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Banking Cash Transaction Tax for 2019


It is now widely reported news in the media that the new government may levy Banking Cash Transaction Tax (or BCTT) in Union Budget 2019 on cash withdrawals of more than Rs. 10 lakh in a year in order to encourage digital transactions and crack down on black money.

The new government will be presenting its first Union Budget 2019 on July 5, 2019, by the first full-time women finance minister of the country Nirmala Sitaraman. 

It is also reported that the government may mandate Aadhaar authentication for all high-value cash withdrawals in order to track individuals and tally tax returns. This move is aimed to discourage cash transactions and is expected to help taxmen detect bogus bills, accommodation entries, artificial loss claims, and dummy firms.

What is a Banking Cash Transaction Tax?

A Banking Cash Transaction Tax or BCTT is a levy which is imposed on cash transactions with a bank by its customers. It may be levied on cash withdrawals or cash deposits with or without any threshold limit. When a person carries on the specified cash transaction with a bank, the bank debits the BCTT in the account of the account holder and remits the tax so collected to the account of the government through Challan. A Banking Cash Transaction Tax is a Direct Tax. It is altogether different from the Banking Transaction Tax or BTT.

What is the history of Banking Cash Transaction Tax or BCTT in India?

The idea of levying banking cash transaction tax is not new in India. Finance Minister P Chidambaram in 2005 had first introduced the Banking Cash Transaction Tax in 2005

Though he was vehemently criticized for his action, he continued with the levy till 2009. India Inc was one of the biggest critics of the tax arguing that it hampered them from meeting their genuine requirement such as disbursement of salary and wages or making genuine stamp duty payments. 

The tax was aimed at unearthing black money and assets. Industry has argued that the rationale for the tax didn’t hold anymore since extensive rules had already been put in place to track banking transactions.

In his Budget Speech, while presenting the Union Budget for 2005 in February, he cited the reasons for introducing such tax in India. In his budget speech, the then Finance Minister P Chidambaram discussed the rationale of introducing the Banking Cash Transaction Tax in the following manner-

"177. The NCMP requires the Government to introduce special schemes to unearth black money and assets. I am obliged to carry out the mandate, but without giving undeserved relief or an amnesty. I am concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amounts of cash. 

These cash withdrawals leave no trail, and presumably become part of the black economy. 

Therefore, I propose to introduce two anti tax-evasion measures: Firstly, I propose to levy a tax on withdrawal of cash on a single day of over Rs.10,000 or more from banks at the rate of 0.1 percent. Thus, a person withdrawing Rs.10,000 in cash would have to pay a small sum of Rs.10.

Secondly, I propose to require banks to report to the Government all deposits which are exempt from TDS on interest. I intend to observe the results of these steps before I propose any further measures."

The Finance Minister while replying to the debate on the Finance Bill, 2005 in both Houses of Parliament, reiterated this objective. Undoubtedly, therefore, the objective of the banking cash transactions tax is to prevent generation and laundering of black money through the banking channels.
Thus the objective of introducing the banking cash transaction tax was to unearth the black money from the economy. This tax was levied as an anti tax-evasion measure and was placed in Finance Bill, 2005 under "MEASURES TO CHECK TAX EVASION". The tax was levied @ 0.1 percent on - 
  • withdrawal of cash in excess of Rs. 10,000 on any single day by a person from any scheduled bank or,
  • purchase of a bank draft or a banker’s cheque or any other financial instrument on payment of cash in excess of Rs. 10,000 on a single day by a person from any scheduled bank or,
  • receipt of cash from a scheduled bank in excess of Rs. 10,000 on any single day by a person on encashment of term deposit, whether on maturity or otherwise, from that bank.

However, after much uproar over the new levy, the government though kept the levy but raised the threshold limit and other conditions for the imposition of banking cash transaction tax. Finally, after carrying out the amendment in Finance Bill, 2005, the Finance Act, 2005 contained the following provisions for levy of banking cash transaction tax on cash transactions-
  • on cash withdrawal for more than Rs. 25,000, which in 2007 further raised to Rs. 50,000, by an Individual or HUF,
  • on cash withdrawal for more than Rs. 1,00,000 in other cases.
Cash withdrawals from savings accounts were kept outside the purview of banking cash transaction tax.

Further, receipt of cash from a scheduled bank on any single day by a person on encashment of term deposit, whether on maturity or otherwise, from that bank was raised to Rs. 50,000.

He continued the BCTT in 2006 also. The then Finance Minister P. Chidambaram in Budget Speech of 2006 had said that "Last year, I introduced two new taxes. The Banking Cash Transaction Tax (BCTT) has turned out to be a boon, not for the modest revenues it brought which was never its purpose, but for the remarkable trails that it has helped establish. To cite just one example, huge cash withdrawals in a bank branch in Chandni Chowk, noticed through the BCTT, led the Department of Income Tax to three entities which were carrying on the business of purchasing demand drafts from traders at a discount and helping the traders to avoid both sales tax and income tax. These entities would deposit the demand drafts in their own accounts and withdraw the cash. In a period of 18 months, they had laundered Rs.1,500 crore. BCTT has also helped the Department to detect bogus bills, accommodation entries, artificial loss claims and dummy firms. I propose to continue the BCTT for some more time until the AIR system is able to capture all significant financial transactions."

