Slowly and gradually, the Indian economy is getting digitized and ultimately moving towards a cashless economy. Electronic transactions ensure a clear money trail and make it very difficult for tax evaders. Many of provisions that existed and introduced from time to time in Income tax act, putting restrictions on cash transactions. The new provisions introduced are the result of the proposal submitted by Supreme Court’s constituted Special Investigation Team in July, 2011. The objective of imposing restrictions on cash transactions is to curb the flow of domestic black money which is not only adversely affecting the revenues of the Government but is also affecting the investment for productive purposes, because most of the black money is transacted in cash, it remains unaccounted and quite a sizable amount remains unproductive and is stored in the form of cash or remains invested in low priority investments such as gold, jewellery etc. The restrictions are intended to move towards a less cash economy and to reduce generation and circulation of black money.
In a bid to curb black money as well as to limit the number and amount of cash transactions, the government has come out with some new provisions and related rules and prohibited some types of cash payments in the Finance Acts. The effects of restrictions under provisions of income tax act are as follows.
- Restrict cash transactions which results disallowances of expenses or deduction under chapter VIA of income tax act in computation of taxable income and allowing deduction to incentivise better compliance.
- Penalising cash transactions above threshold limits to create effective deterrence.
Few of the provisions under income tax act and relevant income tax rules are given below:
It may be noted that the specified mode of payment namely, crossed account payee cheque or draft as stated in the relevant sections above has been expanded by Finance Act 2017 to include any payment through the use of electronic clearing system through a bank account. Such a clearing system may include Real Time Gross Settlement (RTGS), credit card or debit card payments and even payments through the Aadhaar Card System.
Promotion of digital payment to an eligible assesse covered in section 44AD:
The existing provisions of section 44AD of income tax act, inter-alia, provides for a presumptive income scheme in case of eligible assesses (individuals, HUFs and firms excepting LLPs) carrying out eligible businesses. As per provisions under above scheme, in case of an eligible assessee engaged in eligible business having total turnover or gross receipts not exceeding two crore rupees in a previous year, a sum equal to eight per cent of the total turnover or gross receipts deemed to be his business income chargeable to tax under the head “profits and gains of business or profession. Amendment provisions in Finance Act provides for lower presumptive profit rate of 6% on turnover realized in account payee cheque or DD or electronic clearing system through a bank account on or before due date for filing Income Tax Return.
The amendment is made in Finance 2017 (effective from assessment year 2017-18) in order to promote
digital transactions and to encourage small unorganized business to accept digital payments by reducing the existing rate of deemed total income of 8% to 6% in respect of the amount of such total turnover or gross receipts received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified in sub-section (1) of section 139 in respect of that previous year. However, the existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to apply in respect of total turnover or gross receipts received in any other mode. Assesses availing presumptive scheme under section 44AD must keep in view the provisions of section 269ST (as stated above) as also provisions of section 206C(TCS) while accepting cash payments/advances from customers.
While concluding, it may be noted that, by making few provisions under income tax act are not only measures to eliminate black money. No doubt a tax payer is required to adhere to all the provisions of income tax for tax compliances and to get tax benefits. But at the same time, more innovations will be required to route transactions through the banking system. As more transactions go through banking channels, reporting of income and tax compliance will improve leading to higher tax revenues. Higher tax revenues would, ideally, lead to lower tax rates, which will benefit all tax payers.