system expected to increase even more significantly (given the drive for 100% sustained financial inclusion), BTT is likely to generate the required tax revenue and have buoyancy too. 
The negative fallout might be an attempt at bypassing the banking system, but certain additional measures (discussed in in detail in my above cited book) need to be undertaken to ensure that people prefer not to transact in cash, wherever and whenever possible. However, there exists the challenge of ensuring that the people newly entering the banking system remain within its fold. Simplifying banking procedures and improving the quality of and access to other support services should help achieve that. 
Coming back to the BTT, let us look at transaction numbers to understand how beneficial the BTT could be if and when it is implemented. For example, for the FY18-19 alone, the total value of RBI payment system transactions (Table IX.1: Payment System Indicators – Annual Turnover) stood at Rs28,86,465 billion, or Rs28,86,46,500 crore. If we compute a BTT of Re1 per Rs100 (or 1%) across this 28,86,46,500 crore that flowed through the RBI payment system in FY18-19, we get a BTT collection of Rs28,86,465 crore. 
Thus, if one were to try to make a projection based on the total BTT estimated to have been collected using the RBI payment system data for FY18-19, the annual total yield from BTT would have been able to easily compensate for the loss of revenue from all direct and indirect taxes which stood at Rs20,80,000 crore as per the data available and cited in “Union Budget 2019-20: An Assessment, RBI Bulletin September 2019” as under column 4, Table 2
In fact, there would have even been surplus revenue of Rs806,465 crore, which is huge by any standards. And more importantly, it would have been far easier and less costly to implement and ensure compliance. 
The same principle should hold good for 2019-2020 and I have taken a look at the provisional RBI payment system numbers for 2019-2020 (which is available until February, 2020) and it suggests that a BTT of Re1 per Rs100 transacted through the RBI payment system, should be more than good enough to take care of the total of direct and indirect taxes—budget estimates put it at Rs24,61,000 crore (see column 5, Table 2). 
Using the provisional RBI payment system data until February 2020 and also extrapolating it for March 2020, the total estimated revenue from a BTT of 1% would have yielded Rs25,00,901 crore, which as you see is higher than the Budget estimates of direct and indirect taxes of Rs24,61,000 crore (see column 5, Table 2). And going forward, post COVID-19, with increased digitization and further stabilization of the economy, the transactions through the RBI payment system should only further increase. 
Accordingly, the following changes to the present tax system are suggested. 
A crucial first step here is to abolish all direct and indirect taxes—i.e. personal income tax and corporate tax including all kinds of capital gains tax (both short and long term). Corporate tax will also have to be abolished for all body corporates. 
GST must also be completely eliminated.  The same has to be immediately and seamlessly simultaneously substituted with a banking transaction tax (BTT of 1%) of Re1 per Rs100 transacted through RBI’s payment system. 
As the velocity of the payment system and banking transactions increase, the BTT would also be good enough to provide a huge surplus as well. I believe, that, post COVID-19, after the economy stabilises, BTT should ultimately settle down at 75 paise per Rs100 (or 0.75%). 
After a few years, with inclusive and further digitization, it could even come down to 50 paise per Rs100 (0.50%) The BTT is what I see as a fair system to taxation, without burdening the common person—it will bring into its fold, almost everyone in the country from a tax perspective (currently, less than 10% of India is part of the direct tax system) and give huge tax revenues to the government and most importantly, without inconvenience to the common man. A forthcoming article dwells on the specific steps and actions that would need to be undertaken to operationalise this idea in real time. 
The country has been through testing times. Even in the face of adversity, the people have stoically borne inconveniences/losses in the hope of a liberalised economy in the future that will yield benefit to all. Taken together, the abolition of direct and indirect taxes and their substitution with a BTT, as outlined above, should start to yield significant results. 
Once the above is done, it is expected that the various pillars of economic growth will automatically start to move and move at an increased pace. Over time, the shift to a BTT should greatly enhance domestic consumption, increase domestic savings, further reduce interest rates for lending and make exports competitive, apart from helping to generate surplus funds for development (including infrastructure), enhance investment, eliminate poverty and transform India into a rapidly growing, stable and inclusive economy. 
