A Comprehensive Analysis of Section 194N: Payment of Certain Amounts in Cash

Introduction

Section 194N of the Income Tax Act, 1961, introduced via the Finance Act, 2019, serves as a critical legislative measure aimed at curbing the flow of unaccounted cash in the economy. The section mandates a Tax Deducted at Source (TDS) on cash withdrawals exceeding a specified threshold from banks, cooperative societies engaged in banking, and post offices. As India transitions towards a more digitized financial system, this section plays a pivotal role in disincentivizing cash transactions and promoting digital payments.

Legislative Background

Section 194N was introduced as part of the government`s broader strategy to reduce cash transactions in the economy. The demonetization drive in 2016 highlighted the pervasive use of cash in the economy, particularly in unaccounted transactions. The introduction of Section 194N was a subsequent step to reinforce the government`s push towards a cashless economy and to monitor large cash withdrawals that could potentially be used for unaccounted transactions.

Detailed Provisions of Section 194N

Section 194N imposes an obligation on certain entities to deduct tax at source on cash withdrawals exceeding a specified limit. The entities responsible for deducting TDS under this section are:

1. Banking Companies: As defined under the Banking Regulation Act, 1949, including all scheduled and non-scheduled banks operating in India.

2. Cooperative Societies Engaged in Banking: Cooperative banks that fall under the purview of the Banking Regulation Act, 1949.

3. Post Offices: Post offices that provide banking services and facilitate cash withdrawals from accounts maintained by individuals.

The section applies when the aggregate cash withdrawal from one or more accounts maintained by the recipient with these entities exceeds one crore rupees during a financial year.

TDS Rate and Thresholds

The TDS rate under Section 194N is 2% on the amount exceeding the threshold limit of one crore rupees. However, the section also provides for different thresholds and rates in specific cases, particularly concerning non-filers of income tax returns. The detailed provisions are as follows:

1. General Threshold and Rate:

• TDS is applicable at 2% on cash withdrawals exceeding one crore rupees in a financial year.

2. Non-Filers of Income Tax Returns:

• For recipients who have not filed their income tax returns for all three assessment years relevant to previous year for which the due date under Section 139(1) has expired, preceding the previous year of cash withdrawal, the threshold for TDS is reduced to twenty lakh rupees.

• In such cases, the TDS rate is:

• 2% on cash withdrawals exceeding twenty lakh rupees but not exceeding one crore rupees.

• 5% on cash withdrawals exceeding one crore rupees.

Exceptions and Exemptions

The section also outlines specific exemptions where the provisions of Section 194N do not apply. These exemptions are crucial to understand as they delineate cases where the mandatory TDS is not applicable. The key exemptions are:

1. Government Entities: Any payments made to the government are exempt from TDS under Section 194N.

2. Banking Companies and Cooperative Societies: Cash withdrawals by banking companies or cooperative societies engaged in banking or Post Office are exempt from TDS under this section.

3. Business Correspondents and White Label ATM Operators: Payments made to business correspondents or white-label ATM operators, who act as intermediaries for banks, are also exempted from TDS. These entities operate under specific guidelines issued by the Reserve Bank of India (RBI).

4. Co-operative Societies: In addition to the general provisions under Section 194N, a specific relaxation is provided for cooperative societies. According to the proviso, where the recipient of the cash withdrawal is a cooperative society, the threshold for TDS is raised from Rs.1 crore to Rs.3 crores. This means that for cooperative societies, TDS under Section 194N will only apply if the aggregate cash withdrawals exceed Rs.3 crores during the financial year. This adjustment recognizes the unique operational needs of cooperative societies, which often deal with higher cash transactions, particularly in rural and semi-urban areas

5. Special Notifications: The Central Government, in consultation with the RBI, may issue notifications specifying certain recipients for whom the provisions of Section 194N shall not apply or shall apply at a reduced rate. Such notifications typically outline conditions that these recipients must satisfy to avail of the exemption or reduced rate.

