TCS (Tax Collection at Source) provisions changes brought through Finance Bill 2020- A practical Analysis

The provisions of TCS (Tax Collection at Source) was brought under Income tax act w.e.f 01.04.1988 with the intention of controlling tax evasion in the unorganised sector.

Over a period of time several amendment has been made in TCS provisions and before the Finance Bill 2020, TCS U/s 206C was applicable on following 3 types of transaction:

1. sale of tendu leaves, scrap, liquor for human consumption, timber, minerals etc. (Rate of TCS varies from 1% to 5% depending upon nature of product)

2. lease/license of parking lot, toll plaza, mining and quarrying of mineral (other than mining and quarrying of mineral oil, petroleum and natural Gas). (Rate 2%)

3. sale of motor vehicle of value > Rs 10 lacs (Rate 1%)

In all the above 3 types of transaction the TCS is required to be collected at the time of debiting the account of the buyer or at the time of collection of consideration whichever is earlier.

In case the buyer does not furnish his PAN then rate of TCS will be double the normal rate or 5% whichever is higher.

Finance bill 2020 brought a significant change in the TCS provisions and TCS has been freshly introduced in the additional 3 types of transaction below. These provisions are applicable w.e.f 01.04.2020

1. Overseas remittance of Rs 7 lacs or above in a Financial Year covered under Liberalised Remittance Scheme (LRS) through authorised dealer. Under the LRS a person can remit upto $ 2.50 Lacs (from year 2015, prior to that it was $ 1.25 Lacs) in a FY for various purposes like education abroad, travel, maintenance of close relative abroad, gifts, investment in immovable property and shares abroad etc (Rate of TCS 5%, No-PAN/Aadhar case 10%)

2. Sale of foreign tour package by tour operator (Rate 5%, No-PAN/Aadhar case 10%)

3. Sale of goods (i.e no service and excluding the goods on which TCS is already applicable like tendu leaves, scrap etc) for value exceeding Rs 50 lacs to a buyer in a FY by a seller whose turnover / gross receipt exceeds Rs 10 crore in the previous year (Rate 0.1%, No-PAN case 1%)

Summary of Newly Introduced TCS Provisions applicable from 01.04.2020

Nature of Transaction Person liable to collect TCS When TCS will be collected Prescribed Limit Non – Applicability TCS Rate
Remittance out of India under the LRS (Liberalised Remittance Scheme) of RBI An Authorised Dealer At the time of receipt of the amount, or At the time of debiting the amount to customer whichever is earlier  => 7 Lacs 1. If the buyer is liable to deduct TDS under any other provisions and has deducted such TDS

2. If a buyer is CG, SG, an embassy, a high commission,  a legation, a commission, a consulate, the trade representation of a foreign state, a local authority or any other person as notified by CG

5% (No PAN/ Aadhar case 10%)
Overseas tour program package Seller of the package NIL
Sale of any goods (except goods on which TCS applicable under other provisions like scrap, tendu leaves etc) Seller of any goods whose turnover in the previous year exceed 10 crore rupees At the time of receipt of any amount as consideration for the sale of such goods  > 50 Lakh in a FY.

In case amount of consideration received is Rs 54 lacs then TCS is applicable on 4 Lacs only.

1. If the buyer is liable to deduct TDS under any other provisions and has deducted such TDS.

2. If buyer is CG, SG, an embassy, a high commission,  a legation, a commission, a consulate, the trade representation of a foreign state, a local authority or any other person as notified by CG

0.10% (No PAN/ Aadhar case 1%)

Above new provisions of TCS is applicable from 01.04.2020. The number of business organisations in India with turnover exceeding Rs 10 crore is very large and hence TCS compliance is going to affect a very large number of organisations.

Precautions to be taken by organisation to implement New TCS Provisions

1) They must update PAN of each and every customer whose sale consideration is expected to be more than Rs 50 lacs during the year. (Although w.e.f 01.01.2016 mentioning of PAN is mandatory in all invoices exceeding Rs 2 lacs, so major customer PAN number must have already been updated)

2) Categorisation of buyers into CG (Central Govt), SG (State Govt), local authority, embassy etc would become mandatory as in this cases TCS is not applicable on sale of goods. Many a times it becomes very difficult to identify whether the customer is Govt Customer or non-Govt customer. It may be noted that exemption from TCS is not applicable for PSUs customers.

