Black Money: Is govt eyeing a proposal to tax cash withdrawals?

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Is there a plan to tax cash withdrawals from banks above a threshold? The government is examining the option based on a recent tax-reform panel’s advice to bring back the banking cash transaction tax (BCTT), a measure tested during 2005-2009.

“BCTT should be reinstated as an effective administrative measure,” the Parthasarathi Shome-headed Tax Administrative Reform Commission (TARC) 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.

It was withdrawn from April 1, 2009.

Under BCTT Act, a tax of 0.1 percent was levied on cash withdrawals by individuals and Hindu Undivided Families (HUF) from bank accounts of above Rs 50,000 a day. The threshold was Rs 1 lakh a day for other entities.

Apart from keeping a trail on people’s attempt to hoard cash through repeated high-value cash withdrawals, a BCTT-type of a levy will also make it less rewarding for people to transact in cash.

This will enable wider use of electronic payments, a high-priority area for the government in wake of the ongoing demonetisation exercise.

A tax on bank cash withdrawals, if introduced, could come bundled with tax breaks and incentives for credit and debit card transactions, as part of the current government’s broader strategy to move India to a “less-cash” society, sources said.

Sources said income data showed that BCCT had thrown up several tax evasion methods that the government is keen to crack down on.

Sources said that in a branch of a private bank in old-Delhi, three groups of account holders were found to be indulging in discounting of demand drafts of small amounts for a commission in collusion with bank officials.

Small amounts of cash was being withdrawn by the same people using demand drafts.

Discounting is a system through which banks can offer cash withdrawal against a draft up to to a certain limit, and also make drafts by depositing cash up to a certain limit.

“The TARC is of the opinion that it (BCCT) had enlarged the information system of the Income Tax Department. There is no other instrument at present by which such information is being captured,” the Shome panel said.

With its withdrawal, an important source of information to monitor transactions of unaccounted money has dried up. The availability of information that was being collected through BCTT would certainly help the I-T department widen the information base, a source said.

The BCCT 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.

In the previous system, withdrawn in 2009, banks were required to file monthly BCTT statements based on which the IT department carried out investigations and surveys.