Cash tax may drive moneybags to co-op banks

The finance minister's effort to check tax evasion by slapping a nominal tax on cash withdrawals may, indeed, force moneybags into the risky world of unscheduled cooperative banks.

Another interesting aspect to this is that co-operative banks in India are mostly floated by the political class. The Finance Bill has specified that the tax on withdrawals will apply only to scheduled banks.

Apart from the public and private sector banks, and foreign banks, only a handful of cooperative banks are listed in the second schedule of the Reserve Bank of India Act.

Of the 2,100-plus co-operative banks operating in India, only 55 qualify as scheduled urban co-operative banks, 68 banks are under RBI directives and 179 banks are under liquidation, according to the Reserve Bank of India (RBI) report on Trend and Progress of Banking in India, 2003-04.

At present, around 1,809 unscheduled urban co-operative bank are operating in the country. Finance minister Chidambaram had imposed a 0.1 per cent withdrawal tax on cash withdrawals exceeding Rs 10,000 on any single day by a person from any scheduled bank.

"Unscheduled urban co-operative banks are usually used by small businessmen and politicians to park their money," said managing director of a Gujarat based co-operative bank.

"It's important to get these banks in the tax net or else these transactions would go unaccounted for," he added.

The fine print of the Finance Bill specifies that: "'Scheduled bank' means the State Bank of India, constituted under the State Bank of India Act 1955, a subsidiary bank as defined in the State Bank of India (Subsidiary Banks Act 1959) a corresponding new bank constituted under section 3 of the Banking companies (Acquisition and Transfer of Undertakings) Act,1970 or under section 3 of the Banking Companies (Acquisition and transfer of undertaking) Act 1980, or any other bank being a bank included in the second schedule to the Reserve Bank of India Act 1934."'