The Hon’ble Finance Minister in her budget speech for 2020 had introduced sub-section (1H) to the provisions of Section 206C, thereby including sale of goods under the ambit of TCS subject to specific conditions. The initial date of roll out of this provision was 1st of July 2020 which was then extended to 1st Oct. 2020 due to the lockdowns and Covid-19 outbreak in the country along with the petitions from the industries regarding the technological challenges for its implementation. This small 0.10% (0.075% reduced rate for FY 2020-21) change to law brought a technological and logistical nightmare for organizations along with huge development and implementation cost in respective ERP’s. All the existing systems are required to be overhauled to incorporate this amendment.
Subsequently, in the Union Budget of 2021 the Hon’ble Finance Minister introduced Section 194Q wherein TDS would be required to be deducted in cases where the purchase from a specific person during the year exceeds Rs. 50 lakhs and the Company has a total turnover exceeding Rs.10 Crore in the previous year. Further the Hon’ble Minister went on to add that the provisions of Section 206C(1H) would not apply where the provisions of Section 194Q apply. This would lead to interplay between both the sections for businesses with high turnover but low margins.
Let us understand both the provisions by plotting them side by side and the applicability –
|Sr. No.||Particulars||Section 194Q||Section 206C(1H)|
|1.||Who is responsible for paying the taxes||Purchaser of Goods||Seller of Goods|
|2.||Applicability of the law||Turnover1 of Assessee being buyer of goods of goods more than 10Cr. in preceding year||Turnover1 of Assessee being seller of goods more than 10Cr. in preceding year|
|3.||Threshold Limit||Value of purchase from a vendor of goods exceeds Rs.50 Lakhs during the current year.||Value of sale consideration with a customer exceeds Rs.50 Lakhs during the current year.|
|4.||Time of Deduction / Collection||At the time of payment or credit whichever is earlier||At the time of receipt from the buyer of goods.|
|5.||Value on which deduction/ Collection to be made||Deduction on gross value of purchase without GST||TCS to be collected on value including GST value (Circular 17 dated 29-09-2020)|
|6.||Rate of Tax||0.1% (5% in No PAN and where 206AB apply)||0.1% (5% in No PAN and where 206AB apply)|
|7.||Return type||Form 26Q||Form 27EQ|
|8.||Certificate of Credit||Form 16A||Form 27D|
|9.||Interplay between both Sections||Section 194Q to prevail over Section 206C(1H) i.e. where 194Q applies 206C(1H) would not apply.|
|10.||Option for lower deduction||Not Available||Not Available|
The tax teams of various large corporates had just modified their systems to incorporate TCS provisions on sale of goods when the FM decided to completely revamp it and introduce the TDS provisions. This new provision is a bigger technological difficulty for large corporates as where the provisions of TDS do not apply, the provisions of TCS would kick in. To understand this in perspective let us take the following cases.
|Sr. No.||Scenario||Provision of Law|
|1||The turnover of Buyer and Seller in the preceding year exceeds Rs.10 Cr. and the purchase exceeds Rs.50 Lakhs in the current year.||Buyer would deduct TDS @ 0.1% u/s. 194Q.|
|2||The turnover of the Buyer exceeds Rs.10 Cr. in the preceding year but that of the seller is less than 10 Cr. and the purchases exceed Rs.50 Lakhs in the current year.||TDS would apply u/s. 194Q @ 0.1%|
|3||The turnover of the Seller exceeds Rs.10 Cr. in the preceding year, however that of the buyer is less than Rs. 10 Cr. and the purchases of the buyer is more than 50 lakhs in the current year.||TCS would apply u/s. 206C(1H) @ 0.1% assuming that the entire amount has been paid|
|4.||The turnover of both buyer and seller is less than Rs.10 Cr. in the preceding year and the purchases exceed Rs.50 Lakhs during the current year.||No TDS/ TCS is required to be deducted / collected.|
*The entire amount would be subject to the threshold of Rs.50 lakhs on which no TDS/ TCS would be required to be paid or collected.
The basic difference between both the laws is that TDS is required to be deducted on credit or payment whichever is earlier however TCS is required to be collected on the value of receipts. Though, the payment of TCS on receipt does not hamper cash flows for the Companies however it is creating a technological issue in the ERP systems. Further there are multiple cases in large organizations where receivables are knocked off against payables, and TCS in such cases is required to be manually tracked and no automation is possible. Therefore in order to avoid these issues corporates are opting to pay TCS on billing and not receipt basis.
I have tried to cover some issues which organizations might face and with the probable solutions.
