Is cash transaction tax really required?

BCTT, imposed by P Chidambaram from June 1, 2005 was withdrawn from April 1, 2009

Speculations are doing the rounds that the government may reintroduce much-flayed and blunt instrument of banking cash transaction tax (BCTT) in a different form in the Budget for 2017-18 to catch black money holders and discourage cash transactions.

The tax imposed by former finance minister P Chidambaram from June 1, 2005 was withdrawn from April 1, 2009 on the ground that the tax department had many other instruments to nab those having black money, replacing the need of BCTT.

BCTT was imposed at the rate of 0.1 per cent of cash withdrawal, other than from saving accounts. It was imposed on any individual or Hindu undivided family withdrawing Rs 50,000 or an entity taking out Rs 1,00,000 in cash.

BCTT could not generate much revenue, and was able to mop up as little as Rs 220 crore in the first year and Rs 400 crore in the second. However, it was never a tool to generate revenues, but to curb black money transactions. 

The famous Chandni Chowk case was cited to buttress the need of BCTT then. Boasting about the efficacy of BCTT, then finance minister had said in his Budget speech of 2006-07 that huge cash withdrawals in a bank branch in Chandni Chowk, noticed through the BCTT, led the income tax department to three entities that were carrying on the business of purchasing demand drafts from traders at a discount and helping them avoid both sales tax and income tax. These entities would deposit the demand drafts in their own accounts and withdraw cash. In a period of 18 months, they had laundered about Rs 1,500 crore. 

BCTT, he continued had also helped the department to detect bogus bills, accommodation entries, artificial loss claims and dummy firms. 

The withdrawal was announced in the Budget of 2008-09, over a year before the country went for general polls. If that time, it was felt that the tax department had enough information gathering tools to defy the logic of BCTT, what is the urgency to introduce it now when the department has much more sophisticated tools to nab those with black money. 

At that time the government had said that BCTT was a temporary measure till the system of annual information returns (AIRs) is strengthened. 

AIR is a third party information about assessees, given to the tax department. For instance, if you have the term deposits of more than Rs 10 lakh in a year, banks will give that information to the tax department which in turn will match the information provided by you in tax returns. 

AIR is a well-settled information system now. 

Besides, the tax department is already working on project insight where data on earning and spending of tax assessees can be mined through various sources including social media. It also toughened the requirements of PAN reporting. Besides, proposed GST will give much information about various transactions because of its structure of input credit. That could also be used to nab those avoiding even direct taxes. 

However, Parthasarathi Shome, the main brain behind BCTT, had a different view. Heading a panel on Tax Administration Reform Commission, he advocated BCTT be restored because there is no other instrument present to capture the information provided by BCTT. 

Either Chidambaram was wrong in his assessment about BCTT in February, 2008, or his adviser Shome was in November, 2014. The moot question is whose advice should the present government take?