On the 8th of November 2016, the Union Government of India declared a ‘historic’ demonetisation of high-value currency notes across the country. The stated objective of this massive exercise was 3-fold:
All of these have a single running feature – cutting down on the use of cash. Section 40A3 of Income Tax Act is also an initiative to reduce transactions in cash. Instead, more emphasis is laid on digital payments that leave behind a trail.
Following is a look at the various facets of this Act.
This Section has 2 primary sub-heads- 40A3 (a) and 40A3 (b). The first provision deals with individuals, while the latter deals with firms and organisations.
According to the latest laws laid down in the 2017 Union Budget, any payments made to an individual above Rs. 10,000 a day in cash cannot be claimed as a deduction while filing tax returns. Before the 2017 announcement, this upper ceiling was set at Rs. 20,000 per day.
This reduction of threshold is projected by experts as a significant dis-incentivisation of cash transactions.
Under Section 40A3 (b), all expenditure incurred by any organisation, company, or firm that the establishment pays in cash above Rs. 10,000 per day cannot be claimed as tax exemption either. One significant feature of the 40A3 Income Tax Act in this second scenario is that it limits itself to expenses only.
If the same organisation is accruing assets by purchasing land or machinery, etc., it does not come under the ambit of expenses and is covered under the Capital Gains Act.
Thus, regardless of whether cash payments are by individuals or companies, the upper ceiling is Rs. 10,000 per day. The Government is encouraging electronic payments including credit and debit cards, account-payee bank cheque or draft, ECS, and other means.
However, suppose an organisation is hiring new employees, plying goods via transporters, or leasing goods carriages. In that case, the Rs. 10,000 cash payment ceiling can be breached, and the maximum sum payable by cash is Rs. 35,000 a day. This is the only exemption possible under Section 40A3 (b).
There are several merits that shifting to digital payments brings with them. They leave a trail that can be followed by tax sleuths, ensuring that minimum ‘Black Money’ enters the economy and provides tools to the SFIO and other Central organisations to combat graft or fraud.
Here are 2 examples of the implementation of Section 40A3.
The same examples and associated exemptions will also apply to an individual if the total payments a day are up to and including Rs. 10,000 in cash.
Section 40A3 has several exemptions since India is still a cash-dependent economy. All of these instances come under Rule 6DD. In all the scenarios given below, there will be no ‘disallowance’ of payments even if it is more than Rs. 10,000 a day and where an AC-payee cheque or bank draft is not used.
There has been a large spike in digital payments and money transfers after these rules were framed. Besides, the Government has aggressively pursued the idea of a ‘Cashless India’ at all levels of governance.
Section 40A(3) – Rejections of Cash Payments Worth More Than 20,000 and Exceptions Element 40A(3) of the Income Tax Act is an important section that guarantees there is proof of payment made, which helps to decrease tax evasion and promote accountability. Payment can only be made in the form of a demand draught or a check.
The income tax legislation provides for treating payments as earnings and gains from business or profession if the expenditure of Rs. 10,000 is incurred in any given year and payment for such expenditure is made in cash in any subsequent year in excess of Rs. 10,000 in a single day.
Section 40A of the Income Tax Act of 1961, introduced by the Finance Act of 1968 with effect from April 1, 1968, provides for the disallowable expenses or payments that are not deductible in specific situations when computing income under the title Profit & Gains of Business or Profession.
Purchase of stock-in-trade, whether or not the expense is covered by section 40A(3). Payments made for stock-in-trade would also be included by the word expenditure, and such payments might be rejected if paid in cash in an amount greater than the amount stipulated in section 40A.
When the payment is made to RBI, SBI, land mortgage, and more.