LEGALLY SPEAKING May, 2017

Transcription

1 LEGALLY SPEAKING May, 2017 PUSH FOR A LESSER USE OF CASH Consequences of exceeding limit of Rs.2 lakhs Authors Gita Kripalani, The Law Point Tamoghna Goswami, The Law Point

2 : CONSEQUENCES OF EXCEEDING LIMIT OF Rs. 2 LAKHS Introduction The historic decision of demonetization of Rs. 500 and Rs 1000 currency notes on 8th November 2016 was a move to change the Indian normal... A predominantly cash economy has now to be substituted with a digital economy, which will bring more money into the banking system and lead to better revenue generation - Sh. Arun Jaitley, Finance Minister. Following the announcement of demonetization the next measure was the legislation relating to taxation of the huge cash deposits by The Taxation Laws (Second Amendment) Act Taxpayers, who were unable to explain the source of the demonetized cash deposited, were expected to voluntarily declare the sums so deposited as undisclosed or undeclared income or else face higher tax and heavier penalties. The government s narrative surrounding demonetization has now moved to the next step - towards a less cash economy. This sequel, which does not seem to affect ordinary lives or ordinary people, is the insertion of a new section 269ST in the Finance Act, 2017 made effective from 1st April The section, in simple language, provides that no person shall receive an amount of two lakh rupees or more, a. in aggregate from a person in a day; b. in respect of a single transaction; or c. in respect of transactions relating to one event or occasion from a person; otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account. Penalty at 100% of amount in excess of the limit of Rs. 2 lakh limit is provided u/ s 271DA for receipt of sum in contravention of the above provisions. The penalty shall however not be levied if the person proves that there were good and sufficient reasons for such contravention. However, these provisions shall not apply to: (i) any receipt by (a) Government; (b) any banking company, post office savings bank or cooperative bank; (ii) transactions of the nature of loans, deposits etc. not exceeding RS. 20,000/- referred to in section 269SS; (iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify. Purpose of Introducing Section 269ST The background and purpose of introducing these provisions is contained in the Memorandum Explaining Clauses of the Finance Bill 2017.

3 Black money is generally transacted in cash and large amount of unaccounted wealth is stored and used in form of cash. In order to achieve the mission of the Government to move towards a less cash economy to reduce generation and circulation of black money, it is proposed to insert section 269ST. Points to note: The restriction is only on receipt of money and not on anything in kind. The target is cash transactions. The restriction is only on person receiving the money and not on the person paying the money. Therefore, penalty U/s. 271DA on violation of these provisions shall also be leviable only on the person receiving money and not on the person paying the money. The restriction of Rs. 2 lakhs is applicable on all the entities (except those which have been exempted specifically). The reference to person in this section means individuals, HUFs, companies, firms, AOPs, BOIs, local authorities and other artificial judicial persons as defined in sec 2(31) of the Income Tax Act. Thus, the restriction is on receipt of money by any individual, firm etc. from any other individual, firm etc. The provisions of this section are not applicable when the receipts are less than rupees 2 lakhs. They are applicable only when the amount of receipt is of Rs. 2 lakhs or more. This limit is mentioned in many ways like per day, per transaction, for occasion / event etc. The amount beyond the above limit can be received only through (a) an account payee bank cheque ; or (b) an account payee bank draft ; or (c) use of electronic clearing system through a bank account (e.g., NEFT, RTGS, Online transfer from one bank account to another etc.). The restriction is applicable irrespective of purpose of accepting amount i.e., whether business purpose, personal purpose or as a trustee, custodian etc. The restriction is applicable irrespective of the fact whether the receipt is with or without consideration. In case receipt of money is without consideration in contravention of Section 269ST, there will be dual impact, one charge of tax U/s. 56 (in specific cases) as well as levy of penalty U/s. 271DA. All the transactions / purposes (other than those mentioned in section 269SS and exempted in section 269ST itself) are covered by the limit. Some example of these transactions / purposes may be (a) sale proceeds of goods, (b) sale proceeds of movable properties, (c) fees, remuneration, salary, brokerage, contract payments etc., (d) recovery of loan given and interest thereon (this is not covered presently in Section 269SS), (e) gift received on marriage etc. occasion or otherwise, (f) donation receipts by trusts etc.,(g) advance taken by any person for personal purpose or for purpose of business itself, This is only an illustrative list. There may be many other type of transactions / purposes where the above restriction is applicable. Simultaneously with the cash restriction, consequential amendment has been made to Section 206C. The earlier provision relating to tax collection at source at the rate of 1% of sale consideration on cash sale of jewellery exceeding Rupees Five lakh will now be applicable to all sales (except bullion). If someone pays cash of more than Rs. 5 lakhs (Rs. 2 lakhs for bullions) then he has to provide his PAN to the seller collecting TCS. Otherwise, TCS shall apply at the rate of (i) two times the rate mentioned or; (ii) 5%. Thus strict measures have been introduced to curb unaccounted money. How to Determine Limit of Cash of Less than Rs. 2 Lakhs in Different Circumstances An attempt (not comprehensive or complete) is made to detail some of the circumstances where this section would be applicable.

