Income Tax Notice on credit card usage!!

[Sachs]

I have heard that if you spend more than 10 L on a credit card in a year, the CC company is required to report it to income tax department.
I have a alot of cards whose maximum benefit I have calculated after watching technofino videos. I have also used yaper recently & I have realized that they have created a safe system (albeit a very hassle filled one for credit card users.)
I was wondering what will happen if I spend 9.5L on all of my 11 cards. Will I be served a notice because I have spent 104L on my cards.
OR
Will I be not served any notice as my spending on any card has not crossed 10 L??

 

[aditya001]

You are wrong in most cases. You, the person, are a different entity from the business you are running. The card belongs to you. Spends on your card are your spends. You are supposed to repay the card from your income. Any swipes on the pos machine of your business will be counted as revenue for your business.

This will cause huge issues later on for both you, and your business. (Since you are spending 120L a year with insufficient income, and your business is generating 120L revenue without paying tax, and reporting the 120L as revenue).

Technically, the conclusion that ITD might reach is, your business generated 120L revenue, but also paid 120L as "salary" to you. Hence the business is at net zero. But you might end up paying 30% of 120L as income tax on salary.

Edit: Of course there are holes in this system, and blind spots exist where ITD doesn't have visibility. But these systems are getting better every year. To reiterate, it's not whether ITD can figure it out by the end of this FY/AY. It's whether they can figure out in the next 5 to 10 years. Now it's upto you to figure out the risk reward equation of this game of hide and seek.

and even if we leave company here as talk as proprietor, credit line is treated as debt right? i mean if we take loan and spend that does not mean we earn that much.. only the profit is taxed and debt is payed back, i mean treating transaction as direct spend is not logical..

 

[CardShard]

@aditya001 probably, and yes. Then again, I wrote the above as a general rule of thumb. If you fall into any of these cases, you should get a CA to straighten (or twist) your books, and probably won't need tax advice from anon strangers on the internet. 🙂

 

[aditya001]

@aditya001 probably, and yes. Then again, I wrote the above as a general rule of thumb. If you fall into any of these cases, you should get a CA to straighten (or twist) your books, and probably won't need tax advice from anon strangers on the internet. 🙂

Rightt only a CA can guide properly...

 

[hks789]

Its not per card afaik it's per pan that is cumulative of all cards registered with a pan.

Banks are responsible for reporting the data to AIS. Banks don't share each other's data. Banks can only report 10L plus transactions in a financial year to AIS when the user crosses the mark across all cards issued by that bank. Say if you have 3 axis cards with cumulative spends of 10L plus, then it will be reported to AIS. If your total on axis is 9L and ICICI is 9L, they won't report.

But when the new account aggregator platforms come up, banks can share data across each other. That's a different story

 

[samss]

hi, my annual income was,as per pan records 6lakhs.but my spends via all my credit cards in last 6months was almost 80lakhs.what will happen next? is IT department will send notice to me?

Keep breakfast ready, they may visit your house soon!

 

[CA Karan Agarwal]

The risk management system of ITD will capture transactions with disproportionate expenses as compare to the income reported in ITR. So yeah, very high spend not backed by income in ITR can be a reason to trigger the automated notice for scrutiny.
For a proprietor doing expenses of business from own credit card is not an issue (for income tax) as payment/reimbursement of the same by business cannot be treated as his personal income as there is a single PAN card for a proprietor or its business. However this will be against the norms of credit card issuing bank.
Like someone said, the SFT reporting limit is 10 lacs and since interbank data is not aggregated as of now, AIS will not report transactions on multiple banks cards.
For transactions done for family/friends, ensure to have sufficient documentary evidence to satisfy ITO later on. IT notice for tax amount >1 Lakh can be issued for 7 years and they recover tax + Interest +penalty.
However, 95% cases will not have a major issue because scrutiny transactions are very limited as IT office does not have sufficient staff to issue notices to everyone.

