DNA Money Edit: Should direct tax be abolished?

Is there a case for abolition of the direct tax in India and replace it with, in absence of any currently known alternative, a Banking Transaction Tax (BTT)?

The Economic Survey for FY18 has made an interesting observation.

"Unlike in other countries, reliance on direct taxes in India seems to be declining, a trend that will be reinforced if the Goods and Services Tax proves to be a buoyant source of revenue," the report tabled in Parliament says.

Except for urban local governments which generate 44% of their total revenue from own sources, the states generate a low 6% of their revenue from direct taxes while the figure is 19% in Brazil.

Another feature of direct tax collection is that it is highly skewed towards the end of a financial year, in March with a mid-year spike in September.

In contrast, indirect tax collection, linked to economic activities, has fewer spikes.

This brings us to the radical concept of BTT, which, according to Arthakranti, a Pune based think tank.

Conceptually, the BTT appears to be a simple tax which can be implemented at a low rate. This makes it sound like an attractive replacement for the present regime of taxes which are complex, impose considerable compliance cost on the taxpayer and are besieged with problems of evasion and avoidance.

But according to National Institute of Public Finance and Policy, while some Latin American countries do have BTT, they haven't replaced direct tax.

Moreover, the effective tax liability of the tax would be considerably higher than the proposed headline rate of 2%. The effective rate of tax for organised manufacturing comes to 14.3% with a 2% BTT, where a range of activities would have effective tax rates higher than 20%.