TDS And TCS – Expansion Of The Net By The Finance Act 2020

CA Ketan VajaniCA Ketan Vajani has systematically analyzed the large number of amendments relating to Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) which have been inserted by the Finance Act 2020. He has explained the scope of these provisions with the aid of judicial precedents. He has pointed out that several provisions are complex and will lead to confusion and practical difficulties during implementation. He has identified the problem issues and requested the CBDT to issue a suitable clarification

Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) are the most convenient mode of tax collections by the government. The cost of collection of these taxes are minimal and the same also adheres to the sound principle of collecting the taxes as the person earns the income. Classically the concept of TDS and TCS has been an accepted concept all across the globe. However ideally one needs to recognize the fact that ultimately the tax deductor / collector is working as an agent of the government and assists the government in tax collection. Over the period of past two decades or so, several amendments have been made in the Income-tax Act to ensure due compliance with the TDS and TCS provisions. There is a clear approach of a stick for default though unfortunately the carrot is never seen. We have the provisions leading to disallowance of expenses, levy of interest (as high as 18% p.a.), penalties for non-compliance, late filing fees (going upto TDS amount), the deductor being treated as assessee in default and on top of all, the fear of prosecution. All these provisions will keep on bothering the tax deductors whether one likes it or not.

The net of TDS and TCS keeps on expanding year after year bringing newer payments and receipts too within its framework. At times the scope is so expanded that it travels beyond the field of “Income”. Can one ever imagine that one can suffer TDS on withdrawal of cash from bank? There is no income earned in such transaction but we have section 194N to provide for such deduction as a matter of fact. The ever-expanding net catches fish quite effectively and therefore, the policy makers love this mode of collection. Finance Act 2020 also brought in some amendments and expanded the scope further. This article seeks to deal with some of such amendments made by the Finance Act 2020 and issues arising therefrom.

Amendments made by Finance Act 2020

1. Amendment to Section 194

1.1 The Finance Act 2020 had reintroduced the classical scheme of taxation of dividends in the hands of shareholders as against the erstwhile Dividend Distribution Tax to be paid by corporates at the time of distribution of dividends. Since the tax base has again been shifted to the shareholders, the TDS provisions has been also introduced under section 194. Section 194 provides that the Principle Officer of an Indian Company or a company which has made arrangements for declaration and payment of dividends within India shall deduct TDS @ 10% for the dividends paid to resident shareholders before making any distribution or payment to shareholders. The first proviso to the section provides for a threshold of Rs. 5,000/- where the dividend is paid to an Individual share holder provided the dividend is paid by any mode other than cash. The second proviso exempts the dividends paid to LIC, GIC or any other Insurance company from deduction of tax at source.

1.2 Similarly, amendment is made to section 194LBA to provide for tax deduction by business trust on dividend income paid to unit holder, at therate of 10% for resident. For non-resident, it would be 5% for interest and 10% for dividend. Section 195 of the Income-tax Act is also amended and the second proviso to section 195(1) which exempted deduction of TDS on dividends covered by erstwhile section 115O is deleted. As such, the dividend income in the hands of non-resident share holders will henceforth be subjected to TDS u/s. 195 of the Act.

2. Amendments to Section 194A

2.1 Section 194A of the Income-tax Act provides for deduction of TDS on Interest other Interest on Securities. Sub-section (3) of the section relaxes the applicability of the provisions in certain situations.

Scope of TDS expanded in cases of certain Co-operative Societies

2.2 Sub-section (3) granting exemption from TDS also interalia contains two clauses in respect of TDS deduction by certain co-operative societies. Clause (v) of sub-section (3) provides that no deduction is to be made in respect of such income credited or paid by a cooperative society (other than a co-operative bank) to a member thereof or to any other co-operative society. Similarly, Clause (viia) of sub-section (3) provides that no deduction is required to be made in respect of income credited or paid in respect of, deposits with a primary agricultural credit society or a primary credit society or a co-operative land mortgage bank or a co-operative land development bank.

2.3 The Finance Act 2020 inserted a proviso in sub-section (3) so as to provide that a co-operative society referred to in the above clauses (v) and (via) shall be liable to deduct income-tax in accordance with the provisions of sub-section (1), if the total sales, gross receipts or turnover of the co-operative society exceeds fifty crore rupees during the financial year immediately preceding the financial year in which the interest is credited or paid. However, a threshold of Rs. 50,000/- for senior citizens and Rs. 40,000/- for other cases is available for applicability of TDS in such situations.