One point of concern which organizations would face is whether to collect TCS on sales or the vendor would deduct TDS. Let’s take the case of an organization which has a turnover of more than Rs.10 Crores in the preceding year, then it is clear that it would be required to deduct TDS on all the purchases that it makes. There might be cases that upon payment of invoices the vendors might demand for the value of TCS. This can be sorted by communicating to the vendor that as TDS is being deducted no TCS is required to be collected on the sales value.
The issue would arise in cases where such organizations would raise sales invoices and the vendor would pay the amount without deduction of TDS. In such cases the liability of the seller would be to collect TCS. The collection of such amounts normally becomes a tedious tasks specially when the amount of transactions are a lot. Subsequently, such customers which were required to deduct TDS but did not deduct might deduct the same at the time of audit which is normally at the close of the year in order to avoid disallowance. This would lead to double taxation on the same amount.
The probable solution to this issue would be that a declaration is taken at the start of the year from the customers whether they would be deducting TDS on the sales invoices being raised by the Company assuming the purchases during the year exceed Rs.50 Lakhs. This might be tedious at the start of the year however it can streamline the entire process during the year.
This is possibly the issue which concerns the most to the system development teams and is also of utmost importance. It is not possible to manually track whether TDS is being deducted correctly or not or TCS is being collected as per the receipts. Further the possibility to track whether TCS is being collected in cases where TDS is not deducted by the customers is an impossible task in large corporates which have thousands of vendors. In such cases the system is required to be developed in such a way that the entire process is automated by the system.
There cannot be a situation where the system collects TCS on receipts and also TDS is deducted by the customers on the same invoices. In such cases the customer would obviously not pay the TCS amounts and this would lead to cash loss to the organization.
The probable solution for this can be that the system can be developed in such a manner that the organizations can configure at the start of the year by taking declarations whether TDS would be deducted by the customers or not. Once the declaration is received the same can be uploaded in the system and there can be a check point stating TCS or TDS to apply. As the specific key is applied the other would automatically get disabled and the system would not charge the specified tax on the customers. Obviously, this would be faced by the issue of customer’s not reverting back with such declarations and obtaining the declarations and configuring the same in the system becomes a daunting task. This may be overcome, by obtaining the clarification once the purchase orders are received from such customers, however this entire process might come with additional manpower costs in huge organizations.
Now, there are multiple industries particularly the engineering business or metal suppliers who execute the sale only upon receipt of a certain portion of the sales value as advance. Let us take an example of a case where an advance of Rs.60 lakhs has been received for a sale transaction. Now the Assessee would have grossed up the TCS value and paid the same to be government. Now when the Company raises the sales invoice post 01-07-2021 say of Rs. 200 Lakhs the buyer of the goods would be required to deduct TDS on the entire value of the purchase being Rs.200 lakhs. This would lead to overlapping of taxes on Rs.60 lakhs being the advance value. However, this might not be a significant value considering the rate of 0.1%.
Reconciliations with Vendors/ Customers.
Under the existing TDS provisions the reconciliations are a difficult and tedious task specifically in service industry where the TDS statements run into hundreds of pages and long excel sheets are maintained by the organizations for the reconciliations. Some organizations have also obtained software’s for the process. Further with the provision of TCS on sale of goods being introduced this task became more difficult with reconciliation of both TDS and TDS being required.
Now with the introduction of this new Section reconciliations would be required for the normal provisions of TDS i.e. Section 194A to 194LC which was already being carried out by service industries. However the manufacturing concerns which were earlier relived from such reconciliations would also be required to reconcile, reconciliations would not only include that of their sales where the TDS has been deducted or TCS has been collected but also in cases where the TDS is deducted by the Company. There can be cases where the TDS is deducted by the customers on the sales made by the Company and also TCS is required to be collected on the sales made by the Company where the buyer of the Goods does not deduct TDS. In such cases the reconciliation would be possibly required for the entire sales made by the Company. One can just imagine the volumes of such transactions for large corporate houses of our country. Further, the same Company would be deducting TDS on the purchases being made by it and it might be required to furnish reconciliations of the same to its vendors. The task of such reconciliations is going to become a huge daunting task for the Companies and with no proper checks and controls in place it might lead of potential cash losses for the Companies.
This no doubt is a huge and very difficult task however reconciliations can be made on quarterly basis and there are multiple software’s which are now available in the market which automate the entire process. However certain level of human intervention would be required. This entire process might require companies to hire additional manpower for the reconciliation process. We are already seeing this in the service industry which might be required in the manufacturing concerns as well.
1. The terms Turnover has been used interchangeably for total sales, gross receipts or turnover.
Author : Sanket Bakshi – Dy. Manager – Direct Taxation | TATA AutoComp Systems Ltd