Cash purchase of assets will affect depreciation claims
Businessmen and professionals will have to use the banking channel for payments over ~10,000 to continue enjoying the benefit
The manner in which an individual’s taxable income is calculated depends on how he earns. The salaried class does not have too many opportunities to claim deductions, as their scope is limited to a few allowances and reimbursements. On the other hand, for those who are self-employed or run their own business or profession, there is plenty of scope. In their case, business expenses can be deducted from the gross income to arrive at the taxable income.
Capital and revenue expenses
Expenses incurred for the purpose of business or profession become eligible for deduction in two ways. One, they could be revenue expenses which are incurred while conducting the business, and hence are permitted as a deduction. Expenses of this type include those related to running the office, travel expenses, and advertising and marketing expenses.
The other area where a business or profession spends is on the addition of capital assets. Capital assets are defined as those whose benefits come over a period of time, and not just immediately or in the initial time period after the purchase. Hence, the expense incurred on purchasing these capital assets also has to be spread out over a period of time which corresponds with their working life.
The percentage of the total value of the asset that is written down each year is based on a specified formula. It is referred to as depreciation. Depreciation is allowed as a deduction from the gross income earned by the business or profession. It is an important benefit for business as it goes a long way towards reducing their tax liability.
Cash purchases now under the scanner
The purchase of a capital asset often requires a large upfront payment. A business purchases a variety of capital assets, which could range from computers to furniture and even land and building. The payment mode used for making these purchases can vary. Sometimes the payment is done through cheque or via other electronic modes of payment. However, a lot of times businesses also make such payments in cash. This is especially common in the case of small-ticket purchases where the cost is not very high. This mode of payment has now come under the government’s scanner, which is trying to promote digital modes of payment. Those who have income from a business or profession need to understand the new guidelines and be extremely careful in adopting them, or else they could end up enjoying a lower tax deduction on depreciation.
Ceiling imposed
Until now there were no restrictions on incurring capital expenditure in cash, which made it convenient for businesses to make such expenses and claim the corresponding benefit. Now, the government has imposed a monetary limit on capital expenses incurred in cash, so as to get businesses to move towards electronic modes of payment. This transition is also expected to result in greater transparency in the way businesses function.
The limit for cash expense that can be incurred on the purchase of capital assets has been fixed at ~10,000. For amounts higher than this, other modes of payment will have to be used. The fine print of this provision will have to be understood and taken into consideration by businesses.
Pay heed to the fine print
The important thing to consider is the details related to payments and the manner in which the restrictions will apply. The limit of ~10,000 is linked to a payment, or aggregate of payments, made to a person in a day. The words used here are significant: the limit applies to a single payment or an aggregate of payments. It means that if the total expense is, say, ~25,000, then breaking it up into two parts will not be considered as separate transactions. It also applies to a single person. So if the payments are made to two different entities, then this restriction will not apply. Finally, the most significant detail is that the limit applies to a day. Therefore, if the payment is more than ~10,000 but is spread over a couple of days, the limit will not apply. This may offer some relief to those entities that have to make expenses that are higher than the stipulated limit.
Cost of non-compliance
If the expense for the purchase of the capital asset exceeds the ~10,000 limit, then it will not be considered as the purchase price of the asset. If the amount is not considered as the cost, there will be no question of being allowed any depreciation on the amount. This cuts off the benefit right at the source and hence is something that needs to be thought about carefully. This provision will come into effect from April 1, so there is still some time for businesses and professions to take a look at the manner in which they will purchase assets and ensure that it is not done through the cash mode. The cost can turn out to be high if the purchase price of the asset runs into a couple of lakhs and the amount is paid in cash.
The modes of payments that will be acceptable for the purchase of capital assets include cheques, drafts, and other electronic modes of transferring money through a bank account. Since the bank account is mentioned, an Internet transfer through an online bank account would be covered, and so would the electronic modes of payment like NEFT and RTGS.
While many businesses and professions already buy capital assets through cheque and other modes of payment, there are others that pay cash. These persons or entities will have to change the way they operate to ensure that for them the depreciation benefit remains intact.