Few issue related to TDS on cash withdrawals u/s 194N

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Few issue related to TDS on cash withdrawals u/s 194N

Originally section 194N has provided for TDS @ 2% on cash withdrawn in excess of 2%. However, Finance Act, 2020 has altogether changed the mode of collecting TDS by providing (a) different tax rates for (b) two different classes of persons. Further, it also prescribes two threshold limits.

Section 194N as amended reads as under:

 

Payment of certain amounts in cash.

194N. Every person, being,—

 (i) a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act);

(ii) a co-operative society engaged in carrying on the business of banking; or

(iii) a post office,

who is responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding 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, deduct an amount equal to two per cent of such sum, as income-tax:

Provided that in case of a recipient who has not filed the returns of income for all of the three assessment years relevant to the three previous years, for which the time limit of file return of income under sub-section (1) of section 139 has expired, immediately preceding the previous year in which the payment of the sum is made to him, the provision of this section shall apply with the modification that—

(i) the sum shall be the amount or the aggregate of amounts, as the case may be, in cash exceeding twenty lakh rupees during the previous year; and

(ii) the deduction shall be—

(a) an amount equal to two per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds twenty lakh rupees during the previous year but does not exceed one crore rupees; or

(b) an amount equal to five per cent of the sum where the amount or aggregate of amounts, as the case may be, being paid in cash exceeds one crore rupees during the previous year:

Provided further that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the first proviso shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification:

Provided also that nothing contained in this section shall apply to any payment made to—

 (i)  the Government;

(ii)  any banking company or co-operative society engaged in carrying on the business of banking or a post office;

(iii) any business correspondent of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the guidelines issued in this regard by the Reserve Bank of India under the Reserve Bank of India Act, 1934 (2 of 1934);

(iv) any white label automated teller machine operator of a banking company or co-operative society engaged in carrying on the business of banking, in accordance with the authorisation issued by the Reserve Bank of India under the Payment and Settlement Systems Act, 2007 (51 of 2007):

Provided also that the Central Government may specify in consultation with the Reserve Bank of India, by notification in the Official Gazette, the recipient in whose case the provision of this section shall not apply or apply at reduced rate, if such recipient satisfies the conditions specified in such notification.]

 

 

With an aim to widen and deepen tax base & promote less cash economy, FM Smt. Nirmala Sitharaman presented section 194N with following background:

  1. Mr. Speaker, Sir, our 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, I propose to take a slew of measures. To discourage the practice of making business payments in cash, I propose to levy TDS of 2% on cash withdrawal exceeding 1 crore in a year from a bank account.

 

 

There are few interesting issues which one needs to know.

 

  1. TDS is applicable only on amounts above the threshold. 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.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 scenario 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

2.The limit of Rs. 20 Lakh or Rs. 1 Cr is not per branch but per Bank. It means that, a banking company or a co-op. bank or a post office which is responsible for paying any sum, being the amount or the aggregate of amounts, in cash exceeding Rs. 1 crore during the previous year, to any person from one or more accounts, shall at time of payment of such sum, deduct 2% of such sum as income-tax. The limit of Rs. 20 Lakh or 1Cr is applicable for all the accounts of the customer in a bank taken together.

3. It is an obligation of the payer to verify whether the customer is filing income tax return or not. This obligation is on the bank to verify whether the customer has filed the income tax return or not for the last 3 years so as 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.

  1. Above reading will convey that certain payment are outside the net of TDS U/s 194N & no tax is required to be done if cash withdrawal from bank or post office is made by the following recipients:
  2. Central or State Government
  3.  Banks

iii.   Co-op. Banks

  1. Post Office
  2. Banking correspondents
  3. White label ATM operators

vii. Other persons notified by the Govt. in consultation with the RBI. The following categories of persons are notified for the purpose of non TDS u/s 194N:

Commission agent & Traders in APMC, Money Changer, and Cash Replenishment Agencies not subject to TDS U/s 194N on cash Withdrawal : CBDT Clarified

F. No. 370142/27/2020-TPL, Dated 20th July, 2020

 

(a)  Notification 68 of 2019 dated 18.09.2019: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 subject to conditions mentioned in the said notification

(b)   Notification 70 of 2019 dated 20.09.2019: Commission agent or trader operating under Agriculture Produce market Committee (APMC) and registered under any law relating to Agriculture Produce Market of the concerned State have been exempted subject to conditions specified in the said notification

(c)  Notification 80 of 2019 dated 15.10.2019: the 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.

 

  1. Issue of bearer cheque is considered as “Cash withdrawals”which may not be to the account holder directly.TDS is applicable on this 3 entities who are responsible for paying any sum, being the amount or the aggregate of amounts, as the case may be, in cash exceeding 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, deduct an amount equal to two per cent of such sum, as income-tax. The liability is attracted on “paying cash”. Further, section mentions that the TDS is applicable on cash payment from one or more accounts maintained by the recipient.  Issue of bearer cheque is not withdrawal simpliciter though it may result in cash payment by the bank. In case of bearer cheque, the bank is paying cash is the basic conditions which is getting fulfilled for the purpose of section 194N. However, the other conditions may not be fulfilled namely,
  2. the recipient may not be the account holder in the same
  3. Recipients may not be the person owning an account.For applicability of any provision, the entire applicable section needs to be read as an integral code and not in pieces. Section 194N as a complete piece can make anyone draw a conclusion that section 194N is not applicable in case of bearer cheque by which cash withdrawal is done by any person other than account holder. It may be mentioned here that Rule 114E, at S.No. 1(c) requires cash withdrawals for the purpose of specified financial transactions (SFT) as reportable transactions. Similar views have been adopted by the judiciary while interpreting the logic of section 40A(3) which places restrictions on expenditure payment in cash. Further, Section 194 does mention about the “aggregate limit of Rs. 20 lakh or One Crore” which may include the withdrawals done pursuant to bearer cheque as well.However, whether above will equally hold good for section 194N is an issue which only the time will decide. It will be in the interest of all if CBDT suitably clarifies the issue of applicability of TDS in case of bearer cheque.

    To be on a safer side, I am of the considered opinion that the TDS will be applicable on payment done by the bank pursuant to bearer cheque. This interpretation is in line with the legislative intent of the FM expressed in the documents placed before parliament.

Another issue which arises is whether the TDS is to be done by following inclusive method or exclusive method. For example, a person is withdrawing cash of Rs. 1.25 Cr from his bank account. Now, whether TDS would be 2% of Rs. 1.25 Cr i.e., Rs. 2.50 Lakh as a result of which the account of the customer will be debited by Rs. 127.50 Lakh (Towards cash withdrawals for Rs. 1.25 Cr & towards TDS Rs. 2.50 Cr) or Rs. 1.25 Cr only (wherein cash withdrawals to be given to customers would be Rs. 122,54,902 (i.e., Rs. 1.25 Cr / 102%) whereby his account will be debited by Rs. 1.25 Cr consisting of cash payment of Rs. 122,54,902 and Rs. 2,45,098 will be transferred to the TDS account.  It may be noted that the normal presumption at the time of withdrawals from the bank is that he will be taking that much cash with him and so ideally in such a situation one can presume that the exclusive method may be followed and Rs. 1.25 Cr be paid to the customer and Rs. 2.50 Lakh be taken from the account for TDS payment. However, this position may be different if the person is simply closing the bank account or the customer doesn’t have enough balance for TDS recovery. In such cases, the bank must advisably follow the inclusive method of TDS and must do TDS prior to making the payment. 

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