BJP's New Bank Transaction Tax. A Genuine Great Thought

Many people are jumping into an opinion about this new proposal even before understanding the structure properly.

Statistics and economics are jargon that is difficult for common man to crack. So I thought I would put the proposal in a simple manner so that common man can understand as practical example!

First your argument of "Why nobody thought it?" Well, nobody thought that a car can be manufactured under 1 lac. 70 Years back nobody thought that smallest component of any object has the power to destroy the world. Before Apple nobody thought that a Mainframe computer be enclosed in a Radio like shape. Some one thought and rest is history. So just because something has not been tried early has no merit.

Now we shall go to The real mathematics. How would tax be used

1) A salaried Person: Earlier if a person was earning 10 Lac annually he would be paying 3 Lac tax. Now It will be 2000/-. But wait, what if he transfers the money to say his child studying somewhere? In the best possible case he can transfer entire 10 lacks ( not more than it) to his child or anybody. A tax of 2% will mean another 2000/-. So a salaried person would be paying 4,000/- at max instead of 3 lack.

Then how government would recover the rest say 2,90,000/-? Once somebody has an excess amount, he would either invest it in bank or would use it for purchase. If the money goes to bank, bank can utilize it for lending to sectors like manufacturing. A standard loan would mean 3% monthly interest rate which will generate  36% interest amount on this 2,90,000/- which is almost 10,000/-. for the year. The industry that the same money was lend would generate at least 6% profit out of which 3% has already gone to the bank. So 3% Net money will be generated. Which makes it another 10,000/-. To generate this profit atleast one person got to work? So govt. gets 4,000/-, money generated=20,000/-, job generated=1. 

2) A Business: 

a) If you were doing a  agency based business: for 100 Crore business( Annual), you would be earning 3 Crore ( 3% standard profit in agency business). Earlier you would have given a tax of 1 crore, now you would have to bear the cost as 2 crore. Why? Because in agency business you have to receive the money from client. No matter what you pass on to top level distributor, at 2% it is going to remain almost 2 crore only. But how he survives in business? Simple, by making the bottom line higher. A 1% increase in margin would mean he recovers his money. Where this 1% comes from? By eliminating this entire middle man from distributor system. 

So govt gets more, middle man eliminated, system is more transparent. 

He this man wants to give money for his children? He can at max spend 2 crore, so he will have to bear only 4 lack extra for a year.As complete expenditure is generally at the most 30% towards education or any other direct transfer, it would be as low as 1 lack in a year. 

But wait, what if the agency has 1 crore business with 3 lac income? With current system he will have 4 lac income and will give 2 lac tax. He still remains with 2 Lack. But if the same person wants to send money to his child? Mere four thousand extra in a year ( max).

But interestingly see in case 1, one job was created extra so his buyer will increase. Hence the same business will see a minimum 10% growth. In all calculation a small or big both businesses will earn extra.

b) If you are in a Loan based business: 

Many businesses are depended on direct or indirect loans. For instance a fruit seller takes a local loan of say 100/- at 3% at the time of purchasing the fruit. After selling he gets a margin of around 12%. Once he earns 112/-, he returns 103/- to lender and enjoys the 9/-. But this lending remains untraceable and mainly anonymous ( cash transaction). Once the proposed system is in place lender will directly has to give the amount to distributor of fruit seller. After selling the fruits once he returns the money to lender ( 103/-). Lender will have to bear a tax of 2/-. That makes this 3% earning to mere 1% earning. But as there is more money 1) and 2.b) will buy more fruit! So fruit vendor would be taking quick loan of say 200/- which will give lender 2/- income, fruit vendor 18/- income and government gets 5/- tax. This 5/- was never in your repository earlier.  Scale this to 100 crore , you have 5 crore extra!

So? Extra growth for fruit vendor, lot of extra money to government and little loss to lender.

Now assume that government decides  to spend 5% of this amount in infra projects. Around 2,50,000/- investment available which would never have been there! More job and the cycle continues which helps attain an arithmetic progression of growth that will ultimately be geometric.

3) Stock market:

This is the most important aspect to be scrutinized. In  stock market after you sell a share, you receive the entire money and that is not profit. So say if you has purchased 10 shares at 10/- each, it becomes 100/-. When the price is 12/- you sell it. So you earn 120/- Removing broker and other charges, you will get about 15/-. But tax you have to give about 2.5/-. 20% rise in share price is huge. Generally it's in range of even 5% in many occasions, and sometimes worst you sell for a loss. So this will be badly effected.

What? Any stock transaction needs Dmat account. Don't use BTT for DMat account. When money is transferred from any Dmat to main account, put a nominal yearly charge. How will such people benefit? Simple, they will be paying far lesser tax than existing. So the excess money again goes to market and the person remains better invested. 

I am Ph.D in Computer Science and frankly have no formal understanding in economics. So my analysis may not be completely accurate. Nonetheless it's always a good idea to at least clarify few things that we have understood.  A committee needs to be formed and this would change whole economics. My vote for the proposal.