Attractions such as discounts, cash backs, travel miles, sign up bonuses and reward points offered by merchant dealers or banks, make credit cards a lucrative medium for making digital payments.
This objective, when seen in context of impeding tax considerations, makes it imperative to take the edge off some of these tax uncertainties.
By Sandeep Jhunjhunwala
A recent pilot survey conducted by Reserve Bank of India on retail payment habits of individuals in major cities revealed that debit and credit cards are most preferred modes for digital payments, with convenience cited as the paramount reason. As per published data, 0.19 billion credit card transactions were reported at the point of sale during March 2021, with an aggregate transaction value of Rs 72,500 crore.
While convenience is one side of the coin, it would be crucial that credit card users learn the ropes on the tax side as well.
Discounts and cash back
Attractions such as discounts, cash backs, travel miles, sign up bonuses and reward points offered by merchant dealers or banks, make credit cards a lucrative medium for making digital payments. Little would the credit card holder know that monetary value of these freebies could come within their tax bracket. Factual aspects such as nature of purchases made (whether for personal or business reasons), quantum of discounts, etc., also need to be worked out before calling the shots on the taxability front.
Whether such rewards would characterise as post purchase rebate/ discount or qualify as gift tax under Section 56(2)(x) or business gains under Section 28(iv) of the Income Tax Act is the question. Claim of business expense, net of discounts or not, is another facet.
Regulators have introduced provisions in tax laws for reporting of ‘specified financial transactions’. Banking and credit card institutions are required to report payments made by a person of amounts aggregating to Rs 1 lakh or more in cash or Rs 10 lakh or more by any other mode, in a financial year, against credit card bills issued to that person. This gets disclosed in the Annual Information Statement in Form 26AS appearing against the PAN of the credit card holder on his registered income-tax e-filing account.
Income and spending
Access to information on both income and spends gives the regulators an in-road into scrutinising transactions and detect income-spend incongruity. Credit card transactions viewed in the context of employer-employee liaison throws up challenges for employers. Usually, employees use personal credit cards for making payments against official expenses such as travel, training, subscriptions, etc. Employers find themselves in a fix while dealing with withholding tax aspects around such payments made directly by employees using credit cards, particularly to foreign vendors.
‘To do’ or ‘not to do’ is the question. ‘To do’ would mean bearing tax costs due to inherent practical impossibility to ‘deduct’ tax prior to making remittance. ‘Not to do’ would mean interest and penal consequences for TDS defaults and consequent expense disallowance.
A similar conundrum is faced by companies under GST for import of services by employees, as GST paid on such transactions subsequently by employer entails working capital. On the other hand, non-compliance could mean litigation. Availment of input tax credit on transactions using credit cards by employees and without having an invoice without GST number of employer company, is a cause for tax leakage.
Digitisation of financial transactions may undoubtedly be the need of the hour to achieve a cashless economy. This objective, when seen in context of impeding tax considerations, makes it imperative to take the edge off some of these tax uncertainties.
The writer is partner, Nangia Andersen LLP. Inputs from Amita Jivrajani & Tarun Daga