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Section 194N; Another Move to Discourage Cash Economy

- Benet Byju



The Government has taken a number of initiatives in the recent past for the promotion of digital payments and less cash economy. To promote digital payments further and to discourage the practice of making business payments in cash, section 194N has been introduced.


Section 194N requires every banking company, co-operative bank or post office who is responsible for paying any sum, or, as the case may be, aggregate of sums, in cash, in excess of one crore rupees during the previous year, to any person (herein referred to as the recipient) from one or more accounts maintained by the recipient with it shall, at the time of payment of such sum, deducts an amount equal to 2% of sum exceeding one crore rupees, as income-tax.


However the payments made to certain recipients, such as the Government, banking company, cooperative society engaged in carrying on the business of banking, post office, banking correspondents and white label ATM operators, who are involved in the handling of substantial amounts of cash as a part of their business operation, are exempted from the application of this provision. Further the Central Government is empowered to exempt other recipients, through a notification in the official Gazette in consultation with the Reserve Bank of India. This amendment takes effect from 1st September, 2019. However, since the threshold of Rs. 1 crore is with respect to the previous year, calculation of amount of cash withdrawal for triggering deduction under section 194N of the Act shall be counted from 1st April, 2019. Hence, if a person has already withdrawn Rs. 1 crore or more in cash up to 31st August, 2019 from one or more accounts maintained with a banking company or a cooperative bank or a post office, the two per cent TDS shall apply on all subsequent cash withdrawals.


For example, suppose the aggregate payments made till the payment under consideration was Rs 98,00,000.00 and the present payment is Rs 4,00,000.00. The aggregate payments so made are now Rs 1,02,00,000.00, i.e. have crossed ceiling of Rs 1 crore during the relevant PY. Now TDS is applicable at 2% on Rs 2,00,000.00 i.e. Rs 4,000.00 and here the recipient will receive Rs 3,96,000.00 only instead of Rs 4 lakhs from the bank, though his bank account will be debited by Rs. 4 lakhs. The recipient can claim this TDS while filing his/her ITR at the end of the year against total tax liability. Hence it can be seen that the intention of the Government is to track the cash transactions and guard the possible tax evasion. Bank account can be savings bank account, cash credit account, current account etc for application of section 194N.


Above TDS provision envisages to promote less cash economy along with widening and deepening the tax base. However since the ceiling of Rs. 1 crore is per account maintained by the recipient, if the recipient maintains 3 Saving Bank accounts in 3 banks then he/she can withdraw total up to Rs 1 crore from each bank account without applicability of TDS u/s 194N. This provision to some extent dilutes the spirit behind the advent of sec 194N. Also in case recipient is different from the account holder and the payment is by bearer cheques there remains an ambiguity regarding the deduction of tax.


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