Cash withdrawal tax: Finance ministry to examine CM panel’s recommendation

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New Delhi: The finance ministry on Wednesday sought to play down the recommendation of a committee of chief ministers that has recommended taxing cash withdrawals above Rs50,000, holding that government is yet to take a final view on the matter.

The proposal was widely expected to be made part of the upcoming budget to be presented on 1 February to disincentivize high-value cash transactions.

The finance ministry clarification has cast a shadow on the proposal, especially ahead of state elections in five states including Uttar Pradesh.

“The media has reported various aspects of the recommendations made by the committee, including the recommendation relating to levy of Banking Cash Transaction Tax on transactions of Rs50,000 and above. It is informed that the government has not yet taken any final view on the recommendations of the committee. The recommendations will be carefully examined and appropriate decisions will be taken in due course,” the finance ministry said in a statement.

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Prime Minister Narendra Modi had constituted a committee headed by Andhra Pradesh chief minister Chandrababu Naidu to examine and recommend measures for implementation of digital payment systems in the aftermath of the demonetisation exercise. The committee submitted its report on Tuesday.

Niti Aayog chief executive officer Amitabh Kant in December had said that government will make digital transactions cheaper than cash transactions and announcement to the effect may be made in the budget.

Naidu told reporters on Tuesday after submitting the report that a banking cash transaction tax (BCTT) could be levied on cash withdrawals of Rs50,000 and above and a cap put on the use of cash in all large-ticket transactions.

“I am confident that these recommendations will be taken into account in the upcoming union budget” to be announced on 1 February, Naidu said. Y. Sudhir Kumar Shetty, president, UAE Exchange said though there may be initial resistance towards a tax on higher cash withdrawals, it will bring more people into the tax net. “When more and more facilities are available to pay through non-cash channels, one should be able to manage with less cash. This will also bring down crime rate and illegal transactions,” he added.The Naidu committee also recommended that consumers who use digital payments could get tax refunds up to a certain proportion of annual income and tax incentives for micro cash dispensers and biometric sensors at a 50% subsidised price.

The panel also disapproved of the merchant discount rate (MDR) that banks want to charge on usage of debit and credit cards. Naidu said the RBI will consider recommendations on MDR and take appropriate action. The other measures suggested include making Aadhaar the primary identification avenue for KYC (know your customer norms), lower or zero MDR for all digital payments to state entities, making all payment banks and banking correspondents inter-operable, encouraging contactless payments for travelling in buses and trains and roping in rural and urban co-operative banks in the pursuit of digital transactions.