Tax Collection At Source: Understanding The Law & Addressing The Challenges

Shashi BekalAdvocate Shashi Ashok Bekal has explained the applicability of the Scheme of TCS, its compliance procedure and the consequences of non-compliance. He has also highlighted the concerns of taxpayers regarding the levy of TCS on sale of goods above specified limits. He has also identified certain lacuna and ambiguities in the law and requested that these be addressed at the earliest so as to avoid unwanted litigation

Abstract

The Article attempts at explaining the evolution of the Tax Collection  at Source (TCS) provisions, and the intention of the Parliament, each time the widened the TCS base. Further, it explains the applicability of the Scheme of TCS, its compliance procedure, and consequences of non-compliance. The Finance Act, 2020 has amended the provisions of TCS by widening its base with new transactions. Some aspects of the new transactions can be held ultra vires the Constitution. Further, the Article explains the current concerns with the issue of levy of TCS on sale of goods above specified limit. Although the Administration has issued certain clarifications, a minor lacuna still exists. It is imperative to address these ambiguities at the earliest so as to avoid unwanted litigation.

Table of contents

1. Introduction
2. Levy of TCS
  2.1. Applicability of TCS
    2.1.1. Rates
    2.1.2. Exemption
    2.1.3. Buyer & Seller
  2.2. Compliance procedure
    2.2.1. Certificate
    2.2.2. Due Dates
  2.3. Non-compliance
    2.3.1. Late filing fee/Interest
    2.3.2. Penalty
    2.3.3. Prosecution
3. Finance Act, 2020
  3.1. Constitutional validity of TCS on LRS transaction
  3.2. CBDT Circular No. 17 of 2020 dated September 29, 2020
    3.2.1. Frequently asked Questions
    3.2.2. Litigative issues
4. Dénouement

1. Introduction

Tax collection  at Source (TCS) was introduced as section 206C of the Income -tax Act, 1961 (Act) vide Finance Act, 1988(1988) 171 ITR 53. It was introduced to as a consequence to Section 44AC of the Act which was titled “Special provision for computing profits and gains from the business of trading in certain goods.”

According to the scheme of TCS, the seller of certain specified goods, at the time of sale, is required to collect a tax in form of a percentage of the sales from the buyer. The seller is then required to deposit the same with the Government. The buyer of the goods is allowed the credit of the tax paid, in the same year.

As per the Memorandum to the Finance Bill, 1988(1988) 170 ITR 176, these provisions have been enacted on account of the considerable difficult faced by the department in making the assessment of the income in case of assesses who contracts in for sale of liquor, scrap, forest products etc. As per the experience of the Department, for securing such contracts legal entities such as firms or AOPs are constituted, and after the execution of the contract, no trace is left either by the them or their members. Therefore, with a view to combat large scale tax evasion by dealers in such products, section 44AC and section 206C was introduced.

The Constitutional validity of the provision was challenged and the same was upheld by the Hon’ble Supreme Court in the case of UOI v.A. Sanyasi Rao[1996] 219 ITR 330 (SC) wherein it was held that the TCS provisions are akin to the statutory provisions obliging to pay ‘advance tax’.

Further, the Constitutional validity was upheld by The Hon’ble High Court of Kerala in the case of T.K. Aboobacker v. UOI [1989] 177 ITR 358 (Ker) (HC ) swherein it was held that section 44AC and section 206C of the Act does not travel beyond legislative field assigned to Parliament by entry 82 in List I of the Seventh Schedule of the Constitution. In the decision of the Hon’ble High Court of Punjab & Haryana in the case of Sat Pal & Co. vs. Excise & Taxation Commissioner [1990] 185 ITR 375 (P &H ) (HC) it was held that the Parliament was competent to enact sections 44AC and 206C of the Act. Further, section 44AC of the Act, read literally, would be violative of articles 14 and 19(1)(g) of the Constitution, but in interest of social justice, instead of being struck down, it should be read down as an adjunct to sections 28 to 43C of the Act so as to make it consistent with the constitutional guarantees enshrined in Articles 14 and 19(1)(g) of the Constitution.

Section 44AC of the Act was omitted vide Finance Act, 1992 (1992) 195 ITR 214 with effect from April 1, 1993. As per the memorandum to the Finance Bill, 1992 (1992) 194 ITR 170, the section resulted into controversies with respect to interpretation and administrative difficulties in its implementation. However, it has been expressly mentioned that section 206C of the Act i.e. TCS would continue to remain in force.

