Encouraging digital banking and UPI based transactions has been an important agenda of our government. To this end, several checks and balances and reporting obligations have been placed on businesses undertaking cash transactions. Individuals as well as businesses must make themselves aware of these obligations.
Reporting of specified high-value transactions
To ensure high-value transactions don’t go unreported, certain financial institutions have been mandated to report on them. Transactions of cash deposits of ₹10 lakh or more in all accounts maintained with a bank except current and time deposit account are reportable by a bank. Cash payments of ₹1 lakh or more towards aggregate credit card bills are also reportable by a bank.
Also, receipts of cash payment above ₹2 lakh from the sale of any goods or services (other than those specifically reportable otherwise) should be reported by a business or profession that is required to get a tax audit done. All such specified transactions should be reported in an annual return in form 61A by the reporting entity.
The Income Tax Department captures the information from filings made by reporting entities that mention high-value transactions and compares them with the ITR filed by the taxpayer against whom the information has been reported. The comparison reveals whether an ITR was filed in the first place and whether there is any mismatch in the annual income and expenditure.
The Department sends notices in such cases calling for information or asking the taxpayer to file income tax returns. Hence, an individual carrying on such transactions should ensure that they report all their income in the ITR. They should also maintain the details of their income and expenses which will help them with details necessary for ITR filing and other income-tax compliances.
Are individuals required to report cash transactions?
Individuals are not required to report the cash transactions while filing their income tax returns unless they carry on business or profession which is liable to tax audit. The tax auditor carrying out the tax audit should indicate the compliance or otherwise with the cash restrictions imposed in the tax audit report. In other cases, the entities which receive cash payments above the prescribed limit or banks which receive cash deposits or payments above the prescribed limit report the transactions in an annual return in Form 61A.
Reporting of cash transactions by a business or profession
From a business perspective, there are various disallowances for cash transactions above a prescribed limit such as the limit of ₹10,000 for cash expenses per day. Also, a business cannot take a loan or deposit in cash or repay any loan or deposit in cash where the outstanding amount is ₹20,000 or more. Also, in general, there is a restriction on every person from receiving cash of ₹2 lakh or more from a single person for one or more transactions.
Cash transactions are reportable in the tax audit report where the business or profession is liable for a tax audit. Also, there are penalties and disallowance of expenditure on non-compliance with these cash restrictions.
TDS on cash withdrawals
The scope of coverage of cash transactions also increased with the introduction of TDS on cash withdrawals. Persons withdrawing cash will now face TDS, where rates are higher for those who have not filed their tax returns. In the case of a person who has not filed income tax returns for the past three years, the TDS rate is 2% on cash withdrawal in excess of ₹20 lakh and up to ₹1 crore, and TDS rate is 5% on withdrawal above ₹1 crore. In other cases, a TDS rate of 2% on cash withdrawal above ₹1 crore is applicable. The TDS provisions are applied after considering the aggregate of all withdrawals from all the accounts maintained with a bank.
Expanded scope for ITR filing
Apart from securing compliance through expenditure disallowances, penalties, TDS, reporting in tax audit and reporting of specified financial transactions in form 61A, the government also increased the scope of ITR filing from AY 2020-21. The expanded scope captures those whose income is below the basic exemption limit but who had below transactions:
- Deposit of an amount or where the aggregate deposits are above ₹1 crore in one or more current accounts during the financial year. The account can be with a bank or a co-operative bank.
- Expenditure of an amount or the aggregate expenditure above ₹2 lakh on travelling to a foreign country for yourself or any other person.
- Expenditure above ₹1 lakh on the consumption of electricity of an amount or aggregate amounts during the year.
Hence, an individual or entity should bear in mind the tax compliances associated with their expenditure transactions and the reporting requirements. The government also expanded the scope of recognised payments to include specified electronic payment such as debit card powered by Rupay, UPI payments such as BHIM-UPI and UPI QR code payments. All these will help in streamlining the accounting of the transactions leaving less scope for cash transactions.
Quoting of PAN in specified financial transactions
PAN should be quoted for specified financial transactions which include cash transactions such as cash payments exceeding ₹50,000 towards hotel bills, foreign travel including payment for the purchase of foreign currency and cash deposits exceeding ₹50,000 per day into the account of the depositor.
Apart from cash transactions, PAN should be quoted for other transactions such as opening a Demat account, subscribing to bonds or debentures and sale or purchase of a vehicle other than two-wheeled vehicles.
Hence, one should be aware of the mandate to quote a PAN and accordingly render a complete account of their income and expenses in the income tax return.