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Tax on withdrawals: Will it curb black money?

Larissa Fernand in Mumbai | February 28, 2005 14:42 IST

When the finance minister spoke about a 0.1 per cent tax on withdrawal of cash of Rs 10,000 or more from banks or ATMs on a single day, there was an uproar in Parliament.

Probably, everyone watching the Budget on television simultaneously groaned too.

While Chidambaram claims that it is a method to curb black money transactions, there is a lot of ambiguity surrounding it.

First and foremost, he has not distinguished between individuals and corporates. Corporates would definitely need to withdraw such amounts on a periodic basis.

Secondly, it will be more inconvenient for individuals. ATM limits are around Rs 10,000 per day. Now all they have to do is withdraw the amount in two days if they want to want to avoid tax. And why not? After all, why should you pay tax on your own money which you are withdrawing? And it is money on which you have already paid tax, in any case!

And for those who take out transaction slips for every withdrawal, well, the banks will find this more expensive in the long run. A single transaction is now two!

The finance minister justifies it as a measure to curb the circulation of black money.

Here's how it will work. Let's say a builder demands Rs 1 million (Rs 10 lakh) as black money from a potential buyer. This buyer will have to withdraw the money from his bank account to make that payment. He will have to make a payment of Rs 1,000 on it.

Hopefully, this will work as a deterrent. Appears small but this is targeted at huge amounts. All said and done, it will not go a long way in curbing the black market. Just make it a little more inconvenient.

However, tax experts feel that he will definitely increase the amount to be taxed to around Rs 25,000 (up from Rs 10,000).

Let's wait and see.

Budget 2005-06: Complete Coverage

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