2.4 By virtue of this amendment, depositors of money with large co-operative societies having turnover or gross receipts above Rs. 50 Crores will henceforth not be able to avoid TDS. It is pertinent to note that the relevance is on the size of societies and not the income of the recipient. This might prompt the depositors to avoid making deposits with large societies with a view to avoid TDS deduction. The affairs of co-operative societies are not very professionally conducted specially when the society is a smaller society. As such, the investors’ money will be at greater risk with the ill managed societies. This may not bring much revenue to the government. However, the risk of investors’ money being lost is disproportionate to the possible revenue benefit to the government.

3. Amendment to Section 194C

3.1 Section 194C of the Act provides for deduction of TDS on payments to contractors for carrying out any “work”. Clause (iv) of the Explanation defines the term work for the purpose of the section. The term work interalia includes manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from such customer.

3.2 Courts have held that merely because the goods are manufactured as per the specification given by the customer, the same does not become a works contract so as to attract the provisions of section 194C of the Act. Useful reference for this proposition can be made to the judgments in the case of CIT Vs. Reebok India Co. 306 ITR 124 (Del.) and CIT Vs. Glenmark Pharmaceuticals Ltd. 324 ITR 199 (Bom.). As such, the manufacturing does not become works contract even if it is as per specification of the customer. If, however, the raw material for the manufacturing is purchased from the customer himself then the manufacturing activity will turnout to be a works contract due to the language of the section 194C. Manufacturing or supplying a product as per specification of a customer by using raw material purchased from a person, other than such customer will be out of the purview of the term “works” and therefore no TDS will be required to be deducted in such a situation.

3.3 The Finance Act 2020 amended the provisions of section 194C of the Act so as to modify the definition of “work” to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, i.e. a specified person as per the provisions of section 40A(2)(b) of the Act.

3.4 The amendment therefore in effect provides that the manufacturing will be a works contract in a case where the same is as per the requirement or specification of the customer and the raw material is purchased even from some associate concern of the customer. As per the memorandum explaining the provisions of the Finance Bill 2020, “It has been noted that some assessees are using the escape clause of the section by getting the contract manufacturer to procure the raw material supplied through its related parties. As a result, a substantial amount of income escapes the tax net.” Therefore, as per the memorandum the amendment is made with a view to clarity in the section and plug the leakage of revenue.

3.5 On going through the purpose of the amendment as per the memorandum, one really wonders as to how many assessees might actually being resorting to such modalities with a view to avoid deduction of TDS from the income of the contract manufacturer? The assessee was anyways not getting any monetary gain by resorting to such so called escape clause and therefore would have not certainly preferred to enter litigation for such issues.

3.6 Secondly, one also fails to understand as to where is the question of revenue leakage? Even if the assessee does not deduct TDS on the said payments, the contract manufacturer would have had to pay appropriate tax when he files his Return of Income and as such, there is no revenue leakage which can be said to be in existence. At the most, there might have been some deferral of tax collection for which there are sufficient deterrent provisions by way of interest u/s. 234C and 234B.

3.7 One also needs to appreciate the fact that the compliance with the TDS provisions is part of certification by the auditor under section 44AB of the Act. Whether, it will be possible for a tax-auditor to identify all cases where the supply of raw material to the contract manufacturer was made by associate concern of the assessee and the same raw material (lot wise) was used in the manufacturing process by the contract manufacturer? Will this not be adding too much of burden on the tax auditor without any corresponding gain to anyone? Whether it is justified to make such amendments and cast additional obligations on the deductors without any benefit per se?

4. Amendment to Section 194J

4.1 Amongst various amendments that are expanding the scope of tax deduction at source, there is one amendment made by the Finance Act 2020 which reduces the rate of TDS. Amendment has been made to section 194J to provide for reduced rate of TDS @ 2% instead of the normal rate of 10% in the following cases :

• Payment for fees for technical service, not being a professional service
• Payment for royalty, where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films.

