Banking Transaction Tax Unviable – Refuting the Proposition of Arthakranti

Description

Taxation is the main source of revenue of most governments. However, some taxes are “good” whereas others are bad. In the context of India, banking transaction tax is one of the “bad” taxes. A report by Arthkranti, a Pune-based economic think tank, proposes a means of overcoming the financial problems facing India for which it suggests replacement of the existing taxes in India with a banking transaction tax. Various scholars claim that the introduction of banking transaction tax would have a devastating impact on India. This coming hot on the heels of the implementation of another radical policy, demonetization, which had a negative impact on the economy. Preliminary analysis shows that introduction of bank transaction tax by India is not desirable. Most Indians, especially those in rural areas, do not have bank accounts. This will limit the revenues of the tax. In addition, it will discourage people who do not have accounts from opening accounts. Banking transaction tax will also increase use of cash transactions, which would not be subjected to tax, at a time when the government tries to foster the growth of a cashless economy. In fact, the creation of a cashless economy was one of the aims of demonetization. The cascading nature of the tax would make it have unequal impacts across different assets and sectors of the economy. It would lead to a distortion in the economic activity in the country, which is just recovering from the shock of demonetization. This paper will detail the impact of introduction of banking transaction tax using certain Latin American countries (Brazil, Argentina, Colombia, Peru, Venezuela, and Ecuador), Australia, Pakistan, Papua New Guinea, Vanuatu, and India as case studies of the implementation of banking transaction tax. The paper also details the pros and cons of banking transaction tax. Case study analysis and analysis of the pros and cons of banking transaction tax will be used to show why the government of India should not adopt the banking transaction tax.