If every bank transaction were to demand a tax

BTT is the tax levied on debit or credit entries on banking transaction made by any account holder. Essentially this would mean that each time an account holder withdraws from or deposits money in his account, it will be taxed.

How many taxes does the country have at present?
India has two classes of tax. One is direct tax, which can only be levied by the Centre. This includes personal income tax, corporate tax, securities transaction tax and wealth tax. Since the tax rises with income, experts call these progressive. The second group is indirect tax levied both by states and by the Centre. Since a goods item or a service can have only one rate, it makes no allowance for whether the payee is poor or affluent. The only way it can be made progressive is to set an income or turnover threshold for levying the tax. At the central level, indirect tax includes service tax, customs duty and excise duty. In states, other than excise there is sales tax, octroi and others.

What are Ramdev and sections of the BJP seeking?
Ramdev and the BJP leaders want the abolition of all these categories of tax except for customs duty, and their replacement with BTT, which they claim will simplify the tax regime.

What will happen if India does introduce BTT?
Any tax should be on income or production in an economy. BTT is on neither, and simply taxes movement of cash within the same recipient. So it penalises movement of money and consequently impacts the efficiency of the economy. In the Indian economy the total volume of bank deposits is about Rs 70,60,182 crore as per latest RBI figures. To generate the current tax of Rs 24,71,740 crore (Centre and states combined) from that sum would mean a tax rate of close to 35 per cent across the board on everyone with a bank account. Even after taxing credit, it would need a 20 per cent flat rate of tax. It would be highly regressive, subsidising the rich at the expense of the poor. Schemes such as direct cash transfer, where the amount of subsidy is directly transferred into bank accounts of beneficiaries, will be the first casualty of this plan as the poor will pay a disproportionately high tax.
What are the advantages of BTT?
The only advantage tax experts see is the speedy and transparent collection of taxes.

What are the drawbacks?
BTT envisages a ban on any cash transaction above Rs 2,000. This is unfeasible as it would require an army of inspectors even in a market the size of one decent mall. Since the tax department will have no data to assess tax paid beyond examining bank accounts, there is no way to track the parallel economy. For instance if someone keeps bundles of cash somewhere, he cannot be prosecuted in the new dispensation; this will encourage people to keep out of the banking net. Having such a tax would mean undoing what has been done so far towards financial inclusion. Even now, only over 3 per cent of the population pay income tax and given the fact that the penetration of banks in India is very low, having BTT will ensure that many taxpayers go out of the tax net. The move will also lead to taxation of the agriculture income, hitherto out of the tax net. Further, while the need of the hour is a stable and moderate tax regime, bringing in such a regime would scare investors away.

What has been done by the government so far to simplify the tax regime?
The government has started the process of reforming both direct and indirect taxes. The Income Tax Act of 1961 has been revamped into the Direct Taxes Code with a view to simplifying the procedures and is pending with Parliament. Also, for indirect taxes, a goods and services tax (GST) has been proposed that aims at reducing the cascading effects of the taxes and will subsume all central and state levies including service tax, excise duty, VAT, and cess. A bill to amend the Constitution for bringing in the new indirect tax regime is pending in Parliament due to lack of consensus among states, which have been arguing that such a tax will end their fiscal autonomy.