Further monetary reforms in the offing in India

Get ready for a levy on high amount withdrawals

Business & Politics

News - Biz@India

December 26, 2016

/ By / New Delhi

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NITI Aayog and the RBI are egging the economy to go cashless

NITI Aayog and the RBI are egging the economy to go cashless

If it was not enough to stand and sweat in long, serpentine queues for exchanging and withdrawing your money post-demonetisation, the government of India is planning further moves to turn the economy cashless. Execution remains the key.

Now, get prepared to pay a levy on cash withdrawals from banks as a proposal is being examined to tax cash withdrawals from banks above a threshold limit.

Currently, the proposal is being explored jointly by the Finance Ministry and NITI Aayog. Once the contours are finalised, a presentation will be made before the Prime Minister.

As part of this, making payment in cash for a government service or withdrawing cash beyond a prescribed limit from an ATM could soon be attracting additional levy in the range of 0.5 to 2 pc, as the government is mulling a proposal to disincentivise cash dealings.

The levy could be called ‘cash handling charge’ and would also apply on high value withdrawals of over INR 200,000-300,000.

But, it is expected that tax could be pegged for withdrawal of INR 50,000 and above.

Officials argue withdrawal in cash involves security, time and physical presence of a person. Hence, it should attract a cost. This is not the case with online payment where there is no security risk involved.

Another line of argument is that those withdrawing INR 200,000-300,000 in cash are not poor people and can make payments digitally.

To be sure, banks and micro-finance institutions already charge for cash handling indirectly by levying small fees. Payment banks and card companies like Visa and MasterCard also charge a transaction fee for facilitating payments.

So, the  banking cash transaction tax (BCTT) may be reintroduced by revising specific rules of the Income Tax Act, making it mandatory for banks to include clients’ cash withdrawals exceeding specified amounts in their annual information reports filed with the government and the RBI.


Global Experience

Between 1982 and 2002, Australia charged a bank account debits tax on customer withdrawals from bank accounts with a cheque facility. Some South American also experimented with taxes levied on bank transactions. Argentina introduced a bank transaction tax in 1984 before it was abolished in 1992. Brazil implemented its temporary ‘CPMF’ in 1993, which lasted until 2007.


Tried, Tested and Abolished

The idea to tax cash withdrawals is not new. In fact, it was part of the Tax Administrative Reform Commission (TARC) that was headed by Parthasarathi Shome, a veteran economist and taxation expert.

So, now the centre is examining the option based on a recent tax-reform panel’s advice to bring back the BCTT, a measure tested during 2005-2009.

“BCTT should be reinstated as an effective administrative measure,” Shome Panel had said in its third report in November 2014.

BCTT was introduced with effect from June 1, 2005, to track unaccounted money and trace its source and destination. However, it was withdrawn from April 1, 2009. Under BCTT Act, a tax of 0.1 pc was levied on cash withdrawals by individuals and Hindu Undivided Families (HUF) from bank accounts of above INR 50,000 a day. The threshold was INR 100,000 a day for other entities.

Broadly, BCTT often applies to deposits and withdrawals from bank accounts, often including checking account.

Interestingly, BCTT was introduced and later withdrawn during the UPA regime. It was introduced when P Chidambaram was the finance minister and later abolished by his successor, Pranab Mukherjee.



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