ARE CASHBACKS TAXABLE?

The blogpost has been written by Debdatta Das & Matisha Bansal and edited by Lawyasa.

Don’t we all love it when an amount, no matter how small, gets credited to our account? The joy of getting a discount while shopping/ordering food/paying bills/ recharging mobile plans etc. is often in the form of a cashback. Now, what if I told you that these transactions may be taxed? That would burst your joy bubble, right? Before that happens, read further to find out when and how this can happen.

HOW DO CASHBACKS WORK?

Cashbacks can be seen as a mode of discount offered by the merchant or the intermediary when you make a transaction. The same may be credited to your wallet instantly (instant cashback), or at a later time (deferred cashback). This amount may be used by you in your subsequent transactions. This works both for e-commerce websites and payment apps.

However, this is different from a discount in 2 ways:

Firstly, unlike discounts, cashback is not deducted from the net order amount of the same transaction. And secondly, the cashback may exceed in value, than the amount paid by you in the first transaction.

Sometimes, cash-backs of higher amounts may also be given through brand partnerships. For example, when your ordering food, you can see certain coupons which are only applicable when pay through a particular bank’s credit card or a FinTech app.

Some payment applications that are directly linked to your bank account such as UPI apps, offer cashbacks that are directly credited to your bank account. Now, these cash-backs, no matter how small or big they are in value, can be seen as a source of income.

ON WHAT INCOME ARE YOU LIABLE TO PAY TAXES?

The total amount of income on which you are liable to be taxed is known as your taxable income. This amount is calculated as total income minus deductions specified in sections 80C to 80U. The resultant value is taxed on the basis of tax slabs indicated below as per the old or new regime:

However, where the total annual income is less than 5 Lacs, the rebate is available u/s 87A of the Income Tax Act,1961. A salaried individual has the option to choose between the new and the old regime. Although the new regime comes with reduced rates of interest, there are fewer deductions available which are available in the old regime.

The computation of total income in one financial year is to be calculated under the following 5 heads[1]:

1. Salaries

2. Income from house property.

3. Profits and gains of business or profession.

4. Capital gains.

5. Income from other sources.

WHERE DO CASH-BACKS FALL IN THIS WHOLE REGIME?

The income from cash-backs fall under the purview of the fifth head, i.e., income from other sources. Section 56 entails the kinds of incomes that fall under this category. Among them, is the income without consideration or with a consideration that is less than the fair market value to the tune of INR 50,000/- or more. Because these cashbacks do not form a part of the same transaction and stay in your e-wallet/e-commerce account wallet without any consideration from your side, they are taxable u/s 56(2)(x).

Now, if you receive cashbacks that are minimal in value, you are spared of this liability. But, in case the aggregate sum received by you in cash-backs is more than INR 50,000/- in one financial year, this whole amount is taxed.

Further, if you receive gifts or are undercharged for any products from non-relatives, the amount of such gifts will be considered and will be aggregated under this limit of INR 50,000/-. In that case, you’re liable to pay taxes if the collective value of cash-backs and the gift exceed INR 50,000/-[2]. Even peer-to-peer personal transactions fall under this ambit when there is no consideration involved, which makes it necessary to be diligent about our finances.

When a cash-back is received on buying any product for business use, the net amount paid is booked as an expense after deducting the cash-back value for revenue expenditures. In the case of capital expenditure, depreciation is also chargeable on the net amount[3].

HOW WILL YOU BE RESPONSIBLE IF YOU DO NOT INCLUDE CASH-BACKS IN YOUR ITR?

Given that the value of these cash-backs might not be very big when considered in a single transaction and as you might have received many cash-backs that you have lost count, it may not have occurred to you that it is considered as an additional income source. Sometimes, one might not even realize that the aggregate of cash-backs and gifts would go above INR 50,000/- until they actually calculate and take note of every single transaction. Naturally, one may miss reporting it while filing ITR.

This simple mistake on your part can be used to initiate proceedings against you by the tax authorities. You may be sent a reassessment notice u/s 147 for under-reporting of income. Hence, it is important to track these cash-backs that may sometimes mount up and aggregate to an amount of INR 50,000/- to avoid tax complications and have a clear record.

WHY ARE AUTHORITIES TAXING CASH-BACKS?

It might have occurred to you that why would tax authorities go ahead and impose taxes on something so menial as cashbacks. One of the reasons could be that big anomalies often hide in plain sight.

The idea that cash-backs are trivial and should not attract tax liability can be taken advantage of and large sums of money can be transacted while escaping the eye of the income tax department. If cash-backs are not taxed, businesses may receive money in the form of cash-backs over multiple small transactions and escape taxes even if such small cash-backs add up to a taxable amount.

Further, when an e-commerce website or a Fintech pays you cashback, they would show it as an expense, and thus no tax is chargeable on that value. But, when it comes to you, it becomes a source of income and hence, it becomes taxable.

The recent years of digitalisation have shown the advent of various illegal financial activities such as cyber-crimes, fraud, terrorist financing, etc. Cash-backs may even be used as a gateway for receiving the money acquired from these sources. Hence, taxing of cashback serves a dual purpose- firstly, avoiding tax evasion and secondly, keeping track of large transactions.

References:

[1] Section 14, Income Tax Act, 1961.

[2] “Further, where the amount of cashback is less than Rs 50,000 but in addition to this cashback 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.”, CA Naveen Wadhwa, DGM, Taxmann.com and CA Ritu Gupta, Assistant Manager, Taxmann.com, The cashback on your shopping could be taxable: Read the rules to find out, Economic Times, https://economictimes.indiatimes.com/wealth/tax/the-cashback-on-your-shopping-could-be-taxable-read-the-rules-to-find-out/articleshow/66520411.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.[3] CA Supriya Dewan, Cashbacks: Whether an Invitation To Income Tax?, Taxguru, https://taxguru.in/income-tax/cashbacks-invitation-income-tax.html.