Sunday, March 2, 2008

Cash withdrawal tax axed

The Union Budget for the year 2008-09 has proposed to withdraw the banking cash transaction tax (BCTT). It stands withdrawn from April 1. Effective June 1, 2005, a BCTT was introduced. It was 0.1 percent on every withdrawal transaction on any a single day if it was withdrawal of cash from an account (other than savings account) or receipt of cash on encashment of term deposits. The limit for individuals was Rs 25,000 and Rs 1 lakh for others, above which the tax became due.

The government was likely to review this banking cash transaction tax in the budget. It was primarily designed to track unaccounted for money. It was due to be reviewed as the growth rate of cash withdrawals from banks have declined and there is a possibility of expansion of transactions under the annual information report (AIR) system.

As other instruments become more effective, it would be possible to review BCTT next year, the Finance Minister P Chidambaram said, while presenting budget 2007-08 last year. The BCTT was introduced in June 2005.

Industrial chambers, including FICCI, had asked the Finance Minister to withdraw this tax in view of the fact that all high value transactions have now to be supported by the Permanent Account Number for the purpose of identification. Apart from collection of vast information about transactions through AIRs, the Income Tax Department is also collecting information from banks on suspected transactions under the Money Laundering Act.

The other alternative before the Finance Minister could be to bring high cash withdrawals, say above Rs 50,000, under the purview of AIRs. He had earlier said the transactions under the AIRs would be expanded at an appropriate time.

As part of measures to curb tax evasion and unaccounted for money transactions, the finance minister had imposed a cash transaction tax of 0.1 percent on amounts in excess of specified limits that's withdrawn from bank accounts on the same day. This meant one has to pay Rs 10 for every Rs 25,000 he withdraws in a single day. But, now, many establishments accept cards.

Moreover, many places, if they accept card payments, levy an additional charge of 2-3 percent. Vendors of durables, hospitals and educational institutions either do not accept card/cheques or levy high charges on them. The burden falls on the consumer either way. Although the amount may look small, the charge is still there.

This amounted to double taxation. An individual keeps his after-tax income in a bank. When he withdrew the amount, he was again charged a tax. One had to withdraw less than Rs 25,000 over a period of time in order to avoid the extra burden.

The administrative difficulties were many for banks. Also, the bank would collect the tax on behalf of the government. The bank would then need to keep separate records for all these transactions. It created an additional workload as well as cost for the banks.The move has been welcomed by all.

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