After demonetisation, government has taken a slew of measures to promote digital economy and discourage cash transactions. Few measures have also been provided in the Finance Bill for ITA which are as follows:
18.1 Under the current provisions of ITA, if any payment for revenue expenditure to a person in one day is in excess of Rs. 20,000/-; and payment is not made by account payee cheque / draft, the same is disallowed as an expense.
Similarly, disallowance also applies to expenses incurred in one year and paid in subsequent year.
Finance Bill has reduced this limit to Rs. 10,000/-.
18.2 It has also been clarified that apart from payment by cheque / draft, payment can be made by any electronic clearing system through a bank.
18.3 Currently under ITA, the restriction on cash expenses is only for “revenue expenses” and not “capital expenses”. Revenue expenses are allowed in the year of incurring the same as they pertain to the year itself. Capital expenses result in purchase of an asset on which depreciation is available. Courts have held that the restriction on revenue expenditure does not apply to capital expenditure.
18.4 It has now been provided that if a capital expenditure of more than Rs. 10,000/- is not through banking system, then the entire expenditure above Rs. 10,000 will be ignored. The consequence is that depreciation will not be allowed. It can become a very heavy cost.
Similarly for some capital expenditure in case of some businesses like storage of natural gas, specified hotels, and some other businesses, the entire amount is available as a deduction (Investment-linked deduction). This deduction will not be available over and above Rs. 10,000 if expenditure is not incurred through banking system.
18.5 It should also be noted that in case of revenue expenses, the rules provide for certain exceptional situations where there will be no disallowance even if cash payment is above Rs. 20,000 (e.g. purchase of goods from a village where there is no banking facility). (Rule 6DD). There is no such relief for capital expenditure.
An illustration of some consequences– in case a factory is being constructed in a remote area, payment has to be made to labourers on a daily basis in cash. This payment is not revenue expenses. The entire cost of labour is a part of capital asset (factory). All such expenses will be disallowed. One can of course make a payment to a labour contractor by cheque. The labour contractor can make payment to the labourers in cash. For the labour contractor, the payment is revenue expenditure. If the payment is less than Rs. 10,000 per day per labour, it should be allowed. We are not recommending this. However people will attempt to find ways. It will be better that for capital expenditure also, appropriate relief should be available in case of bonafide difficulties.
18.6 It should also be noted that making payment in cash is not illegal. It however leads to high tax cost. In case of personal expenses, where there is no issue of any disallowance of expenses (e.g. buying personal furniture), these provisions do not apply. There are however restrictions on recipient of income. (see next para).
19.1 Finance Bill provides that if any recipient receives Rs. 3 lakh or more in cash, he will be penalised with an amount equal to the amount received by him.
19.2 For following transactions, a person will be liable to penal consequences if he accepts Rs. 3 lakhs or more cash:
i) From one person in a day:
Example: Mr. A purchases furniture worth Rs. 2 lakhs; and white goods worth Rs. 2 lakhs from Mr. B. Although both are separate transactions, Mr. B cannot accept an amount exceeding Rs. 3 lakhs in cash in one day. Whether the sale transactions are entered into in one day or over several days is not relevant.
ii) For one transaction:
Example: Mr. X wishes to buy a property of say Rs. 25 lakhs from Mr. Y. Mr. X proposes to pay Rs. 2.5 lakh every week to Mr. Y. However, the same will not be permitted because it is for one single transaction of purchase of property. The daily limit is not relevant.
iii) For transactions relating to one event or occasion from one person:
Example: ABC Pvt. Ltd. and DEF Pvt. Ltd. are jointly organising a 2-day orientation for their employees. They have appointed XY & Co. (Partnership Firm) as event managers. Their charges are say Rs. 2 lakhs per day. Now if ABC Pvt. Ltd. and DEF Pvt. Ltd. want to pay Rs. 2 lakhs each in cash, XY and Co. cannot accept it as the payment is for one single event (the orientation course). Here, limit per person or per transaction is not relevant.
These restrictions will affect contracts of catering, marriage functions, etc. where cash transactions are frequent.
19.3 If the person can establish that there were sufficient reasons due to which he had to accept the funds in cash, then there will be no penalty.
19.4 Note: As usual, all penalties are for people who bring their financial transactions on record. Consider the illustration of the payer & receiver both – do not bring the cash transactions to records. They can’t be penalised. And it is believed, there is a huge cash economy for which these provisions have no effect.
There is a huge issue in USA. All digital communication transacted – whether in India, USA or elsewhere is exposed to US Government if the service provider is a US Company. Transactions carried out within India in cash are not exposed to US Government. What kind of exposure we are inviting by going digital – is a serious issue to be considered.