Although, the Memorandum to Finance Bill, 1988 and section 206C of the Act refers to “scrap” in its title, no rate was specified for transaction in scrapuntil 2003.Scope of TCS waswidened to include “scrap”vide Finance Act, 2003(2003) 261 ITR 62.

Further,vide Finance Act (No. 2), 2004 (2004) 269 ITR 101, the scope of TCS was further widened to include every person who grants a lease or a licence or enters into a contract or otherwise transfers any right or interest in any parking lot or toll plaza or a mine or a quarry to another person, other than a public sector company, for the use of such parking lot or toll plaza or mine or quarry for the purposes of business.

Finance Act, 2012 further widened the scope of TCS to include sale of jewellery of bullion in cash. The Memorandum to the Finance Bill, 2012 (2012) 342 ITR 234 explains that the provisions are introduced in order to reduce the quantum of cash transaction in bullion and jewellery sector and for curbing the flow of unaccounted money in the trading system of bullion and jewellery.

Finance Act, 2016 (2016) 384 ITR 1 (St) widened the scope of TCS sale of motor vehicle of the value exceeding ten lakh rupees and sale in cash of any goods (other than bullion and jewellery), or providing of any services (other than payments on which tax is deducted at source under Chapter XVII-B) exceeding two lakh rupees. According the Memorandum to the Finance Bill, 2016, this provision has been introduced in order to reduce the quantum of cash transaction in sale of any goods and services and for curbing the flow of unaccounted money in the trading system and to bring high value transactions within the tax net.

Finance Act, 2020 further widened the scope of TCS to include TCS on foreign remittance through Liberalised Remittance Scheme (LRS) and on selling of overseas tour package as well as TCS on sale of goods over a specified limit. Further, the Act also sought to discriminate the non-PAN/ Aadhaar cases with a higher rate of tax,

Thus, it has been made clear that, the Scheme of TCS has been upheld for Constitutional validity. Further, the Scheme of TCS has been enacted as an anti-abuse provision, and subsequently, widened with a view to curb cash transactions, etc. It is now important to understand, how TCS is levied and collected.

2. Levy of TCS

As mentioned above, TCS is paid by the buyer to the seller of the goods or services, as applicable. The seller is liable to deposit the same with the Government within the prescribed time. The buyer can avail the credit of such taxes paid, in the year of payment.

2.1. Applicability of TCS

2.1.1. Rates

A snap shot of the rate of TCS for good and services which attract TCS are as under:

Sr. No Type of Goods Rate
1. Alcoholic Liquor for human consumption 1%
2. Timber obtained under a forest lease 2.5%
3. Tendu leaves 5%
4. Timber obtained by any mode other than under a forest lease 2.5%
5. Forest produce other than Tendu leaves and timber 2.5%
6. Scrap 1%
7. Minerals like lignite, coal and iron ore 1%
8 Bullion (including coins/articles) that exceeds over Rs. 2 lakhs/ Jewellery that exceeds over Rs. 5 lakhs [in cash] 1%
9. Purchase of Motor vehicle exceeding Rs. 10 Lakhs 1%
10. Parking lot, Toll Plaza and Mining and Quarrying 2%
11. Sale of Goods more than Rs. 50 lakhs. [Finance Act, 2020] 0.1%
(1 % For non-PAN/Aadhaar cases)
12. Liberalized Remittance Scheme (LRS) [Finance Act, 2020] 5%
13. Overseas Tour Program Package [Finance Act, 2020] 5%

 
As per section 206CC of the Act, Failure to furnish Permanent Account Number (PAN) would attract the higher rate of:

  • at twice the rate specified in the relevant provision of this Act; or
  • at the rate of five per cent.

2.1.2. Exemption

Activity of Processing:Where the buyer, who is resident in India, purchases the good for purposes of manufacturing, processing or producing articles or things or for the purposes of generation of power and not for trading purposes.

The Hon’ble High Court of Patna in the case of North Koel Kendu Leaves &Mahulam Leaves v. UOI [1997] 228 ITR 630 (Patna) (HC) held that where the Petitioners, a tendu leaves trader, after purchasing leaves carried out activities of drying, sprinkling of water, sorting and screening of leaves and thereafter sold in market. The activities carried out for preserving leaves for its use as bidi patti, no different substance was brought into existence, benefit of proviso to section 206C(1) of the Act was not available.

Sale of Bullion & Jewellery: Finance Act, 2017 proposed to omit this from the scope of TCS, no explanation was provided in the Memorandum to the Finance Bill 2017 or Notes to clauses.

