Section 206C of the Income Tax Act, 1961 (‘ITA’ or ‘the Act’) deals with tax collection at source (TCS). Untill 2011, only sale of specified goods (alcoholic liquor for human consumption, Tendu leaves, Timber obtained under a forest lease or by any other mode, any other forest produce not being timber or tendu leaves, Scrap, minerals being coal or lignite or iron ore) and specified contracts (parking lot, toll plaza and mining and quarrying) were covered under the ambit of TCS.

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, TCS at the rate of 1% was made applicable on cash transaction in bullion and jewellery exceeding specified limits through Finance Act 2012. To further tighten the transactions in cash and to bring high value transactions within the tax net, Finance Act 2016 widely extended the web of TCS to cover the below transaction (with effect from 1^st June 2016):

1. TCS @ 1% on cash transactions in any goods and services exceeding value of INR 2 lacs

2. TCS @ 1% on purchase of motor vehicle exceeding value of INR 10 lacs

The relevant extract of the Section 206C(1D) is reproduced as under:

“(1D) Every person, being a seller, who receives any amount in cash as consideration for sale of bullion or jewellery or any other goods (other than bullion or jewellery) or providing any service], shall, at the time of receipt of such amount in cash, collect from the buyer, a sum equal to one per cent of sale consideration as income-tax, if such consideration,—

(i) …….; or

(ii) …….; or

(iii) for any goods, other than those referred to in clauses (i) and (ii), or any service, exceeds two hundred thousand rupees:

Provided …..”

The newly inserted provisions had raised several doubts on its applicability in various scenarios. Considering the number of queries received on the scope of the provisions, the Central Board of Direct Taxes (CBDT) clarified the position by issuing Circular No. 22/2016 dated 8 June 2016 and Circular No. 23/2016 dated 24 June 2016 in form of question and answers.   However, inspite of the fact that CBDT has tried to clarify the doubts, there are still some vexed issues which need consideration by the CBDT. This article discusses certain core issues which have remained unanswered and our views on the same.

Question 1: The core question that arises is whether the threshold of INR 2 lacs under section 206C(1D) for sale of goods and service is to be applied per transaction or on an aggregate value of sale during the year?

Our view: The section uses the words ‘every seller who receives consideration for sale of specified goods or services shall at the time of receipt of such amount in cash….'. On a conjoint reading of all the words, it appears that one would have to see the value of each invoice to check whether the same exceeds INR 2 lacs. If the interpretation is given that even if the individual value of the invoice is less than INR 2 lacs, but the customer wise value exceeds INR 2 lacs during the year, then also TCS would be applicable, it could practically cover the entire sales made by the seller as in the present time the value of INR 2 lacs can exceed very easily.  Further, whenever the legislature wanted aggregation, it has always mentioned so in the section itself. Section 194C, 40A(3) etc. are examples of such sections. In absence of any such requirement under section 206C(1D), aggregation should not apply.

The CBDT circular No. 22/2016 dated 8 June 2016 in question no. 4 has mentioned as under:

“Question 4: Whether TCS is applicable o each sale of motor vehicle or on aggregate value of sale during the year?

Answer: Tax is to be collected at source at the rate of 1% on sale consideration of motor vehicle exceeding ten lakhs rupees. It is applicable to each sale and not to aggregate value of sale made during the year. This can be explained by way of illustration:

Illustration: …..

Similar will be the position with regard to collection of tax at source under sub-section (1D) of section 206C”

Thus, in can be inferred that aggregation of the invoices is not necessary.

Question 2: If the invoice value exceeds INR 2 lacs but the payment is split and the consideration received in each installment is less than INR 2 lacs, whether TCS would not apply?

Our view: As already explained above, the term, ‘such amount', could be interpreted to mean the invoice value. Hence, where the invoice value is more than INR 2 lacs and the consideration received in cash is split to make it less than INR 2 lacs for each installment only to avoid applicability of TCS, in our view, would not absolve the seller from collecting the TCS as the value of invoice is more than INR 2 lacs. However, CBDT should clarify this aspect.

Question 3: In case where invoice value exceeds INR 2 lacs and part payment is received in cash, will TCS be applicable on the entire invoice value or only to the extent of cash receipt?

Our View: On literal interpretation of the section it appeared earlier that TCS would apply on the entire sales consideration even if a meager amount was received in cash. However, considering the doubts raised by the stakeholders, the CBDT has clarified that TCS shall apply only to the extent of receipt in cash. This clarification also supports our view in question no. 2.

Question 4: Will TCS apply where multiple invoices are issued and the value per invoice is less than INR 2 lacs, however, at the time of receipt the cash received exceeds INR 2 lacs?

Our view: If the interpretation as explained in question no. 2 (supra) is applied, then ideally TCS should not be applicable, since the value per invoice does not exceed INR 2 lacs. However, it would be advisable that CBDT also clarifies this aspect by issuing further clarification on the same. 

Question 5: Will TCS under sub-section (1D) apply in case of sale of goods by manufacturers to dealers/distributors?

Our View: The circular touches upon this aspect, however only in a limited context of ‘motor vehicles’. It is clarified that TCS will not be applicable in case of sale of motor vehicle by manufacturers to dealers/distributors. However, the Circular does not clarify whether similar principle should apply in respect to sale of goods by manufacturers to dealers/distributors.

In absence of a specific clarification to this effect, it appears that TCS will apply on sale of goods by manufacturers to dealers/distributors on crossing of the prescribed threshold of 2 lacs.  However, in our view similar benefits should be extended to sales of other products as well.

Conclusion

The objectives of Introduction of this levy are twin fold as is evident from the speech of the Finance Minister, Mr. Arun Jaitley viz. firstly, it results in advance collection of tax in respect of the buyers and secondly, it would help the tax department in identifying the persons who incur such expenditure but may be missing from the tax base. Thus, this provision is a welcome move. However, it would be useful if the following aspects are also addressed quickly:

- As stated above some of the issues need more clarifications.

- Further, the terms ‘goods’ and ‘services’ are not defined for the purpose of said section and hence, one may have to take recourse to other relevant laws to understand what could get covered under the said terms.

- There is no area-based exemption provided. Hence, TCS would be applicable even where banking facilities are not available. Like Rule 6DD which provides for circumstances under which cash expenditure is allowed, it would be advisable to provide for such exceptional circumstances.