4 Limit of Receipt of Cash from a Single Entity in a single day. Through sub clause (a), limit is put on receipts from a single entity in cash etc. in a single day (i.e., in one date). This limit is not for each receipt from an entity in a day but for aggregate receipts from any single entity in a day and not from multiple entities. (i)if X receives a single payment of Rs. 1 lakh from Y in a day there is no violation of this Section. However, if he receives a single payment of Rs. 2 lakhs from Y there is a violation of this Section. (ii) If X receives Rs. 1 lakh from Y in a day in small amounts then there is no violation. If he receives Rs. 2 Lakhs from Y in a day in small amounts, then there is a violation. (iii)if X receives Rs. 1 Lakh from Y and also Rs. 1 Lakh from Z in a day (transaction with Y and Z is not a single joint transaction) then there is no violation. Likewise, if X receives Rs. 1 Lakh from Y on one day and Rs.1 lakh on any other day then there is no violation, provided it is a separate transaction.. (iv)if X receives a part amount through account payee cheque etc. and balance amount is received through cash etc. then the limit of less than Rs. 2 lakhs will be only in respect of amount received through cash etc. and the amount received through permissible modes will not be impacted by the restriction. Limit of Receipt of Cash in respect of Single transaction Through sub clause (b) restriction is introduced in respect of each transaction also. This limit will work simultaneously with the limit of aggregate receipt per day from a single entity. According to this an entity can receive only less than Rs. 2 lakhs in respect of a single transaction through cash etc. An amount more than this limit can be taken only through account payee cheque etc. (i) If A sells goods to B through a single invoice for Rs. 4 lakhs then only less than Rs. 2 lakhs can be received by A from B in cash etc. The balance amount will have to be received through account payee cheque etc. only. A cannot receive in cash etc., the entire Rs. 4 lakhs on different days in piecemeal within the limit of per day per entity. It is so because not only the limit of per day per entity is to be followed but also the limit of per transaction is to be followed simultaneously. (ii) If A sold goods of Rs. 4 lakhs to B through two different bills of Rs. 2 Lakhs each. Then entire Rs. 4 lakhs can be received by him from B in cash etc. on two or more days complying with the limit of per day per entity because here the limit of per transaction as well as of per day per entity is not crossed. However, if one sells goods worth Rs 4,50,000 through three different bills of Rs.1,50,000 each to one person and accepts cash in 1 single day at different times then section 269ST(a) will be contravened. Limit of Receipt of Cash in respect of single transaction jointly with two or more entities.

5 If a transaction is a joint transaction with many entities, in such a situation also this limit will be a consolidated limit in respect of all the payees for that single transaction. Separate limits will not be available in respect of each payee in respect of a single transaction. A sold goods to B and C jointly for Rs. 4 lakhs through a single invoice. Then total amount of only less than Rs. 2 lakhs can be received in cash etc. from B and C. It is not permissible that Rs. 2 lakhs in cash etc. is received from B and rest Rs. 2 lakhs is received from C. Limit of Receipt of Cash in respect of all the transactions related to one event or occasion. Through sub clause (c) restriction is put in respect of all the transactions which are related with any single event or occasion. This limit will be applicable simultaneously with the limit of aggregate receipt per day from a single entity as well as with the limit in respect of single transaction. According to this, an entity can receive only less than Rs. 2 lakhs in respect of all the transactions which are related to single event or occasion. There is no definition / description of the words event or occasion in section 269ST. In such a situation their meaning can be taken as they are understood in the real practical life e.g., marriage, birthday, etc. If a person has done work of different nature in a marriage, say, given a marriage hall on rent for marriage reception, done decoration and also provided catering services and has issued three different bills of Rs. 2 lakhs each for each separate service (total Rs. 6 lakhs), then he can receive only 2 lakhs from his customer in cash in respect of all the 3 bills / transactions. If entire Rs. 6 lakhs are taken in cash etc. then even though the limit of per transaction and also limit per day per entity is not crossed, but since all the transactions are related with the single occasion of a marriage, then the limit will be a single limit for all the related transactions. These illustrations are only in respect of typical situations. There may be many other situations where these limits are to be applied. Tax payers should avoid the pitfalls. Finally, wherever and whenever, section 269ST gets contravened, penalty u/s 271DA is applicable at 100% of amount in contravention. LACUNAE REMAIN: Though almost all the transactions / situations are covered in this section but some obvious lacunae remain and total avoidance of use of cash may not be achieved. For example, when the transactions are not related with a single event or occasion, but is a transaction of sale of goods. An entity may prepare several bills of less than Rs. 2 lakhs and may receive the amount in cash (complying with per day per entity limit). Another lacunae is keeping the payer of cash out of the purview of this section. This is a grievous error as this may give rise to non recoveries of dues by the receiver as the latter would insist on payment by account payee cheque. Many doubts remain on the effectiveness of this section. It may be perceived more as a deterrent than a provision which will completely halt the circulation of cash in sums exceeding Rs. 2 lakhs. As

6 the provision now stands, knowing the Indian mind for ingenuity, it just leaves scope for creative invoicing or no invoicing i.e. an unrecorded/unaccounted all cash deal. We know that huge cash transactions in real estate deals has not abated or even reduced. Likewse in purchase of jewellery, high value assets etc More comprehensive legislation is required in other enactments, particularly property registration charges and rate of tax to incentivise the use of less cash.

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