If there is one proposal that received the sharpest criticism of the House when the Finance Minister delivered the Budget, it was the proposal to levy tax on banking cash transactions. While there is another proposal equally illogical, that of taxability of fringe benefits, the full implications of the latter took some time to sink in. The uproar in the House was a reflection of the reaction the proposal was to receive from the public.

Later during the meetings with industrialists the Finance Minister admitted that the proposed law was poorly conceived, and that they were working on an alternative methodology to track the black money. This article attempts to analyse the inconsistencies in the proposed laws.

Proposal to tax certain banking transactions are contained in Chapter VII of the Finance Bill. This chapter extends to the whole of India and shall come into force on 1st June, 2005, and shall apply to taxable banking transactions entered into on or after the commencement of this chapter.

"Taxable banking transaction" has been defined to mean:

(a) A transaction, being withdrawal of cash (by whatever mode) exceeding ten thousand rupees on any single day by a person from scheduled bank; or
(b) A transaction, being purchase of a bank draft or a banker's cheque or any other financial instrument on payment of cash exceeding ten thousand rupees on any single day by a person from any scheduled bank; or
(c) A transaction, being receipt of cash from any scheduled bank exceeding ten thousand rupees on any single day by a person on encashment of term deposit, whether on maturity or otherwise, from that bank.

Clause 95 provides that the amount for the purpose of the transaction of term deposit shall be the amount received on encashment of such deposit.

The proposed law provides for the taxability, after the date of commencement of this chapter, in respect of the taxable banking transactions, at the rate of 0.1% of the value of such transaction.

Sub-clause (2) of Clause 95 of the Finance Bill provides that the Banking Cash Transaction (BCT) tax shall be payable:

(i) In respect of cash withdrawal, by the person who withdraws the cash;
(ii) In respect of purchase of draft or pay order, by the person who buys such instrument;
(iii) In respect of encashment of term deposits, by the person who encased such deposit;
(iv) In respect of withdrawal of cash exceeding ten thousand rupees, by the bearer of such instrument.

The proviso to the clause provides that no BCT tax shall be payable if the amount of term deposit is credited to any account with the bank.

While the above clause provides for the liability of payment, Clause 97 casts a responsibility on every scheduled bank to collect BCT tax from every person liable to pay such tax. The tax so collected shall be payable by the bank to the credit of the Central Govt before the 15th of the month following the month of the collection. If a bank fails to so collect the tax, it will still be the responsibility of the bank to pay such tax.

Clause 98 prescribes for furnishing of the return of BCT Tax by the bank within the prescribed time after the end of the financial year, and provides that where no such return has been furnished, the Assessing Officer may serve on the bank a notice to furnish such return. A revised return may also be submitted before the assessment is made.

Clauses 99 to 112 lay down the detailed procedure for assessment, and provides for interest, penalties, rectification of mistakes, appeals, etc.

Analysis

The apparent purpose of the law is to track black money. The Finance Minister stated in his budget speech that he is concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amount of cash. These cash withdrawals leave no trail, and presumably become part of the black economy.

While the Finance Minister must be congratulated for a very pragmatic and growth oriented budget, one fails to understand what prompted him to propose a very illogical BCT law. I have discussed the key issues below.

1. When it is true that large amount of cash is withdrawn every day, some of the money may be withdrawn for no ostensible purpose, still it does not make it a case for taxing all cash transactions. There are many genuine purposes for which one has to withdraw cash. Take the example of a construction company which makes payment of lakhs of rupees at the construction site to the daily wage earners, the amount being paid to each of such worker being a small sum of money. Can they force the daily wage earner, who lives hand to mouth, to have a bank account where the amount would be credited after two days?

2. The law is applicable to all persons, including individuals, businesses, trusts, Governments and to all withdrawals whatever be the purpose of such withdrawal. It seems the Finance Minister believes that even in respect of withdrawal by the Government, black money is generated!

3. In a country where banks are closed on all religious ceremonies and festivals, and where bankers sometimes go on a strike, people often carry cash balance with them on such occasion so that the work is not hampered. Is it justified to tax such transaction?

4. When there is an unexpected medical emergency, and the hospital refuses to take cheque, or the payment for medicine has to be made in cash, does it look justified to charge transactions such as these to tax?

