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TDS on cash withdrawals – Invalid provision? Fair?? or double taxation??

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TDS on cash withdrawals – Invalid provision? Fair?? or double taxation??

Union Budget 2019, in order to encourage cashless transactions; imposed Tax Deducted at Source (TDS) at 2% on the withdrawal of cash from bank accounts in excess of Rs. 1 crore.

Click here to understand the detailed provision of Section 194N.

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Who withdraws such huge amounts in cash?

The government is time and again promoting the digital transactions and discouraging the use of cash. Demonetisation done in FY 2016-17 was historic and still unforgettable. After demonetization, the use of cash for transactions was reduced by the public at large. Hence, many individuals believe that this provision is unnecessary since the cash transactions are reduced post demonetization. Some wonder if super rich withdraw such big amounts.  In spite of this, the data published by PTI for FY 2017-18 is surprising:

Cash withdrawals of more than Rs 11 trillion in FY 17-18

  • In FY 2017-18 just 448 entities withdrew over Rs. 100 crore each
  • The cumulative withdrawal stands at approx. Rs. 5.56 lakh crores in FY 17-18
  • Not just business entities but even individuals withdrew the cash in such large amounts. Over 7,300 people have withdrawn Rs 1.57 lakh crore and the withdrawal value range from Rs 10-100 crores.
  • As per PTI news, almost 2 lakh individuals and business entities withdrew more than Rs 1 crore in cash from bank accounts in FY 17-18.
  • These entities had cumulatively withdrawn over Rs 11.31 lakh crore.

This data clearly suggests the need to again discourage the cash transactions and a measure the FM seems to be fair to introduce the TDS on cash withdrawals.

Having said that, still many businesses like Transporters, Hotels, etc especially in Tier-2 and Tier- 3 cities in India require to withdraw cash in order to make payments to their staff.  The workers/ laborers still prefer to use cash instead of cards due to lack of facilities or maybe lack of confidence in using technology.

The validity of Section 194N

Some experts challenge the validity of the new Section 194N. According to them, as per the scheme of the Income Tax Act, the income tax shall be deducted in order to receive the tax on the income earned in advance or to report the “income” earned by an assessee. Hence it is levied on the “income” chargeable to tax. In other words, a tax can be withheld only on the “income” of the assessee. The withholding of 2% introduced is on the balance withdrawn which may or may not be the “income” for the assessee.

Double Taxation

The intent to impose the withholding tax on cash withdrawals is clear. The promotion of digital transactions. However, some genuine taxpayers can be sufferers.

For eg. A transporter who receives digital payments from companies for transport of goods will receive his payment after deducting taxes. However, let’s presume that he continues to make payments to drivers in cash by withdrawing the amounts from the bank. In this case, his taxes will get deducted twice and he will have to claim a refund from the tax authorities.

Considering the time and efforts involved in claiming and getting the refund in India; the process seems tiresome.

What is the solution?

Prima facie the provision is aimed at digitization and hence that’s the prime solution to avoid this withholding. Having said that, FM in her Budget Speech also mentioned that “…………..Some business models, where large cash withdrawal is a necessity, are proposed to be exempted. It is also proposed that the Central Government may notify the persons to whom these provisions shall not be applicable in consultation with the Reserve Bank of India.”

The withdrawals made by Government, or banks, etc are specifically excluded from section 194N, the section also mentions that payments to “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” are exempted. 

This clearly implies that the government will come up with the list of businesses that might suffer this provision and are likely to exempt them.

Click here understand the exclusions in detail and Some Unanswered Questions related to this section

The article is written by CA Janhavi Phadnis. If you have any queries concerning the above article. Please write to us either in the comments section below or email us on info.financepost@gmail.com.

Disclaimer: Anyone relying on it is expected to take adequate professional care before using/implementing the content of the article. The website will in no case be liable for any damages incurred by relying on the content without adequate consultation.
Disclaimer: The views expressed in the above article is exclusive to the author. Anyone relying on it is expected to take adequate professional care before using/implementing the content of the article. The website/author will in no case be liable for any damages incurred by relying on the content without adequate consultation.
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