BTT on each transaction, will cascading lead to inflated prices?

A question arouses in the mind that if one pays say 2% tax on each transaction, starting from purchase of raw material, how much it would become with cascading for end consumer? If there are 7 linearly stacked steps involved, will BTT cascade to more than 14%?…So would it not lead to hike in prices?There is one good thing behind such question or objection that the person having such doubt/thought is giving some serious thought on application of Arthakranti proposed Bank Transaction Tax (BTT) to real life. So this is a good beginning to be able to understand Arthakranti’s real impact on day to day life of a aam aadmi (common man), apart from its impact at national level.

Let’s consider a real case of manufacturing and sell of fowler bed, which is a hospital bed. Its MRP in current system is Rs.14,122/- only. Below details have been provided about how its pricing would be with BTT in practice.FowlerBed

  • Below computation is done with actual data from manufacturer.
  • This case involves 2 transactions before manufacturing and 3 transactions post manufacturing for distribution, so in all it involves 5 steps of transactions stacked after one another
  • With this 5 step transaction chain, it works out that the total bank transaction tax would be 7.45% of selling price with BTT and 6.84% of current selling price.
  • Whereas tax in current system is 17.2% of current selling price, so with BTT the net % reduction in price would be 8.11%. These are very conservative estimates. Some considerations and assumptions are listed below the calculations.

Transaction step linear sequence number

Transaction details

Base cost without tax

BTT % applicable

BTT actual amount

Total price with tax

1

Raw material directly bought from manufacturer

3729.10

2

74.58

3803.68

2

Raw material directly bought from middleman supplier

320.00

4

12.80

332.80

1

Labor+Other services

3193.40

2

63.87

3257.27

0

Total manufacturer’s cost

7393.74

1

Manufacturer’s profit

732.06

2

14.64

746.70

1

Buffer by manufacturer
for wastage and other inputs

3425.70

2

68.51

3494.21

0

Manufacturer’s base sell price

11634.66

3

Manufacturer’s sell price to distributor

11634.66

2

232.69

11867.35

4

Distributor’s (with profit) sell price to retailer

12223.37

2

244.47

12467.84

5

Retailer’s (with profit) sell price to end consumer

12717.20

2

254.34

12971.54

Total tax cascaded into final price

965.91

% of tax into final price with BTT
= (965.91 / 12971.54) * 100

7.45

% of tax into final price in current system
= (965.91 / 14122.45) * 100

6.84

Net % reduction in price = ((14122.45-12971.54) / 14122.45) * 100

8.15

Some considerations:

  • The gains seen here are conservative and actual gains would be certainly more
  • Here we have not removed many taxes which have gone into existing input prices considered here like service taxes on inputs & storage costs, taxes on fuel & transport, which are at about 20% of transport cost
  • No excise duty is considered here i.e. if we remove excise duty from input raw material used, the cost hence price with BTT would reduce further
  • Here BTT rate of 2% is considered. However with implementation of Arthakranti proposal, as parallel economy will be merged to white economy and majority of transactions would happen through banks, the BTT rate would slide below 1%. So if we consider BTT rate of 1%, % of BTT amount in final price of current system would go down to mere 3.37% and reduction in price would go up to 11.62%

For theory behind the cascading effect of BTT on prices, pls also look at the detailed explanation provided in the research report, which is extracted in the article http://arthakranti.org/proposal/objections-and-positions/79-cascading-cumulativeness-and-allocative-efficiency

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5 thoughts on “BTT on each transaction, will cascading lead to inflated prices?”

  1. Like they say the devil is in the details. The paradigm change in taxation you suggest is enormous and it cannot be applied in one go. So I would suggest introducing intermediate milestones before we reach the goal which is only BTT say over a period of a decade or so.
    In addition the change in taxation will have a lot of other implications for e.g.

    - All financial contracts which were executed before this system came in place but will be fulfilled over a period of time spanning a number of years. In all this contracts all the calculation/estimates etc were done with the current taxation system as well as future inflation and capital cost in consideration. You would have to provide a way for this contract to be applicable with modifications. This category encompasses a lot of financial activity. I also think a lot of legal and compliance related rules would have to be changed. There will be a lot of grey areas and tricky scenarios here and this will be the biggest challenge of all.

    - All the government and private employees currently working directly/indirectly in income tax collection, compliance/auditing, teaching etc would need to be provided with an option to reskill or exit through VRS.

    - There will also be a drop in prices of various hard assets like real estate, commodities etc which can cause severe financial distress since the last owner had to pay all the taxes where as the current production of that entity will be cheaper due to the new taxation policy.

    I think it will take years to just create a proposal for implementing this policy in a piece meal manner. But I am positive that this is doable and should have the highest priority and can over a period of 2-3 decades bring us closer to other developing nations. It would be a historic day when a political party includes this in their manifesto.

  2. Great idea.

    But a silly question arises in my mind:
    Suppose an area of 100 persons, each having an income of Rs. 1,00,000.00 and spending of Rs. 85,000.00.
    In current tax system Govt. is getting around Rs. 17,00,000.00. But with BTT Govt. would get Rs. 10,50,000.00, which is a decrease in total tax collection.
    Can anybody explain?

    1. Hello,
      First of all, thanks for the question and it is not silly at all.
      The glitch in that question is that it is assumed that all transactions are being taxed today, which is certainly not the case. You can think for yourself that on spending in general, on how much part we collect valid receipts and on how much part we the citizens pay right amount of taxes?…There are lot of reasons behind that like it’s not only the question of amount of tax, but that efforts in tax compliance is also big headache with the current system.

      Whereas with BTT, since the transactions above Rs. 2000/- will consequently take place through banking system and taxes will be automatically deducted, hence collection will improve significantly. That is why the tax base will widen and though the tax rate is not large but the overall tax collection would improve significantly. You can observe details about the same at http://arthakranti.org/proposal/proposal-benefits#IB_3

  3. Exactly. Government gets less, but from large number of people, which makes the total amount considerably higher than what government get now.
    The best part is cleansing the society of black money, money power in politics.
    People and governments are reluctant to implementing this, since every one is used to the old system for as long as it existed and now apprehensive if some thing goes wrong !!.

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