Accepting cash in business transactions - Know the limits

In India, managing cash transactions in business is crucial, as the government has imposed several restrictions and penalties to promote digital transactions and curb black money. Understanding these restrictions and adhering to them is vital to avoid hefty fines and penalties under the Income Tax Act, 1961. This article delves into the limits on accepting cash in business transactions and the consequences of non-compliance.

Key Provisions Governing Cash Transactions

The Income Tax Act imposes several limitations on cash transactions to ensure transparency and traceability. Below are the key provisions business owners need to be aware of:

1. Section 269ST – Limit on Receiving Cash Transactions

Section 269ST was introduced to limit high-value cash transactions. Under this section, businesses and individuals cannot accept cash of Rs 2 lakhs or more:

• In a single day, from a single person.

• For a single transaction or a series of transactions related to one event or occasion.

Penalty: If this rule is violated, the recipient will be liable to pay a 100% penalty of the amount received in cash.

2. Section 269SS – Restriction on Accepting Loans and Deposits in Cash

Businesses cannot accept loans, deposits, or specified sums exceeding Rs 20,000 in cash from any person. This section is applicable not just for business transactions but also for loans from friends, family, or other non-business parties.

Penalty: Any violation under Section 269SS attracts a 100% penalty on the amount accepted in cash.

3. Section 269T – Restriction on Repayment of Loans and Deposits in Cash

Just like accepting loans, repaying loans, deposits, or advances exceeding Rs 20,000 in cash is also prohibited under Section 269T. The aim is to maintain transparency and accountability in financial transactions.

The provisions of Sections 269SS, 269ST, and 269T do not apply to the transactions with the following:

1. The Government (Central and State).

2. Any banking company, post office savings bank, or co-operative bank.

3. Any corporation established by a Central, State, or Provincial Act.

4. Any Government company, as defined in Section 2(45) of the Companies Act, 2013.

4. Section 40A(3) – Disallowance of Business Expenses Paid in Cash

Under Section 40A(3), payments exceeding Rs 10,000 made in cash towards a single expenditure (such as purchases, services, or payments) are disallowed as a deduction when computing taxable income. In the case of payments made to transporters, the limit is Rs 35,000.

Impact: Cash payments above these thresholds will be disallowed as business expenses, which could lead to higher taxable income and, consequently, more tax liability.

5. Second Proviso to Section 43(1) – Cash Purchases of Fixed Assets

When a business acquires fixed assets (like machinery, equipment, etc.) in cash exceeding Rs 10,000, the depreciation claim on such assets is not allowed. This means that even though the business owns the asset, it cannot claim tax benefits in the form of depreciation.

Penalty: The penalty for violating Section 269T is also 100% of the cash amount repaid.

6. Cash Donations and Contributions

Under Section 80G of the Income Tax Act, deductions for charitable donations are allowed only if the donations exceed Rs 2,000 and are made by means other than cash (e.g., cheque, bank transfer). This rule aims to encourage transparency in charitable contributions.

Consequences of Violating Cash Transaction Limits

Failing to comply with the cash transaction limits can lead to significant financial repercussions. Key consequences include:

• 100% Penalty: In the case of Section 269ST and Section 269SS/269T violations, the business will be penalized with 100% of the amount received or repaid in cash.

• Increased Tax Liability: Disallowed expenses under Section 40A(3) can increase your taxable income, resulting in higher tax payments.

• Loss of Depreciation: Businesses that purchase assets in cash will lose the benefit of claiming depreciation, increasing their overall tax burden.

Why the Restrictions?

The Indian government introduced these restrictions to curb the circulation of unaccounted money (black money), promote digital payments, and ensure transparency in the financial system. By limiting cash transactions, the tax authorities can better track business activities and tax compliance.

Best Practices for Businesses

To comply with these cash transaction restrictions, businesses should adopt the following best practices:

• Digital Payments: Encourage customers and suppliers to use digital modes of payment such as bank transfers, cheques, debit/credit cards, or UPI.

• Maintain Proper Records: Always maintain proper documentation for all transactions, whether cash or digital. Invoices, receipts, and bank statements should be well-organized.

• Limit Cash Payments: Where possible, avoid making large cash payments. Instead, opt for payments through banking channels.

• Consult Professionals: Engage with tax professionals or advisors to stay updated on tax laws and ensure compliance with cash transaction limits.

Understanding the cash transaction limits under the Income Tax Act is critical for businesses to avoid penalties and ensure proper tax compliance. With rising scrutiny on financial transparency and digitalization of the economy, businesses should adopt cashless payment methods and maintain accurate records of all financial transactions.

By adhering to the limits imposed under the Income Tax Act, businesses can ensure smooth operations, avoid unnecessary penalties, and contribute to a transparent and accountable financial ecosystem.