5. In an agrarian economy, where 70% population is dependent on agriculture, where the poor farmers often come to the nearby towns and cities to sell their produce, many of them don't even have bank accounts, can a cheque payment be forced upon them? It may be worth mentioning here that even in respect of disallowance of payment in excess of Rs. 20000 not made through a crossed cheque, there are many exceptions provided under Rule 6DD, which recognise the difficulty in carrying on transactions through banking system. Unless a law is made making it compulsory to receive and give payments by cheques, it is not proper to assume that the economy would suddenly become a cashless economy. Large cash dealings will continue to be made, the only consequence of this law will be that the Govt would be richer by an estimated amount of Rs 4500 crores.

6. The law provides for taxability of BCT in respect of 'scheduled banks'. Since co-operative banks have been kept out of the provision of the law, and since people need to withdraw cash for many purposes, this measure is likely to shift large balances to co-operative banks. The financial health of many of the co-operative banks is in a bad state, many of the co-operative banks are controlled by politicians, and do not have much credibility. This may result, on the one hand, in erosion of deposit of scheduled banks, and on the other in larger funds at the disposal of small co-operative banks with unhealthy track records.

7. The logic that a large amount of cash is withdrawn from the bank and it becomes a part of the black economy is a faulty one. The fact is that a substantial part of money remains in cash form and is never deposited in bank. The money in bank is substantially the declared or the white money, and if this proposal becomes a law, it would have the effect of taxing the honest money lying in the bank in lieu of the tainted money. The limit of Rs 10000 is set so low, that most of the middle class salary earners would also be covered in the law.

8. The Finance Minister wants this 0.1% tax to be a kind of tracking device, kind of a trail over the cash withdrawn from the bank. There are other measures, such as PAN, which the Govt has been using to track financial transactions, and the transaction of the nature proposed to be taxed under BCT law could have been easily brought within the ambit of the requirement of compulsory quoting of PAN. We boast of a very sophisticated level of computerisation being implemented in the Income Tax Department, the imposition of this tax only goes on to prove the inefficiency of the Government is making use of the potentials of computerisation. It is absurd the people should pay the price for Govt's inefficiency by way of a tax on withdrawal from bank.

9. The implementation of BCT tax would be an ordeal for the banks. Banks would have to collect tax, keep a record of tax so collected, and pay the tax to the Govt. every month. They would have to file an annual return and would have to get it assessed. The cost per transaction to the bank of doing this exercise is likely to be more than the tax collected in most of such transactions. In case of ATM withdrawals, the software would be required to be modified, so that the machines would pay 0.1% less than the amount requisitioned by the customer.

10. The law speaks of a transaction exceeding Rs 10,000 on a single day. It is not clear whether this limit is in respect of a branch, or of the banking company. On plain reading of the provision, it seems the limit is in respect of 'any schedule bank', which means if more than Rs 10,000 are withdrawn in aggregate from different branches of the same bank, the provision would be attracted. In a bank where branches are not networked, it would be impossible to monitor the transactions.

11. There will be considerable difficulties in implementing the withdrawals from ATM's. If a customer withdraws Rs 9,000 in the first transaction, and later withdraws an amount of more than Rs 1,000, the tax would be required to be deducted on the whole amount. This is going to be a challenging job for the bank and the designers of the software. ATM's work on the principle of redundant distributed processing, where the data is processed locally at the ATM, and is updated later in the central database. If somebody withdraws less than Rs 10,000 per transaction, and before the central database is updated, makes another withdrawal from another ATM, he would be able to avoid tax, adding to the problems of the bank.

12. The Finance Minister has said that this tax has been inspired by the Brazilian model. However, in Brazil, the tax is on all withdrawals from bank, whether by way of cheque or otherwise. The Finance Minister decided to single out cash withdrawal transactions and put then under the tax net. The provision of Entry 82 of the Union List, (read with Article 246(1) of the Constitution) would have to be stretched too far for justifying the levy of tax on something which is neither income nor an expenditure in commercial sense of the term.

13. Taxable transaction is defined to mean, inter alia, a transaction of encashment of a term deposit of an amount exceeding Rs 10,000. Proviso to Clause 95 says that no banking transaction tax shall be payable if the amount of term deposit is deposited to any account of the bank. It the intention is not to tax this amount, I wonder how this would be monitored, if the amount gets merged with the account of a person, and he makes a combined withdrawal from that account.

This proposed law is an example of illogical thinking and poor drafting. It certainly does not serve the purpose of tracking the cash transactions, but on the other hand, will be chaotic if implemented in the present form. It is only hoped that the provisions do not encourage people to keep money at home, or in non-scheduled banks, which would prove to be exactly contrary to the intentions of this law. Long queues at the banks, where people will withdraw less than Rs 10000 daily is also not ruled out.