By Abhirup Ghosh (firstname.lastname@example.org)
One of the major highlights of the Finance Budget 2017 was the introduction of section 269ST of the Income Tax Act, 1961. The section was introduced with an intention to curb black money by reducing the scope of large ticket size cash transactions in the economy. As per the provisions of the section, no person can accept an amount of Rs. 2 lakhs or more:
- In aggregate from a single person in a day;
- In respect of a single transaction;
- In respect of transactions relating to one event or occasion from a person.
This section affected several businesses in the country, financial entities in particular. During the course of business, financial entities, like NBFCs, often accept repayments through cash, even though they lend out through banking channels, and this section was a certainly something to worry about.
There was a notion that if a loan is a transaction, then the instalments received against such loan transaction would have to be aggregated for the purpose of this section. This however was an unrealistic presumption because if one were to take a view that all payments made by the borrower under a loan contract will need to be aggregated, the amount that can be paid in cash, to avoid the applicability of the section, under clause (a) and under clause (b), will become completely disproportional. Clause (a) will capture the payments made in a single day, whereas the clause (b) will capture payments made over the tenure of the loan. Such wide amplitude is not the intent of the law.
For instance, if there is an invoice of Rs 3 lakhs, which is paid over three tranches, over 3 days, all in cash, the section shall get attracted. However, where there is an invoice, which is payable in 12 monthly instalments, one cannot argue that all the 12 instalments relate to a single transaction, and therefore, need to be aggregated.
Therefore, in the given example of extending of loan and accepting repayments in multiple instalments, loan extended and each of the instalments accepted must be treated as independent transactions for the purpose of section 269ST and must not be seen on a cumulative basis.
Subsequent to the introduction of the section, the Central Board of Direct Taxes received representation from several financial institutions, pursuant to which it came out with a clarification on 3rd July, 2017 stating:
…it is clarified that in respect of receipt in the nature of repayment of loan by NBFCs or HFCs, the receipt of one instalment of loan repayment in respect of a loan shall constitute a ‘single transaction’ as specified in clause (b) of section 269ST of the Act and all the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions section 269ST.
Therefore, henceforth, for the purpose of section 269ST, NBFCs and HFCs will not have to aggregate all the instalments received in cash against a single loan transaction to see if it exceeds Rs. 2 lakhs or not. Each instalment will be treated as a separate transaction. So, if a single instalment of say, Rs. 3 lakhs, is split in two halves and paid in cash over 2 days, then this section will get attracted.
The position after this circular can be explained through the table below:
|Instance||Applicability of section 269ST|
|Loan of Rs. 3 lakhs – EMIs of Rs. 50,000 paid over 6 months in cash||Not applicable|
|EMI of Rs. 300,000 split into two halves and paid in cash over two days||Applicable|
|EMIs against more than one loan transactions in a single day from a single person aggregating to more than Rs. 2 lakhs||Applicable|
After this clarification, the NBFCs and HFCs will breathe a sigh of relief as this was going to affect their business seriously.