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Beware! Cashback on cards for business expenses could be taxed

Priya Nair / New Delhi 08 Nov 16 | 03:06 PM

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If you spent Rs 5000 on shopping clothes during Diwali and recieved a cashback of Rs 250 on your credit card, the taxman may spare you but if you have used the card to spend Rs 1 lakh on  office equipment such as printers, computers, scanners, etc and and recieved a  cashback of Rs 5,000 on your credit card, you may be charged.

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In the first instance, clothes is a personal purchase and thee cashback is only a discount which has been provided by the bank instead of the retail store. But in the second case, since you can claim a deduction after showing it as a business expense, there is a possibility that you may have to pay tax on it, say experts. Since the amounts are small, so far there have not been too many disputes on cashback being taxed.

"While there is no clarity or tax guidelines on how cashbacks could be taxed, in case of business expenses there is possibility it could be taxed because a tax deduction is already allowed on business expenses", says Homi Mistry, Homi Mistry, Partner, Deloitte Haskins & Sells. 

In case or credit cards the cashback is reflected in the credit card statement, which may not always come under the scrutiny of the tax authorities. In case of debit cards since the cashbacks are debited into the savings bank accounts, they may be noticed. The assessing officer (AO) may also ask why the tax payer had not disclosed it and levy a penalty. The AO may include the cashback under the head ‘casual other income’. 

Most cardholders tend to have a mix of personal and business expenses on their cards. And since the cashbacks are paid after the ongoing billing cycle, it could be difficult to relate which particular transaction has received the cashback. 

If a businessman or a professional like a lawyer or a doctor buys an asset for their work, say a laptop, for Rs 40,000 and gets a cashback of Rs 2000, it is advisable to show the price of the item in their books of account as Rs 38,000, says Preeti Khurana, Chief Editor, Cleartax.com. The same applies in case your employer authorises you to buy an asset for your use, say a mobile, but the money is paid by the employer. Inform your employer the actual price you pay for it, including the cashback if you receive one. This will reduce chances of queries being raised by the I-T department.

“In case of personal items a cashback can be treated as a discount, which you get later instead of upfront,’’ Khurana adds. 

Most banks offer cashbacks on credit and debit cards, usually up to 5 per cent. They could be either on spends at particular retail chains or for specific categories like groceries, electronics, etc. Also, in most cases there is a condition that cashback will be paid only if the spend crosses a certain amount. 

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