Got Cashback from wallet or credit card transaction? You may be liable to pay Tax.

The demonetization has lead us to the cashless society where we are bound to use credit cards and wallets more often. Every bank, financial institution and wallet companies do provide cash back on various transactions to incentivize customers and attract more customers.

Online shopping websites like Flipkart, Snap deal, Amazon, etc and some stores like Big Bazar, Dmart, etc are offering cashback on use of certain credit cards or mobile wallets to pay for the goods. Travel websites like Goibibo, Make my trip, expedia, etc are offering cashbacks on booking tickets, hotels or holidays by using credit cards or mobile wallets. Online taxi aggregators Ola and Uber are offering cashbacks on taxi rides. Online food delivery order booking websites Zomato, are offering cashbacks on orders. You can get cashbacks even on payment of your utility bills by using certain credit cards or mobile wallets link Paytm, Freecharge, etc . The amount of cash back if we calculate from all the sources can be more than few thousands in a year. So, are such cashbacks taxable?

Discount Vs Cash Back

When you buy a product or service you may get some discount upfront on payment. The amount you pay is price of product or service less discount received. The product cost for you will be net price. However, in case of cashback you pay full amount for the product or service and receive cashback which you can utilize to buy another product or service. So cashback is actually different from discount.

Cashback Accounting for Business or Professional Expenditure or Asset Buying

If cashback is received for the business expenditure incurred, the expenditure will be accounted in the books of account at the net price paid (i.e Gross expenditure less cashback) that would be allowed as a deduction. If the expenditure is for acquiring a business asset, on which one is claiming depreciation, the cost of the asset for the purposes of depreciation would be computed by deducting the cashback from the total cost of that asset.

Salaried Employee receiving Cashback on reimbursement of Expenditure by Employer

Normally, any allowance given by an employer for business purposes is exempt only to the extent of the actual expenditure incurred by employee. In this case, the actual expenditure incurred by employee is a lower amount than the reimbursement, i.e net expenditure which would be relevant for this purpose. Therefore, the excess reimbursement is actually taxable in employee’s hand as income from other source.

Cashback can be taxable in hands of Individuals as Gifts even if he is not in business or profession

As per Section 56 of the Income Tax Act, where an individual receives any sum of money, without consideration, the aggregate value of which exceeds Rs 50,000, the whole of the aggregate value of such sum shall be taxable in the hands of the individual under the head income from other sources. The tax department may argue that cashbacks credited to the bank account or e-wallet should be taxable.

 

Time factor in case of cashback

What would be the position if the expenditure is incurred in one year, but the cashback is received in the subsequent year? In case individual is following cash based accounting, the cashback in subsequent year in case of expenditure will be accounted as income and in case of asset it will be reduce from cost of asset in subsequent year. In case of mercantile system of accounting business income, we would have to account for the cashback as an amount receivable in the initial year of expense itself, and reduce it from the expenditure or cost of asset.

BRIEF SUMAMRY OF ABOVE EXPLANTION

Nature of Transaction

Taxability of Cashback

Note

Salaried Employee  Claiming Reimbursement of Expenditure

Cash back is taxable as income from other source

In case reimbursement is claimed on gross expenses

Personal Expenses

Incase of cashback received for personal spending is more than 50k then it can be taxable

Any cash back received by individual can be clubbed in his income as Gift received without consideration

Business or Professional Expenditure

Cashback is treated as reduction of cost of expenditure

The expenditure is booked at the net price you pay

Buying Asset for Business or Profession

Cashback is reduce from cost of the asset

Depreciation to be claimed on Net price of asset

 

Clarification in Budget 2017

Currently, there is no litigation on taxability of cashbacks in India. However, it is possible that the tax department may start issuing notices and attempt to tax cashbacks. Hope Budget 2017 provides some clarification on taxability of cashback.

For any query you can write to chirag@cachauhan.in . Before making any decisions do consult your Professional / tax advisor.  Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on.

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CA Chirag Chauhan

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Chartered Accountant, CA Chauhan



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