Income Tax 22 Jan,2020
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Electronic payment modes mandate: Facilitating ease of doing business?
Promod BatraPartner, Deloitte India
Manish AggarwalManager, Deloitte Haskins & Sells LLP

As a step towards less cash economy, over the years multiple steps have been taken by the Government of India by introducing various provisions in the Income Tax Act, 1961 ('the Act') and gradually amending the same in order to curb the flow of Black Money and digitize the economy. Since demonetization in November 2016, the Government is actively pushing its stance towards digitized and less cash economy, thus, putting curb on tax leakages, creating audit trail of the transactions and widening of tax base by bringing more and more transactions under the formal payment modes.

Historically, with a view to restrict the cash transactions and generation of black money, the Act has provided for limiting cash transactions to provide for disallowances of expenses or deduction under Chapter VIA of the Act while computing taxable income e.g. Section 40A(3) of the Act prohibits payment of any expenditure in excess of INR 20,000 otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account. The threshold limit has recently been halved to INR 10,000. Similarly, depreciation is not allowable in respect of expenditure in excess of INR 10,000 otherwise than by account payee cheque or electronic mode etc. Further, granting or repayment of loans under section 269SS and 269T has been limited to INR 20,000 else the tax payer may face penal consequences.

Similar provisions are contained in Section 80D, 80G, 80GGA, section 80GGC etc. of the Act restricting the deduction if the payment is made otherwise by cheques or electronic mode of payment.

Further, vide Finance Act, 2017, section 269ST was introduced to limit receipt of cash in certain circumstances (specified) to INR 200,000. Failure to non-comply with the provisions attract a penalty equal to the amount of cash transaction.

New Provision vide Finance Act, 2019

As a step further towards digital and less cash economy, section 269SU read with Rule 119AA of Income Tax Rules, 1962 require that every person having total sales, turnover, and gross receipts in business exceeding INR 50 crore shall mandatorily provide facilities for accepting payment through following electronic modes, in addition to the facility for other electronic modes of payment, namely:

  •  Debit Card powered by RuPay;

  •  Unified Payments Interface (UPI) (BHIM-UPI); and

  •  Unified Payments Interface Quick Response Code (UPI QR Code) (BHIM-UPI QR Code)

Further, it has also been provided that a penalty of INR 5,000 per day may be levied in case of failure by the specified person to comply with the provisions of section 269SU of the Act. The said section was earlier made effective from 1 January 2020, however, CBDT vide circular No. 32/2019 dated 30 December 2019, has deferred the penalty provisions to be applied where the additional facility is not provided by 31 January 2020 i.e. made effective from 1 February, 2020. It has also been provided that no charges shall be levied for making payments through the above modes, necessary amendments have also been carried out in Payment and Settlement Act, 2007.

It is be noted that prior to insertion of section 269SU, the Act provided for deterrence in the form penalty for making cash payments but nowhere prescribed the payment/settlement mechanism. Now, vide Finance Act, 2019 substantive amendments have been made and as a result of this, a business entity (with turnover exceeding 50 crs) is under a legal obligation to provide the additional modes of payment facility to its customers despite having other modes of electronic payments in place.

It is interesting to note that there is a specific legislation that deals with payments and settlement mechanism i.e. 'Payment and Settlement Act, 2007' and the preamble of the Payment and Settlement Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India ('RBI') as the authority for that purpose and for matters connected therewith. Further, as per section 10 of the Payment and Settlement Act, 2007, the RBI may from time to time prescribe the format of payment, manner of transfer of funds and issue such guidelines as it may consider necessary for the proper and efficient payment system.

One may wonder that whether aforesaid section 269SU has appropriate support and judicial backing under the Act to regulate payments and settlement mechanism which on the other hand is clearly within the specific domain of Payment and Settlement Act, 2007. Accordingly, whether will it be right in saying that prescribing additional electronic modes should have been done by RBI under the provisions of Payment and Settlement Act, 2007 as RBI has been given the power to deal with such matters.

Practical Challenges

While the efforts of the government towards digitalization are laudable, however there are several practical constraints and business scenarios wherein the provision of the prescribed payment facilities may not be commercially feasible. The limit mentioned in the section would cover a wide range of business entities into the electronic modes of payment ambit. It would be better if some exceptions can be introduced by CBDT especially for entities such as:

  •  Foreign entities acting as captive shared service Centers, R&D Centers etc. which do not deal with any third party customers in India and are established just for the group support function;

  •  B2B transactions as payments are already being made by NEFT/ other electronic means or through banks.

To conclude, the endeavor of the Government has been to achieve less cash economy, evade Black Money and tax evasion and thus mandating payment/settlement mechanism seems laudable. However, covering it as part of Income Tax Act appears to be debatable and levying penalties for non-compliance would only result in spending additional time and efforts (as tax payers have opportunity to explain reasonable cause for non-compliance) without yielding any incremental benefits to the Government and the assessee. If at all, it needs to be implemented then Government should invite comments from the stakeholders and then a well thought out exception list should be issued at the earliest.