The Hindu Business Line : Panel asks Govt not to tax ECS payments by companies

THE Parliamentary Standing Committee on Finance has suggested that the Government should make it clear in unambiguous terms in the income-tax framework that payments made by businesses through the electronic clearance systems (ECS) should be a permissible mode of payment and no portion of such payments should be brought to tax.

In its report on the Taxation Laws (Amendment) Bill 2005, the panel has recommended that the Government should "seriously" consider enlarging the scope of Section 40A (3) to include bona fide payments made through instruments such as the ECS.

Currently, this section stipulates that where any sum exceeding Rs 20,000 is paid by a business or professional concern other than by a crossed cheque or crossed bank draft, 20 per cent of such sum is disallowed in the computation of income.

According to the panel, the current provisions on mode of payment do not take into account the present day circumstances where payments are made through other modes or instruments, inclusive of ECS, that may be offered or made available by banking companies.

The panel's suggestion goes beyond the Government's intention to change the language of Section 40A(3) of the Income-Tax Act. The current Act provides exemption from tax for any payment in excess of Rs 20,000 through "a crossed cheque or crossed bank draft."

The amendment proposed is to make this clause read as "through an account payee cheque."

An account payee cheque or a draft cannot be endorsed to any third party, while a "crossed cheque" can be endorsed any number of times and may result in bogus claims of expenditure.

The Finance Ministry has in its submissions before the panel admitted that clarifications might be necessary to ensure that payments by ECS through banks would not attract any disallowance.

However, on the issue of allowing payments made through credit cards as a permissible mode of payment, the Finance Ministry has indicated that this may not be allowed as verification of expenditure claimed by the assessee becomes difficult.

Incidentally, the panel has lamented the tendency to bring in frequent amendments to the income-tax law, which causes difficulties in comprehending the law by various people concerned. Therefore, it has urged the Government to come out with a comprehensive, simplified, single legislation at the earliest.