Section 194N – TDS on Cash Withdrawal – As after Finance Bill 2019 (No.2)

What do we know on this?

  1. Introduced by Union Budget 2019
  2. Applicable from 1st September 2019
  3. Applicable to Banking Company/Co-Operative Society carrying on banking business/post office
  4. Monetary Limit – 1 Crore in aggregate during the PY
  5. Applicable Rate – 2% on sum exceeding 1 Crore
  6. Purpose - The sole purpose of introducing the provisions of section 194N is to curb black money generation and circulation in the economy by promoting digital transactions. The government expects that the proposed measure will discourage large cash transactions.

What more on this?

1. What was initially thought of to be implemented? Instead 194N came into effect

It was speculated that the government may reintroduce Banking Cash Transaction Tax or BCTT. However, instead of levying a separate tax, the government had imposed deduction of income tax on cash withdrawals.

2. Branch-Wise or Bank-Wise?

Probably, where the bank maintains CBS (Core Banking System), it has to be checked by the banker Bank-Wise and not Branch-wise similar to Section 194A – TDS on Interest where it is specifically established.

3. Conceivable Flaws

a. What if I want to withdraw 2 Crores during the year without falling under the Section?

Let me open 2 bank accounts in 2 different banks and withdraw a Crore from each bank. As simple as that. The section is applied not on a person to person basis but looked into from the bank’s point of view. We can call it as an INHERENT LIMITATION. But you may note that, where you withdraw from more than 1 account from same bank, you cannot escape the section. Additional responsibility for the banks.

b. What am I going to do with the cash withdrawn?

I have to make payment to some other party. He insists only Cash receipt. I don’t want to get attracted by 194N.

What to do?

Simpler again. Instead of withdrawing and paying, I will issue bearer cheque(s) to the counter party(s) and get done with the requirement. TDS shall be attracted only when the recipient and Account holder is a same person whereas it is not in this scenario. Smart isn’t it !!

Moving Forward

a. TDS on cash withdrawal a paradox

TDS was introduced to deduct tax on conceivable income earned by a person during the PY so that there is attached evidence for earning income at the time of earning itself and minimized chances of concealing it. But whether cash withdrawal from a person’s own bank account by itself is an Income? Certainly not. Probably the section acts more in the nature of TCS than TDS. Substance over form.

b. Sorry to say so

With all due respect to people suffering and fighting against Covid - 19, out of several small-small benefits on account of Covid 19, extension of Filing of returns has been blessing in disguise. Wondering how many Defective returns and responses are to come and go for the reason ‘Mismatch in Income admitted’ which might erupt on account of Cash withdrawal shown under Income in Form 26AS. Necessary steps ought to have been taken to change the system logic for this. If not, get ready with a standard response to defective return “Gross Cash withdrawal during the PY shown as Income under 26AS whereas the same is not an income for the Assessee”. Hope not.

The discussions are based on the Finance Act (No 2). Lot of amendments vide Finance Act 2020 are also brought into. Stay tuned for the updates as well !

Share this post