One of the 2019-20 Union Budget’s less-discussed proposals, having significant implications for agricultural trade, is the levy of a 2% TDS (tax deducted at source) on cash withdrawals exceeding Rs 1 crore in a year from any bank account.
The levy — aimed at promoting “digital payments” and a “less cash economy”, to quote Finance Minister Nirmala Sitharaman — comes on top of two earlier measures in the 2017-18 budget.
The first one, via an amendment to section 40A (3) of the Income Tax Act, discouraged cash payment above Rs 10,000 to any person in a single day, by not allowing it as deduction in the computation of income from profits and gains of business. However, this provision was explicitly stated as not applicable to payments made to producers for purchase of farm, horticulture, livestock, fish and forest produce.
The second was the introduction of a new section 269ST, prohibiting any person from receiving Rs 2 lakh or more in cash in a single day. This section, read with the previously noted amendment, made it clear that nothing stopped farmers from being paid in cash for sale of produce valued at below Rs 2 lakh. Moreover, nor would the trader be disallowed any expenditure under section 40A (3) in respect of cash payment above Rs 10,000 made to farmers for purchase of their crop.
The relatively harmless 2017-18 budget measures — notwithstanding reports of traders wrongly denying cash payment above Rs 10,000 to farmers, when the daily limit was actually Rs 2 lakh — may well be neutralised, though, by the proposed 2% TDS levy through a newly inserted section 194N.
“An average trader here buys 1,000 bags of soyabean or chana daily from some 30 farmers during the peak marketing season, which is about 120 days of the year. At Rs 4,000/bag, his daily purchase is worth Rs 40 lakh. Some buy even 3,000 bags, working out to Rs 1.2 crore of cash payments to farmers in a single day. If TDS is paid on withdrawals exceeding Rs one crore in a year, when this amount covers only 2-3 days of the trader’s purchases, that cost will obviously be passed on to the farmer,” says Jitendra Agarwal, secretary of the Anaj Tilhan Vyapari Sangh at the Chimanganj wholesale market in Ujjain, Madhya Pradesh.
But it is not just agricultural produce. Trade in livestock is also overwhelmingly cash-based. A typical buffalo meat abattoir-cum-processing plant handling 1,000-1,500 animals daily procures these from 10-15 registered suppliers. While payments to them may be through RTGS bank fund transfer, they, however, source their stock of 100-150 animals per day from primary village-level aggregators or vyaparis. The latter are, in turn, paid in cash. At Rs 20,000/buffalo, it translates into Rs 20-30 lakh of daily cash withdrawals by the registered supplier.
“A 2% tax, deducted from the supplier’s bank account when his cash withdrawals cross Rs one crore, comes to Rs 400 per animal. He will recover this by paying Rs 400 less to the vyapari, who would, then, do the same to the farmer selling his spent buffalo,” points out Fauzan Alavi, vice president, All India Meat & Livestock Exporters Association.
The ultimate impact of this would be on liquidity: Much of produce trading in India is cash-based and financed through a chain of mandi intermediaries, input dealers, retailers and primary processors. Anecdotal evidence suggests that this traditional agro-commercial capital was dealt a body blow, first by demonetisation in November 2016 and the assorted restrictions on cash transactions that followed. It has hit both liquidity and sentiment in the mandis, contributing to price crash/deflation in many farm commodities.
Chart 1 shows that the annual growth in ‘nominal’ gross value added from agriculture – which factors in both production and price increases – has fallen to low single digits since April-June 2017. This has had a knock-on effect on rural wages as well. After rising initially despite demonetisation — partly because of increased farm labour demand from a good monsoon that followed two consecutive drought years — the all-India average growth in wages for rural male workers slumped from October 2017. They have since remained at below 4% in nominal and 2-2.5% in real terms (Chart 2).
“Moving towards a less-cash economy is desirable in the long run. But the 2% TDS levy will certainly create disruptions in the short term,” adds Alavi. Interestingly, the Finance Bill has sought to exempt certain categories of individuals/organisations from the proposed levy on cash withdrawals in excess of Rs 1 crore. That includes government departments, banks, banking correspondents, white-label ATM operators and “such other person or class of persons” that the Centre may “specify in consultation with the Reserve Bank of India”. Whether traders dealing in primary produce, and whose cash purchases are backed by appropriate mandi bhugtan patra (payment slips), would be added remains to be seen.