Licenses issued by the Government: The Hon’ble Supreme Court in the case of UOI v. Om Prakash S.S. & Co [2001] 248 ITR 105 (SC)held that, ‘Buyer’ would mean where a person by virtue of the payment gets a right to receive specific goods and not where he is merely allowed/permitted to carry on business in that trade. On licences issued by the Government permitting the licensee to carry on liquor trade the provisions of section 206C are not attracted as the licensee does not fall within the concept of ‘buyer’ referred to in that section.

Tribal: The Hon’ble Bombay High Court in the case of Maharashtra State Co-operative Tribal Development Corporation Ltd. vs. CIT [2017] 78 taxmann.com 197 (Bom)(HC) held that where tribal development corporation engaged Tribals to collect forest produce, which were sold in auction by corporation, Tribals could not be said to be first seller; corporation would be first seller and be liable to deduct TCS from buyers in auction sale.

2.1.3. Buyer and Seller

Buyer: "buyer" means a person who purchases any goods, but does not include:

  • The Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or
  • A local authority as defined in the Explanation to clause (20) of section 10 of the Act; or
  • A person importing goods into India or any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein;
  • a buyer in the retail sale of such goods purchased by him for personal consumption (in certain cases)
  •  public sector company which is engaged in the business of carrying passengers. (in certain cases)

The Hon’ble Supreme Court in the case of UOI v. Om Prakash S.S. & Co. [2001] 248 ITR 105 (SC) held that ‘Buyer’ for purposes of section 206C of the Act means buyer of goods and not merely a person who acquires a licence to carry on business.

Seller: "seller" means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or co-operative society and also includes an individual or a Hindu undivided family whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limit, during the financial year immediately preceding the financial year in which the goods of the nature specified are sold.

2.2. Compliance procedure

The compliance procedure is enumerated under section 206CA, 206CB and 206CC of the Act.

Tax collection account number: Every person collecting TCS is required to apply to the Ld. Assessing Officer for allotment of a tax collection account number vide Form 49B.

2.2.1. Certificate 

The Seller/Collector is required to issue Form 27D i.e. the Certificate of TCS to the buyer. This certificate has to be issued within 15 days from the date of filing TCS returns.

Quarter Ending

Date for generating Form 27D

For the quarter ending on June 30

July 30

For the quarter ending on September 30

October 30

For the quarter ending on December 31

January 30

For the quarter ending on March 31

May 30

2.2.2. Due Dates

Payment: The seller/Tax collector is required to deposit TCS by the 7th of the next month. The same has to be deposited vide Challan 281.

Return: The seller/Tax collector is required to file quarterly returns in Form 27EQby the 15th of the month after the quarter (except for quarter ended March, it can be filed by 15th of May)

2.3. Non-compliance

Non-compliance of TCS provisions by the collector can attract unintended consequences, they are as under:

2.3.1. Late filing fee/Interest 

A person who fails to file the TCS return or does not file the TCS return by thedue dates prescribed in this regard has to pay late filing fees as provided under section234E of the Act and for late payment of TCS he shall be liable to interest under section 206C(7) of the Act.

As per section 234E of the Act, where a person fails to file the TCS return on or before the due date prescribed in this regard, then he shall be liable to pay, by way of fee, a sum of Rs. 200 for every day during which the failure continues.

As per section 206C(7) of the Act,  interest shall be payable from the date on which such tax was collectible to the date of furnishing of return of income by such buyer or licensee or lessee. Interest in such a case, will be levied at 1 per cent for every month or part of a month.

Interest on delayed in TCS payment should be paid before filing of TCS return.

2.3.2. Penalty 

As per Section 271H of the Act, where a person fails to file the statement of TCS return on or before the due dates prescribed in this regard, then assessing officer may direct such person to pay penalty under section 271H of the Act.

Minimum penalty can be levied of Rs. 10,000 which can go upto Rs. 1,00,000. Penalty under Section 271H will be in addition to late filing fees prescribed under Section 234E.

Apart from delay in filing of TCS return, Section 271H of the Act also covers cases of filing incorrect TDS/TCS return. Penalty under section 271H of the Act can also be levied if the deductor/collector files an incorrect TDS/TCS return. In other words, minimum penalty of Rs. 10,000 and maximum penalty of upto Rs. 1,00,000 can be levied if the deductor/collector files an incorrect TCS return.

