The Finance Act,
2020 has inserted a new sub-section (1H) in section 206C of the Income-tax Act,
1961 with effect from 1st October, 2020 to provide for collection of
tax at source (Tax Collected at Source or TCS) on consideration received on
sale of certain goods. In this article an effort is being made to set out
various issues that are likely to arise out of these newly-inserted provisions.
AMENDMENT IN BRIEF
Every seller whose
turnover in the immediately preceding F.Y. exceeds Rs. 10 crores and who
receives an amount exceeding Rs. 50 lakhs in aggregate from a buyer in any
previous year on the sale of goods, is required to collect a sum of 0.1%
(0.075% for F.Y. 2020-21) on the sale consideration exceeding Rs. 50 lakhs from
the buyer of such goods.
The rate is to be
increased to 1% if neither PAN nor the Aadhaar number are provided.
Receipts from sale
of scrap, alcohol, motor vehicles, remittances under Liberalised Remittance
Scheme (LRS) and overseas tour programme packages are excluded from this
sub-section since they are covered by other clauses of section 206C.
The provisions of
TCS shall not be applicable in cases where the buyer is liable to make a tax
deduction at source from the amount payable to the seller, and such tax has
been deducted. Besides, goods exported out of India have also been excluded
from the applicability of TCS.
Further, the
following have been excluded from the meaning of the term ‘buyer’, thus making
these provisions inapplicable to them:
– Central Government
– State Government
– Embassy
– High Commission
– Legation
– Commission
– Consulate
– Trade Representation of a foreign state
– Local Authority
– Person importing goods into India
– Other Notified Person
ISSUES
‘Goods’
The levy of TCS is
on the consideration received on the sale of goods. The Income-tax Act does not
define the term ‘goods’. But it can be interpreted widely since anything that
is marketable, i.e., capable of being sold in the market, can be classified as
goods. The other relevant legislation from which a definition can be drawn is
the Sale of Goods Act. As per section 2(7) of the Sale of Goods Act, ‘goods’
are described as: ‘Every kind of movable property other than actionable claims
and money; and includes stock and shares, growing crops, grass and things
attached to or forming part of the land which are agreed to be severed before
sale or under the contract of sale.’
Under this
definition, shares and securities are included within the definition of goods.
Let us analyse this position in the following scenarios:
Shares &
securities held as stock in trade by a dealer trading in them
Listed shares and securities:
In case of listed
shares and securities, the dealer who regularly trades in them is required to
pay Securities Transaction Tax (STT) for transactions carried out through the
recognised stock exchanges. The identity of the buyer is not known to the
seller and, therefore, whether the sale consideration exceeds Rs. 50 lakhs for
each buyer cannot be determined. The machinery for implementation of TCS
provisions would not work in these cases. In view of these practical
difficulties, the CBDT vide its Circular No. 17 of 2020 dated 29th
September, 2020 (the Circular) has provided that the provisions of sub-section
(1H) of section 206C will not be applicable to transactions for sale of shares
/ securities and commodities which are carried out through recognised stock /
commodities exchanges. Though welcome, the Circular gives only limited clarity
and a few more issues with regard to ‘goods’ covered under this section are
discussed below.
Unlisted shares & securities:
In such a
scenario, there would be no STT payable on the sale of these shares. Since the
consideration would be received directly from the buyer, the seller will be in
a position to collect tax at source. Therefore, unless there is a specific
exclusion, unlisted shares and securities sold by a dealer may be covered under
these provisions. However, shares of private limited companies are not tradable
on account of restrictions on their transfer and may therefore not be regarded
as stock-in-trade. Sales proceeds of such shares may not be regarded as turnover
if they are held as capital assets. If the seller of such shares is otherwise a
dealer in goods having a turnover of more than Rs. 10 crores in the preceding
year, the question of applicability of TCS may arise. The question is whether
TCS provisions are attracted by sale of goods only in the course of business or
even otherwise in the case of a businessman. This is discussed further below.
Shares held as capital assets are taken up next.
Shares &
securities held as investments / Capital assets by an investor
Listed shares and securities:
In the case of
listed shares and securities, they would remain outside the scope of TCS for
the same reasons as discussed above.
Unlisted shares and securities:
In a case where unlisted shares and securities held as investments are
sold, whether they would constitute ‘goods’ would determine the applicability
of the TCS provisions. These shares and securities would usually be capital
assets and their sale would give rise to resultant capital gains / loss. Though
the definition of ‘goods’ under the Sale of Goods Act includes stocks and
shares, the fact that they would be considered as ‘goods’ in the context of
these provisions seems unlikely, and therefore may be excluded.
In order to
extrapolate this thought further, let us analyse the criteria to be fulfilled
for the applicability of TCS provisions. This sub-section has two-fold
criteria:
(i) the turnover from business of the preceding
financial year should be in excess of Rs. 10 crores, and
(ii) the aggregate consideration received from sale
of goods during the previous year should be in excess of Rs. 50 lakhs.
