Taxing cash withdrawals

The central government's reported move to tax aggregate cash withdrawals by an individual in excess of Rs 10 lakh in year is nothing short of a hasty decision that will for sure create uproar among common people.

As per news reports emanated from New Delhi on Monday, the finance ministry is reportedly mulling 3-5 per cent tax on cash withdrawals if the cumulative amount in year goes beyond Rs 10 lakh. The reports also indicated that this initiative will be incorporated in the upcoming full-fledged Union Budget 2019 scheduled to be presented by Nirmala Sitharaman, the first full-time woman Finance Minister of the country, in Parliament next month. It is said that the move is aimed at curbing unaccounted or black money. The other objective seems to be encouraging digital transactions.

It is pertinent to recall here that Prime Minister Narendra Modi took the country by surprise by demonetising high-value currency notes of Rs 500, Rs 1,000 denominations in November 2016. He claimed that the demonetisation exercise would clean up all the black money and nail the hoarders of illicit stash. But the move boomeranged as entire high-value currency came back to the banks.

Furthermore, people withdrew deposits from banks and invested in real estate instead. That way, demonetisation generated more black money than what it could eliminate, as the involvement of unaccounted money is always very high in the real estate business. Stung by the failure of the demonetisation to achieve its intended objective, the central government changed the track and maintained that the note ban was aimed at encouraging digital transactions.

The latest tax move on cash withdrawals will have similar ramifications and may force people away from banking system. Afterall, no one will be ready to pay such a high tax for withdrawing their own money from banks.

For instance, if one withdraws Rs 10 lakh more cash than the stipulated limit, then he or she will have to shell out Rs 30,000 to Rs 50,000 towards the 'withdrawal tax'. That's not a small amount. So, there is the danger of people shunning away from depositing their hard-earned money in banks. That way, the move will generate more illicit cash instead of curbing it. The new tax is not the right way to eliminate black money.

However, there are some effective ways to curb black money. Broadly, real estate transactions, tax evasion and corruption generate the largest chunk of unaccounted money in the country. There is no way black money can be curbed without addressing these issues. To minimise black money's role in real estate, the government should reduce land registration charges, GST and other taxes on property sales. Tax evasion in other areas could also be curbed by lowering taxes.

Moreover, lower taxes will lead to increase in tax base. But the third major source of black money i.e. corruption can't be curbed so easily. The government should devise innovative ways to check the corruption. Black money can be eliminated to a large extent if these three key issues are effectively addressed. But levying tax on cash withdrawals is a futile exercise.