Important aspects of TDS on Cash Withdrawal under Section 194N after Union Budget 2019: A new section 194N is introduced in the Income Tax Act, 1961 vide clause 46 in the Finance (No. 2) Bill, 2019 according to which cash withdrawals from a bank account will attract TDS. Before the budget, it was speculated that the government may reintroduce Banking Cash Transaction Tax or BCTT in the Budget 2019. However, instead of levying a separate tax, the government imposed deduction of income tax on cash withdrawals. The TDS on cash withdrawal is intended to discourage cash transactions.
In her maiden Budget Speech, while presenting the Union Budget 2019, the Finance Minister Nirmala Sitaraman said that in a bid to promote digital payments and to discourage cash payments she proposed to levy TDS of 2% on cash withdrawal exceeding 1 crore in a year from a bank account.
The Memorandum explaining the provisions of Finance (No. 2) Bill, 2019 further deliberates the intention behind the introduction of the TDS levy of 2 percent on cash withdrawals. The Memorandum states that in order to discourage cash transactions and move towards less-cash economy, it is proposed to insert a new section 194N in the Act to provide for levy of TDS at the rate of 2 per cent on cash payments in excess of one crore rupees in aggregate made during the year, by a banking company or cooperative bank or post office, to any person from an account maintained by the recipient.
And this is how the provision is proposed to be enshrined in the law, a new section 194N is introduced in the Income Tax Act, 1961 vide clause 46 in the Finance (No. 2) Bill, 2019 as follows-
46. 194N. Every person, being,–
(i) a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that Act);
(ii) a co-operative society engaged in carrying on the business of banking; or
(iii) a post office,
who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from an account maintained by the recipient with it shall, at the time of payment of such sum, deduct an amount equal to two per cent of sum exceeding one crore rupees, as income-tax:
Provided that nothing contained in this sub-section shall apply to any payment made to,–
(i) the Government;
(ii) any banking company or co-operative society engaged in carrying on the business of banking or a post office;
(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934;
(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorization issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007;
(v) such other person or class of persons, which the Central Government may, by notification in the Official Gazette, specify in consultation with the Reserve Bank of India.’
The 'Notes on Clauses' states that the proposed new section 194N provides that a banking company or a co-operative society engaged in carrying on the business of banking or a post office, which is responsible for paying any sum or aggregate of sums, in excess of one crore rupees in cash during the previous year to any person (referred to as the recipient in the section) from an account maintained by the recipient with such banking company or co-operative society or post office shall, at the time of payment of such amount, deduct an amount equal to two per cent of sum exceeding one crore rupees as income-tax.
The proviso to the said section provides that the provisions of the proposed new section shall not apply to any payment made to the Government, any banking company, co-operative society engaged in carrying on the business of banking, post office, business correspondent of a banking company or co-operative society, engaged in carrying the business of banking, any white label automated teller machine operator of a banking company or co-operative society engaged in carrying the business of banking, or such other persons or class of persons, which the Central Government may, specify by notification in consultation with the Reserve Bank of India.
These amendments will take effect from 1st September 2019.
The sole purpose of introducing the provisions of section 194N is to curb black money generation and circulation in the economy by promoting digital transactions. The government expects that the proposed measure will discourage large cash transactions, but how far will it achieve the objective, is a big question.
The salient features of section 194N are listed below-
1. It is not clear whether the limit of Rs. 1 crore shall apply branch-wise or bank-wise. However, in case of a core banking compliant bank, it appears that it is applicable on the bank-wise basis. One can easily escape the TDS by transferring funds from one bank to another bank account and split the cash withdrawals between two or more banks.
2. TDS can be saved by not only with cash withdrawal swapping between banks, but the TDS can also be saved even within the same bank by holding different types of bank accounts. Since the provision will hit only when the cash withdrawal from one bank account exceeds Rs. 1 crore in a year. The limit proposed is per individual account basis. For example, if a person has a savings account, current account, overdraft account, then the limit will be applicable for each type of account separately.