In 2007, the government also continued the levy but excluded cash withdrawals by the Central and State Governments from the scope of BCTT. Calling the levy an extremely useful tool to track unaccounted money and trace their source and destination, he extended the scheme for another year before finally withdrawn in 2009.

Under which Act the Banking Cash Transaction Tax 2005 was levied? Who was administering the levy?

In the case of Banking Cash Transaction Tax, 2005 no separate law or Act was framed but was introduced as a chapter in the Finance Act, 2005. Chapter-VII of the Finance Act, 2005 (Sections 93 to 102) contained the provisions related to Banking Cash Transaction Tax, 2005. This came into effect from 1st June 2005. BCTT 2005 was applicable to the whole of India except the State of Jammu and Kashmir.

The levy was administered by the income-tax department.

Was Banking Cash Transaction Tax was allowed as a deduction?

Consequent upon levy of Banking Cash Transaction Tax in 2005, section 36 of the Income-tax Act,1961 was amended so as to provide that the BCTT paid during a year by a person during the course of business or profession was allowed as deduction in computing the income from business or profession for the purposes of the Income-tax Act, 1961.

When was the Banking Cash Transaction Tax 2005 was withdrawn?

The Finance Act 2008 has withdrawn Banking Cash Transaction Tax 2005 from 01 April 2009. This means that with effect from 1st April 2009 any amount of cash can be withdrawn from a bank account without paying any tax. 

The Finance Minister while presenting the Union Budget for 2008-09 told in his Budget Speech that "181. The Banking Cash Transaction Tax (BCTT) has served a very useful purpose in enlarging the information system of the Income Tax Department. Since the information is also being gathered through other instruments introduced in the last few years, I propose to withdraw this tax with effect from April 1, 2009."

But no one knows whether the purpose was actually served or the withdrawal was a strategy to capture the vote bank in the forthcoming Lok Sabha elections in 2009. The country went to the general election in April-May 2009.

The proposal to withdraw the BCTT 2005 was made one year earlier in 2008 from its effective time of operation in 2009.

What was the revenue collection from the BCTT 2005?

The revenue collection from BCTT 2005 was very minimal compared to other tax revenue. In 2005-06, the BCTT collected was Rs 350 crore. In 2006-07 and 2007-08, collection from BCTT was Rs 550 crore which modestly rose Rs 600 crore in 2008-09.


What are the reasons for reintroducing the Banking Cash Transactions Tax in 2019?

A Tax Administration Committee headed by Parthasarathi Shome had also recommended reinstating the BCTT in 2014. A high-level committee on digital payments in 2017, headed by Chandrababu Naidu, the then Chief Minister of Andhra Pradesh, had suggested a tax to discourage cash transactions, a cap on the maximum allowable limit for large-size cash transactions and a complete abolition of charges on card payments to incentivise digital transactions. 

The committee had submitted the report to Prime Minister Narendra Modi. It had suggested levy of banking cash transaction tax (BCTT) on transactions of Rs 50,000 and above. 

It is pertinent to note that even in Pakistan a cash withdrawal of more than Rs 50,000 attracts such a tax.

The same contention is given in favor of reintroduction of Banking Cash Transaction Tax in 2019 and that it will curb the generation of black money. It will help in making India a Digital and cashless economy. It will bring more people under the tax net as tax evasion would become difficult.

As per media reports. Finance Ministry is planning to propose BCTT on withdrawal of more than Rs 10 Lakh a year can attract 3-5 percent tax. Though some expect the rate of tax may be as high as 5 percent. Though the limit is quite high at Rs. 10 Lakh, it is said that a business does not require more than Rs. 10 Lakh cash and it is a very sufficient level for a year to meet the genuine requirements.

To achieve the objective of making the nation a digital economy and to encourage people to move towards digital transactions, recently the Reserve Bank of India waived the fee imposed on banks for using its NEFT/RTGS payment servers to make NEFT/RTGS free. The central government also setting up a panel to review charges imposed by banks on ATM withdrawals. 

In 2005, we have seen that many corporate and government bodies switched to banking mode for payment of salary or wages.

The present Modi led NDA government on many occasions introduced various provisions to curb cash transactions. In 2017, Section 269ST was introduced to restrict cash receipt of more than Rs. 2,00,000 under specified circumstances. 

Non-allowance of depreciation on capital expenditure incurred in cash in excess of Rs. 10,000. Also reduced the limit of revenue cash expenditure from Rs. 20,000 to Rs. 10,000.

Further, no deduction for donation will be allowed if made in cash for more than Rs. 2,000.

The above are some of the noted cash restrictive provisions introduced from 2014 to 2018.

Let us now wait for the Union Budget 2019 to be presented on 5th July 2019 and see how the Banking Cash Transaction Tax 2019 is introduced. Till then keep the finger crossed!

Suggested Readings:

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What is the difference between Tax and Surcharge and Cess? 

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  1. A very elaborative article on the subject. Really have much insight into the BCTT. Let's see how it will be implemented this time.