The Union’s Minister of Finance in the budget presented on July 5, 2019, had proposed a tax deduction of 2% at source (TDS) on a cash withdrawal of one crore from an “account” to discourage high-value withdrawals. However, as people with multiple accounts could have abused the provision, the 2019 finance bill has been amended so that TDS will be charged if the total withdrawal of one or more accounts exceeds Rs. 1 crore. The amendment also clarified that TDS on withdrawing cash beyond Rs. 1 crore will be adjusted relative to the total tax payable by the taxpayer and would not constitute income in the hands of the taxpayer. The said provision of section 194N came into force on September 1, 2019.
During the debate on the bill, the Minister of Finance assured members that if taxpayer citizens make withdrawals like this, the TDS will be adjusted relative to total taxes. She also stated that the TDS was not above what is expected to be paid, but that it will be reconciled with the total tax claims deposited on an individual, and therefore it was not something that worked alongside him.
Before analysing the constitutional validity of the said provision, it is imperative to look at the fundamental structure of TDS and the reason for introducing the same. The primary reason for the introduction of the TDS regime was the advance collection of tax on income in order to ensure the continuous flow of money in the government treasury. Section 4(2) of the Act also used the expression ‘……in respect of income chargeable under sub-section (1) of Section 4, income-tax shall be deducted at the source”. And Section 190(1) of the Act specifies that ‘…the tax on such income shall be payable by deduction or collection at source or by advance payment or by payment’. Hence, it is crystal clear that TDS can only be paid on the income received. However, Section 194N introduces the provision of charging TDS on the money withdrawn from the bank accounts and puts an extra burden on the banks to charge 2% TDS on the withdrawal of more than INR 1 crore from an individual’s bank account.
In addition, in accordance with the provision, TDS must be billed on the cash withdrawal of more than 1 crore INR from banks in one year. Therefore, for these purposes, can it be said that the amount withdrawn by a person from his own account would result in income received or income earned?
One of the basic services provided by a bank includes the service of withdrawing cash from a bank account. Therefore, the transaction of withdrawing money from the account would not be considered a separate business transaction, and the money paid by the bank to the account holder would not be qualified as “payment”. Likewise, money received by the account holder will not qualify as “income”. In addition, there is no provision in the law stipulating that the TDS paid under section 194N would not be considered as income received. Therefore, it can be said that TDS can only be billed on the recipient’s income and not on withdrawing money from the account. In other words, the basic factor that must be taken into account when billing TDS is the generation of income and not the transfer of funds or the withdrawal of cash.
While proposing such a provision, the Minister of Finance used the word “levy” from TDS. However, a TDS can never be levied as tax, duty, cessation. It simply acts as an instrument to withhold a person’s taxable income to achieve the goal of a continuous inflow of income into the government fund. Consequently, it can be said that the logic underlying the introduction of this provision does not correspond to the ideology on which the TDS regime is based.
Constitutionality of Section 194N
Undoubtedly, the aforementioned 2% TDS provision for cash withdrawal aims to discourage cash transactions and to promote digital payments, but the validity of section 194N providing for 2% TDS on cash withdrawals exceeding Rs. 1 crore is doubtful. Since the tax to be withheld at source relates to withdrawals of cash which should not be treated as income, the question of the deduction of any tax at source does not arise. When the transaction is not subject to the collection of income tax, the question of the deduction of income tax at source with a provision for adjustment thereof with respect to the tax burden ultimate cannot be considered legal.
We are aware that there is no generation of income when an account holder withdraws cash from his/her own bank account and the TDS cannot be charged. However, can it be said that tax can be collected on the transaction which is not liable to be taxed? Of course not, because that is against the basic principle of taxation. Also, as per Entry 82 of the Union List mentioned in the 7th Schedule to the Constitution of India, the Union can only levy taxes on ‘income other than agricultural income’. Hence, the constitutional validity of the section is very doubtful.
The apex court has also held in the case of Nathpa Jhakri Joint Venture v. State of Himachal Pradesh that Section 12A of the Himachal Pradesh General Sales-tax Act is unconstitutional in nature because it levies TDS on such transactions which are not subject to levy of tax as per the said statute.
Also in the case of Bhawani Cotton Mills Ltd. v. State of Punjab, the Apex Court held that if a person is not liable for payment of tax at all at any time, the collection of a tax from him with a possible contingency of refund at a later stage will not make the original levy valid. It was further held that if the sales or purchases are completely exempt from tax, they can in no case be taken into account for the purposes of calculating or realizing taxable turnover and collecting the tax. Tax collection can only be made for the transaction which is taxable. The tax withheld at source is also in the nature of tax collection. The tax can only be deducted at source for transactions subject to the collection of said tax. Any deduction from source tax on non-taxable transactions is unconstitutional.
Therefore, the levy of TDS on cash withdrawal from the bank account is unconstitutional in nature even if the amount deducted at source can be deducted from the total income tax at the time of paying final taxes.
The tax administrators play a very important role while drafting a tax provision, and it is their duty to take into account and apply all the principles of tax law. The idea of becoming a cashless economy is one of the most important goals for India’s rapid growth, and the government’s intention to make it cashless is also appropriate. That said, due to ineffective tax administration and the insertion of legal provisions such as Article 194N, the government faces many obstacles while achieving the set objectives.
Tax administrators play a very important role when drafting a tax provision, and it is their duty to take into account and apply all the principles of tax law. The idea of becoming a cashless economy is one of the most important goals for India’s rapid growth, and the government’s intention to make it cashless is also appropriate. That said, due to ineffective tax administration and the insertion of legal provisions such as section 194N, the government faces many obstacles while achieving the set objectives.
Firstly, the provision does not take into account the foreign exchange activity which involves a large number of cash transactions and whether these would be exempt from this provision. Secondly, article 194N only takes into account transactions made by the bank with the account holder and the sum of 1 crore INR would only include cash withdrawals made by the account holder from their bank account. But all this provision can be easily misused because there is no TDS on payment by non-crossed bearer check, and the amount paid by bearer check would not be taken into account when calculating the total withdrawal cash. For example, if A (an account holder) signs an uncrossed bearer check in the name of B (a family member or any other known person), then B can simply withdraw money from A’s account and this transaction will not be taken into account during the calculation of all transactions submitted to the TDS under article 194N. This method can be used to easily abuse this provision and a person who has already withdrawn 1 INR crore from their account can sign an uncrossed bearer check in the name of another person and obtain the money withdrawn in their name.
In accordance with this provision, banking companies, cooperatives and post offices are required to deduct 2% on the withdrawal of cash when the limit of INR 1 crore is exceeded. However, there is already a huge red noise pre-existing in our banking system, and putting more burden on the banks is not an example of good tax administration. Keeping track of all transactions to be deducted from TDS is a difficult task, and this additional service undertaken by banks could also result in an increase in service charges or an increase in any other cost which could indirectly annoy customers or account holders.
ABOUT THE AUTHOR
Milind is a third-year law student at National University of Study and Research in Law, Ranchi. He has a keen interest in reading and writing about contemporary legal issues.