Congress MPs, who met finance minister P Chidambaram last week, sought an abolition of Banking Cash Transaction Tax (BCTT). No surprises. This demand featured their 2006-07 pre-Budget wish-list as well, though the FM did not yield then.

Insiders say the traders lobby is active behind the scenes. No one is willing to go on record though. The tax is perceived to be an irritant to traders who launder money through the banking channel as it leaves an audit trail. They can be tracked down for evasion and that has happened.

Revenue authorities in Mumbai, for instance, have recommended retaining the levy as they reckon that it is an effective anti-tax evasion tool. The investigation wing has tracked several bogus bills, artificial loss claims and dummy firms through such audit trails. This was precisely the rationale given by the FM for continuing the tax in this fiscal. According to him, the banking cash transaction tax turned out to be a boon as it has helped establish remarkable trails. He made it clear that the levy was not a revenue raising measure.

Individuals pay a 0.1% tax on cash withdrawals from their current accounts if the amount exceeds Rs 25,000 on a single day. For businesses, the tax is charged if withdrawals are over Rs 1 lakh.

At this juncture, however, there are divergent views even within the government on the efficacy of the levy. A disconcerting feature has been the rise in revenue collections from this source. The levy was meant to stem the generation of black money by discouraging cash transactions and moving towards a cheque economy.

There are really no scientific estimates of unaccounted moneyit is essentially income that should have been subject to taxation. However, even a modest increase in collections from this tax is a warning signal. Ideally, collections should have been nil. So theres clearly a case for review and the process is underway as part of the Budget exercise.

The tax was imposed in June 2005. Ahead of India, at least six Latin American countries, including Argentina and Brazil, introduced a tax on different types of banking transactions in the mid-seventies. The levy was meant to shore up revenues of these fiscally stressed economies.

The trigger for replication was the governments commitment in the common minimum programme to introduce measures to unearth black money and assets. An amnesty scheme, it was reckoned, would not go down well with the Left. The government settled for a levy on cash withdrawals.

There were hitches right from the start. The tax was initially proposed a tax on withdrawals from savings accounts, but this was dropped. Some public finance experts criticised the levy, saying there was no rationale for its imposition.

Financial intermediation is important for a developing country like India. Imposing a levy only creates a transaction cost on financial intermediation which should be avoided. Banks can, instead, be asked to provide details on cash withdrawals, if the objective is to establish audit-trails, said Dr Govinda Rao, director, National Institute of Public Finance and Policy Bankers are more guarded. A policy reversal, according to them, is a call to be taken by the government. On a stand-alone basis, reporting transactions on cash withdrawals is not too much of a burden for highly computerised banks. But this may not be the case for all banks, said a senior banker.

Banks are, in any case, listing out details on cash deposits of over Rs 10 lakh in the annual information returns (AIR). The PAN-based data is processed by the tax information network hosted by the National Securities and Depositories Limited (NSDL) and is matched with the individuals tax returns.

Cash withdrawals will eventually come in the AIR basket. When they do, banks will furnish this information once a year and not on a monthly basis as they do now. This could pose problems in real time monitoring of these transactions.

With core banking solutions (CBS) in place, constant monitoring is possible if banks transmit data on cash withdrawals to a central system in the income tax department, say the national data centre. Smart operators will find it tough to beat the system, if this mine of information is processed and used effectively to track evaders. Policy flip flops is something that any government must avoid. But the cash withdrawal tax could well be one exception to this rule.