Section 194N: TDS on cash withdrawals

Relevant Part of Union Budget 2019 Speech on Levy TDS of 2% on cash withdrawal under Section 194N

The Finance Minister made a statement in the House of Parliament that to continue to provide momentum to the buoyancy in direct taxes through deepening and widening of the tax base, promoting less cash economy, proposed.

126. Mr. Speaker, Sir, our Government has taken a number of initiatives in the recent past for the promotion of digital payments and less cash economy. To promote digital payments further, I propose to take a slew of measures. To discourage the practice of making business payments in cash, I propose to levy TDS of 2% on cash withdrawal exceeding 1 crore in a year from a bank account.

TDS on cash withdrawal from banks: In order to discourage large amount of cash withdrawal from bank accounts, it is proposed to provide for tax deduction at source at the rate of 2% on cash withdrawal by a person in excess of Rs. 1 crore in a year from his bank account. 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.

Clause 46 of Memorandum of Objects and Reasoning on Finance No 2 Bill 2019 in the following manner:

TDS on cash withdrawal under Section 194N to discourage cash transactions.

In order to further 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 two 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.

It is proposed to exempt payment made to certain recipients, such as the Government, banking company, cooperative society engaged in carrying on the business of banking, post office, banking correspondents and white label ATM operators, who are involved in the handling of substantial amounts of cash as a part of their business operation, from the application of this provision.

It is proposed to empower the Central Government to exempt other recipients, through a notification in the official Gazette in consultation with the Reserve Bank of India.

This amendment will take effect from 1st September, 2019.

It is interesting to consider whether the TDS on cash payments whether the objective is (a) widening of tax base (b) deepening of tax base or (c) Promoting cash less economy.

From the literal review and understanding from the language of the Finance Minister, it is not a case of widening of tax base, it is not a case of deepening of tax base and neither promoting cash less economy. But it is a provision to discourage cash economy and propose to levy TDS at the rate of 2% of the cash withdrawal. It is a method to collect taxes at source from the transactions as much as TCS on purchase of vehicle at the rate of 1% of the cost of vehicles exceeding Rs 10 lakhs. Technically, it is a cash of tax collection provision (TCS), but not a tax deduction provision. It is in other words a penal provision to deduct tax at the rate of 2%.

The statutory provision is stated in the provisions of section 194N in the following manner:

Extract of Section 194N of Income Tax Act, 1961

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;

From the understanding of the statutory provision, the following merits consideration and implications.

1. It is applicable to is binding on Banks, Coop Societies carrying on the business of banking or post office and such entities are responsible for paying in cash.

2. It is applicable to payments in cash in excess of Rs 1 crore during a previous year from 1st April to 31st March.

3. Banks and such entities make payments in cash normally only against an instrument namely cheques and such cheques issued by the account holders. The TDS is not applicable in the case of an account holder requesting the bank to issue a bearer draft or bankers cheque which are cashable for cash at a different location or time. For example, if an account holder say ABC Ltd requests the bank to issue a pay order for Rs 100,000 and such sum is in excess of Rs 1 crore in that previous year, such sum is not liable for TDS since the bank is not paying any sum in cash. In other words, the bearer cheque of the bank does not fall in the definition of cash.

4. It is abundantly clear from the language of the provision that the TDS is applicable only if the aggregate of payments including this sum exceeds Rs 1 crore. For example, the aggregate payments made till the last payment was Rs 99,80,000/- and the present payment is Rs 100,000. The aggregate payments so made crosses and reaches Rs 1,00,80,000/-. Now the matter for consideration whether the TDS is on Rs 80,000 or on Rs 100,000. From the language of the provision, it is applicable at 2% of Rs 80,000 = 1600 and the net payment to be made by a banker is Rs 100,000 minus Rs 1600 = 98400.

5. From the reading of the above, it is clear that the Banks and such entities must maintain tab of payments in cash exceeding Rs 1 crore in a previous year.

