The Hindu Business Line : Is BCTT <i>ultra vires</i>?

IT IS SAID "hasty legislation leads to leisurely litigation". Chapter VII of Finance Act, 2005 imposing a new tax called banking cash transaction tax (BCTT) is a classic illustration of hasty legislation. The declared objective for introduction of this levy is in para 177 of the Finance Minister, Mr P. Chidambaram's Budget speech, which reads thus:

"The NCMP requires the Government to introduce special schemes to unearth black money and assets. I am obliged to carry out the mandate, but without giving undeserved relief or an amnesty. I am concerned about large cash transactions, especially withdrawals of cash, when there is no ostensible purpose to withdraw such large amounts of cash. These cash withdrawals leave no trail, and presumably become part of the black economy. Therefore, I propose to introduce two anti tax-evasion measures:

"Firstly, I propose to levy a tax on withdrawal of cash on a single day of over Rs 10,000 or more from banks at the rate of 0.1 per cent. Thus, a person withdrawing Rs 10,000 in cash would have to pay a small sum of Rs 10. Secondly, I propose to require banks to report to the Government all deposits which are exempt from TDS on interest. I intend to observe the results of these steps before I propose any further measures." (emphasis supplied)

The above objective is further reiterated in para 2.2 of CBDT's Circular No. 3 of June 3, 2005 (275 ITR Statute 139):

"The Finance Minister while replying to the debate on the Finance Bill, 2005 in both Houses of Parliament, reiterated this objective. Undoubtedly, therefore, the objective of the banking cash transactions tax is to prevent generation and laundering of black money through the banking channels." (emphasis supplied)

The objective has two limbs: a) to prevent generation of black money through banking channels; and b) to prevent laundering of black money through banking channels.

A look at the second objective first. Already, there is an enactment called `Prevention of Money-Laundering Act, 2002' (PMLA). The Preamble of that statute reads: "An Act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money-laundering and for matters connected therewith or incidental thereto."

If the Government is really interested in prevention of laundering of black money through banking channels, nothing prevented the Government from enforcing that law. In terms of sub-section (3) of Section 1 of PMLA, the Central Government has been empowered to bring it into force by notification in the Official Gazette. As per news report, the PMLA has been brought into force from July 1, 2005. Consequently, BCTT becomes otiose.

Coming to the first objective — prevention of generation of black money through the banking channels — the presumption of Mr P. Chidambaram is that "the cash withdrawals leave no trail and presumably become part of the black economy". It naturally follows that the new tax BCTT is actually not on the event of withdrawal of cash from banks but on the unknown trail that the cash withdrawals may not leave, as presumed by the Finance Minister. Applying the theory of pith and substance vis-à-vis the objective, this tax is levied due to the inefficiency of the Government, if any, in tracing the trail of the cash withdrawals.

Is the Government really inefficient from tracing the trail of the cash withdrawals? Let us examine this question. There are already built-in disincentives in the tax laws against use of cash for large transactions in business.

For instance, any expenditure incurred in cash over Rs 20,000 would suffer a disallowance of 20 per cent of the entire expenditure in terms of Section 40A(3) of I-T Act, 1961. The original concessions extended for cash transactions in terms of Rule 6DD(j) of I-T Rules, have been done away with, with effect from July 25, 1995.

Further, any acceptance or repayment of cash loans in excess of Rs 20,000 would attract levy of penalty equivalent to the amount borrowed or repaid in terms of Section 271D of the I-T Act.

In terms of Section 285BA read with rule 114E of the I-T Rules, banking companies, mutual funds, financial institutions, companies, registrars or sub-registrars and the RBI are required to furnish the Annual Information Return with regard to transactions of various kinds, which include details of cash transactions also.

It is anybody's guess as to what the Government has done with such an avalanche of information and data. Have they collated and put to proper use such huge volume of data? Despite such an exercise, did the Government fail in its earnest attempt, if any, in tracing the trail of huge cash withdrawals? More such valid questions do arise in the mind of any right thinking citizen who is affected by BCTT. The objective of introducing this tax is not to raise revenue but to prevent generation of black money through banking channels.

One is reminded of the words appearing in Act-III, Scene-II of Shakespeare's Julius Caesar, as spoken by Mark Antony: "They that have done this deed are honourable; What private griefs they have, alas, I know not, That made them do it; - they are wise and honourable, And will, no doubt, with reasons answer you."

(To be continued)

(The author is a Hyderabad-based advocate.)

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