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Incentives to Encourage Cashless Business Transactions

CA.R.S.KALRA 
on 07 February 2021

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A. Presumptive Rate of Income:

The presumptive rate of income would be 8% of total turnover or gross receipts.

However, Proviso to sub-section (1) provides that the presumptive rate of 6% of total turnover or gross receipts will be applicable in respect of amount which is received

Incentives to Encourage Cashless Business Transactions
  • By and account payee cheque or
  • By an account payee bank draft
  • By use of electronic clearing system through a bank account OR through such other electronic mode as may be

During the previous year or before the due date of filing of return under section 139(1) in respect of the previous year.

However the assessee can declare in his return an amount higher than presumptive income so calculated, claimed to have been actually earned by him.

  • Other Electronic Prescribed by CBDT: The Central Board of Direct Taxes has prescribed other electronic modes to provide for the followings as an acceptable electronic mode of payments-
  • Credit Card;
  • Debit Card;
  • Net Banking;
  • IMPS (Immediate Payment Service);
  • UPI (Unified Payment Interface);
  • RTGS (Real Time Gross Settlement);
  • NEFT (National Electronic Funds Transfer), and
  • BHIM (Bharat Interface for Money) Aadhaar Pay

For this purpose, a new Rule 6ABBA with the heading 'Other electronic modes' is introduced in the Income Tax Rules, 1962. This rule has been given a retrospective effect and will come into force from 01- 09-2019 even though the notification was issued on 29- 01-2020.

This proviso to sub-section (1) has been inserted w.e.f. 01/04/2017 to promote digital transactions. The government has offered incentive to the seller for accepting payment by banking channels or digital means by allowing lower rate of income. This was particularly necessary to encourage digital transactions after demonetization.

Assessee accepting payment through account payee cheque/ account payee draft or ECS through bank or other electronic mode can declare income at 6 % of turnover/ sales or gross receipts. However, the payment must be received before the due date of filing of return.

Example: Mr. Arshdeep Singh, an individual carrying business of laptops has a Turnover of Rs. 80 Lakhs during the F.Y. 19-20. He has received the payments as

  • Rs.60 Lakh in cash
  • Rs.10 Lakh by account payee cheque during the previous year Rs. 4 Lakh by ECS through bank account upto 31st July 2019 Rs. 6 Lakh has not been received yet.

Now, since the TO is below Rs.2 Cr, he has the option of availing benefits of section 44AD. Mr. Arshdeep Singh can exercise this option and declare income as

 
8% of Rs.66,00,000 (60 Lakh + 6 Lakh) 5,28,000
6% of Rs. 14 Lakh (10 Lakh + 4 Lakh) 84,000
Total income from PGBP 6,12,000

Computation of Income under Section 44AD

Computation of Income under Section 44AD

Benefit of the reduction of deemed profit rate under Section 44AD of the Income- tax Act to taxpayers who will accept digital payments

 

Section 44AD of the income tax Act, 1961 provides that if taxpayer is engaged in the any eligible business and having a turnover of Rs. 2 crores or less ,its profits are deemed to be 8 per cent of the total turnover or gross receipts.

In order to achieve the government's mission of moving towards a cash-less economy and to provide incentive small traders/businesses to proactively accept payments by digital means, it has been decided to reduce the existing rate of deemed profit of 8 per cent under Section 44AD of the Act to 6 per cent in respect of the amount of total turnover or gross receipts received through banking channels digital means.

However, the existing rate of deemed profit of 8 per cent referred to in Section 44AD of the Act, shall continue to apply in respect of the total turnover or gross receipts received in cash.

The benefit to traders and small businesses is explained in following different scenarios considering FY 2020-21:

Particular 100% Cash Turnover 80% Digital Turnover 100% Digital Turnover
Total Turnover 1.90 Crore 1.90 Crore 1.90 Crore
Cash Turnover 1.90 Crore 38 Lakh NIL
Digital Turnover NIL 1.52 Crore 1.90 Crore
Profit on Cash Turnover @ 8% 15.20 Lakh 3.04 Lakh NIL
Profit on Digital Turnover @ 6% NIL 9.12 lakh 11.40 Lakh
Total Profit 15.20 Lakh 12.16 Lakh 11.40 Lakh
Tax Payable under New Regime 201240 122928 107120
Tax Saving NIL 78312 94120

From the above table, it is clear that if an assessee makes his transactions in cash on a turnover of Rs. 1.90 crore, then his income under the presumptive scheme will be presumed to be Rs. 15.20 Lakh at the rate of 8 per cent of turnover, his total Tax Liability under new tax regime will be Rs. 201240. However, if an assessee shifts to 100 percent digital transactions and his profit will be presumed to be Rs. 11.40 Lakh at the rate of 6 per cent of turnover, his total Tax Liability under new tax regime will be Rs.107120. It is to be noted that by adopting digital system i.e. non-cash system. He will save income tax of Rs.94120.00

Lower Rate of Income in Different Scenarios

As per the proviso to 44AD(1), income can be declared as 6% of the turnover if the payment is received digitally or through banking channel before the due date of return filing u/s 139(1). However, many a times due date for return filing is extended or sometimes it may happen that assessee files his return after due date or he has filed return earlier than the due date. We shall discuss here whether the assessee can claim 6% of turnover as his income under these scenarios.

Case 1: Due date of return filing is extended

The due date of return filing u/s 139(1) is extended by the Income Tax Department due to different reasons such as natural calamities, pandemic, technical glitches etc. The extended date becomes the due date u/s 139(1) of the Act for that assessment year. Therefore, any payment received through banking channel/ digitally up to the extended due date u/s 139(1) of the Act shall be eligible for claiming 6% of turnover as income.

