The government today removed the 1% tax on cash purchases above Rs 2 lakh, after putting a limit on transactions.

In budget 2016, finance minister Arun Jaitley had imposed on a 1% tax on any cash purchase of goods and services, which was to be collected by the seller or service provider at the time of sale. The tax for cash purchase of bullion was kept at Rs 2 lakh, with exception on jewellery purchase, which was capped at Rs 5 lakh.

But in Budget 2017, a limit of Rs 3 lakh was introduced for cash transactions including that for jewellery, but was revised downwards to Rs 2 lakh through an amendment to the bill.The penalty on violation is an amount equal to that transacted.

To reconcile both provisions, the 1% tax has been scrapped and is effective from April 1. For removing the tax, sub-sections (1D) and (1E) from Section 206C has been scrapped.

Section 206C(1D) was inserted through the Finance Act, 2016, expanding the scope of Section 206C to ban cash transactions exceeding Rs 2 lakh.

This cash transaction limit was part of the 40 amendments that the government moved to the finance bill. The amendment had to be introduced to lower the limit from the budget proposal of Rs 3 lakh.