Income Tax Budget 2019: TDS on cash withdrawal is hardly a deterrent besides smacking of one-size-fits-all

Finance Minister Nirmala Sitharaman has in her Budget speech proposed a 2 percent tax deduction at source (TDS) on cash withdrawals in excess of Rs 1 crore in a financial year by those in business. This is supposed to deter the use of cash for making business expenditure and correspondingly encourage digital transactions. When the banking cash transactions tax (BCTT) that held sway between 2005 and 2009 couldn’t deter cash transactions, one wonders how TDS, which is neither a tax nor a penalty, can. Tax and penalty both go down the drain insofar as the assessee is concerned. TDS, on the other hand, is just a variant of advance tax which is adjustable against the finally determined tax liability and if together with advance tax is in excess, it becomes refundable pro tanto. Only taxes and penalties or fear of prosecution are deterrents enough. TDS is not. To be sure, TDS has its uses—expedition of tax collections (pay tax as you earn) and foiling of tax evasion—but they do not include incentivizing digital payments and discouraging cash payments. Those who are subjected to this new TDS are not going to lose any sleep over it because to this extent they are going to reduce the installments of advance tax payments. Suppose the first installment of advance tax on or before 15 June of the previous year which is 15 percent of the expected tax liability works out to Rs 100 crore for a big company and it has already been subjected to a TDS of Rs 20 crore on this score, it is simply going to deposit just Rs 80 crore as the first installment of advance tax. Ditto for the subsequent installments. Advance tax scheme itself says in so many words that to the extent one has already been subjected to TDS or likely to be subjected to TDS, an individual need not pay advance tax. Yes, loss-making concerns would feel the heat of this new measure because TDS would lock up their funds. [caption id=“attachment_5759311” align=“alignleft” width=“380”] Representational image. Reuters[/caption] In plantations and remote quarries untouched by the banking habit, cash still rules the roost. Therefore, such businesses would have to take in their stride the extra cost on account of funds getting blocked in TDS if workers remain adamant and insist on being paid in cash. Indeed, rule 6DD which provides an exemption from the rigor of section 40A(3)—100 percent disallowance of cash expenditure in excess of Rs 10,000 during the course of a day—still contemplates payments to farmers, horticulturists, fisheries, poultry farmers, etc., as extenuating circumstances for cash payments. So it is not as if the payer always is in a position to decry cash transactions by the counterparty. Cash is an Indian reality. It cannot be wished away. The point is to bring the hitherto untouched-by-banking-habit category into the banking fold is not through coercing on applying pressure on the payer. It gives no pleasure to an otherwise law-abiding and tax-compliant company to play footsie with an obstinate cash-obsessed person. He willy-nilly has to pay cash if he desperately wants his goods or services as is the case with farm and fisheries products. The payees should be incentivized or penalized. For example, the presumptive tax scheme for small traders subjects them to tax on just 6 percent of their profits to the extent their turnover is through banking channels; otherwise, 8 percent of their turnover is deemed to be their profit. This is the way it should be. A trader thus cosseted would, in turn, reach out to his customers by offering them say a 1 percent rebate on card or mobile wallet payments. If there is still resistance to digital payments or payments through banking channels, the fault does not lie with the payer but with the government is not winning over the resistance. It must take the banking habit to the payee’s doorsteps. There is no reason why the government cannot dangle the carrot of free health or life or accident insurance cover for bank accounts in remote areas or in areas of financial wilderness. (The author is a senior columnist and tweets @smurlidharan) Follow full coverage of Union Budget 2019-20 here