1. Got cashback incentive from banks? Well, it may be taxable

Got cashback incentive from banks? Well, it may be taxable

With the popularity and value of cashbacks increasing, it is important to analyse the tax implication of these cashbacks in the hands of the individuals.

By: | Updated: October 24, 2016 7:19 AM
With the popularity and value of cashbacks increasing, it is important to analyse the tax implication of these cashbacks in the hands of the individuals. With the popularity and value of cashbacks increasing, it is important to analyse the tax implication of these cashbacks in the hands of the individuals.

A cashback is an incentive programme offered by banks and e-wallet companies as a marketing strategy to acquire customers. Under these programmes, a percentage of your spending is credited back to your account either immediately or after a few days depending on the scheme.

For instance, Mr A makes payment for an Uber ride using his Paytm account. Due to an ongoing cashback scheme, he gets a cashback of Rs 50 on his ride. This cash back of Rs 50 is credited to his Paytm account after he pays the total bill. He can use this credit for his next ride.

A cashback programme is different from a discount scheme. Under a discount scheme, the invoice value of goods purchased is reduced, requiring less payment to be made by the consumer in the first place. But in a cashback programme, credit is received after full payment of the invoice and may be received after a few days.

With the popularity and value of cashbacks increasing, it is important to analyse the tax implication of these cashbacks in the hands of the individuals. Yes, it might come as a surprise to many, but based on the provisions of Income Tax (I-T) Act, cashbacks may be taxable in the hands of individuals.

As per Section 56 of the I-T Act, where an individual receives any sum of money, without consideration, the aggregate value of which exceeds Rs 50,000, the whole of the aggregate value of such sum shall be taxable in the hands of the individual under the head “income from other sources”. Although, in our opinion, cashbacks are post purchase discounts and hence not taxable, based on the provision of Section 56, the tax department may argue that cashbacks credited to the bank account or e-wallet should be taxable.

Since the concept of cashback is fairly new in India, the income tax laws do not specifically provide for the tax treatment of these. However, it is interesting to note here that the IRS in the United States has already considered this issue. According to it, the types of rewards and the way in which you receive them determine whether they are taxable. A cashback programme for using your credit card is treated as if it were actually a post-purchase discount and hence not taxable. However, a credit card reward programme that offer large sign-up bonuses is considered as taxable income.

Currently, there is no litigation on taxability of cashbacks in India. However, it is possible that the tax authorities may start issuing notices and attempt to tax cashbacks. We only hope that before this starts the tax authorities issue clarifications on the same.

The writer is partner Nangia & Co. With inputs from Neetu Brahma, manager, Nangia & Co

  1. S
    Shekar
    Oct 24, 2016 at 5:37 am
    This is a regressive tax practice.It amounts to Expenditure Tax, The Finance Ministry must immediately ure the consumers that the cashback facility will be completely tax free. This type of taxation works contrary to the economic definition of utility as the satisfying capacity of a commodity or service. When countries facing recession are contemplating stimulus package to spur growth in economy, it will be unwise to tax the cashback incentive in the hands of consumers for further spending as a booster dose to economic growth is like killing the goose that lays golden eggs. Administratively also it will become a bersome exercise to tax petty incentives on transaction to transaction basis for the tax collector and tax payers. Consumer protection groups must pressure the government to keep such incentives on spending outside the tax net and amend Section 56 of the IT Act suitably to avoid conflicting interpretations..
    Reply
    1. S
      Shekar
      Oct 24, 2016 at 5:41 am
      This is a regressive tax practice.It amounts to Expenditure Tax.The Finance Ministry must immediately ure the consumers that the cashback facility will be completely tax free. This type of taxation works contrary to the economic definition of utility as the satisfying capacity of a commodity or service. When countries facing recession are contemplating stimulus packages to spur growth in economy through public spending, it will be unwise to tax every cashback incentive in the hands of consumers that are not exchanged for cash but used only for further spending as a booster dose to economic growth, is like killing the goose that lays golden eggs. Administratively also it will become a bersome exercise to tax petty incentives on transaction to transaction basis for the tax collector and tax payers. Consumer protection groups must pressure the government to keep such incentives on spending outside the tax net and amend Section 56 of the IT Act with better clarity to avoid conflicting interpretations..
      Reply

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