Unexplained Cash Credits and Cash Transactions under GST

Last Update Date : September 18, 2018

unexplained cash credits under gst

Under GST, there are certain types of transactions which are categorised as unexplained cash credits and cash transactions. This article will help you understand all those transactions and credits and their taxability as per section 68 of the CGST Act.

Meaning of Unexplained Cash Credits and Cash Transactions

Unexplained cash credits mean:

  • any amount credited in either your books of accounts or deposited in your bank accounts for which there is no valid reasoning or explanation about the source of cash or nature of transaction, or
  • any amount credited in either your books of accounts or deposited in your bank accounts for which an assessing officer is not justified with the reasoning or explanation about the source of cash or nature of the transaction.

Example

Mr Rajat’s bank statements showed a credit amount of Rs 2,00,000. When the assessing officer inquired about the source of cash and nature of the transaction, he was unable to provide the same.

Ideally, here, Mr Rajat has to provide the details (name of the lender, his PAN, etc.) to the assessing officer when he enquired. In the absence of valid source to cite, the deposited amount of Rs 2,00,000 will be treated as an unexplained cash credit.
In the above scenario of Mr Rajat, in case he would have provided details, but the assessing officer would not have satisfied with it, the deposited amount of Rs 2,00,000 is treated as an unexplained cash credit.

This was the example of entrepreneurs. In case of companies, unexplained cash credit refers to the amounts of share application money, share premium or share capital that is credited, but no explanation is received from the resident assessee. Or the explanation is provided by the resident assessee, but the assessing officer is not satisfied with the explanation offered.

However, in case the person in whose favour such amount is credited/recorded in the books of such company is either a venture capital fund or a venture capital company as per section 10(23FB), the above discussed special provision will not apply.

Quick Tip: In simple terms, unexplained cash credit means the amount credited in your books of accounts, but its source and nature are not disclosed.

Tax on Unexplained Cash Credits

Even though the explanation of the source and nature of cash credit is either missing or not justified, the same amount would be treated as taxable income in the year in which it is credited.

Unexplained cash credits or cash transactions are taxed at the rate of 30% in addition to tax, cess and surcharge .

Cash Payment Limit under GST

For assessees carrying on business, will have to pay tax on any cash payment made above Rs 10,000 in a single day. If the cash payment limit exceeds Rs 10,000, the same will not be treated as an expenditure and tax have to be paid along with it.

Example

Mr Mukesh is a freelance tutor. To develop his own educational website, he purchased a domain name and paid the amount of Rs 12,500 in cash. Here, this payment would not be treated as an expenditure but the cash payment amount will also include the applicable amount of tax. In other words, since the payment beyond the cash limit of Rs 10,000 is done in cash, it will not be deducted from his total tutoring fees received for the year.

Further, while accepting a cash payment, under section 269ST, a person should not exceed the limit of Rs 2,00,000 in hard cash:

  1. in respect of a single transaction
  2. in aggregate from one person in a day
  3. in respect of transactions one event or occasion from a person.

However, such payments are acceptable in the form of ECS, cheque or demand drafts.

This section 269ST that explains restrictions on cash transactions is not applicable to:

Post demonetisation in the country, the law has become more stringent to control high-value transactions in money. In case, if any transaction violates section 269ST, penalties under the section 271DA is applicable.

Example

  1. Mr Rajat sells goods worth Rs 4,80,000 to Mr Mukesh. For the single transaction, he raises three different bills of Rs 1,80,000, Rs 1,40,000 and Rs 1,60,000 respectively. And, the entire amount is paid in cash against all three bills. This instance is the violation of the section 269ST(a).
  2. Mr Rajat sells goods worth Rs 3,90,000 to Mr Mukesh. The entire amount is raised in a single bill. But, the amount of Rs 1,95,000 is paid in cash on the day of the transaction and the remaining is paid in cash on the following day. This instance is the violation of the section 269ST(b).
  3. Mr Rajat accepts an order worth Rs 4,50,000 for catering, decoration and hall for the marriage event of Mr Mukesh. He accepts entire amount in cash on three different days; Rs 1,40,000 for catering, Rs 1,20,000 for decoration and Rs 1,90,000 for hall. Since the amount is charged for the single occasion, this instance is the violation of the section 269ST(c).

Penalty for Cash Transactions beyond Limit

Since the government has become stricter to curb the black money, there are penalties for tax evaders. Under section 271DA, any person violating the provisions of section 269ST, will be liable to pay penalty. The amount of penalty equates to 100% amount of the cash received.

Dos and Don’ts to avoid Penalties

These are the key points which need to be adhered to avoid penalties and obey cash payment limit under GST.

Dos

  • Always accept receipts of transactions/amount of payments through account payee cheque or draft.
  • Do collate necessary details like the address, bank account number or PAN of the money depositor in your account.

Don’ts

  • Never accept cash payment beyond Rs 2,00,000.
  • Do not pay expenditures in cash beyond Rs 10,000 to a single person on the same day.

Last, but not the least – Existence of ‘books of accounts’ is mandatory to appeal section 68. Any sort of scraps of papers or loose sheets are not accepted as books of accounts as they can be easily replaced or detached.

How can H&R Block help you?

After the implementation of GST, the tax compliance requirements changed drastically. As a result, several businesses find it challenging to focus on their business while trying to be GST compliant. This is where we come into the picture. Our team of in-house GST experts can help you meet all the GST compliance requirements right from registration and filing of returns to handling notices.

We hope, this guide answers all the questions you had about GST on unexplained cash credits and cash transactions. If you still have any question in mind, you can post it on our TaxForum to get it answered from a tax expert.

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