4.2 As per the memorandum explaining the provisions of the Finance Bill 2020, the purpose of the amendment is to reduce litigation where in many cases, the assessee used to deduct TDS @ 2% u/s. 194C while the tax officers used to claim that the deduction should have been made @ 10% u/s. 194J. Considering these litigations, the rate of TDS is brought at part with section 194C in respect of fees for technical services and royalty for cinematographic films. Though the object is laudable, it seems that now new disputes would start as to whether a particular payment is fees for technical services or fees for professional services? As per the notification issued for the purpose of section 44AA of the Act, the term profession includes technical consultancy. As such, the grey area still remains. Instead of disputes between two different sections, now the disputes will be within two segments of the same section. Correction in the mindset of revenue officers is more required then amendments to the section for the purpose of avoiding litigation.

5. Insertion of Section 194K

5.1 The Finance Act 2020 has inserted one more section 194K in the statute. The section provides for deduction of TDS on incomes from units of Mutual Funds or units of Unit Trust of India @ 10% subject to the threshold of Rs. 5,000/-. The amendment is a consequential amendment due to change in the method of taxing dividend in the hands of the shareholders / unitholders from the erstwhile Dividend Distribution Tax.

5.2 The language of section 194K as introduced by the Finance Bill 2020 created lot of confusion. The section talks about any income from the units of mutual funds or UTI. On the basis of this language, a view was expressed in some quarters that even the capital gains arising on transfer of the units will suffer TDS. The fear was not misplaced. The CBDT, however issued a press note on 4th February, 2020 clarifying that the TDS provisions will not apply in respect of capital gain transactions. In furtherance of this press note, a clause has specifically been added in the proviso while enacting the Finance Act so as to provide that the provisions of the section will not apply if the income is in the nature of capital gains.

6. Substitution of Section 194N of the Income-tax Act w.e.f. 1st July, 2020

6.1 Section 194N has been introduced in the Income-tax Act by the Finance No. 2 Act, 2019 with effect from 1st September, 2019. The section provides for deduction of tax at source @ 2% from the amount of cash withdrawn during the year. The deduction is to be made by (a) a banking company, (b) a co-operative society engaged in banking business and (c) a post office. There is a threshold of Rs. 1 Crore and the deduction of TDS is applicable if the withdrawal from the bank account/s is more than Rs. 1 Crore. The threshold is for the deductor as a whole and in case of multiple bank accounts, the same will apply to the amounts withdrawn from all the bank accounts during the financial year. The section does not apply in case of cash withdrawals by governments, banks and post offices, business correspondents of banks, white label ATM operators authorized by RBI and such other persons as may be notified.

6.2 The Finance Act, 2020 has substituted the section 194N with effect from 1st July, 2020 so as to make it more stringent in operation. The operation of the section has been expanded further in the case of recipient who has not filed the Returns of Income for all the three assessment years for which the time limit u/s. 139(1) has expired before the previous year. In such cases, the threshold will be Rs. 20 Lakhs as against the normal threshold of Rs. 1 Crore. Further it is provided that in the rate of TDS in such cases will be 5% if the withdrawal amount crosses Rs. 1 Crore.

6.3 The amendment seeks to make the TDS applicability stricter and wider for the assessees who do not file the Return of Income and yet withdraw a high amount of cash from banks. On reading the plain language of the section, it is clear that the reduced threshold will apply only in a case where the Return of Income is not filed for all the 3 years prior to commencement of the financial year. If the assessee has filed even one year’s Return of Income, the first proviso to the section will not apply and the assessee will continue to have the original threshold of Rs. 1 Crore and also the original regular rate of 2% for entire transactions. Further, on reading of the section it also becomes evident that the first proviso will apply in cases where all the three Returns are pending as on the beginning of the financial year. Consider a case where the Return of Income is filed beyond the date prescribed u/s. 139(1) but the same is admittedly filed before the beginning of the financial year. In such a situation, I believe that the first proviso will not apply. On the basis of the language of the section, it seems that the object is to discourage cases of absolute non-filers and not affect the cases where the Returns are filed belated.

6.4 There are few practical difficulties which are likely to emerge in implementation of the amended section. The banks will now have to check whether the account holder has filed its Income-tax Return and decide the threshold amount as well as rate based on the fact. Also, there can be cases where the income of a person in the earlier years might be below basic exemption and hence the person might not have filed the Return. It seems that even in such a situation, the first proviso will get triggered and the threshold will be reduced to Rs. 20 Lakhs. One more situation can be where a firm / LLP / company etc., is newly incorporated and therefore there is no question of it filing Returns of the earlier three years. In such a situation, a judicious view shall be that the first proviso does not apply considering the object behind the same.