No penalty will be levied under section 271H of the Act for the failure to file the TCS return,if the person proves that after paying tax deducted/collected by him, along with the latefiling fee and interest (if any), to the credit of the Central Government, he had filed theTCS return before the expiry of a period of one year from the due date of filing theTCS return.

2.3.3. Prosecution  

As per section 276BB of the Act, if a person fails to pay to the credit of the Central Government, the tax collected by him as required under the provisions of Section 206C of the Act, he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.

3. Finance Act, 2020

The Finance Act, 2020 further proposed to widen the scope TCS with the introduction of the following amendments:

Liberalised Remittance Scheme:An authorised dealer, who receives an amount, for remittance out of India from a buyer i.e. a personremitting such amount out of India under the Liberalised Remittance Scheme of the Reserve Bank of India, shall collect a TCS of 5 percent from such person/buyer.

Overseas tour program: If the amount or aggregate of the amounts being remitted by a buyer isRs. 7 lakh or more, an authorized dealer is expected to collect TCS at 5 percent from such buyer.

Foreign education: If the amount or aggregate of the amounts being remitted by a buyer is Rs. 7 lakh or more is a loan obtained from any financial institution as defined in section 80E of the Act, for the purpose of pursuing any education; TCS has to collected at 0.5 per cent.      

Sale of Goods: It was proposed that A seller of goods is liable to collect TCS at the rate of 0.1 per cent on consideration received from a buyer in a previous year in excess of fifty lakh rupees. In non-PAN/ Aadhaar cases the rate shall be one per cent.

Further, only those sellers whose total sales, gross receipts or turnover from the business carried on by it exceed ten crore rupees (100 Million Rupees) during the financial year immediately preceding the financial year, shall be liable to collect such TCS.

The definition of buyer has been amended to exclude export of goods and import of goods.

3.1. Constitutional validity of TCS on LRS transaction

The Finance Act has proposed to levy TCS on remittance made on account of LRS.

The LRS is made under the Foreign Exchange Management Act, 1999 (FEMA) to allow all resident individuals, including minors, are allowed to freely remit up to USD 2,50,000 per financial year. The Scheme was introduced on February 4, 2004, with a limit of USD 25,000. The LRS limit has been revised in stages consistent with prevailing macro and micro economic conditions. According to LRS, Individuals can avail of foreign exchange facility for the following purposes:

i. Private visits to any country (except Nepal and Bhutan)

ii. Gift or donation

iii. Going abroad for employment

iv. Emigration

v. Maintenance of close relatives abroad

vi. Travel for business, or attending a conference or specialised training or for meeting expenses for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient going abroad for medical treatment/ check-up

vii. Expenses in connection with medical treatment abroad

viii. Studies abroad

ix. Any other current account transaction which is not covered under the definition of current account in FEMA 1999.

Although the Memorandum to the Finance Bill, 2020 and Notes to clauses to the Finance Bill, 2020 is silent about the intention of the legislature in introducing TCS to LRS transactions, levy of TCS on certain LRS transactions such as gift/ money given to a relative is prima facieunconstitutional

Firstly, at the outset,gift made to a relative is not a commercial transaction rather a domestic transaction which is exempt under the Income tax Act, 1961, and there is no necessity to bring the same within the purview of the Scheme of TCS. The Hon’ble Supreme Court in the case of GE India Technology Cen (P.) Ltd. v. CIT [2010] 187 Taxman 110 (SC)held that wherein it was held that payments to non-residents will be subjected to withholding tax only when such payments are chargeable to tax in India as per section 5 & 9 of the Act. That is, a non-resident company having no PE in India nor having any business connection in India, the income on this account even if paid, is not taxable in India.
The principles upheld by the Hon’ble Supreme Court is that if a commercial transaction is not taxable in India, there is no need to impose any tax on such transaction at its source. The gift given by a relative is not a commercial transaction and a non-taxable transaction.

Hence the proposed law on imposing TCS on a domestic-exempt-transaction is arbitrary and violative of Article 14 of the Constitution of India. 

Secondly, the levy of TCS on cross border transaction on a gift made to a relative, merely because the relative is located outside India is discriminatory and violative of Article 14 of the Constitution of India i.e. Equality before law; as the same transaction to a relative in India would be exempt from the levy of TCS.

The Doctrine of eclipse squarely applies to the said transaction, that the inconsistency in the new law should be overshadowed by the fundamental right of equality.

Thirdly, the LRS as the same suggests is a scheme for remittance up to a certain amount without the burden of excessive compliance. It authorizes the AD bank to undertake the remittance transaction without RBI’s permission.