Together, the abolition of direct taxes and indirect taxes and introduction of a simple BTT should also help in building a more competitive industrial base in India, especially among the micro, small and medium enterprises (MSMEs) and also in manufacturing in general. Various manufacturing clusters that are doing badly should now be able to do better and without a doubt, exports will pick up. 
The move to BTT (with additional reforms in the real estate and other sectors) should also enhance the overall size of the economy, especially given that the informal sector and the parallel (black) economy in the real estate sector would have been fully absorbed into the mainstream. 
One last point is in order. Much has been tried for the past 72 years (with varying degrees of success) with regard to building a vibrant economy and I strongly believe that it is a now or never situation for the Indian economy today. 
What we do now will determine the quality of life for our children and grand-children (much into the future) and India is clearly at the cross-roads. 
Here is a great opportunity to create a vibrant and dynamic economy and that should be utilised. That is what India needs today and that is what will cure our ailing age old system of economic governance and push us into an era of dynamic and vibrant entrepreneurship based on sound fundamentals into a period of long-lasting (hopefully, double digit) growth. 
(Ramesh S Arunachalam is author of 12 critically acclaimed books. His latest release in January 2020 is titled, “Powering India to Double Digit Growth: Five Key Steps To A Robust Economy”. Apart from being an author, Ramesh provides strategic advice on a wide variety of financial sector/economic development issues. He has worked on over 311 assignments with multi-laterals, governments, private sector, banks, NBFCs, regulators, supervisors, MFIs and other stakeholders in 31 countries globally in five continents and 640 districts of India during the last 31 years.)
1 year ago
The present union government should take such a great reforms in indias taxation system so that more than 90% of the people come under taxation so that for the people who is paying tax a normal employees should be in smaller bracket and also black money which is trending in real-estate also would come into white
2 years ago
It is the only way to rationale tax system and to promote economy with ease of living.people who disagree with it should have a fresh positive look at it.This BTT would be very sound ,equitable ,justified , and practicble however if any issue that can be addressed by a transparent lagislation.present tax system is total mess on the 2.5% people of india
Most common argument some put forth that rich and poor will pay same tax.They do not know in actual rich will pay more considering their volume and frequency of transaction as compared to poor who may hold to even bank account
It is clear country has paid a heavy price till now for assumption of rich and poor devide used by few for their benefit
In fact the life of poor will be improved when they get things at cheaper rates
Its high time that all people and govt should come forward to abolish all taxes and inpose BTT without loosing any time
3 years ago
BTT is the only practical solution for tax issues. Due to GST small businesses are eliminated from the system. Most of the time is wasted in calculating & filing the taxes monthly, quarterly, yearly etc. GST is the most flawed tax regime. Its high time that we implement BTT.
3 years ago
Excellent proposal. I think the ONLY reason this may not see the light of day is the entire superstructure of Tax bureaucracy and Chartered accountants that exist only because of this complicated tax structure. The tax cadres of all states combined runs into several lakhs of employees. But I really wonder, the present Govt came to power with the mandate of maximum governance and minimum government but just the opposite is happening. Bureaucracy and controls are ballooning.
The BTT has the potential to make India the richest economy in the world, but do the bureaucrats and politicians want it? Will Mr Modi show his 56" prowess by implementing this path-breaking reform? I wish it could happen in my lifetime!
4 years ago
When you project the revenue from the BTT, you said last years value of transactions is 28crore crore. But how much is the value of transactions by govt?
4 years ago
Very very sound logic...my vote for it ! But is government lending it's ear to it? These are the times of "now or never" economy can bounce back immediately if the aforesaid recommendations are implemented. No tax implies no need to hide income. Hence no black money..system benefits...earner benefit... incentivising people to consume more through reducing BTT with increasing consumption will attack the ghost of consumption crisis head on!
4 years ago
Wonderful BTT (Banking Transaction Tax) article by Ramesh S Arunachalam
28 April 2020, the original author of the idea Arthkranti being Dr. Subramanian Swamy. I have been widely propagating the adoption of Arthkranti system of taxation of every transaction of business, say, 2% only, on every business transaction through banking channels - No Sales Tax / GST and no Income Tax, no big paper work, not much of man power - and give boost to digital transaction.

