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TCS on Sale of Goods – A New Horizon

Mar 14, 2020

Vide Finance Bill 2020, Government proposed to collect TCS in respect of two transactions, namely, overseas remittances and TCS on sale of goods above specified limit. The Memorandum to the Finance Bill 2020 states that the intent of expanding the scope of TCS provisions is to widen and deepen the tax net.

In this regard, Deepak Manoharan & Abhishek Singhvi, Chartered Accountants discuss certain practical issues which may arise on the amended to TCS provisions. The Authors highlight various grey areas proposed in the Finance Bill, 2020 (‘the Bill’), and remark that there are no exclusions to non-resident sellers, who do not have any kind of presence in India and in case buyer is a non-resident covered, a resident seller exporting goods outside may be required to collect TCS. The authors take a constructive view that TCS should not be applicable in case of exports if the non-resident buyer is otherwise not subject to tax in India.  On proposed amendment on sale of goods, the authors point out issues on applicability of TCS on B2B sales / GST / Works contract / contract manufacturing / inter-unit transfer having multiple TAN. 

The authors conclude that the proposed amendment with additional errands by way of such TCS provisions leave taxpayers with increased costs to buyers, cash flow hitches, updating the software/ infrastructure to espouse the new law, etc 

TCS on Sale of Goods – A New Horizon

Amidst the economic slowdown, the Finance Minister delivered her budget speech recently to bring in various reforms for revival of the economy and ease of doing business by introducing various tax measures and reliefs for the country.  Alongside, we also note the Government’s plans to move to a new horizon in order to widen and deepen its tax base through amendments made to the tax collection at source (‘TCS’) provisions by introducing within its ambit, transactions in relation to sale of goods, remittance under liberalized remittance scheme and sale of overseas tour packages.

We have identified and discussed certain practical issues which may arise on the amended TCS provisions, as it stands today.

TCS on sale of goods

Mechanics

 

 

TCS at the rate of 0.1% shall be collected

 Key Components of the section 206C(1H) of the Act

 

 

A Seller

A person whose total sales / receipts from the business carried upon by him exceeds INR 10 Crores in the immediately preceding financial year (‘FY’) shall be required to collect TCS from eligible buyers on sale of goods.

Key Issues

(i) Seller - is even a non-resident covered?

As per the plain reading of the provisions as introduced in the Finance Bill, 2020 (‘the Bill’), there are no exclusions and hence, a non-resident selling goods in India may be required to collect TCS from the Indian Buyer.

The above provisions tend to institute compliance burden on the non-resident sellers, who do not have any kind of presence in India, by forcing them to obtain PAN, TAN and filing of returns.  Hence, we believe that applicability of the TCS provisions on non-resident sellers could neither have been the intention of the legislature, nor could the Indian tax law be coerced extra-territorially on the such non-residents without a business presence in India.

This is akin to the discussion on whether the resident TDS provisions (e.g. section 194J) can apply on a payment of professional fee by a non-resident having no presence in India to an Indian resident.

(ii) Computation of turnover for the business as a whole or only on sale of goods?

Since the section uses the terms “turnover from the business of the seller” and does not restrict to sales, for a taxpayer engaged in the business of providing services along with sale of goods, the collective business turnover shall be construed to test the threshold.

(iii) How will the turnover threshold be computed for a taxpayer in the first year of its incorporation?

Since the turnover of newly incorporated taxpayer would be NIL in the preceding year (the year prescribed for threshold test), it may be argued that TCS provisions should not apply in the year of incorporation.

B. Buyer

Buyer shall mean any person (except Government and related persons) who purchases goods. A buyer who purchases goods from any eligible seller (as mentioned in Point A) shall pay TCS in addition to the purchase price charged by the seller.

Key Issues

(i) Buyer - is a non-resident covered?

The only exception carved out by the provisions of section 206C(1H) is Government and related persons. Therefore, any Resident seller exporting goods outside may be required to collect TCS.