A. Cash Replenishment Agencies (CRAs) and White Label ATM Operators (WLATMOs):

• Notification No. 68/2019 dated 18th September 2019 exempts CRAs and WLATMOs from TDS on cash withdrawals made exclusively for ATM replenishment, provided specific conditions are met.

B. Commission Agents or Traders Under Agricultural Produce Market Committee (APMC):

• Notification No. 70/2019 dated 20th September 2019 exempts commission agents or traders registered under the APMC from TDS for cash withdrawals related to agricultural trade activities, under certain conditions.

C. Authorized Dealers and Full-Fledged Money Changers (FFMCs):

• Notification No. 80/2019 dated 15th October 2019 exempts authorized dealers and FFMCs, along with their franchise agents, from TDS on cash withdrawals for purchasing foreign currency from tourists or disbursing inward remittances under the Money Transfer Service Scheme (MTSS), subject to specified conditions.

Compliance and Operational Challenges

While Section 194N is a significant step towards reducing cash transactions, its implementation has posed several challenges. Banks, cooperative societies, and post offices have had to upgrade their systems to track cash withdrawals across multiple accounts held by a single recipient. The need to identify non-filers of income tax returns has also added to the compliance burden.

The real-time application of TDS under this section requires these entities to have robust systems capable of:

1. Tracking Aggregate Withdrawals: Ensuring that the TDS is deducted only when the aggregate withdrawals from all accounts exceed the prescribed threshold.

2. Identifying Non-Filers: Leveraging data from the Income Tax Department to identify non-filers and applying the reduced threshold and higher TDS rates accordingly.

3. Ensuring Timely Compliance: Depositing the TDS with the government within the prescribed timelines and issuing TDS certificates to the recipients.

Impact on Stakeholders

The introduction of Section 194N has had far-reaching implications for various stakeholders:

1. Banks and Financial Institutions: The increased compliance burden has necessitated investments in technology and human resources to ensure adherence to the provisions of Section 194N. Banks have also had to engage in extensive customer education to inform account holders about the implications of cash withdrawals under this section.

2. Account Holders: Individuals and businesses accustomed to cash transactions have had to reassess their reliance on cash, particularly those who do not file regular income tax returns. The section has acted as a deterrent against large cash withdrawals, pushing many towards digital transactions.

3. Government and Regulatory Bodies: The implementation of Section 194N has provided the government with valuable data on cash withdrawals, aiding in the monitoring of cash flow in the economy. It has also reinforced the government`s digitalization agenda, encouraging the use of electronic modes of payment.

Practical Scenarios and Case Studies

To illustrate the practical application of Section 194N, consider the following scenarios:

1. Scenario 1: A Regular Filer of Income Tax Returns

• An individual who files regular income tax returns withdraws Rs. 1.2 crore in cash during a financial year. The bank deducts TDS at 2% on the amount exceeding Rs. 1 crore, i.e., on Rs. 20 lakh, resulting in a TDS of Rs. 40,000.

2. Scenario 2: A Non-Filer of Income Tax Returns

• A small business owner, who has not filed income tax returns for the last three assessment years, withdraws Rs. 50 lakh in cash during the financial year. Since the individual is a non-filer, the threshold for TDS is Rs. 20 lakh. The bank deducts TDS at 2% on the amount exceeding Rs. 20 lakh but not exceeding Rs. 1 crore, i.e., on Rs. 30 lakh, resulting in a TDS of Rs. 60,000.

3. Scenario 3: Exempted Entity

• A government agency withdraws Rs. 2 crore in cash for operational purposes. As per the exemptions under Section 194N, no TDS is deducted on this withdrawal.

Conclusion

Section 194N of the Income Tax Act, 1961, represents a significant legislative measure aimed at reducing cash transactions in the economy. Its detailed provisions, exemptions, and compliance requirements reflect the government`s intent to monitor and curb the flow of unaccounted cash. While the section has introduced new challenges for banks, financial institutions, and account holders, it has also paved the way for a more transparent and digitized financial system.