TDS on cash withdrawn from bank & Societies u/s 194N: Issues & Concerns

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TDS on cash withdrawn from bank & Societies u/s 194N: Issues & Concerns

New & new system of tax collections and raising revenue is often explored by the tax department. Not all, but some of them are really interesting and worth discussion. One such provision is related to the TDS on cash withdrawals.

A person withdrawing money from his own account is subject to TDS.  There is no element of income that may be involved when the person is withdrawing his own money from his own bank account. This measure is introduced to keep a track of the person withdrawing cash and also to promote less cash economy. Earlier, the focus was simply on the cash deposit which is not stretching towards cash withdrawal & end use of cash thereafter.

Originally, section 194N has provided for TDS @ 2% on cash withdrawn in excess of Rs. 1 Cr. However, Finance Act, 2020 has altogether changed the mode of collecting TDS by providing different TDS rate & threshold limit for Income Tax Return Filers vs. Non Filers. This differential rate of TDS & threshold limit is introduced for the first time in the Income Tax Act – 1961.

 There is a lot of confusion as to the TDS u/s 194N. For ease of understanding, it is summarized as under:

  1. It is applicable only to Banks; Coop Societies carrying on the business of banking or post office who are responsible for paying in cash.
  2. Above categories of persons who are paying any sum in cash exceeding Rs. 1 crore in aggregate during the year are required to do TDS @ 2% U/s 194N.
  3. Section 194N has been amended to reduce the threshold limit for deduction of tax at source from Rs. 1 Cr to Rs. 20 Lakh if such person has not filed a return of income for all the 3 preceding years. In such case, TDS rate shall be (a) 2% on the amount withdrawn in cash if the aggregate of the amount of withdrawal exceeds Rs. 20 lakhs in a year but does not exceed Rs. 1 Cr; (b) 5% on the aggregate of the withdrawals exceeding Rs. 1 crore during the year.
  4. In short, bank, societies, post offices will now be required to verify whether the customer has filed the income tax return or not for the last 3 years to apply the correct threshold and rate of TDS. Question arises as to how to verify whether the customer is filing income tax return or not? It may be noted that new utility is provided at www.incometaxindiaefiling.gov.in to provide for this verification which is titled as “verification of applicability U/s 194N”. After clicking the verification options, the portal asked for the PAN of the customers and few other clicks, the payer will get to know the applicable TDS rate for the customers.
  5. The limit of Rs. 20 Lakh or 1 Cr is applicable for all the accounts of the customer in a bank taken together.
  6. Issue of bearer cheque:
    Issue of bearer cheque is considered as “Cash withdrawals” only and will be subject to TDS. The issue needs to be further confirmed and clarified by the RBI & CBDT.
  7. No TDS u/s 194N is required to be done in respect of cash withdrawn by the  following categories of persons:
    i. Central or State Government
    ii. Banks
    iii. Co-op. Banks
    iv. Post Office
    v. Banking correspondents
    vi. White label ATM operators
    vii. Cash Replenishment Agencies (CRAB) and franchise agents of White Label Automated Teller Machine Operators (WLATM0s) for the purpose of replenishing cash in ATMs operated by these entities (Notification 68 of 2019 dated 18.09.2019).
    viii. 
    Commission agents or traders operating under Agriculture Produce Market Committee (APMC) and registered under any law relating to Agriculture Produce Market of the concerned State have been exempted (Notification 70 of 2019 dated 20.09.2019)
    ix. 
    Authorized dealer and its franchise agent and sub-agent and Full Fledged Money Changer (FFMC) licensed by the Reserve Bank of India and its franchise agent for the specified purposes (Notification 80 of 2019 dated 15.10.2019)
  8. The language of the provision makes it clear that TDS is applicable only if the aggregate of payments exceeds Rs 1 Cr or Rs. 20 Lakh. For example, if the aggregate payments made till 21.08.2020 was Rs 99,00,000/- and the customers withdrew Rs 2,00,000 on 22.08.2020 then the TDS would be applicable only on Rs. 1 Lakh only as payment exceeding Rs. 1 Cr would be Rs. 1 Lakh only. This example is assuming that the customer has filed an income tax return for the last 3 years.
  9. An illustration of how the provision operates is as under. M/s Smart Pvt Ltd withdraws from his bank the following cash on different dates:
Date of Withdrawn Cash withdrawn

 

01.07.2020 18,00,000
02.07.2020 22,00,000
03.07.2020 58,00,000
04.07.2020 22,00,000

Let us consider the TDS calculations & implications in two different scenarios as under:

i] M/s Smart Pvt Ltd  is regularly filing and submitted the income tax return for the last 3 years to the bank. TDS liability in such cases would be as under:

Date of Withdrawn Cash withdrawn

 

Aggregate Amount TDS Applicable on amount Amount of TDS
01.07.2020 18,00,000 18,00,000 0 0
02.07.2020 22,00,000 40,00,000 0 0
03.07.2020 58,00,000 98,00,000 0 0
04.07.2020 22,00,000 120,00,000 On Rs. 20 Lakh only on cash withdrawals of Rs. 22 Lakh 40,000/-

ii] M/s Smart Pvt Ltd has not filed and submitted the income tax return for the last 3 years to the bank. TDS liability in such cases would be as under:

Date of Withdrawn Cash withdrawn

 

Aggregate Amount TDS Applicable on amount Amount of TDS
01.07.2020 18,00,000 18,00,000 0
02.07.2020 22,00,000 40,00,000 Only on 20,00,000 out of Rs. 22 Lakh of cash withdrawn 2% of Rs. 20 Lakh = 40,000/-
03.07.2020 58,00,000 98,00,000 58,00,000 2% of 58,00,000 = 1,16,000/-
04.07.2020 22,00,000 120,00,000 22,00,000

 

 

 

a)   2% of Rs. 20 Lakh = 40,000/-
and

Innovative Concept:

An innovative concept introduced in section 194N is by providing a differential threshold as well TDS rate for Income Tax Return Filers  vs. Non Filers. This new system is backed by the open online facility of verifying whether such a person is filing the income tax return or not.  I believe it’s going to be the beginning of new era of TDS regime and in years to come, the TDS Rate as well as threshold limit would be different for non filers wherein the upfront TDS rate of say 20% or 30% may be introduced for the person who is not filing income tax returns.

 

[Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]

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