The proposal by Pune-based think-tank, ArthaKranti, to replace all the existing taxes -- excluding Customs -- with one on banking transactions is not a "singularly superior tax on all parameters", according to an NIPFP report.
The National Institute of Public Finance and Policy (NIPFP), in its report titled 'Evaluation of the ArthaKranti Proposal', said multiple objectives that policymakers seek to achieve through taxation would not be possible through the original and appealing version of the 'banking transaction tax (BTT)'.
ArthaKranti has been advocating scrapping high-value currency notes to tackle the menace of black money for years and claims to have suggested demonetisation to the government.
"Conceptually, the proposed BTT does not emerge as a singularly superior tax on all parameters. It fails to achieve the extent of equity that we have in the current system," said the NIPFP report. "The BTT scores better in terms of easy implementation and monitoring through the banks. However, multiple objectives that policy makers seek to achieve through taxation would not be possible through the original and appealing version of the BTT."
According to the NIPFP, this report has been prepared for governments of Haryana and Madhya Pradesh.
The NIPFP report further said, "Contrary to what is argued in the ArthaKranti's proposal, the BTT is not neutral the effective tax rate varies across sectors; it cannot be positioned as an efficient tax regime it is a cascading tax where the tax rate can build up from 2 per cent to over 6 per cent, or if the tax rate is higher at 4 per cent, to over 12 per cent."
Its other argument is a banking transaction tax fails to achieve the extent of equity in the current system.
"It (BTT) promises a broader base for taxes in its design, but ends up advocating some exemptions which ultimately shrink the tax base and takes the shine of BTT away," the premier research body stated in its report.
Noting that even if the banking system matures enough and then a tax is levied on every transaction, the report said there are chances that some of the transactions would try to bypass the system.
"In that event, the proposed system may not be evasion proof," the NIPFP report further argued.
The ArthaKranti proposal entails withdrawal of all taxes except for Customs and import duties and levy of BTT on all credits and receipts at an appropriate rate which it suggests could be 2 per cent.
Revenues from the tax, according to the proposal, should be divided between the Centre, states, and local bodies and the transacting bank. ArthaKranti suggested a break-up of 0.7 per cent for the Centre, 0.6 per cent for states, and 0.35 per cent each for local bodies and the transacting bank.
It also proposed withdrawal of high-denomination currency.
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