The levy of a transaction tax and subsequent compliance on the same, defeats the purpose of the LRS i.e. the existing law. The proposed amendment under the Income tax Act, 1961 is inconsistent with the LRS issued under FEMA, 1999. The repugnancy or inconsistency in the latter law should be avoided and a harmonious interpretation should be given to the provisions. Therefore, the Scheme of TCS should carve out an exception for a gift made to a relative situated abroad.

Fourthly, as the transaction of gift to a relative is not taxable, the amount of TCS paid will be given as credit while paying the taxes for the relevant year. This process of credit is understandable in a commercial transaction. However, in a strict domestic transaction, unwarranted collection of tax in advance is a deprivation of right property which is enshrined under Article 300A of the Constitution.

In conclusion, the Parliament of CBDT via delegated legislation, should carve out an exception to the amendment made via Finance Act, 2020 so as to save the TCS provisions from being ultra vires the Constitution. As an alternative the newly amended TCS provisions can also be challenged via a Writ under Article 226 or 32 of the Constitution.

3.2. CBDT Circular No. 17 of 2020 dated September 29, 2020

On account of several queried the CBDT vide Circular No. 17 of 2020 dated September 29, 2020 provided a much-needed clarification on certain issues emanating from TCS inter alia. The same are provided as under: 

Applicability on transactions carried through various Exchanges:It has been provided that transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporation located in International Financial Service Centre will not attract TCS [section 206(1H) of the Act].

Similarly, transactions in electricity, renewable energy certificates and energy saving certificates traded through registered power exchanges will not attract TCS [section 206(1H) of the Act].

Calculation of threshold for FY 2020-21: TCS on sale of goods [section 206(1H) of the Act] shall not apply on any sale consideration received before October 1, 2020.Consequently, it would apply on all sale consideration (including advance received for sale) received on or after 1st October 2020 even if the sale was carried out before 1st October 2020.

Since the threshold of fifty lakh rupees is with respect to the previous year, calculation of receipt of sale consideration for triggering TCS section 206C (1H) of the Act shall be computed from 1st April, 2020. Hence, if a person being seller has already received fifty lakh rupees or more up to September 30, 2020 from a buyer, the TCS shall apply on all receipt of sale consideration during the previous year, on or after October 1, 2020, from such buyer.

Sale of motor vehicle:As per section 206C(IF) of the Act apply to sale of motor vehicle of the value exceeding ten lakh rupees.  It has been requested to clarify that whether all motor vehicles are excluded from the applicability of section 206C (1H) of the Act.Hence, in order to remove difficulty, it is clarified that:

  • Receipt of sale consideration from a dealer would be subjected to TCS under sub-section (1H) of the Act, if such sales are not subjected to TCS under sub-section (1F) of section 206C of the Act.
  • In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value of ten lakh rupees or less to a buyer would be subjected to TCS under sub-section (11-1) of section 206C of the Act, if the receipt of sale consideration for such vehicles during the previous year exceeds fifty lakh rupees during the previous year.
  • In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value exceeding ten lakh rupees would not be subjected to TCS under sub-section (1H) of section 206C of the Act if such sales are subjected to TCS under sub-section (1F) of section 206C of the Act.

Adjustment for sale return, discount or indirect taxes: It is requested to clarify that whether adjustment is required to be made for sales return, discount or indirect taxes including GST for the purpose of collection of tax under of Section 206C (1H) of the Act. It is hereby clarified that no adjustment on account of sale return or discount or indirect taxes including GST is required to be made for collection of tax under section 206C(1H) of the Act since the collection is made with reference to receipt of amount of sale consideration.

Fuel supplied to non-resident airlines: Section 206C (1H) of the Act shall not apply on the sale consideration received for fuel supplied to non-resident airlines at airports in India.

3.2.1. Frequently asked Questions  

Press release dated September 30,2020 cleared few misconceptions, they are as under:

Question: How will TCS be collected for Financial year 2020-21?

Answer: TCS shall be applicable only on the amount received on or after 1st October, 2020. For example, a seller who has received Rs. 1 crore before 1st October, 2020 from a particular buyer and receives Rs. 5 lakh after 1st October, 2020 would be required to collect tax on Rs. 5 lakh only and not on Rs. 55 lakh [i.e Rs.1.05 crore – Rs. 50 lakh (threshold)] by including the amount received before 1st October, 2020.

