The Government of the present day, continuing from its previous tenure, has placed emphasis on harnessing the power of information technology in improving the governance in the country. One of the prime examples of the Government’s E-Governance Policy would be the introduction of E-assessment under the provisions of the Income-tax Act, 1961 (‘the Act’).
Similarly, in the recently announced Budget, the Government has re-emphasized on the use of information technology for undertaking monetary transactions as opposed to cash transactions, by introducing a new section in the Act viz., Section 194N. The said section provides that a banking company, a co-operative society (in the business of banking) or a post office, shall be liable to withhold tax at the rate of 2% on withdrawal in cash, of an amount which is in excess of Rs. 1 crore in a financial year. The implication of the section would arise over any form of cash withdrawal, be it cash withdrawal from a debit card or cash withdrawal by way of a demand draft/cheque.
The measures taken by the Government via the Finance Bill, 2019, would prove to be another step in promoting a less cash economy. Earlier the Finance Act, 2017 had introduced Section 269ST, which placed a restriction on acceptance of cash equal to or more than Rs. 2 Lakh for any transaction. Therefore, by introducing Section 194N, the Government is further discouraging people from undertaking cash transactions.
However, comparison of the proposed section with the Banking Cash Transaction Tax (‘BCTT’) would be inappropriate as the said BCTT was introduced as a separate levy via a separate chapter in the Finance Act, therefore, acting as a separate code in itself, as opposed to being a new section in the Act. Further, the BCTT was levied on cash withdrawal, cash purchase of instruments like bank draft and on receipt of cash on maturity or otherwise of the term deposit, whereas the present section is applicable only on withdrawal of cash.
Another objective that can be attributed to the introduction of the new section is to keep a check on large cash withdrawals. The newly introduced section would thus go on to act as a deterrent to transactions in the real estate sector, where the component of cash is still quite high.
However, the Government may face resistance, as well as criticism, over the introduction of the said section from certain parts of the country where the banking system is either not fully developed, or though developed, lacks operational efficiency. As per reports, one such instance is that of the Indian Tea Association which has asked the Government to exempt it from the applicability of the said section. The reason for seeking such exemption being that there are inadequate banking facilities in the tea growing areas and accordingly, the workers are generally paid in cash.
Therefore, in this regard questions may be raised over this step of the Government in a scenario where the country has a large unorganized sector, which, perhaps, suffered a major setback from the demonetisation carried out in 2016 and is still struggling to be back on the track of recovery.
Apart from the above highlighted operational difficulties, the provision, if it were to be incorporated in the statute book in the form in which it was introduced, it would have also posed a challenge to the banks who are burdened with the task of deducting appropriate tax. This was on account of the ambiguity in the language used in the proposed section.
It is clear from a reading of the section that if a person has accounts in multiple banks, then the limit of Rs. 1 crore per annum is to be applied by each bank separately. For instance, if a person withdraws Rs.75 lakhs from one bank and Rs.60 Lakhs from the second bank, then either of the banks will not be required to withhold any tax under Section 194N. It is also quite logical because the obligation of withholding cast under the section is on the bank, which will only have access to cash withdrawals made by a person from accounts maintained with it.
What was not clear earlier was as to how this limit will be applied if a person maintains multiple accounts with the same bank. Let us say a person withdraws Rs. 75 lakhs from one account and Rs. 60 lakhs from the second account. Though the aggregate amount of cash withdrawals in a year exceeds Rs.1 crore, withdrawals from each account considered separately is still below the limit.
The use of the phrase ‘an account’ in the section initially introduced, suggested that the monetary limit shall apply qua each account. Therefore, going by such interpretation of the section, it shall mean that if a payee has multiple bank accounts with a single bank, then in that case the monetary limit shall be in respect of each account and not aggregate of all the bank accounts. Basis this one may have argued that adopting the above interpretation would go on to defeat the very purpose for which the section has been introduced. For instance, if a payee has 4 bank accounts with a bank, then virtually he can withdraw cash to the extent of Rs. 4 Crore in a year without attracting tax deduction.
However, the amendment vide the Finance (No. 2) Bill, clarified that the limit would apply qua the bank i.e. it will have to be seen in respect of all the bank accounts maintained by a person with a bank.
Nevertheless, question regarding the validity of the provision would still persist, as, a sum in the nature of income tax is being withheld, on the withdrawal of the money, placed in a bank which may or may not have the character income. Also, whether the step of the Government will discourage people from bringing money in the banking stream is something which will have to be seen apart from the operational challenges that may arise.
[The author is a Principal Associate, Direct Tax Team, Lakshmikumaran & Sridharan, New Delhi]