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Applicability of tax on Cashback

Suresh Thiyagarajan 
on 28 June 2019


In the increasing backdrop of E-commerce platform of doing business, there arises a tax angle on how to deal with Cashback. Though Income tax, tax the income arising from cashback exceeding Rs. 50,000 per year on an aggregate basis. This issue is addressed in Sec 56(2)(x) which deals with the gift tax. It taxes all those gifts received during the PY where the monetary value exceeds Rs. 50,000 per year in aggregate. The underlying idea of introducing this section is to curb from people giving out gifts to avoid tax (especially in the form of Immovable property).

After, scrapping wealth tax it has become common for people to send out gifts instead of actual consideration for their work. This area was left out for more than a year where people dealt in gifts without coming in tax ambit. If Gift which was given of out of love and affection, the same will not be taxed. (gift from a specified person not taxable). However, if the same is from an unknown person or from a client (in most cases) the same will be brought to tax. Hence gift in the form of monetary or non-monetary benefits will be taxable u/s 56(2)(x). Only the valid question is could notional income even though it's not an actual income, could it be brought to tax...?

Some important section which taxes these types of income are Sec 28(iv) (PGBP), Sec 41(1) (PGBP), Sec 50C (Capital Gains) sec 56(2)(x) (IOS). According to sec 28(iv) where any benefits whether convertible into money or not arising from a business or profession will be taxable under the head PGBP. Sec 41(1) also deals with the taxation of remission or cessation of trading liability. In this case, provision already created or expenses incurred which goes down to decrease the trading liability and subsequently a benefit on account of such expenses are received which will result in tax liability. Now the real question with respect to Cashback.

Cashbacks are only decreasing in expenses and how can it be taxed?

If otherwise not for cashback my income would have been increased. The very basic nature to tax an income is that it should have actually been earned by you. Like in sec 28(iv) it will go down to decreasing the trading liability or some other benefits would have been claimed. Hence it is getting taxed. Likewise, sec 50C which comes in play when a person sells a Capital Asset lesser than its Stamp Duty value. Hence, the value for which he should have paid tax but is getting taxed by virtue of sec 50C. The same goes with sec 56(2)(x), where the gift received which is basically in the form of income which is getting taxed. In all the above scenario either income is escaping from tax liability or some other form of benefits are received by the assessee (like in case of cessation of trading liability).

However, with respect to cashback, the same scenario of decreasing the tax liability could not be enforced in here because expenses will not play a role in taxing Individual's income such as Salaries, Income from House Property, Capital Gains and Income from Other Sources. Cashback (not relating to business) will have no impact on the above income unlike in sec 28(iv) or sec 41(1). It merely decreases one expense. I take the benefit of market condition and various schemes to reduce my expenses. With my knowledge and schemes available in the market if I get to take advantage of it, I get a discount, coupons or in that case cashback. This is another form of discount where I am purchasing a product from a retailer, in the form of Cashback.

Hence, the counter-argument could be in relation to sec 28(iv) and sec 41(1), where any benefits whether monetary or not will be taxable as income. But these two sections will have a bearing on the profit of the company but when it comes to income other than Business income, the same will not have an impact on assesses profit. Hence, keeping the above points in mind, there should not be a tax on Cashback.

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Category Income Tax
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Suresh Thiyagarajan 

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