In an age where we are rapidly moving towards a digital-first economy, India still grapples with the excessive reliance on physical currency. S.194N of the Income Tax Act, 1961, is a step towards encouraging digital transactions and thus curbing unaccounted cash flows. This provision, introduced by the Union Budget, 2019, deals with Tax Deducted at Source (TDS) on cash withdrawals that exceed the prescribed threshold.
Aimed at creating a paper trail for high-value cash movements, this section applies to withdrawals from banks, cooperative societies engaged in banking, and post offices. The TDS kicks in at withdrawals exceeding ₹1 crore at the rate of 2% on the amount exceeding the threshold. Later, the Finance Act, 2020, altered the tax rates to 2% on withdrawals exceeding ₹20 lakhs and 5% if it exceeds ₹1 crore for taxpayers who have failed to file their returns for the preceding 3 consecutive years while maintaining the old rates for taxpayers who have filed their tax returns in the past 3 years. This section is applicable to any taxpayer, including an individual, a HUF, a company, a partnership or LLP, and Association of Persons (AOPs) or Body of Individuals (BOIs).
While S.194N has resulted in increased ITR filing and promoting Digital India, businesses reliant on cash flow, such as agriculture, retail and transport businesses, etc., face operational hurdles due to limited cash fluidity. It also places a strain on banks and post offices which bear the onus of implementing the provision, which requires upgradation to existing systems, staff training and compliance burden. Despite its good intentions, this section has been criticised for unfairly impacting small business owners and the rural population. Additionally, misinterpretations by banks regarding thresholds and exemptions have been reported.
As India continues surefootedly towards digitalisation, S.194N walks a tightrope. Cashless transactions are here to stay and might help steer the public towards it with an incentive-based approach rather than a punishment-based one. Rewarding taxpayers who adhere to the provision might coax more people to adopt digital transactions. Sector-specific exclusions, improving digital infrastructure and promoting financial literacy could be the key to the success of S.194N. This section stands as not just the government’s commitment towards transparency but also our collective responsibility towards redefining India’s financial identity.
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