2% tax on bank transactions, will it lead to cash and more black-money?

Context: The objection is that if bank transactions are taxed at 2%, then why would people transact through banks? They would rather start transacting in other parallel means as cash or barter like ways, people would lend each other in cash. So will not this lead more people to operate in cash and leading to more black-money?

This is very logical and obvious question, however answer will also emerge simply & very clearly, if one considers different aspects together and practicalities involved, as listed below.

First of all, let’s revisit the 2 points from the five point Arthakranti proposal

  • High denominations (currency say above 50) to be removed’
  • Legal protection for cash transactions only up to certain limit (say Rs. 2000/-)’
    • For instance, if one tries to buy mobile of 3000 in cash, he will be able to, but then he would not get warranty for the same. If one tries to buy vehicle in cash (let’s say in Rs. 50 notes), the vehicle would not be registered at all

People naturally follow the path which is more convenient and has more benefits. So post Arthakranti, the path of banking transactions will offer lot of multi-dimensional benefits and hence would be followed by majority!

Other motivating factors, encouraging bank transactions even with Bank Transaction Tax(BTT):

  • With more bank transactions, people will start getting higher loans at cheaper interest rates
      • RateOfInterst
      • Due to lack of adequate credit supply and the lack of adequate credibility, today loans in our country are costly (10% to 16%) annual rate of interest, if you get it from banks. If one gets it from private lenders (most of the poor and people who do not use banks), the rate is even higher, sometimes 120% to 3600% annually!
      • With Arthakranti proposal, most of cash money will have to be put in banks, government’s tax revenue will be adequate and banks getting fees on every transaction, all these would lead to reduction in interest rates significantly.
      • Only those people will get cheaper loans from banks, those have good credit history!…and for any purpose, may it be education, farming, business etc
  • The transaction tax will be a smaller amount, it will be lower than 2%, as more people start operating in cash, it would reduce further even below 1% → For details please go through chapter 6 in the paper.
  • This small amount of BTT is packaged with removal of all other tax burdens, like removal of income tax and significant reduction in indirect taxes!
  • Also people in business today say that they prefer paying more taxes than complicated burdensome processes. So with Arthakranti the creativity will be completely freed from tax manipulation, the compliance is automatic. This is probably the reason Confederation of All India Traders has endorsed Arthakranti.

When Securities Transaction Tax (STT) was introduced, there was a speculation that financial market would collapse. Now you can see the results yourself, STT did not matter, market adapted itself to the new tax and moved on easily.

Also look at what economic experts have to say about the concern of people moving to cash or other means – Experts’ view.


6 thoughts on “2% tax on bank transactions, will it lead to cash and more black-money?”

  1. The solution is theoretically seams pretty simple ,but in practice it will have cascading effects on our economic system, imo,current problem with tax system is more of avoidance than evasion. If we address those discrepancies will not solve our problems ?

    Nonetheless, this initiative has caught everyone attention and will have sore repercussions on our policy makers.

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  3. The most important point is not being highlighted by arthkranti in most of the places and most of the debate program in tv channels

    Please highlight first that total bank transaction is 960 Lac crore and total tax collection is 12 lac crore, so total tax collection is only 1.25% of the total bank transaction

    And bank cash economy is 80% and rest 20% is bank economy
    If Ruppee 1000 and 500 and 100 notes are removed then people will be forced to use the bank more like done in top around 50 countries in the world
    And then 20% bank economy will become 80%

    If this happen then bank transaction will become from 960 Lac Crore to 4 times of it that is 3840 lac crore

    So now total tax which is 12 lac crore is 0.3% of total new bank transaction.

    Highlighting this point is very very important and in this way only

    When you go for debate or seminar then please use slides to highlight these 2-3 points using slides.

    Then also highlight that big currency takes 90% of the cash

    Thank you

  4. I have been giving this some thought. And the main question is whether people will choose to transact business with cash to avoid the 2% levy. And my conclusion is that they will not. The reason being that there are lots of costs related to handling and dealing with cash. If you are selling a piece of land for 2 crores. If the purchasing party chooses to give you cash, you have to keep it somewhere, there is risk of theft, and risk of being given fake currency. All in all most people would rather pay the 2% bank transaction tax and have your money safely stored in a bank.
    This is the case with most big money transactions. Cash is risky and people will be willing to pay the 2%.
    I also think there is another big benefit. The business community now spends huge amount of money worrying about, interpreting and paying taxes, direct, indirect, state, and local. Add to this is the cost of bribes and the time spent dealing with lawyers, chartered accountants and bureaucrats. If there is a bank transaction fee, you just don’t need to worry about this whole nightmare. The bank deducts it and its over and done with. The mind space that is freed itself will increase our GDP by atleast 2%.

    1. Thank you for writing your thoughts!
      We agree with that. As you said, tax compliance cost is heavy particularly for small and medium scale business, many a times its detrimental to their business, hence they avoid taxes. So that problem should get solved with Arthakranti proposal and it should foster business and entrepreneurship, which would in tern result in creation of more employment and virtuous cycle.
      We also agree that people would not mind paying taxes, if they get adequate results of those. With the increased traceability hence accountability, which would be established because of Arthakranti implementation, we can surely hope for improved results on delivery by governing mechanism. So transact through bank, automatically pay small amount as tax and enjoy the results. Otherwise for those who do not want, there is already a way to transact in cash (in below Rs. 50 currency), however they will not get relevant benefits. Hence paying small amount of transaction as tax, rather as fees to get those results would be acceptable to majority!

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