However, there is no clarity if an individual person is holding an account in his single name as well as in the joint name, then how the threshold will be counted.
This provision will only cover the money that is already in the system and the department can easily track such a huge cash withdrawal. This cannot track unaccounted money or cash circulation in the economy which is a more bigger problem than tracking the accounted money.
This provision does not control the use of cash withdrawal which is more thrilling. For the sake of argument, let us assume that a person had withdrawn Rs 2 crore in cash from a bank account. Now that TDS was paid Rs. 2 Lakh.
The objective of this provision is to restrict this cash withdrawal to become a part of black money. But my understanding is that this provision may fail to achieve this objective. The person can easily use the money in the cash market to earn income in cash and later on can re-deposit the cash into the bank account. On such cash earnings, no tax will be paid by the person since it is a black income.
Later, when he will file the return of income he can claim the credit of TDS of Rs. 2 Lakh which he had paid on withdrawal of cash.
3. From reading the objective of the provision it appears that the TDS shall apply when the account holder of the bank withdraws cash for more than Rs. 1 crore in a year. However, the manner in which the provision is drafted is somewhat different.
The provision states that a bank or a post office shall deduct TDS @ 2% on payment of cash in excess of Rs 1 crore during a previous year to a person (to be called as the recipient) from an account maintained by the recipient with the bank.
To attract the provision the recipient must be the account holder of the bank. If the recipient is not the account holder of the bank then TDS provision will not apply. To illustrate, suppose Mr. A is the account holder of ABC Bank Ltd. If the bank makes payment in cash of Rs. 2 crore to Mr. A from the account of Mr. A then TDS under section 194N will apply otherwise not. If Mr. A issues a bearer cheque to his friend Mr. F and the bank pays the amount in cash to Mr. F from the account of Mr. A, no TDS under section 194N shall apply. This is because the payment to Mr. F is not made by the bank from the recipient's account who is Mr. F in this case. The payment is being made from Mr. A's account. Therefore, the recipient and the account holder are different persons. To attract the TDS u/s 194N, both must be same.
However, in case an employee withdraws cash from his employer's account then this preposition will not apply because the employee is working on behalf of the employer and such payment will be considered as a payment to the employer who is the account holder of the bank. The separate recipent must be in an independent capacity and not as an agent of the account holder.
2. TDS can be saved by not only with cash withdrawal swapping between banks, but the TDS can also be saved even within the same bank by holding different types of bank accounts. Since the provision will hit only when the cash withdrawal from one bank account exceeds Rs. 1 crore in a year. The limit proposed is per individual account basis. For example, if a person has a savings account, current account, overdraft account, then the limit will be applicable for each type of account separately.
However, there is no clarity if an individual person is holding an account in his single name as well as in the joint name, then how the threshold will be counted.
This provision will only cover the money that is already in the system and the department can easily track such a huge cash withdrawal. This cannot track unaccounted money or cash circulation in the economy which is a more bigger problem than tracking the accounted money.
This provision does not control the use of cash withdrawal which is more thrilling. For the sake of argument, let us assume that a person had withdrawn Rs 2 crore in cash from a bank account. Now that TDS was paid Rs. 2 Lakh.
The objective of this provision is to restrict this cash withdrawal to become a part of black money. But my understanding is that this provision may fail to achieve this objective. The person can easily use the money in the cash market to earn income in cash and later on can re-deposit the cash into the bank account. On such cash earnings, no tax will be paid by the person since it is a black income.
Later, when he will file the return of income he can claim the credit of TDS of Rs. 2 Lakh which he had paid on withdrawal of cash.
3. From reading the objective of the provision it appears that the TDS shall apply when the account holder of the bank withdraws cash for more than Rs. 1 crore in a year. However, the manner in which the provision is drafted is somewhat different.
The provision states that a bank or a post office shall deduct TDS @ 2% on payment of cash in excess of Rs 1 crore during a previous year to a person (to be called as the recipient) from an account maintained by the recipient with the bank.