While PM Modi has been talking on various forums about digital transaction, but he has as yet not talked to the FM to move towards BTT and swapping of Sales Tax/GST and Income Tax, which he must do now without loss of any further time. The system is very much Indian and should be adopted.

4 years ago
Dear bsgandhi.
It is a myth that Indian business men are dishonest and evade tax. But the truth is that they are forced to do this, because of complicated tax calculation system and high tax rates. With the applicability of proposed BTT system, direct and indirect taxes will be judiciously reduced or abolished which will motivate assesses to record all transactions legally.
4 years ago
It lookes simple and effective proposition theoreticaly but in practice it will not be. E.g. if I go to a offline cellphone vendor , he insists on cash pmt.,small grocery or mom and pop stores they all deals in cash, most of small retailers don't accept card or wallet pmt. To keep out of GST liability. So a big part of economy will avoid BTT.
Replied to bsgandhi77 comment 4 years ago
Thanks for your comments. There are safeguards proposed to reduce large volume cash transactions and it calls for a number of measures and reforms including in real estate. I will be sharing the same as a complete article at a later date and it will address some of the issues you have raised. Some small cash transactions will however be there. Also, the current volume of RBI payment system transactions and its yearly growth are more than sufficient for the proposed BTT to cover the sum of direct and indirect taxes (if fact there will be a surplus over this) and hence, make BTT a viable proposition. Thanks. Will post the new article link here for your perusal. Thanks.
Replied to rameshsa2009 comment 4 years ago
Hello Mr Ramesh

Is govt serious on Implementing this or its just a idea floating around with no concrete steps around it... if yes then by when do you think govt will implement this ? 2021 ??
Replied to rameshsa2009 comment 4 years ago
Outlandish idea. Some segments will collapse. If you impose tax of 1% on cblo or Fx transactions these markets will become untenable. Or for that matter RTGS.
Replied to rakeshpushkar comment 4 years ago
Thank you. Let us agree to disagree. There are huge benefits from BTT. ALL OTHER TAXES TOTALLY ELIMINATED and India's growth story will be unparalleled and in double digits. The idea is very viable. It's time has come. You are entitled to your view and I have solid research/reasons/benefits that favour BTT. PLUS there will be several categories and exceptions for BTT. thank you
Replied to rakeshpushkar comment 4 years ago
Dear Rakeshpushkar...
BTT will definitely create a win-win situation for the all the sectors of the economy including government. Thus the proposed banking transaction tax system will prove as an ideal tax system.
4 years ago
Arunachalam Sir for very good article on arthakranti's BTT - The perfect tax system is that which can curb flow of black money, reduce corruption, creates equality, minimize tax collection cost, increase tax base and facilitates tax payer to easily compute the tax. The effective and transparent tax system can help any economy to develop in a systematic manner with equality. The proposed banking transaction tax will be applicable as a single point tax on banking accounts which are credited or receives money. It is proposed that a certain percentage of tax will be deducted on each banking transaction and all other taxes except customs will be abolished.
( For details visit www.arthakranti.org )
4 years ago
In BTT rich and poor will be contributing revenue equally. Rich should contribute more. So in my opinion BTT is not acceptable
Replied to kasreenivasan comment 4 years ago
Fair Point sir. That is why the rates of BTT will be different for different categories. The average rate of 1% is given for illustrating the calculations and in reality, during implementation rates can be created for different categories of people, corporations, MSMEs, own family transfers (to mother etc), b2b, b2c etc. Thank You. Point is well taken. Many commenters have also suggested differential rates for different categories of people, volume of transactions, b2b, b2c, family members etc. These are finer details that can be operationalized for effective implementation (i.e., once policy makers take a decision in favour of the proposed idea of swapping BTT for all direct and indirect taxes).
Replied to rameshsa2009 comment 3 years ago
No no. There can't be any differential rate structure. Else again the bureaucracy wil become important. The idea is that the rate should be so small that it doesn't pinch anyone to pay it. In any case, everyone already pays GST (it is part of the pricing), so the BTT will be totally acceptable.
4 years ago
After this article and a previous one on something like "why NRC if great", it seems Moneylife has become a tool in the hands of trolls.
4 years ago
1. Wherever possible, big cash transactions will happen outside India, particularly between big corporates. Complex rules will follow regarding such transactions.

2. Black money transactions will explode.

3. GST complications will not go away since the companies pay their suppliers at different time than their customers pay them. There are various other complications. Author does not seem to have much knowledge about functioning of business.

4. If BTT is so great, which other countries are doing it? Why is there no modern history of BTT in the article? Or, like demo do you want to experiment with the lives of 1/6th of humanity, 130 billion people?
Replied to in4tunio comment 4 years ago
Along with introduction of BTT, there will have to be appropriate safeguards to prevent cash transactions in real estate and a whole set of reforms are required there and will be done.

