Traders or business with 1% margin, will 2% BTT be fair?

There is a very commonly raised objection that for traders or businesses, with profit margin as small as 1%, bank transaction tax of 2% is not fair. Let’s see how this is a misunderstanding and in fact it would lead to more profit for traders and lesser prices for consumers with Arthakranti’s Bank Transaction Tax (BTT)!

Let’s consider a real case of trading of cooking (edible) oil, let’s see the pricing structure today and how it would be impacted by BTT. In nut shell it appears that for the given case, with BTT the trader’s profit margin is going to grow by 11%, at the same time price for end consumer is going to go down by 4%. These are very conservative figures, where we have not considered many other gains. Actually gains are going to be much more, details of which are given below. This is the reason for Confederation of All India Traders’ (CAIT) association have endorsed Arthakranti proposal, pls read the same at -  http://www.arthakranti.org/hi/news-events/61-cait-endorsed-the-idea-of-banking-transaction-tax

The case

  • Oil manufacturer sells oil to trader, with profit priced at Rs. 135858/-, before taxes
  • Considering this initial price of oil, below is comparison of pricing currently and with BTT

Trading_CookingOil

Even today, there is VAT and service taxes, which are to be paid by traders, so what they do is pass it on to the end. Same would be applicable for BTT as well, so traders will pass it on and would not pay it from their profit. Even then, these calculations clearly show that how BTT would result in increase in profit margin for trader as well as price drop for consumers. However here for simplicity of understanding impact on trading, we have not considered many other aspects.  So these gains are very conservative, actually gains would be significantly more. That should be clear from following considerations

  • We have not at all considered service taxes involved, which would definitely be applicable for inputs of services for any manufacturing or distribution.
  • We have not considered tax component involved in transport and storage. At least 20% of transport cost will be saved with BTT, because of reduction in tax burden on fuel, energy etc.
  • With BTT compliance cost for manufacturer and trader is going to be negligible, that is not only money saved, but lot of headache will be straightaway gone!
  • Wherever excise (cenvat) rate is 12%, which is the case for many commodities and goods, we would see more gains.
  • We have not considered increase in profit margin for manufacturer. As an effect of increase in profit margin for manufacturer and trader both, due to competition, some of that would be passed on to end consumer and price will go down further.
  • The BTT rate considered here is 2%, however please note that 2% is just a notional figure for simplicity of consideration. Actual rate of BTT required will be much lower. For current state of banking and white economy, required BTT rate estimate comes out to be about 1.5%.
  • Today only about 15% transactions in our country take place through banks, rest all are through cash. With BTT black economy in suitable way will get merged with while economy and majority of transactions then would happen through banks, as it is the case in all of the developed countries and even some developing countries. That would lead to required rate of BTT, even below 1%. Let’s see how the calculations would look like with 1 % of BTT

Trading_CookingOil_2

As banking would spread, because banks will have their commission in transactions, the more gains it would be for common man and for the whole economy!

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