6.5 The purpose of section 194N is to discourage cash transactions by business entities. Though, the purpose is laudable purpose and promotes less cash economy, a basic question which arises is whether there is any income element on withdrawal of cash from bank? Tax Deduction at Source is ultimately one of the modes of collection of Income-tax. Since there is no income element in such withdrawal, in my humble view the provisions of section 194N are travelling beyond the concept of Income and on that count the provisions are not justified. There can be surely better ways to administer less cash economy and also to track the cash withdrawals from bank and its deployment for unaccounted transactions.

7. Insertion of Section 194O with effect from 1st October, 2020

7.1 Finance Act 2020 has inserted a new section 194O in the Income-tax Act, 2020 with effect from 1st October, 2020. Sub-section (1) of section 194O provides for deduction of tax at source in a case where sale of goods or provision of services of an E-commerce participant is facilitated by an E-commerce operator through its digital or electronic facility or any platform. The section provides that in such a case, the E-commerce operator will be liable to deduct tax @ 1% of the gross amount of such sale or services or both. The deduction is required to be made at the time of credit of the amount of sale or services or at the time of payment thereof, whichever is earlier.

7.2 Consequential Amendment to Section 206AA of the Act

At this point, it is also relevant to take a note of a consequential amendment made to section 206AA of the Act. Section 206AA of the Act provides for higher rate of tax deduction @ 20% in a case where the payee does not furnish his PAN to the deductor. A proviso has been added in the section 206AA so as to provide that for the purpose of section 194O, the deduction will be made @ 5% (and not 20%) where the payee does not furnish its PAN to the deductor.

7.3 As per the Explanation to sub-section (1), any payment made by a purchaser of goods or recipient of services directly to the e-commerce participant shall be deemed to be the amount credited or paid by the e-commerce operator to the e-commerce participant. As such, the direct receipt of the money from customers by the E-commerce participant in Cash on Delivery transactions (COD) will also need to be included for the purpose of deduction by E-commerce operator.

7.4 Sub-section (2) of the section provides for a threshold of Rs. 5 Lakhs in a case where the E-commerce participant is either Individual or HUF and further subject to condition that the E-commerce participant furnishes its PAN or Aadhar number to the E-commerce operator. No threshold is however available at all for E-commerce participants other than Individual and HUF.

7.5 Sub-section (3) provides that if the TDS has been deducted under this section or is not deducted due to threshold being applicable as per sub-section (2), then TDS will not be deducted under any other provisions of the Act. However, the proviso to sub-section (3) makes it clear that this will not be applicable to any amount receivable by E-commerce operator for hosting advertisements or for providing any other services which are not in connection with the sale or service which suffers TDS under sub-section (1). As such, the TDS deduction will work in both directions. The E-commerce operator will deduct TDS from the payments to E-commerce operators on the gross amount of sale of goods and provision of services facilitated through the e-platform. The E-commerce participants will also continue to deduct TDS from payments made to E-commerce operators under the applicable provisions like 194C, 194J, 194H etc. in cases where the payments are unconnected to the sales or services facilitated through the e-platform.

7.6 Sub-section (4) and (5) are merely giving powers to remove difficulties in implementation of the section and not very relevant for the purpose of our understanding. Sub-section (6) defines certain terms for the purpose of the section. The Finance Bill 2020 defined an E-commerce operator to mean a person who owns, operates or manages digital or electronic facility or platform for electronic commerce and is responsible for paying to e-commerce participant. This definition worked contrary to the Explanation to sub-section (1) which provides that the payment made directly by the customer to the E-commerce participant will be treated as payment made by the E-commerce operator. As such, there was an anomaly between Explanation to sub-section (1) and definition of E-commerce operator. With a view to remove this anomaly, the definition of E-commerce operator has been amended while enacting the provision and as per the enacted definition, E-commerce operator means a person who owns, operates ormanages digital or electronic facility or platform for electronic commerce. The stipulation as regards responsibility for paying to e-commerce participants has been done away with.

7.7 In today’s world a large part of the commercial transactions are done in electronic mode. E-commerce is the order of the day. The growth of business on platforms like Amazon, Flipkart, Make My Trip, Ola, Uber etc. has been exponential over the period of years. Even the small players find it easy to market their product on these platforms and reach out to a large section of people with much lesser efforts. Considering these facts, the move to introduce section 194O is a very shrewd way of tax collection. Though there cannot be any objection against the government devising newer modes of collection of taxes with the changing economic situation, it seems that few peculiar aspects of the entire e-commerce business have not been appreciated and the provision as it stands now needs lot of refinement.

