TDS on Cash Withdrawals: New Mandi Tax

The 2019-20 Union Budget has proposed a 2% TDS (tax deducted at source) on cash withdrawals exceeding Rs 1 crore in a year from any bank account. The move is aimed at promoting digital payments and a less-cash economy.

Measures Proposed in Earlier Budgets to Promote Digital Economy

The 2017-18 budget made the following proposals:

• It proposed an amendment to section 40A (3) of the Income Tax Act for discouraging cash payment above Rs 10,000 to any person in a single day. The amendment did not allow cash payment above Rs 10,000 as a deduction in the computation of income from profits and gains of business.
• A new section 269ST was added. This prohibited any person from receiving Rs 2 lakh or more in cash in a single day.

The amendment to section 40A (3) of the Income Tax Act explicitly stated as not applicable to payments made to producers for purchase of the farm, horticulture, livestock, fish and forest produce.

Impact on Farm Economy

• The measure of TDS on cash withdrawals possibly would be transferred to farmers. This additional burden would possibly affect the farm income.
• Most of the farm trading in India is cash-based and financed through a chain of mandi intermediaries, input dealers, retailers and primary processors. There is ample evidence to show that demonetization dealt a body blow by restricting cash flow. The TDS may lead to liquidity crunch and restricted cash flow would adversely impact cash economy.

Will Traders be exempted?

The finance bill also seeks to exempt certain categories of individuals/organisations from the proposed levy on cash withdrawals in excess of Rs 1 crore. These include government departments, banks, banking correspondents, white-label ATM operators and “such other person or class of persons” that the Centre may “specify in consultation with the Reserve Bank of India”.

Now we have to wait and watch whether traders dealing in primary produce, and whose cash purchases are backed by appropriate payment slips would be added remains to be seen.