To attract the provision the recipient must be the account holder of the bank. If the recipient is not the account holder of the bank then TDS provision will not apply. To illustrate, suppose Mr. A is the account holder of ABC Bank Ltd. If the bank makes payment in cash of Rs. 2 crore to Mr. A from the account of Mr. A then TDS under section 194N will apply otherwise not. If Mr. A issues a bearer cheque to his friend Mr. F and the bank pays the amount in cash to Mr. F from the account of Mr. A, no TDS under section 194N shall apply. This is because the payment to Mr. F is not made by the bank from the recipient's account who is Mr. F in this case. The payment is being made from Mr. A's account. Therefore, the recipient and the account holder are different persons. To attract the TDS u/s 194N, both must be same.
However, in case an employee withdraws cash from his employer's account then this preposition will not apply because the employee is working on behalf of the employer and such payment will be considered as a payment to the employer who is the account holder of the bank. The separate recipent must be in an independent capacity and not as an agent of the account holder.
4. It shall apply if the aggregate amount of cash withdrawal in a financial year exceeds Rs. 1 crore from a bank account etc. If the cash withdrawal amount in a year exceeds Rs. 1 crore then TDS will apply only on the excess amount of cash withdrawal over Rs. 1 crore. For example, if the cash withdrawal is Rs. 1.10 crore then TDS will apply on Rs. 10 Lakh only. The TDS amount @ 2 percent will come to Rs. 20,000 only.
5. It is provided that the deduction shall be in the form of income-tax. The Finance Minister in her Budget Speech used the words as 'levy of TDS' on cash withdrawals. The Memorandum and explanatory notes also refer the term in a similar manner. The big question is whether cash withdrawals partake in the nature of income for the recipient to justify the levy of income-tax thereon. Can income tax be levied on a receipt which is not at all an income?
6. The TDS will be reflected as TDS and the cash withdrawals as income in the Form 26AS of the taxpayer. Though the cash withdrawal is not income, unless the return of income or ITR is suitably modified, the return filing would become tedious for such a taxpayer.
7. It is applicable to all the account holders be it individual, HUF, Company, etc. except the Government, banks, white-label ATM operators, etc. who withdraw cash in excess of Rs. 1 crore in a year. It covers savings accounts also.
8. The purpose of cash withdrawal, whether for business or personal, is irrelevant.
9. Though the provision is made for TDS it operates more like TCS (Tax collected at source). When an account holder will withdraw cash from his bank account, would the bank pay the cash after TDS? Suppose, a person wants to withdraw Rs. 2 crore in cash from his bank account. Would bank pay him Rs. 1.98 crore only or Rs. 2 crore and the TDS amount of Rs. 2 Lakh will be debited separately in his account. In my view, the latter will become practice. This will more work like TCS instead of TDS.
9. Though the provision is made for TDS it operates more like TCS (Tax collected at source). When an account holder will withdraw cash from his bank account, would the bank pay the cash after TDS? Suppose, a person wants to withdraw Rs. 2 crore in cash from his bank account. Would bank pay him Rs. 1.98 crore only or Rs. 2 crore and the TDS amount of Rs. 2 Lakh will be debited separately in his account. In my view, the latter will become practice. This will more work like TCS instead of TDS.
Comments: The objective of introducing the TDS provision on cash withdrawals is to discourage large amount of cash withdrawal from bank accounts and push the country towards a digital economy. Since the limit of cash withdrawal is kept at a large level of Rs. 1 crore it will hardly affect any genuine account holders. However, after the presentation of Budget 2019, it is reported in news media that large tea estate companies are demanding to exclude them from this provision. To mitigate the genuine hardships to any person, the provision empowers the government to exclude those persons from the applicability of the provisions of this section.
Considering various loopholes and ambiguity in the provision itself, and until they are plugged off to achieve the objective, this provision will only remain a bullet point measure to curb cash circulation or black money.
Considering various loopholes and ambiguity in the provision itself, and until they are plugged off to achieve the objective, this provision will only remain a bullet point measure to curb cash circulation or black money.
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