7.8 The provisions of section 194O brings along lot many practical challenges, some of which are discussed hereunder :

Cash on Delivery Transactions

7.9 The first issue which surfaces is that of Cash on Delivery i.e COD transactions. In e-commerce business, it is very common that the order for the product or service is placed on the digital platform. However, the goods are delivered directly by the e-commerce participant to the customer at his doorstep. The payment for the goods is made by the customer to the person who carries the goods to his place and the transaction gets completed. The cash collected from the customer is deposited in the treasury of the e-commerce participant and the e-commerce operator gets its commission / service charges for enabling the transaction. Since in such a model, the E-commerce operator acts merely as a facilitator, he doesn’t make any payment to the e-commerce participants. As such, it is difficult to deduct TDS from the payments. Now, due to the operation of Explanation to sub-section (1) it is deemed that the money received in COD transactions is deemed to be the payment made by the e-commerce operator to the e-commerce participants. This creates practical difficulties. Probably, the only solution is that the e-commerce participants will reimburse the TDS portion of 1% to the e-commerce operator out of the amount collected and the same will be treated as tax deduction by the e-commerce operator. But the question is whether such a provision is at all required? Does it serve any big purpose? …. In fact in one more variation, there can be a situation that part of the amount is paid by the customer at the time of booking of the contract on the platform and the balance will be collected on COD basis. How, the TDS deduction will place in such a case is again a challenge, albeit arithmetical or accounting challenge but it is.

No adjustment for Goods Returned

7.10 It is very common for customers to return the goods if it doesn’t suit their choice. There can be multiple factors resulting in goods being returned. In the e-commerce model since the customer doesn’t physically look at the goods while buying it, the percentage of goods return is very high as compared to the total business. However, the provisions of section 194O somehow doesn’t take cognizance of this peculiar feature of the trade. As per the provision, tax deduction is to be made on the gross amount of sales or services. The amount of goods returned does not get factored into this and therefore this is going to have excess deduction then desired. It will be appropriate for the CBDT to understand this difficulty and issue a circular relaxing the unwanted difficulty on this front.

TDS deduction to be made on Gross amount of Sales or Service

7.11 The section provides for deduction of tax on the gross amount of sales or service. The gross amount will include the portion of GST also. As such, on plain reading of the provisions, it appears that the deduction will also take place on the GST portion of the transaction. As regards the applicability of TDS on various sections, the CBDT had issued a circular clarifying that the deductor will not be required to deduct TDS on the GST portion of the respective payments. However, the said circular cannot be applied to the provisions of section 194O and one will have to wait for another circular to clarify the position as regards section 194O.

TDS is to be made on the gross amount of sales and not on income embedded in it

7.12 One more fundamental aspect of the matter is that the section provides for tax deduction on the gross amount of sales / services. The gross amount of sales or services cannot be the income. Though, the tax rate is nominal @ 1%, what disturbs the mind is that the deduction against basic principle of collecting tax on income and resorts to tax deduction on the sales / gross receipts amount. Lesser rate of deduction cannot be a justification for what is fundamentally incorrect.

One must however note that the provisions of section 197(1) has also been amended to include within its ambit the deduction under section 194O. Accordingly, the assessee can make an application to the assessing officer for lower deduction or nil deduction of TDS under the provisions of section 194O of the Act and try to reduce the impact of this provision to an extent.

Non-resident E-commerce operator will also need to comply with section 194O

7.13 The term E-commerce participants is appropriately defined to include only residents. However, there is no such restriction when it comes to the definition of E-commerce operators. Accordingly, a non-resident E-commerce operator is obliged to deduct TDS u/s. 194O from the payments made to a resident E-commerce participant. This will add to the compliance burden of the non-resident e-commerce operators who might not be having any other tax deduction under any other provisions of the Act due to their absence in Indian territory.

However, consequential amendment is made in section 204 of the Act which lays down meaning of the term “person responsible for paying”. One more clause has been added in the section to provide that in the case of a person not resident in India, the person himself or any person authorised by such person or the agent of such person in India including any person treated as an agent under section 163 shall be the person responsible for paying. As such, it will be possible for a non-resident e-commerce operator to authorize any person to act as its agent for the purpose of the TDS compliance u/s. 194O.

