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An Indian money changer shows new Indian rupee currency notes to a customer while sitting on the side of a road iDIBYANGSHU SARKAR/AFP/Getty Images

The Finance Ministry is planning to introduce 3-5 percent tax on cash withdrawal of Rs 10 lakh annually in the upcoming budget. The step is seen as the government's push to keep a check on high-value cash deals and make digital payments mandatory.

In a move which would disincentive heavy cash users in the economy, the Modi government is deliberating on levying a tax on cash withdrawal of Rs 10 lakh a year. The centre is of the view that paying Rs 30,000-50,000 for Rs 10 lakh annual withdrawal would be considered a huge loss for the users which would discourage them from doing cash payments.

English daily The Times of India, citing its sources has reported that the Finance Ministry may announce 3-5 percent tax on these transactions. The government is, however, planning to deliberate on the issue diligently as it wants to avoid any step which would burden the middle class and the poor with excessive compliance.

Notably, in order to push digital transaction, the Reserve Bank of India has removed the transaction fee imposed on banks for using its NEFT/RTGS payment servers earlier this week. Moreover, the centre has also announced that it is considering to set up a panel to review charges taken by banks on ATM withdrawals.

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A Reserve Bank of India employee counts currency notes before placing them into new machines that will weed out soiled and counterfeit notes in Bombay REUTERS/Roy MadhurReuters

Since its first term, the BJP-led government is pushing for a digital transaction and tracking illicit cash in the economy. In another proposal, the Finmin is also planning to mandate the Aadhar authentication for high-value cash withdrawals. The government is of the view that this would lead to easy tracking of individuals and tally tax returns.

"A MGNREGA beneficiary needs to authenticate receipts using Aadhaar but someone withdrawing Rs 5 lakh need not do so as things stand," said one of the officials. In 2016, Chandrababu Naidu, the then Chief Minister of Andhra Pradesh, chaired a high-level committee on digital payments had recommended for a series of measure to encourage digi-transaction.

Some of its submission included the introduction of tax to discourage cash transactions, a cap on the maximum allowable limit for large-size cash transactions and complete removal of taxes on card payments to push digital transactions among the people.