Bank Transaction Tax: Number Crunching on Top Companies in India

We have been discussing merits and demerits of the bank transaction tax for a while. What will be the impact of the bank transaction tax on our economy in general is a question most of us have on our minds. To start with I have tried calculating bank transaction tax on India’s leading companies. I have selected companies randomly; data used for the calculation is taken from MoneyControl.com.

Assumption for calculation above:

• This is a static model, I do understand that in dynamic model the calculation may vary a lot. Bank transaction tax is applied on the gross receipt in the bank. In the absence of this information I have derived the Gross bank Receipt highlighted in column F.
  
• It is assumed that working capital requirement for above operation is funded from internal accruals and there is no working capital loan is taken. Gross bank transaction includes capital receipts to fund expansion meeting working capital requirement etc. I have not included these transactions in model.
  
• Complexity of global supply chain cycle is not considered for above calculation, I would be happy to discuss impact on above calculations. Cash flow from investing or financing activity is not taken in to account for above calculations.
  
• Total Income includes Revenue, other income, stock adjustment and excise duty in some cases.
  
• Profit before tax does not include extra-ordinary items
  
• Table is sorted based on column G in ascending order.
  
• BTT rate is assumed at 2%
  
• All data is for Fiscal year ended 31st March 2013. Opening balance of Sundry Debtors is taken from 31st March 2012.
  

Inference from Simulation

You may observe that organisation with lowest profit margin ends up paying more tax than organisation with highest profit. Let’s compare tax payable by Cipla and Hindalco. Hindalco made 34.77 crore more profit than Cipla, but under the BTT regime Hindalco has to pay 364.042 crores more tax than Cipla. The difference is due to profit before tax to total revenue ratio, Higher the profit margin a company manages lesser the tax it contributes. Impact of Bank transaction tax on whole supply chain cycle and organisation behaviour is matter of debate.

Simulation at different profit level

For the benefit of simplification one more simulation is done, in this simulation BTT impact at various profit level is measured

You can simulate and change the figure in column C to see effect on column I.

Inference from Simulation

Higher the profit margin of the company the lesser the tax it contributes. An organisation earning Rs 500 at 5% profit margin has to pay Rs 200 in taxes and an organisation earning Rs. 10000 also contributes the same Rs 200.

Conclusion

I would like to draw you attention to a point I made in my last post

Canon of Equity

“Every person should have to pay the taxes to the government proportional to his ability.”

Bank transaction tax is neither Income tax nor consumption tax. It assumes that person’s banking transactions determines his ability to pay. This might be true but not always.

Dynamic model which better represents the subtleties of business cycle could make the above simulation more complex. I would be happy to take those discussion as well. I am presenting a most simplified static model to make my case. Even in simplest model BTT looks unfair to me. In my humble opinion BTT is not a fair taxation system. It simply does not meet the canon of equity. I would be happy to proven otherwise.

I would also like my fellow commentators to give their views on this simulation. Please find the simulation worksheet here