Example: Suppose the due date for filing return u/s 139(1) for the A.Y. 2019-20 has been extended to August 31, 2019. An eligible assessee who has received payment through account payee cheque, account payee draft, ECS through banking channel or other prescribed modes up to 31/08/2020 shall be eligible for declaring profits at the rate of 6% of turnover.

Case 2: If the assessee files his return after the due date of return

The proviso to sec 44AD(1) of the Act requires payment to be received up to due date of return filing. Any payment received even digitally/ through banking channel after the due date of return filing shall not be eligible for lower rate of income i.e 8% of turnover or higher shall be assumed as income.

Example: Suppose the due date for filing return u/s 139(1) for the A.Y. 2019-20 is July 31, 2019 and the assessee files his return on Dec 26, 2019. Whether receipts through banking channel/ digitally up to Dec 26, 2019 will be eligible for claiming 6% of turnover as profits?

The receipts through banking channel/ digitally up to July 31, 2019 shall be eligible for claiming 6% of turnover as profits. The payments received after the due date i.e 31/07/2019 shall not be eligible for lower rates and these payments received after the due date of filing return will not be given the benefit of 6% of turnover .

Case 3: If the assessee files his return before the due date of return

When the assessee files his return before the due date u/s 139(1) of the Act, he would have considered the facts on the date of filing of return and not assumed the facts beyond that date. The receipts through banking channel/ digitally up to date of return filing are considered for lower rate of income and the amount not received yet shall be considered for 8% of turnover as profits. The interesting issue here is what about the payments received through banking channel/ digitally after the date of return filing but before the due date of return filing. Whether these will be considered for 8 % of turnover or 6% of turnover as profits? If 6% is to be considered whether the return can be revised? Let us understand this with help of an example.

Example: Mr. Raj has a turnover of Rs. 80 Lakh for the A.Y. 2019-20. The due date of return filing is July 31, 2019. He files his return on May 15, 2019. He has received the following payments by account payee cheque:

  • Up to 31/03/2019 - Rs. 50,00,000
  • Up to 15/05/2019 - Rs. 15,00,000 From 16/05/2019 to 31/07/2019 Rs. 10,00,000
  • Received after 31/07/2019 Rs. 5,00,000

Mr. Raj has filed return on 15/05/2019. Till that date, payments to the extent of Rs.65,00,000 has been received by account payee cheque. Mr. Raj can declare progits from business as:

  • 6% of Rs. 65,00,000 = Rs. 3,90,000
  • 8% of Rs. 15,00,000 (80L - 65L) = Rs. 1,20,000
  • Total profits = Rs. 5,10,000

Mr. Raj has received Rs. 10,00,000 after date of return filing but before due date of return filing. Mr. Raj can can not claim 6% of Rs. 10,00,000 as profits by revising the return. There is no doubt that the return can be revised u/s 139(5) before the end of assessment year or up to completion of assessment whichever is earlier. But as per the provisions of sec 44AD of the Act, the income claimed by Mr.Raj in his income tax return will be final and subsequently by revising return ,the same cannot be reduced.

The assessee has to maintain complete records about the receipts from customers, whether they are received in cash or through banking channel/ digitally and whether they are received up to due date of return filing or not. Further, the record maintenance is for two financial years. Maintenance of all these records is a cumbersome task for a small business person. It is also against the basic object of presumptive taxation which is to make the taxation system simple, easy and hassle-free for small taxpayers. There is a need to create a balance between the object of less-cash economy and creating ‗ease of doing' business environment.

B. Combined Study of Section 44AB with Section 44AD

Currently, businesses having turnover of more than one crore rupees are required to get their books of accounts audited by an accountant. In order to reduce the compliance burden on small retailers, traders, shopkeepers who comprise the MSME sector, the Finance Act 2020 has raised the limit of audit by five times the turnover threshold for audit from the existing Rs. 1 crore to Rs. 5 crores. It is also to be noted that this amendment is applicable for F.Y. 2019-20 i.e for the A.Y. 2020-21

Further, in order to boost less cash economy, it has been provided that the increased limit for mandatory tax audit shall apply only to those businesses which carry out less than 5% of their business transactions in cash. But in this connection, following points are to be noted

  1. This threshold limit for the applicability of mandatory tax audits is applicable to business entity only and limit for a professional assessee shall continue to be at Rs. 50 lacs even if he receives entire consideration in non-cash
  2. It is not provided that who will certify the margin of transactions in cash mode of 5 percent. It appears that the assessee is himself requiring declaring the percentage of receipt in cash mode and non-cash
  3. The provision to increase the turnover limit for a mandatory tax audit is amended to benefit the MSME sector.
  4. The amendment is carried out only in section 44AB. No amendment is made in section 44AD and thus the turnover limit of Rs. 2 crores shall continue. Suppose an assessee is having a turnover of 180 lacs for the financial year 2020-21 and all the transactions of business are by non-cash modes. The net profit of the assessee is Rs.7 lacs which is less than 6% of turnover of the assessee. Now as per the provisions of sec 44AD, the assessee is required to maintain books of account and get them audited u/s 44AB of the Act.
  5. The term ‗aggregate of all receipts and aggregate of all payments' is very wide and covers not only the receipts and payments on account of turnover or sales but all other business transactions. Capital introduction, receipt and repayment of a loan, etc., partners' drawings, payment of freights, etc. Even payment of taxes made in cash will come within the purview of cash

It can be better understood with the help of following table.

Turnover Cash Payments ≤ 5% Cash Receipts ≤ 5% Net Profit Audit u/s 44AB
6 crores Yes Yes 6% Yes
4.5 crores Yes Yes 7% No
3 crores Yes No 5% Yes
1.8 crores Yes Yes 6% Yes
1.5 crores Yes Yes 5% Yes

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