However, a constructive view should be that TCS should not be applicable in case of export sale if the non-resident buyer is otherwise not subject to tax in India.  Section 206C being a machinery provision and TCS being just a mode of collection of tax, a charge for taxation cannot be created when the buyer is otherwise not subject to any tax in India. It may be a violation of the Constitutional provisions to collect taxes which is actually not due to the Government.

C. Goods

In the absence of a definition for the term ‘goods’, a question which arises is what all may be covered under TCS regime.

Below is the list of goods as defined under various legislations.               

Particulars

CGST Act, 2017

Customs Act, 1962

Sale of goods Act, 1930

Definition

Every kind of movable property

Inclusive definition to cover all goods

Every kind of movable property

Inclusions

Actionable claims, crops, grass and things attached to land

Vessels, stores, baggage, currency, negotiable instrument & other kind of movable property

Stocks & shares, Crops, Grass and things attached to Land

Exclusions

Money & Securities

-

Actionable claims & money

Considering that the Act does not specify the definition of goods, revenue authorities may draw reference from any of the above laws for levying TCS.  Therefore, TCS could be levied on actionable claims, currency, negotiable instruments and stocks & shares.

Key Issues 

Issues

Remarks

Applicability of TCS on business to business (‘B2B’) sales

Section 206C(1) (applicable for TCS on sale of alcohol, tendu leaves, timber, scrap, etc.) specifically excludes its applicability when such goods are procured for the purpose of further manufacturing / processing, subject to declaration by buyer.

Considering no similar exemption in section 206(1H), TCS may be levied for any sale of goods covered by section 206C(1H), even if the goods are procured for subsequent manufacturing / processing.

Applicability of TCS on GST

Central Board of Direct Taxes (‘CBDT’) vide Circular No. 23/2017 dated July 19, 2017 has clarified that no tax shall be deducted under Chapter XVII-B, if the GST on services is indicated separately. The above clarification issued by the CBDT covers only tax deduction under chapter XVII-B, whereas section 206C of the Act is governed by Chapter XVII-BB.

The FAQ issued by the Income Tax Department on TCS provides that the “amount debited to the account of buyer or payment shall be received by seller inclusive of VAT /Excise /GST. TCS to be collected on inclusive of GST.”

The above view was also affirmed by Madhya Pradesh HC in case of Vinod Rathore (278 ITR 122)

Considering the above ruling, FAQ and no specific clarification in respect of section 206C(1H), TCS may be leviable on the GST component as well.

Applicability of TCS on works contract if single invoice issued

Scenario - A construction contract involving supply of goods, labor and other services. Currently no TCS is leviable on sale of goods if a separate invoice has been issued.

However, if a single invoice is issued with no bifurcation into value of goods and services, a question then arises whether the provisions of TDS & TCS applicable on the single invoice? 

The 2nd proviso to section 206C(1H) provides that the provisions of 206C(1H) shall not be applicable if the buyer has deducted tax at source under any other provisions of the Act.

Therefore, if a buyer has deducted TDS on the complete invoice, the provisions of section 206C(1H) shall not be applicable.

Applicability of TCS on contract manufacturing

Scenario - Company A sells component to Company B for processing, which in turn is sold back to Company A for further sales.

In the above scenario, Company A would be liable to collect TCS for sale of component to Company B, and Company B shall in turn levy TCS on sale of finished product to Company A, as the same would be treated as separate transaction.

Applicability of TCS on inter-unit transfer having multiple TAN

Scenario - Transfer of raw material from one unit in State A to another unit in State B for a consideration to be adjusted in the inter-unit books.

Though the two units may have different TANs, considering that the PAN of both the units remains same, a view may be taken that no TCS shall be collected for such inter-unit transfers.

Transfer of goods for testing purpose

Scenario - Company A transfers its newly created product to Company B for testing

Section 206C(1H) provides that seller shall collect TCS on consideration received on sale of goods. Considering that the goods are transferred for the purpose of testing and no consideration is received, a view could be taken that TCS shall not be leviable.

