Input GST – CGST, SGST, IGST is on trading expenses is deductible as a valid business expense. Only if is the trader has no GST registration. If the trader has registration under GST, they can claim the credit of Input GST against Output GST. Hence, they are not allowed double deductions.
Tax on Income – Tax paid on income such as Income Tax or tax paid on sales such as GST cannot be claimed as a business expense
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Note: Trader having income they classify Capital Gains cannot claim any trading expense except Brokerage. This can happen in the case of traders investing in equity delivery and mutual funds.
Confused on how to classify income from sale of shares?
Read here to understand if this income classifies as Business Income or Capital gains!
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Expenses which a Trader cannot claim in Income Tax Return
Personal Expenses – An expense incurred for personal purposes is not deductible.
Fines & Penalties – The non-compliance or delay in compliance attracts interest and penal consequences. Hence, interest, fine, late fee, penalty, etc. are not a valid deductible.
Tax – Any form of Tax paid on the income earned is not deductible as an expense. For example Income Tax, Advance Tax, GST etc
Cash Payment – If an expense has been paid in cash for an amount exceeding Rs. 20,000, it cannot be claimed as an expense. Additionally, there are exceptions to this mentioned under rule 6DD of the Indian Income Tax Act
TDS not deposited – If tax is not deducted at source or not deposited, then such expense is not deductible. These expenses include interest, commission, rent, royalty, professional or technical fees paid or payable to any person in India.
Points to remember for Trader who claims Business Expenses
The invoice should be in the name of the trader and the invoice date should fall in the relevant financial year
If a trader incurs an expense for both personal and business purpose, he/she should claim a reasonable portion towards business
The trader should preserve the bills, invoices, or any other proofs of the payments made. You need to submit proofs during the process of Tax Audit by a Chartered Accountant. If the Income Tax Department issues a notice, these proofs justify expenses claimed.
If a trader uses some specified services, he/she should deduct TDS as per the applicable TDS section. For example, Mr. X, a trader obtained the services of a professional CA for auditing his books of accounts and filing ITR. Mr. X should deduct TDS u/s 194J on making payment to the Chartered Accountant. He should deposit the TDS and file TDS Return Form 26Q
The trader should not pay expenses in cash. The cash payment made to a single person in a day should not exceed Rs. 10,000. Thus, pay expenses using modes other than cash
While calculating Income Tax on trading, the trader can claim deductions under chapter VI-A. This includes LIC premium (80C), medical insurance premium (80D), interest on an educational loan (80E), etc.
If the income from business or profession is more than Rs.1,50,000 or the total sales or gross receipts is more than Rs.25 lacs in any of the preceding 3 years, then you must maintain books of accounts which can help the Assessing Officer to calculate the taxable income as per the Income Tax Act
If a trader opts for Presumptive Scheme u/s 44AD, they cannot claim expenses. This is because they are not required to maintain books of accounts.
A trader having Business Income should claim valid business expenses in the P&L Statement. They also need to prepare financial statements and file ITR-3. The trader also needs to calculate the trading T/O and determine the applicability of Tax Audit to file ITR.
By: via @AlliesFin Serve Stock Market
