Post demonetization it was expected that the Union Budget 2017 would have provisions to encourage cashless payment methods and further clamp down on the cash economy that contributes to our low tax base. in line with such expectations the honorable finance minister has announced a slew of measures that are detailed below.
Budget 2017 : Measures to invoke a less cash India
Restriction of benefits under section 80G
To limit donations in cash and the ensuing misuse of such cash flows, it has been proposed to amend provisions of section 80G to disallow 80G deductions where any donations exceeding Rs 2000 are made in cash. The erstwhile limit in this case was Rs 10,000.
Donors making donations in excess of the specified limits will still be able to give such donations but will not be able to take the benefits under section 80G being of rebates offered on account of such donations.
Amendment of Section 40A, to reduce the threshold for cash transaction
Section 40A of the act was already in place as a check to limit cash transactions with any person in excess of Rs 20,000 per day. To further clamp down upon cash transactions, the limit for such transactions has been halved to Rs 10,000.
Therefore from AY 2018-19 onwards:
- Cash expenses above Rs 10,000 per day per person/business
- Payments booked in one year but paid in another year by way of cash
Shall not be allowable as deduction while computing taxable income.
Section 43, 32 and 35AD amended to include capital purchases
In spite of restrictions on revenue expenses in cash, there is no commensurate bar on purchase of capital assets in cash. To rectify this anomaly and to further clamp down upon the use of cash in business the following changes have been proposed in the finance Bill 2017:
- Amendment of section 43 of the act to disallow exclude for the purposes of calculation of depreciation the cost of any asset in respect of which payment of more than Rs 10,000 per day is made in cash.
- Amendment of Section 35AD to ensure that any expenses for which payments exceeding Rs 10,000 per day are made in cash shall be not be eligible for investment linked depreciation on capital expenditure incurred.
While both steps are welcome, this shall not completely limit cash transactions or capital asset acquisitions via cash as room for misuse of these provisions exists.
Restrictions on cash transactions in excess of Rs 3 lakhs
While there are restrictions on cash payments by businesses, some of which have been detailed earlier there were no equivalent restrictions on use of cash by Individuals. To check this a new Section 269ST has been proposed to be introduced in the Act to curb large transactions by cash by imposing restrictions on persons receiving such sums.
As per the proposed section no person shall receive a sum exceeding Rs 3 lakhs from a person in a day, in respect of a single transaction or in respect of multiple transactions relating to one event/occasion from a person.
While the phrase “transaction” has not been defined here, it shall be construed in it widely understood meaning to cover both capital as well as revenue transactions.
Persons receiving such sums in contravention of this provision shall be liable to pay penalties of a sum equal to the amount so received by them.
As a result of this amendment the provisions of tax collection at source on cash sale of jewelry (detailed in section 206C) become inconsequential and have been omitted
Lower deemed profit ratio for businesses receiving non-cash payments
Section 44Ad allows for the taxation of profits earned by small enterprises without the need for maintaining books of accounts by using an assumed rate of profitability ( minimum 8%). Since such businesses do not have to maintain books and get them audited, this aids in ensuring compliance and at the same time ensures that the cost of compliance is kept low.
Thanks to demonization and the ensuing charge towards digital payments, the government has proposed to reduce the minimum rate of profitability under section 44AD to 6% for payments received through electronic means. This will result in a net saving of 0.6% in net taxes on revenues earned. Given that the benefits of section 44AD are applicable to Individuals and firms earning up to Rs 2 crores in revenue, the maximum possible savings in taxes under this relaxation will be around Rs 1,20,000.
Sums received by businesses through cash and non account payee cheques will still be applicable to tax under the old regime.
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