Cashback on shopping could be taxable!
In festive season, Cash backs offered by e-shopping websites to attract customers. But this year, Mr. Sharma is a little hesitant in buying anything from these websites. Last year, he bought a smartphone, laptop, refrigerator, AC, and TV for his new house from one of the e-commerce websites. He compared the prices quoted by a near-by shop with prices on online sites.
Finally, he chose a particular website to buy these goods as it offered good cash back. But his sound sleep was interrupted when he got a notice from the Income-tax Department for alleged under-reporting of income. Through the notice, the Assessing Officer initiated the re-assessment under Section 147 as Mr. Sharma didn’t declare the cash back as part of income chargeable to tax in the income-tax return (ITR) form.
Various online shopping websites, credit card companies, and e-wallet companies offer lucrative cashback schemes. These cash backs are awarded either by way of ‘Instant Discounts’ or by way of ‘Cash Backs’. Do you know that these cash backs may invite taxes in certain situations? Income and taxes are the flipsides of the same coin. Any monetary benefit received by a person by way of gifts or cash backs from a non-relative might be subject to income-tax under the head ‘Income from Other Sources’ or ‘Profits and Gains from Business or Profession’, as the case may be.
Before we evaluate the taxability of such benefit schemes, it would be imperative to first take cognizance of the provision of Section 56(2)(x) of the Income-tax Act. This provision provides for levy of tax if any sum of money is received without consideration. This tax, popularly known as ‘gift tax’, is levied only if the aggregate value of such sum exceeds Rs 50,000 during the financial year.
If the benefits are not given in the form of cash back but in form of accessories (i.e., free earphones, power banks, etc.), this provision shall not be applicable. However, a market value of freebies can be taxable if goods are purchased for the purpose of business or profession as all benefits, arising in the course of business or profession, are taxable under section 28(iv) whether they are convertible into money or not. In other words, the provision of gift tax can be invoked only if any monetary benefit is received by way of credit in the bank account, wallets or credit card. In case of gifts received in kind, no amount is credited to the user’s account, hence the provision of gift tax shall not be applicable.
In the discussion below, we have evaluated various discount schemes to determine their taxability.
In instant discount schemes, if the customer opts to pay for the order using the prescribed debit card or credit card, an extra discount is offered by the website which is instantly subtracted from the listed price and customer pays the net discounted amount only. If the customer is buying the goods for his business or profession, the net price shall be allowable as the business expense or if it is a capital asset (i.e., laptop, AC, TVs, etc.) then the depreciation will be allowed on the net amount only.
However, if goods are purchased for personal consumption and not for any business or profession, then nothing shall be chargeable to tax as no monetary benefits is received by way of credit to the account of the customer.
Deferred cash backs
In ‘Cashback’ schemes, if a customer chooses to pay with the credit card or debit card of partner bank, the bank credits the predetermined cashback in card user’s account at the end of a pre-determined ‘cooling’ period. If an individual receives cashback in relation to the purchasing of any goods, not being a capital asset, for the purpose of business or profession carried on by him, then the buyer can either claim the deduction only for the net expenditure after reducing the amount of cashback from total expenditure or to add the cash back to ‘other business receipts’ and declare in income tax return as part of gross income.
If cashback is received in respect of the purchase of a capital asset to be used for the purpose of business or profession carried on by him, then he can claim depreciation on the net amount after reducing the total value by the amount of cashback or he can claim depreciation on gross amount and pay tax on the cash back as other business receipts.
if the total amount of cash back exceeds Rs 50,000 during a financial year cashback received for the goods purchased for personal consumption shall be taxable under the head “Income from other sources” only. Further, where the amount of cash back
is less than Rs 50,000 but in addition to this cash back the buyer has also received some monetary gifts from non-relatives or friends and the aggregate of such gift and the cashback exceeds Rs 50,000, then he shall be liable to pay taxes on such aggregate value.
For example, Mr. A bought a camera for Rs 50,000, on which he received a cashback of Rs 10,000. Additionally, he received a gift of Rs 45,000 from one of his friends. Even though the amount of cash back is less than Rs 50,000, yet, the aggregate of cashback and gift exceeds Rs 50,000. The entire receipt of Rs 55,000 shall be taxable in the hands of the Mr. A under the head “Income from other sources”.
Frequent flyer miles
Frequent flyer miles are the rewards which can be redeemed while booking tickets for a flight. So these are just like instant discounts. As in the case of instant discounts, no tax ability will arise on frequent flyer miles whether they are linked with the business or profession or not. These rewards can also be availed by way of instant reduction from the billed amount, in which case no taxability shall arise. In both the cases if these rewards are linked with the business or profession carried on by the assessee, he can claim only net expenditure as the business expense.