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Budget 2019: Tax on banking cash transactions to be re-introduced? Why it’s a bad idea!

The Financial Express
Budget 2019: The fact that there was no stunning increase in tax buoyancy after Chidambaram s cash tax suggests it wasn t very successful

Budget 2019 India: The government is reportedly considering bringing back a banking cash transaction tax (BCTT), of the type introduced in 2005 when P Chidambaram was the finance minister. And, just as Chidambaram said the idea of the tax was not so much to generate revenue it collected just `350 crore in FY06 as it was to establish remarkable tax trails since a large part of the cash found its way into the black economy, the government s reported plan is also linked to trying to disincentivise the use of cash and crack down on evasion. The fact that there was no stunning increase in tax buoyancy after Chidambaram s cash tax suggests it wasn t very successful; besides, since the government has a lot more information on taxpayers than it did earlier, it is not clear what a tax on cash withdrawals it is actually unfair to honest taxpayers will achieve.

After GST, the government has a mine of information on people s incomes and revenues which needs to be mined assiduously. Then, there is the data the taxman gets from Operation Insight which is a linking of various databases on the purchases of jewellery, automobiles, property, credit card payments, airline tickets, etc and with each bank account in the country mandatorily linked to a PAN, the government can always ask the banks to generate a list of cash withdrawals beyond a certain amount from banks. There are, it is true, a large number of fake PAN cards; but since each PAN card has to be linked to an Aadhaar number, bank managers can be asked to conduct periodic scans to weed out fake PANs. More important, the government claimed that, as a result of demonetisation, it had collected a wealth of information on people; so why isn t this being used to track tax evaders? At the time of demonetisation, the government claimed it had identified 23.5 lakh PANs that appeared suspicious the cash deposited wasn t in keeping with their known sources of income; two years down the line, if just around `6,600 crore of taxes has been collected from these people, it doesn t suggest the exercise was very effective. With just around `6,900 crore of benami property attached so far, it is clear the government hasn t been able to unearth serious amounts of black money; so, what is to be achieved with yet another information source when not enough is being done with the existing information?

Indeed, the sharp slowing of personal income tax collections in FY19 shows the demonetisation bump has also exhausted itself despite all the information this gave the taxman. An FE analysis by Sumit Jha showed that, for every taxpayer reporting an income of `5+ crore, 13 others outwit the taxman; while there are likely to be around 68,000 Indians who earn more than `5 crore a year, the official tax data shows just 5,000 people in this income bracket; indeed, in most cases of people earning more than `20 lakh, just around 10-15% of potential taxpayers are in the tax net. The taxman has more than enough tools to catch these evaders; a banking cash transaction tax is not going to materially add to the wealth of information the government either already has or has access to.