The government is considering the possibility of introducing a tax on cash withdrawals of Rs 10 lakh in a year. The government is mulling this move to discourage use of paper currency, promote digital payments as well as crack down on black money. Another proposal under consideration is mandating Aadhaar authentication for all high-value cash withdrawals as the government believes that the move will make it easy to track individuals and keep tax returns in check.
The government believes that annual cash withdrawals of more than Rs 10 lakh are not needed for most individuals and businesses, as mentioned in a report in Times of India. While the final decision is yet to be made, the government is clear that it does not want to burden the middle and poor class with excessive compliance.
In its Monetary Policy Committee (MPC) meet last week, the Reserve Bank of India (RBI) announced that it will do away with the charges on NEFT and RTGS transfers. The finance ministry believes that this will help in promoting non-cash transactions.
Moreover, this move is in line with other rules mandated by the government to keep cash transactions in check. A few years ago, the government made digital or cheque payments mandatory for businesses to claim benefits of business expenses. Following this rule, large companies are now making wage payments of more than Rs 10,000 through cheque or via bank transfer.
It remains to be seen if the tax on cash withdrawal will be implemented. Something similar was introduced by the UPA a decade ago. It had introduced a bank cash transaction tax that was met with a lot of resistance, and was withdrawn a few years later. The current amount of Rs 10 lakh in a year is much higher threshold.
In 2016 a high-level panel of chief ministers, headed by then Andhra Pradesh CM N Chandrababu Naidu had recommended reintroduction of the tax on withdrawals of over Rs 50,000, among other measures to check cash use after demonetisation. However, the cash withdrawal tax was not implemented.