3) Organisation should develop accounting system so that their accounting software will start collecting TCS once the threshold consideration of Rs 50 lacs is exceeded, because TCS need to be collected only on the value of consideration exceeding Rs 50 Lacs. For example if the value of consideration is Rs 54 lacs then TCS @ 0.10% need to be collected on Rs 4 lacs only.

4) Generally in all the other provisions of TCS, TCS need to be collected at the time of collection of consideration or at the time of debiting the customer account whichever is earlier. For example– In case of sale of scrap generally business use to collect TCS on the face of invoice. It makes convenient for the customer also to pay the amount to vendor and claim the amount of TCS as credit at the time of filing his/her Income Tax return.

However in the given case of sale of goods (other than tendu leaves, scrap etc) TCS need to be collected at the time of receipt of amount of consideration only. So no TCS need to be collected at the time of invoicing. Rather the business need to wait for the time of receipt of consideration which may come after a time lag. This is surely going to make the whole accounting and controlling process difficult as business may have to raise separate debit note / invoice for TCS at the time of receipt of payment.

A liberal view of collecting TCS at the time of generation of invoices itself can be taken (unless the amount has been received in advance) as it will make the system of accounting simple and cash outflow on account of TCS would be only 0.10% of invoice value which would not be that substantial amount. However it is expected that Govt may come with a notification providing more practical solution for the same.

5) The proposed provisions provides that TCS @ 0.10% need to be collected on receipt of consideration and such consideration would obviously be inclusive of GST/ other indirect taxes. So on pure reading of this section it appears that TCS need to be collected on the amount inclusive of indirect taxes which is otherwise not applicable on TCS on other product (such as scrap in which TCS is collected on base value before indirect taxes).

Even if the intention of law is to collect TCS on base value before tax then even it will be very difficult to bifurcate the total consideration received into base amount and indirect tax amount.

A clarification on the above aspect will help to avoid unnecessary litigation in future.

6) Some large organisation use to exchange product among themselves in different states of the country (India) against tax invoices (to save the logistic cost and attain operational efficiency). In these cases accounts are settled between them on periodic basis and net payable / receivables are settled between them.

Since the Act proposes that the TCS will be applicable on the amount of consideration received, so whether in this case Gross consideration or net consideration has to be taken for the purpose of TCS.

On a conservative basis the organisation may choose to collect TCS on gross consideration. However a clarification on the above aspect will help to avoid litigations.

7) Since TCS need to be paid on the amount of consideration received (rather than at the time of billing), so it may be difficult to collect the amount of TCS from customers as they may insist for some invoice or proof of payment of TCS which may be difficult to substantiate on the part of vendor at times.

8) There is always a time lag in receipt of payment from customers and date of billing. Since the TCS provisions are applicable on consideration received w.e.f 01.04.2020, so a question arises whether the amount received on account of billing done during FY 2019-20 or before will form part of consideration received for the purpose of deciding the threshold limit of Rs 50 lacs.

9) Again TCS is not applicable in case buyer is liable to deduct TDS under any other section like 194C etc. TDS under GST (applicable for PSUs) is not covered here. Hence if the buyer is deducting TDS under GST but not under Income Tax then even TCS will be applicable.

Generally buyer use to deduct TDS u/s 194C for supply of goods by vendors which is classified as works contract by the vendor. So if supplies is providing works contract services (which includes goods) and buyer is deducting TDS under Income tax Act then TCS provisions on supply of goods will not apply to vendor / supplier/ seller.

Since the impact of TCS on sale of goods is very wide, so it is expected that Govt will come up with some clarification on above noted points which will be able to resolve a number of issues associated with the same.

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  1. Nitin says:

    1. Plz, explain the TCS Provisions applicability with some practical examples.
    2. Is it necessary to calculate & print TCS on Tax Invoice? if Yes plz, provide a sample Tax Invoice format for the same.
    3. Plz tell, TCS would be deducted on the whole amount orthoses amount which exceeding 50Lacs..

  2. Satish Joshi says:

    Many companies in India have multilocations over many states with same PAN. But these locations ask for separate invoice per location so it is necessary for supplier to create separate buyer ( customer ) account for each location for accounting purpose. my question is whether the TCS provision is PAN based or location based ? any clarity about this. If PAN based , needs many changes in ERP. Please guide

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November 2020