 

[aditya001]

The risk management system of ITD will capture transactions with disproportionate expenses as compare to the income reported in ITR. So yeah, very high spend not backed by income in ITR can be a reason to trigger the automated notice for scrutiny.
For a proprietor doing expenses of business from own credit card is not an issue (for income tax) as payment/reimbursement of the same by business cannot be treated as his personal income as there is a single PAN card for a proprietor or its business. However this will be against the norms of credit card issuing bank.
Like someone said, the SFT reporting limit is 10 lacs and since interbank data is not aggregated as of now, AIS will not report transactions on multiple banks cards.
For transactions done for family/friends, ensure to have sufficient documentary evidence to satisfy ITO later on. IT notice for tax amount >1 Lakh can be issued for 7 years and they recover tax + Interest +penalty.
However, 95% cases will not have a major issue because scrutiny transactions are very limited as IT office does not have sufficient staff to issue notices to everyone.

Getting notice from tax department is not a issue right? as far as every thing is legal? and can a director spend his spend his own money for the company does it count as loan for they company that has to pay back to the director? & you said "Against the norms of credit card issuing bank" are you taking about banks not allowing credit cards for commercial purposes that norm?

 

[kkk]

Let me ask one doubt. Suppose I use my credit card for investment(ex: Invoice discounting). There can be multiple ways of using credit card for investment, some portal accepts credit card as payment or I can transfer money from Credit card to bank by paying charges(There are some risky portal like Snappay where during offer they charge around 0.45%). Invoice discounting typically ranges from 45 days to 180 days. So, after 45 days I get my investment back(+ additional amount). Infact 12% club or Mobikwik extra+ gives 1% returns per month, so I am still in profit if I plan my credit card transfer to bank just after bill is generated. So, during payment I can withdraw and pay off credit card bills.

So, effectively few times what I did was this.(Ex: for 1,00,000)
Use Snappay to transfer money from credit card(Axis Flipkart, I don't have Ace) to bank.
Effective Snappay charge - Rs. 470
Card cash back(@1.5%) - Rs. 1500
Invest 1,00,000 in 12% club for 40 days(@ 1% per month) ~ Rs. 1300
Pay credit card bill using Postpe and get 0.4% - Rs. 400

This I can do every month and earn 1500+1300+400 - 470 = Rs. 2730 per 1 lakh per cycle.

At the end of the year I will show above profit as Source from other income and pay tax.

Do you find any issue with this? I am paying tax for whatever profit I get at the time of ITR.

 

[Predator]

Let me ask one doubt. Suppose I use my credit card for investment(ex: Invoice discounting). There can be multiple ways of using credit card for investment, some portal accepts credit card as payment or I can transfer money from Credit card to bank by paying charges(There are some risky portal like Snappay where during offer they charge around 0.45%). Invoice discounting typically ranges from 45 days to 180 days. So, after 45 days I get my investment back(+ additional amount). Infact 12% club or Mobikwik extra+ gives 1% returns per month, so I am still in profit if I plan my credit card transfer to bank just after bill is generated. So, during payment I can withdraw and pay off credit card bills.

So, effectively few times what I did was this.(Ex: for 1,00,000)
Use Snappay to transfer money from credit card(Axis Flipkart, I don't have Ace) to bank.
Effective Snappay charge - Rs. 470
Card cash back(@1.5%) - Rs. 1500
Invest 1,00,000 in 12% club for 40 days(@ 1% per month) ~ Rs. 1300
Pay credit card bill using Postpe and get 0.4% - Rs. 400

This I can do every month and earn 1500+1300+400 - 470 = Rs. 2730 per 1 lakh per cycle.

At the end of the year I will show above profit as Source from other income and pay tax.

Do you find any issue with this? I am paying tax for whatever profit I get at the time of ITR.

This thing reminded me of this guy:

How One Couple Manufactured $300,000 in Cash Back -- and Won a Case Against the IRS

Check out the landmark case of a couple who took "manufactured spending" with credit cards to an extreme and beat the IRS in court.

www.fool.com

Concluding remarks: “He’s a very mathematical, brilliant person,” said his lawyer, Mr. Sklarz. “And this was just something he thought was fun

 

[CA Karan Agarwal]

Getting notice from tax department is not a issue right? as far as every thing is legal? and can a director spend his spend his own money for the company does it count as loan for they company that has to pay back to the director? & you said "Against the norms of credit card issuing bank" are you taking about banks not allowing credit cards for commercial purposes that norm?