8. De-linking of the limit of turnover as per the provisions of section 44AB of the Act for the purpose of Tax Deduction in the cases of deductor being Individual or HUF and f subject to Tax Audit

8.1 As per the scheme of the Act, tax deduction is to be made in cases where the assessees are other than Individual or HUF. However, by way of specific provisos inserted in various TDS sections, the TDS provisions had been made applicable to such Individuals and HUFs whose turnover is in excess of the turnover as specified in section 44AB. In simple terms, it has been provided that the TDS provisions will be applicable in the cases of Individuals and HUFs subjected to tax audit u/s. 44AB in the earlier financial year. The turnover limit for tax audit under section 44AB was hitherto Rs. 1 Crore.

8.2 The Finance Act 2020 has increased the limit of turnover for the purposes of tax audit under section 44AB to 5 Crores from the earlier limit of Rs. 1 Crore subject to certain conditions. In view of this, as a consequential amendment, various sections dealing with tax deduction at source has been amended to delink the applicability with reference to the turnover amount as per section 44AB. Instead of referring the turnover amount as specified in section 44AB all the provisions have been amended to quantify the applicability of tax deduction at source in the cases of Individuals and HUFs where the turnover for the immediate preceeding financial year exceeds Rs. 1 Crore. The amendments in this regards are made in the following sections :

• Section 194A – Interest other than Interest on Securities
• Section 194C – Payment to Contractors
• Section 194H – Commission or Brokerage
• Section 194I – Rent
• Section 194J – Fees for professional or Technical Services

8.3 To sum up, one needs to note that though the limit of tax audit has been increased to Rs. 5 Crores by virtue of amendment to section 44AB of the Act, the applicability of TDS provisions to the above specified sections in the cases of Individual and HUFs will continue to apply once the turnover is more than Rs. 1 Crore in the immediately preceeding financial year.

9. Expansion of Tax Collection at Source : Amendments to Section 206C of the Income-tax Act

Just as TDS, the Tax Collected at Source TCS has also become one of the easiest modes of collection of taxes by the government, The scope of TCS provisions have also been expanding over the period of past few years. The Finance Act 2020 is not an exception to this. The Finance Act introduced two more sub-sections in the section 206C of the Income-tax Act with effect from 1st October, 2020. The provisions of the new two sub-sections and the issues emerging therefrom are discussed hereunder :

Sub-section (1G)(a) : Tax Collection by Authorised Dealer for remittance under LRS

9.1 Sub-section (1G)(a) of Section 206C provides that an authorized dealer receiving an amount from buyer of foreign exchange for remittance out of India under the Liberalised Remittance Scheme of RBI (LRS) shall collect TCS @ 5% on the amount exceeding Rs. 7 Lakhs during a financial year. The TCS is not required to be collected in a case where the buyer is liable to deduct and has deducted TDS on the payment under LRS or in a case where the buyer of the foreign exchange is Central Government / State Government / Embassy or a High Commission etc.

9.2 The amendment proposed by the Finance Bill 2020 was proposed to be applicable with effect from 1st April, 2020. However, while enacting the Finance Bill the applicability of the sub-section has been deferred to 1st October, 2020. Originally it was proposed that the TCS will apply in a case where the remittance exceeds Rs. 7 Lakhs in a financial year. As per the proposal, the once the remittance exceeds Rs. 7 Lakhs TCS would have applied on the entire amount without any threshold as such. However, while enacting the provisions, the second proviso to the sub-section now makes it explicitly clear that the TCS will apply only on the amount exceeding Rs. 7 Lakhs. As such, if a buyer has made remittance of Rs. 10 Lakhs in a financial year, the TCS will apply only in relation to Rs. 3 Lakhs and not on the entire amount of Rs. 10 Lakhs.

9.3 The remittances made under the LRS are personal payments. The remittance is made out of the tax paid money of the buyer. As such, it is not appropriate to have such provisions at all under the basic cannons of taxation. Representations were made to the government after presentation of Finance Bill on this count. One of the examples given in the representations was that a poor student who wants to undergo education in a foreign country by taking loans from banks and financial institutions will also have to bear the burnt of the additional 5% in the form of TCS while remitting the funds to the overseas universities.

