Business Daily from THE HINDU group of publications
Sunday, Jul 09, 2006
Business Daily from THE HINDU group of publications Sunday, Jul 09, 2006 |
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Industry & Economy
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Taxation Banking transaction tax erodes tax base: IMF study G.Srinivasan
New Delhi , July 8 A new research project by the International Monetary Fund has voiced reservations over the banking transaction tax (BTT) as resulting in a permanent erosion of the tax base through financial disintermediation. India had embraced the banking cash transaction tax (BCTT) only a couple of years ago. In its latest IMF Research Bulletin, the IMF senior fiscal expert Mr Adrei Kirilenko has said over the past 25 years, a number of countries mostly in Latin America have imposed taxes on banking transactions. Though these taxes have been shown to be effective in generating revenue in the short term, recent studies, however, question their ability to be a reliable source of revenue in the medium term. There is considerable diversity in what these taxes are called, with names including bank debit taxes, bank account debit taxes and financial transaction taxes. Citing an earlier study he made with another expert, the authors show that, on average, the introduction of a BTT results in disintermediation of between 4 and 44 cents for every dollar in revenue. According to their estimation, for every dollar raised through these taxes, financial disintermediation has reached maximum values of 46 cents in Argentina, 58 cents in Brazil, 64 cents in Colombia, 48 cents in Ecuador, 66 cents in Peru and 49 cents in Venezuela. The authors also find that disintermediation effects tend to cumulate as the taxes remain in place, providing additional evidence for the hypothesis that these taxes quickly erode their own tax bases. Analysing the revenue-raising ability of bank transaction taxes, the authors use a panel of quarterly data from six Latin American countries that have had banking transaction taxes. They find that, for a given tax rate, BTT revenue declines in real terms over time (owing to erosion of the tax base). Therefore, in order to meet the given revenue target, the tax rate needs to be raised repeatedly. They also find, however, that a 0.1 percentage point increase in the statutory tax rate reduces the revenue base (or productivity) by 0.18 - 0.30 per cent. Thus, increasing the tax erodes the tax base by more than it raises revenue and accelerates the speed at which the tax base is being eroded. Hence they conclude that these taxes should be used only as a temporary means to mobilise revenue in situations of fiscal duress. India adopted this BCTT as an anti-tax evasion measure in the 2005-06 budget as it came into effect from June 1, 2005. The idea came from the current adviser to the Finance Minister, Dr. Parthasarathi Shome, who has been conferred the highest civilian honour by Brazil for his fiscal expertise. BCTT at 0.1 per cent on withdrawal of cash from bank on a single day of Rs 25,000 or more by individual or Hindu Undivided Family and Rs 1 lakh by persons other than individuals and HUF. BCCT remains applicable for encashment of term deposits if cash received during a single day exceeds the limit. Cash withdrawals from savings account and purchase of demand draft for cash exempt from BCTT, while banks have to report all deposits, which are exempt from, tax deduction at source on interest. BCCT fetched Rs 350 crore in 2005-06 and is budgeted to yield Rs 500 crore this fiscal. The Finance Minister, Mr P. Chidambaram, has extolled the BCCT in his 2006-07 Budget speech, as it turned out to be a boon, not for the modest revenue it brought which was never its purpose, but for the remarkable trails that it has helped to establish. He said the BCCT helped the department to detect bogus bills, accommodation entries, artificial loss claims and dummy firms which were carrying on the business of purchasing demand drafts from traders at a discount and helping the latter to avoid both sales tax and income tax.
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