On June 1, 2005, a Banking cash transaction tax (BCTT) was introduced on every withdrawal transaction. On every withdrawal transaction on any a single day if it was withdrawal of cash from an account (other than savings account) or receipt of cash on encashment of term deposits there was 0.1 percent tax. The limit for individuals was Rs 25,000 and Rs 1 lakh for others, above which the tax became due.
In the Union Budget for the year 2008-09 the Finance Minister has proposed to withdraw the banking cash transaction tax (BCTT). The Finance Minister P Chidambaram had said while presenting budget 2007-08 last year as other instruments become more effective, it would be possible to review BCTT next year. The BCTT was introduced in June 2005. Therefore the government was likely to review this banking cash transaction tax in the budget. The main purpose for designing the BCTT was to keep an eye on unaccounted for money. There has been decline in the growth rate of cash withdrawals from banks so it had become necessary to review the BCTT and there is a possibility of expansion of transactions under the annual information report (AIR) system.
Industrial chambers, including FICCI, had given a proposal to the Finance Minister to withdraw this tax in view of the fact that all high value transactions have now to be supported by the Permanent Account Number for the purpose of identification. Apart from collection of vast information about transactions through AIRs, the Income Tax Department is also collecting information from banks on suspected transactions under the Money Laundering Act.
The other option before the Finance Minister could be to bring high cash withdrawals, say above Rs 50,000, under the limit of AIRs. He had earlier said the transactions under the AIRs would be extended at an appropriate time.
Earlier as part of measures to control tax evasion and unaccounted for money transactions, the finance minister had imposed a cash transaction tax of 0.1 percent on amounts in excess of specified limits that's withdrawn from bank accounts on the same day. According to this one had to pay Rs 10 for every Rs 25,000 he withdraws in a single day. But, now, many establishments accept cards.
Moreover, many places, if they accept card payments, levy an additional charge of 2-3 percent. Vendors of durables, hospitals and educational institutions either do not accept card/cheques or levy high charges on them. The burden comes on the shoulders of the consumer either way. Although the amount may look small, the charge is still there.
In turn this amounted to double taxation. An individual keeps his after-tax income in a bank. But when he withdrew the amount, he was again charged a tax. One had to withdraw less than Rs 25,000 over a period of time in order to avoid the extra burden.
Even the administrative difficulties were many for banks. It had created an additional workload as well as cost for the banks Also the bank would collect the tax on behalf of the government. The bank would then need to keep separate records for all these transactions. The move has been welcomed by all.