9.4 The legislation has considered this example and has provided that if the amount being remitted out is a loan obtained from any financial institution as defined in section 80E, for the purpose of pursuing any education, the rate of TCS will be 0.5% as against 5% under other cases. This amendment has been made while enacting the provisions by inserting the third proviso in the sub-section. Though concession has been given and therefore it is welcome, it seems that the concession has been given without appreciating the concept of personal payments and going by the example given to bring out the difficulty.

9.5 Ideally, this provision should have been omitted completely appreciating the fact that the remittance is out of the tax paid money and hence no further tax collection out of the same is required. If at all the purpose of the legislature is to have a trail and to find out as to whether some unaccounted money is being remitted under LRS, the same could have been addressed in some better manner by RBI making some stricter norms for remittance under LRS. Is it appropriate to administer all the economic situations by way of additional tax collection under Income-tax Act? If a person wants to flaunt with the provisions, what stops him making remittances from different authorized dealers so as to not cross the threshold of Rs. 7 Lakhs from each of the authorized dealers? Is this going to achieve any object then?

Sub-section (1G)(b) : Tax Collection by seller of an overseas tour program package

9.6 Clause (b) of the new sub-section (1G) of section 206C provides for collection of TCS by a seller of an overseas tour program package @ 5% of the amount received from or debited to the account of the buyer of such package. No TCS is required to be collected in a case where the buyer is liable to deduct and has deducted TDS on such payments or in a case where the buyer of the foreign exchange is Central Government / State Government / Embassy or a High Commission etc.

9.7 It is pertinent to note that there is no threshold provided for the sale of overseas tour program package contrary to remittance under LRS. The TCS liability will start from zero level and even if the overseas tour is for a small amount, the TCS provisions will apply. The term overseas tour program package has been defined to mean “any tour packagewhich offers visit to a country or countries or territory or territoriesoutside India and includes expenses for travel or hotel stay orboarding or lodging or any other expenditure of similar nature or inrelation thereto.”. As such, the definition is much wider and all types of payments made for overseas tour gets covered by the definition. It seems that the purpose is to bring those cases under tax net where people used to travel abroad and spend huge amount out of their unaccounted money. There cannot be any argument against bringing such person within the tax net. However, considering the rate of TCS @ 5%, surely it is not the amount which the government wants to collect from such defaulters but the purpose is to have trail, which was probably available even otherwise on the basis of passport and visa entries of the person travelling overseas.

Sub-section (1H) : Tax Collection by seller of any goods

9.8 Sub-section (1H) has also been inserted in section 206C. This sub-section provides for Tax Collection at Source by a seller of goods, other than goods exported out of India or goods covered by sub sections (1) or (1F) or (1G) of the section, @ 0.1% of the sale consideration exceeding Rs. 50 Lakhs from a buyer during the financial year. In a case where the buyer does not furnish his PAN or Aadhar number, the TCS will be @ 1% instead of 0.1%. No TCS is required to be collected in a case where the buyer of goods is liable to deduct TDS under any provisions of the Act from the seller and has deducted such TDS.

9.9 For the purpose of this sub-section “Seller” means a person whose total sales, gross receipts or turnoverfrom the business carried on by him exceed ten crore rupees during the immediately preceding financial year. Further the Central Government has the power to exempt any seller from the applicability of this sub-section by way of notification in the Official Gazette.

9.10 For the purpose of this sub-section “Buyer” is defined to mean a person who purchases any goods but does not include (a) Central Government / State Government / Embassy / High Commission etc.; (b) a local authority as defined in Explanation to section 10(20) ; or (c) a person importing goods into India. The Central Government has the power to exempt any buyer from the applicability of this sub-section by way of notification in the Official Gazette.

9.11 As per the provisions of the sub-section (1H) the Tax is to be collected at the time of receipt of the sale consideration from the buyer and not at the time of entering into sale transaction. As such, the trigger point of time is the receipt of sale consideration. Considering this, it appears that if in a particular financial year, the seller receives consideration for sale of goods from a buyer in excess of Rs. 50 Lakhs, he will have to collect TCS from the buyer. It will be irrelevant as to whether the amount of Rs. 50 lakhs pertain to sales made in one year or sales made in number of earlier years.