Sale of motor vehicle spares

Section 206C(1H) provides that TCS shall be levied on goods other than those covered under sub-section 1F (TCS on sale of motor vehicle).

Considering that only motor vehicles are excluded from the purview of section 206(1H), sale of spare parts above Rs. 50 lakhs could attract TCS provisions.

Sale of motor vehicles to dealers

Considering that sale of motor vehicles to dealers is not covered under section 206C(1F) owing to the CBDT Circular No. 22/2016, can it be said to be covered now under section 206C(1H)?

Since section 206C(1H) excludes any goods (and not transactions) covered in sub-section 1F, it may be possible to take a view that TCS shall still not apply on sale of motor vehicles to dealers.

TCS on capital goods

Section 206(1H) provides that consideration for sale of any goods other than goods mentioned under sub-section (1) / (1F) / (1G) shall attract levy of TCS.

That is, the provision of TCS could be applicable irrespective of the end use by the buyer.

D. Consideration

Section 206(1H) shall be attracted on receipt of sale of goods of the value or aggregate value exceeding INR 50 lakhs. That is, TCS shall be levied on a single invoice above INR 50 lakhs as well as on 6 invoices of INR 10 lakhs each.

Key Issues

(i) Whether TCS shall be applicable on amount over and above INR 50 lakhs or on the entire consideration?

Section 206(1H) provides for collection of TCS on the portion of sale consideration exceeding INR 50 lakhs. For instance, if a seller has sold goods for INR 80 lakhs, then TCS shall be applicable only on INR 30 lakhs.

(ii) Whether TCS is applicable on receipt of consideration post April 1, 2020 on goods already sold?

Section 206C(1H) shall be applicable for any receipt and is applicable with effect from April  1, 2020. Therefore, any consideration received post April 1, 2020, even if pertaining to sale already made, could attract the levy of TCS.

(iii) What happens on receipt of advance money for sale to be made post April 1, 2020?

As mentioned in Point (ii), the provision of section 206(1H) shall be applicable on any consideration received post April 01, 2020. Therefore, the provision of 206C(1H) may not be attracted for advance money received prior to April 1, 2020

E. Rate 

Rate

Remarks

0.1%

PAN / Aadhar number provided by the Buyer

1%

Other cases

Key Issues

(i) Failure to deduct taxes / pay taxes to Central Government

Any seller responsible for collecting tax at source, who fails to collect / post collecting fails to remit to the credit of the Government shall be treated as an Assessee in default (‘AID’). The proviso to sub-section 6A which provides for instances where the seller shall not be treated as AID if the buyer has filed ROI / paid taxes on such income, has been amended to exclude sub-section (1H) within its ambit.

Thus, even if the buyer furnishes the ROI / pay taxes on such transaction, the seller shall be deemed as AID if he fails to deduct taxes / remit taxes post collection. The above position can lead to adverse impacts including penalty and prosecution, for seller who misses to collect / remit taxes.

(ii) Application for lower collection of taxes

Section 206C(9), which allows the buyer to obtain a lower collection certificate (‘LDC’), has been amended to exclude transactions covered under section 206(1H).

Therefore, a buyer shall not be eligible to obtain an LDC for any purchase of goods covered by virtue of section 206C(1H). The above situation will cause hardship to the non-resident buyers and other genuine transactions where tax collection at source is not called for.

Introduction of these kinds of provisions into the Act reminds us of the phrase “Give with one hand and take away with the other”.  The Government does exhibit its intents to afford stimulus to the taxpayers by way of reduction in corporate tax rates, abolition of dividend distribution tax, etc.  Nevertheless, subjecting the same taxpayers with additional errands by way of such TCS provisions, which include dealing with increased costs to buyers, cashflow hitches, updating the software/ infrastructure to espouse the new law, etc. leave the taxpayers irked.  Further, it goes without saying that the issues discussed above and many more will come up for consideration, and difference in interpretations between the taxpayers and taxman will continue to keep our judiciary system busy.

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