6. The language deployed in the section is from an account maintained ….. with it, meaning that the limit is applicable for each such an account maintained by it. For instance if ABC Ltd has cash credit account, current account, Overdraft account, the limit of Rs 1 crore is applicable for each such account. Similarly, if an entity maintains more than one account from which cash payments can be made by a bank, the limit is applicable for each such account. Further, if ABC Ltd has branches all over the country and it maintains separate accounts for each such branch, the limit is applicable for each branch even though it belongs to the same account holder.

7. From the language of the provision that from an account maintained by the recipient with it negates or defeats the provision such that it is not a case of recipient maintaining an account. It is the account holder who mandates the paying bank to make payment in cash to the recipient. Recipient need not always be the account holder himself in which case the account holder is the payee such that it is a case of cash drawal. As long as the recipient is different from the account holder, and the payment is by bearer cheques the TDS is not deductible. The language should have been differently worded to attract the incidence of TDS from all kinds of cash payments from account belonging to an account holder and the TDS is not on the basis of recipient, but on the basis of payments in cash from an account exceeding Rs 1 crore.

8. The provision also says that the deduction is by way of income tax.

9. The proviso to the section gives the cases of exempted category of payments made such as payments made to Government, Banks, Coop Societies and post offices. It means that Any one making payment to any such entities are exempted from the deduction of TDS irrespective of the amount. But the Government need to spell out more clearly what is a Government, who constitutes government etc., Now a days most of the operations are being done in the name of corporations established by the Government such Electric Supply Companies, Road Transport Corporations which are all Government owned and established under the Companies Act or under a Statute, but such entities are not pure Government or Sovereign Authorities. For instance, payment made to an Embassy of a foreign country is not a Government for the limited understanding of this section.

10. The Finance Minister used the word LEVY OF TDS in her speech and in the Memorandum of Objects and Reasoning. Levy means is a tax, duty, surcharge or cess levied as a transaction cost and the same is not normally refundable. Levy is to impose and collect a tax, tariff, fine, etc., Whereas TDS is a deductible from certain payments being in the nature of income of the recipients and it takes the character of advance collection of taxes. Therefore, it incorrect to propose this as a levy when the nature of provision is in the form of a deduction provision for withholding. Such deduction is being made from the payment made to oneself. Payment made to oneself is not an income at all. Therefore, it is quite contradicting to bring such enactment under the chapter of XVII B since the very chapter was introduced and the provisions under chapter XVII B were introduced to collect taxes in advance from the payers and duty is cast to deduct certain portion of the income being paid to the payees. In view of the above, the very constitutional validity of the object and the provision is questionable. Ideally, it should have been named as TCS provision.

11. If the provisions of 194N are implemented from the viewpoint of TDS, posting to 26AS might pose a challenge since presently all the TDS provisions and the corresponding TDS Deductions get posted to 26AS as income and the TDS corresponding to that. As said, cash withdrawal cannot itself become an income of an assessee.

12. If an account holder is liable to pay a sum of Rs. 20,000 and the payment is made by bearer cheque and assuming that the limit crossed one crore, the reciepient can draw cash after deducting TDS of 2% of Rs. 10,000, which is equal to Rs. 9800. How such short payment can be taken as sufficient consideration in discharge of liability for payment of consideration due? This leads to controversies, conflicts and frictions in settlement of debts and payment of expenses by bearer cheques in favour of the recepients affecting the foundation of Contract Act 1872 and practically impossible for the commercial transactions to be completed in its substance.

13. Since the banks are mandated to deduct TDS, this being a service provided to the government under law by the bank, the banks should not be charging any service charge. It is also possible that banks might resort to debiting the account for doing the voluminous work and the cost of banking operations are likely to go up if banks resort to this practice.

14. It is also not clear whether authorized money changers, who happen to deal in hard currencies are also subjected to TDS, the provisions should not be applicable to money changers since no account of the customer is maintained by them and nevertheless they do not carry on banking operations and they deal with different currencies and only exchange facilities provided.

15. The transactions of cash payments are already subjected to reporting in 3CD with reference to 40A(3) of the Income Tax act and the said expenditure is disallowable. If the TDS of 2% is treated as a levy as inferred from the language of the Honble Finance Minister, then 2% of such transactions will also become cost since it is not permissible for crediting the PAN of the account holder in 26AS.