Real legitimate businesses have realized the futility of engaging in large cash transactions and things are slowly changing as 360 degree information is available and technology will help to a large extent in triangulation. And COVID-19 has accelerated the demise of large cash transactions the world over. That is reality.

BTT will not have the hangover of GST. It is built in and passed on and it is a simple, single point tax.

Mark my words. BTT will make India a true leader in economic reform and of course all implementation issues that crop up must be addressed. Implementation will bring on-course corrections but as the commenters have mentioned below, there are huge advantages to the BTT.

Well. My article is a just point of view. You can agree or disagree but certainly you cannot call me a troll as you have in your above comment. I strongly object to the use of such words. Let the discourse be decent and let us debate it out. If you have substantive issues, please raise it and I will take the feedback seriously and build it in and try and address these. Otherwise, let us agree to disagree. Common, we can have different points of view and not call each other by names.

Criticism should not be politically colored and has to be constructive. I have no political leanings at all and I am not a member of any political party. I am professional who has worked in 640 districts of India and 31 countries with governments, multi-laterals, private sector, the UN, regulators and supervisors in the last 31 years. I strongly object to your language as it is defamatory.
4 years ago
Apt time it’s.
The author Mr Ramesh has rightly vouched for the opportune time to bring in Banking Transaction tax, BTT shortly.
As a practitioner of taxation for about two decades, I strongly feel BTT is a sure-fire way and it can herald in a quality productive time. In the sense that it will go a long way in obviating unnecessary tax litigation at various for a.
Years ago on one occasion an ex parliamentarian was a co-passenger in a train journey. In the brief conversation, he had mentioned that former Minister Madu Dantavate was in favour of replacing tax laws with transaction based tax, i.e., like BTT.
If the BTT collection can overwhelm, as the author writes about, the total of estimated traditional direct and indirect taxes, and with value addition of cost saving, is not time to roll out a red carpet to BTT and bring curtains to existing direct and indirect taxes. When every single payment transaction goes through the hammer of BTT, there is hardly any need for separate compliance cost, like filing of separate return for Tax Deducted at Source, Special Financial Transactions, reporting of high value transactions etc.
Already the whole nation is sensitized to do digital transactions. Like social distancing to flatten out Covid19, Government may go stricter about no-cash transaction, establish stringent checks in place to curb and penalise violation. This measure will surely work out in ensuring people to adopt digital transactions. The argument that people may not be well equipped to handle digital transaction is a fallacy. Already we hear the number of mobile phones is almost equal to the size of the population. If proper awareness is given, people will have no hesitation to switchover to digital transaction. A techie friend who goes onsite work to other parts of the globe said, in digital transaction, India, in his view, is far better and advanced than any other countries.
May be various rates of BTT could be adopted factoring in considerations like small, medium enterprises, bigger ones, turnover-depended ones etc .
If BTT is brought in, there is nothing like that.
Ramanthan Subramanian
4 years ago
Great amount of research has gone into re-presenting this concept. Kudos to the author. An unprecedented national emergency is as best a time as any to introduce any drastic step that is reform oriented.

But let's be practical here. Ms Sucheta Dalal comes up with brilliant ideas through her videos and articles. Do they get implemented? No chance. There are very many people who come up with great ideas. Prof ND Nalapat is, one for sure.

Sanjeev Sanyal & Krishnamurthy are economic advisors. Both are brilliant. Are their ideas seeing the light of the day in governance? Very few, that too in twisted form thus denying the intended benefits of a policy initiative.

Let's say an idea reaches Modi, he likes it - asks his team to implement - Result - utter chaos - why does it happen? Our famed bureaucracy which thinks it knows the best. So when a novel idea is to be implemented, bureaucrats will top it with their TADKA and citizens will get only burnt portion of any cooked dish.

If an organ of a Govt doesn't have accountability, that is asking for disaster. We have Bureaucracy & Judiciary. Political parties can be thrown out in elections.

Constitution gives absolute Job protection to Bureaucrats - that has to be amended, giving power to elected Govt to throw out the dead wood, if Country has to progress.. This has been done in Australia, UK & USA. Equally important is reforming the Judiciary - 6 years of NDA govt, there is hardly any movement in this direction.

Mr Arunachalam may like to watch these 2 videos - Bureaucracy is Modi's Enemy No 1 - Part I & II.


Replied to mahesh.kalkar comment 4 years ago
The least accountable today is one particular political party which claims it will not be thrown away for 50 years.
Replied to in4tunio comment 4 years ago
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