Directors can spend and take reimbursements but they need to prove business expense. Resolution by board of directors can be used to ratify the expenses if the amount is substantial. No tax implications unless directors make a profit on those transactions. However reward points worth more than 50k per annum are taxable for you.
I would suggest for business transactions, directors can opt for purchase/ travel and expenditure card (provided by HDFC bank) You wont find much details about these cards online, you need to talk to the wholesale team which manages corporate exposures for such unique products.
And yes i was talking about restrictions on using personal cards for commercial purposes only.

 

[aditya001]

Directors can spend and take reimbursements but they need to prove business expense. Resolution by board of directors can be used to ratify the expenses if the amount is substantial. No tax implications unless directors make a profit on those transactions. However reward points worth more than 50k per annum are taxable for you.
I would suggest for business transactions, directors can opt for purchase/ travel and expenditure card (provided by HDFC bank) You wont find much details about these cards online, you need to talk to the wholesale team which manages corporate exposures for such unique products.
And yes i was talking about restrictions on using personal cards for commercial purposes only.

Just one last stupid question 😅, why if i use my own companies payment gateway to take money from personal credit card & then reimburse it after some time.. not taking about banks t&c, but just want to know is this legally allowed? Thanks for the clarification by the way it really helps..

 

[CA Karan Agarwal]

If its a private limited company then you are contravening provisions of section 73 of companies act, 2013. Director can give money to company from own funds and not from loan(credit card) funds. Auditors will question, ROC can impose penalties and lots of hassle.

 

[aditya001]

If its a private limited company then you are contravening provisions of section 73 of companies act, 2013. Director can give money to company from own funds and not from loan(credit card) funds. Auditors will question, ROC can impose penalties and lots of hassle.

and in sole proprietorship?

 

[CA Karan Agarwal]

and in sole proprietorship?

no issues.

 

[Wealth is my birth right!]

Being card users first disciplinary thing we have to do is file IT every year without fail and also have a cross check on spends below the filed ITR.
If at all we spend more keep those papers in file or soft copy in a laptop folder so that in future it will be handy for reference if required

 

[Mohur]

I am a sole proprietorship, my CA advised to use separate card for business expenses. I use infinia. I pay infinia bill using my current account.

For personal expenses I use Amazon pay card and pay its bill using my savings account.

For a pvt ltd company, it will be a complex thing because business is different entity than directors

 

[BMR]

and in sole proprietorship?

What will the scenario be for a purchase by an employee on behalf of a Pvt Ltd company? For e.g. I often buy electronics for my use (printers/mobiles etc.) and the company reimburses those charges after I file the voucher. But I use my personal card for those purchases.Can it create trouble for me or for the company?

 

[Wealth is my birth right!]

What will the scenario be for a purchase by an employee on behalf of a Pvt Ltd company? For e.g. I often buy electronics for my use (printers/mobiles etc.) and the company reimburses those charges after I file the voucher. But I use my personal card for those purchases.Can it create trouble for me or for the company?

Experienced CAs only can explain with facts this scenario

 

[CA Karan Agarwal]

What will the scenario be for a purchase by an employee on behalf of a Pvt Ltd company? For e.g. I often buy electronics for my use (printers/mobiles etc.) and the company reimburses those charges after I file the voucher. But I use my personal card for those purchases.Can it create trouble for me or for the company?

I have already given my views on this...
Directors can spend and take reimbursements but they need to prove business expense. Resolution by board of directors can be used to ratify the expenses if the amount is substantial. No tax implications unless directors make a profit on those transactions. However reward points worth more than 50k per annum are taxable for you.
I would suggest for business transactions, directors can opt for purchase/ travel and expenditure card (provided by HDFC bank) You wont find much details about these cards online, you need to talk to the wholesale team which manages corporate exposures for such unique products.
And yes i was talking about restrictions on using personal cards for commercial purposes only

this applies to directors as well as normal employees

 

[abhinavnbhat]

Hi, hope this thread is not dead. In cases where the credit card spend is >10 L and around 60% of ITR for a salaried employee, let's say 30L ITR, 18L credit card spend, can one expect to get a notice from the income tax department? Or is it fine? What if it's 80%? Or does the scrutiny kick in only when expenditure matches ITR?