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