Advantages and disadvantages of banking transaction tax

Advantages

(1) Combating Black Money

The opportunity to hoard money in the form of cash and evade taxes through legal loopholes would no longer be available as all taxpayers, who would include the majority of the population, would be obliged to move to electronic methods of transaction.

(2) More individuals are taxable

Less than 10% of Indian citizens pay direct taxes. A vast number of individuals would be subject to taxes if the present tax system was abolished and a tax was placed on all financial transactions. The government would earn more money as a result of this.

(3) Increase in disposable incomes

With a rise in income, the tax rate goes up. Once an individual's income surpasses the basic exemption ceiling, their disposable income may be immediately cut by 20–30% under direct taxes. However, if BTT were to be reduced by, say, 2%, and 98% of the income would still be available for spending.

(4) Cashless economy

Greater accountability and openness would result from a shift to electronic payment methods and cheques. The advantages of government initiatives would also experience fewer leaks and be used legally.

Disadvantages

There are a number of disadvantages to BTT, despite the fact that it largely appears to be a straightforward, totally automated, efficient, and cost-effective tax system. The following are possible examples of them:-

(1) Cripple rural economy

India's rural economy is primarily cash-based. Rural areas of India have only gradually been linked to the mainstream financial system, leaving the bulk of the country unconnected. The whole agriculture industry, from seeds to fertiliser, depends heavily on hard currency for day-to-day transactions. Therefore, BTT will be a tough step for rural India or the agriculture sector.

(2) No taxation flexibility

A progressive taxation policy's fundamental goal is to increase the burden on the wealthy while decreasing it for the poor. However, in the case of BTT, a consistent rate of tax will be applied to every transaction, regardless of the income level of the individual receiving the money. BTT is therefore a regressive tax. BTT will in some ways fall short of addressing the rich-poor divide. Additionally, BTT would have the unpleasant cascading effect of taxing the same revenue twice, which is especially bad for enterprises.

(3) Breaking the Federal Structure

Revenue will be lost by states that place less of a focus on the banking industry. Similar to the GST, implementing a unified taxing system across the country might go against the democratic federal concept.

(4) Problems that might arise identical to those in GST

With the GST, the consuming states often make more money than the production states. Similar to this, under BTT, the states with a high density of bank branches stand to benefit, while the less developed areas where banking is still in its infancy stand to lose a significant portion of the money.

BTT would be collected and paid by banks, just as STT, which must be collected and paid by a single intermediary, such as recognised stock exchanges in the case of shares or fund managers in the case of mutual funds. This well-established system of bank connections may prove to be the ideal pitch to bowl BTT because India's public and private banking sectors are sensibly supervised by the Reserve Bank of India.

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