Is deposit received in advance taxable?

Is deposit received in advance taxable?

On 29 Dec 2015, the Finance Act was passed and S.24(1)(b) and S.24(1)(c) of Income Tax Act (ITA) was amended which now read “... any services rendered or services to be rendered at any time in the course of carrying on a business” and “... any property dealt or to be dealt with at any time in the course of carrying on a business” respectively.

S. 24(1A) of Income Tax Act was introduced which states that money received by a person in respect of any services to be rendered or the use or enjoyment of any property shall be treated as gross income for the relevant period in which the money is received notwithstanding that no debt is owing to the relevant person in respect of such services or such use or enjoyment.

Current tax treatment under of sections 24(1)(b) and 24(1A)

  • Under the amended section 24(1)(b), a debt arising from services that are to be rendered will be brought to tax in the year when the debt arises.

  • Under the new section 24(1A), payments received in advance even though there is no contractual obligation to pay at the time payment, will be brought to tax in the year of receipt Section 24(1)(b)is to be considered first before applying section 24(1A).

  • Where such sum is refunded in respect of services that have yet to be rendered, a tax deduction can be claimed in the YA the refund is made.

Services which are not subjected the tax treatment under sections 24(1)(b)and 24(1A The following are services not subjected to the new tax treatment:

  • Services that are governed by separate income tax rules(e.g. Construction contract or property development).

  • Services provided by a non-resident person.

  • Refundable deposits which do not form part of the gross income of the service provider's business (e.g security deposit), but does not include deposits which are forfeited

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