Question: How will adjustments made for the month of October?

Answer: Asthe seller in most of the cases maintains running account of the buyer in which payments are generally not linked with a particular sale invoice. Therefore, in order to simplify and ease the compliance of the collector, it may be noted that this TCS provision shall be applicable on the amount of all sale consideration received on or after1st October, 2020 without making any adjustment for the amount received in respect of sales made before 1st October, 2020. Mandating the collector to identify and exclude the amount in respect of sales made up to 30th September, 2020 from the amount received on or after the 1st of October, 2020 would have resulted into undue compliance burden for the collector and also litigation.

Question: How will TCS apply where Income tax is paid on presumptive basis?

Answer:Assuming a net profit of 8% on sales, his business income in respect of this payment of Rs. 10 crore made for purchase would be around Rs. 87 lakh. The income-tax liability on the income of Rs. 87 lakh for an individual in the new taxation regime would be around Rs. 27 lakh. Hence, the amount of TCS collected i.e. Rs.50,000 (Rs. 37,500 this year) would be a miniscule part of his actual tax liability and would be easily adjusted against his tax liability. In a rare case, if his tax liability is less than even Rs.50,000 (Rs. 37,500 this year), he shall be entitled for refund of excess TCS with interest.

Other Frequently asked questions are as under:

Question: What is the meaning of “seller” for attracting TCS under section 206C(1H) of the Act?

Answer: As per part (b) to the explanation contained under the 2nd provision to section 206(1H) of the Act, "seller" means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out, not being a person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.

It is pertinent to note that the term “turnover” is not defined under Income tax Act, 1961.

Question: Whether Sales consideration would include GST?

Answer: There is no clarification from the Department. GST component is included while calculating the limit of section 44AB of the Act i.e. Tax Audit.

Question: Whether TCS will be applicable on CIF basis (cost, insurance and freight)" or FOB (free on board) basis?

Answer: The same would depend upon the terms of the contract.

Question: What is the applicability of TCS on refund of advance?

Answer: TCS is collected on advance for sale of goods, and if the goods are refunded later, the TCS would have to be deposited with the Government. The buyer can claim credit of the amount of tax paid in advance.

Question: Whether TCS is applicable on the amount of GST?

Answer:The CBDT vide Circular No. 17, dated September 29, 2020, has clarified that no adjustment on account of sale return or discount or indirect taxes including GST is required to be made for collection of tax under section 206C(1H) of the Act since the collection is made with reference to receipt of amount of sale consideration.

This position is contrary to the principles of transaction taxes collected under direct tax laws. For example, while dealing with Tax Deducted at Source (TDS), CBDT vide Circular No. 23 of 2017 dated July 19, 2017 has clarified that no tax shall be deducted under Chapter XVII-B, if the GST on services is indicated separately.

Question: Whether GST would be applicable on the component of TCS?

Answer: CBIC vide Corrigendum to Circular No. 76/50/2018-GST dated March 7, 2019it has been clarified that TCS is not a tax on goods but an interim levy on the possible “income” arising from the sale of goods by the buyer and to be adjusted against the final income- tax liability of the buyer.

3.2.2. Litigative issues 

Definition of Turnover: It would be necessary for Income tax to define “Turnover” under the Income tax Act, 1961 or at least for the purpose of TCS under 206C(1H) of the Act. Otherwise, Since the criteria for imposition of TCS under this provision is on turnover and sales consideration, the lacuna will result in unwanted litigation.

Applicability of TCS on GST/Indirect taxes: This is not in accordance with the provisions of levy of transaction tax under the scheme of Income tax. The Department should issue a clarification to remove this ambiguity that has arisen on account of the recent circular.

4. Dénouement

The intention of the Administration with the introduction of new provisions under TCS is appreciated, as the same are with a view to widening the tax base. However, precaution must be taken so as the new law does not contain any ambiguity.

A blanket TCS on all LRS transactions above Rs. 7 lakhs, hampers the purpose of an LRS. Further, when such provisions are enacted without proper carve outs, the same are inconsistent with other provisions of the same statute.

With respect to TCS on sale of goods above a certain limit is a good provision. Once again precaution must be taken to fill any lacuna in the statute to avoid any unintended consequences. Further clarifications are expected from the Department at the earliest with this regard.

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor itatonline.org and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, non-commercial use) without express written permission of itatonline.org
One comment on “Tax Collection At Source: Understanding The Law & Addressing The Challenges
  1. RAJIVE KUMAR says:

    excellent article..

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