9.12 Also, on the pure language of the sub-section, it appears that once the section is applicable from 1st October 2020 and the amount received crosses Rs. 50 Lakhs in a financial year, TCS will have to be collected despite of the fact that the sales might have been made in the earlier year when the sub-section (1H) was not on statute. Though this does not seem to be the intention of the sub-section, it will be appropriate for CBDT to issue a clarification in this regard so as to avoid retro activity of the sub-section.

9.13 The transactions of Import and Export are now out of the purview of application of this sub-section since the definition of Seller and Buyer have been amended while enacting the provision. As per the provisions of the Finance Bill 2020, no such exclusions were available and therefore there was an apprehension, and a correct one, that even in a case where the goods are exported out of India, the provisions of TCS will apply and the exporter will have to collect TCS from the overseas buyer at the time of collection of money. This would have been extremely unjust since the foreign buyer’s income would not have been taxable in India presuming that he doesn’t have a PE in India and he would have to get refund after making payments. Similarly for goods imported in India, the original provisions would have created the situation where the foreign seller would have had to apply for TCS number and had to carry out the obligation of collecting tax and paying though he might not be having any taxable income in India and therefore not filing Income-tax Returns in India. Fortunately, these anomalies have been taken cognizance of and suitable amendments have been made while enacting the provision.

9.14 The sub-section expands the scope of TCS to purchase of all goods as against certain specified goods prior to this sub-section. Practical difficulties are also likely to arise since the trigger point is linked to receipt of money and not the sale / purchase. It is possible that in the year in which tax is collected, there might not be any transactions between the two parties. However, the TCS will be applicable and on the basis of the TCS details, there might be inquiries from the assessing officer as to why the transactions are not reflected by both the buyer and also the seller?

9.15 Threshold of Rs. 10 Crore as the Turnover is not something where there can be big respite. Rs. 10 Crore is not a very substantial amount in today’s inflationary times and many of the businesses will be crossing this threshold for sure. This will lead to enormous amount of additional procedural burden to collect TCS, make payments on time and file the TCS Statements on quarterly basis. The amount of collection being more than Rs. 50 Lakhs in a year from a buyer is even much lesser and it is surely likely to be crossed in many cases.

9.16 A question arises as to what is the purpose of such provision when the same is likely to result in lot of procedural compliance burden without any material amount of tax collection. In one of the press conferences after the presentation of the Finance Bill, it was stated that the purpose is to catch those businesses who do not reflect their turnover correctly despite of having huge turnover base. With due respect, this does not seem to be convincing reason. We already have GST network in place and all the players having turnover of more than Rs. 40 Lakhs in a financial year are subject to GST registration and filing of returns etc. The information could have been easily gathered from the GST network and making TCS provisions for this is completely unwarranted.

10. Conclusion

The complexity of provisions of Income-tax Act are well known to everyone. Unfortunately, the TDS and TCS provisions are not an exception to this. Finance Act 2020 has added some further complexities to this ever-challenging subject of Income-tax Act. Several confusions are likely to arise in implementation of the provisions and practical difficulties are likely to multiply. It will be desirable that CBDT comes out with clarifications on all the issues so as to avoid different interpretation of the subject by the assessee and the assessing officer. It is also desirable that the legislature reconsiders some of the provisions which are likely to create practical difficulties. It is high time that the policy makers take the assessees as their partners in true spirit and their representations do not meet deaf ears.

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 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
8 comments on “TDS And TCS – Expansion Of The Net By The Finance Act 2020
  1. Prakash R Sahane says:

    Sir very helpful analysis of TDS & TCS

  2. Alfred D'Souza says:

    Hi Ketan:

    1)Your article does not clarify if the TCS tax that will be implemented from October 1, 2020 if it applies to monies transferred out of NRO or NRE accounts to the account holders foreign account outside of India.

    NRE accounts are tax exempt and hence TCS should not be applied for funds transferred out to foreign accounts from NRE?

    2)TDS is deducted at source on interest paid on NRO account. Hence if money is transferred out of
    NRO account to a account holder’s foreign account, will TCS apply?

    Appreciate your clarification.

  3. Kishor Rajeshirke says:

    Very good analysis Ketan.

  4. Kishore Shah says:

    very good analysis Ketan

  5. K RAVEENDRAN says:


  6. Akash Gupta says:

    Good one..

  7. Sanjeev Lalan says:

    Good Ketan!

  8. Ujjval Mehta says:

    Sir very interesting article ?

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