The consideration
received from the sale of such shares will not be included in the ‘turnover’
from business while determining the threshold of Rs. 10 crores. It would be
inappropriate to include such consideration while ascertaining the threshold
for aggregate consideration for the applicability of the TCS provisions. One
cannot apply an independent sense to interpret the words ‘turnover’ and
‘consideration’ on sale of goods which has been used in the same sub-section
(this reasoning has been elaborated further).
OTHER ASSETS
Next, would TCS
provisions be applicable in the case of other assets (other than the ones in
which the seller deals) that are sold? To illustrate the same, let us look at a
scenario: Say, Mr. A sells certain automobile parts (which constitute his
stock-in-trade) to Mr. B (buyer) during the year, the aggregate consideration
being Rs. 60 lakhs and the other relevant conditions have been fulfilled.
Assume that he further sells some machinery / furniture to Mr. B for a
consideration of Rs. 25 lakhs.
Will Mr. A collect
tax at source on the consideration received for the sale of machinery /
furniture as well?
A prima facie
view that one may be inclined to adopt is that TCS would be required to be
collected on the consideration received from the sale of machinery or
furniture, since the section does not carve out any specific exclusion. That
may be a conservative view, but it would be unfair to not evaluate the contrary
view. Before we analyse the same, it is pertinent to note that Mr. A in the
illustration above trades in or deals in automobile parts. In what is probably
an isolated transaction, he has sold certain machinery / furniture to one of
his buyers, Mr. B.
Before taking up
the contrary view, the following are certain important observations:
1. As discussed above, the term ‘goods’ has not
been defined in the Act. It is therefore capable of being applied to a wide
range of things. ‘Goods’ may also cover every movable asset except money and
actionable claims. However, when a particular word has not been defined in the
statute, it is important to understand its usage in the context of the
provision.
2. The provisions related to TCS are covered
under Chapter VII-B of the Income-tax Act, 1961 which deals with Collection
& Recovery of Tax. The heading for section 206C containing the group of
sub-sections u/s 206C reads as ‘Profits & Gains from the business of
trading in alcoholic liquor, forest produce, scrap, etc.’
3. While the term ‘goods’ may mean a wide range of
items, the heading to the section in which the particular sub-section appears
clearly hints at receipts in the nature of profits / gains from the business of
‘trading’… In view of this, one may infer that the receipts intended to be
covered in this section are such receipts as arise to the seller from the sale
of such items that he trades in as part of his business.
4. Further, as per the Literal Rule of
Interpretation of Statutes, where a statute uses a word which is of everyday
use, such a word should be interpreted in its popular sense, i.e., construed as
it is understood in common language. Therefore, to interpret goods as
understood in common language, would ordinarily mean stock in trade or goods
that a person trades in regularly in the course of his business activities.
5. Explanation to this sub-section defines
‘seller’ as…
‘seller’ means
a person whose total sales, gross receipts or turnover from the business
carried on by him exceed ten crore rupees during the financial year immediately
preceding the financial year in which the sale of goods is carried out, not
being a person as the Central Government may, by notification in the Official
Gazette, specify for this purpose, subject to such conditions as may be
specified therein.
The seller in the context of this sub-section is a person whose sales /
gross receipts or turnover from ‘business’ carried on by him exceeds Rs. 10
crores in the preceding financial year. In determining the threshold for one of
the two criteria for applicability of these provisions, the sales / turnover
from ‘business activities’ of such seller has to be taken into account. It
would be inappropriate to include receipts on sale of such items which would
otherwise not form a part of
turnover or sales in determining the threshold for consideration of goods sold.
To put it simply, in the illustration above, when Mr. A sells machinery /
furniture to Mr. B, such amount will not be included in his ‘turnover from
business’ as clearly stated by the meaning of seller given in the explanation.
To include it in the aggregate consideration for goods sold, and
collect tax on such amount, would therefore not be appropriate.
Thus, a possible
contrary view is that other assets sold by the seller to the buyer which do not
represent goods or items that the seller trades in as a part of his business
would not be covered by these provisions.
APPLICABILITY OF
PROVISIONS
This sub-section
is effective from 1st October, 2020 and is prospective in
application. It is triggered if the consideration received for sale of goods of
the value, or aggregate of such value, is in excess of Rs. 50 lakhs in any
previous year (other than goods exported out of India). Therefore, the
threshold criterion of consideration in excess of Rs. 50 lakhs has to be
considered for the entire previous year.
This has been
clarified by paragraph 4.4.2(iii) of the Circular, which states that since
the threshold of fifty lakh rupees is with respect to the previous year,
calculation of receipt of sale consideration for triggering TCS under
sub-section (1H) of Section 206C shall be computed from 1st April,
2020. Let us take up a few probable scenarios here:
(I) Mr. A sells goods to Mr. B for Rs. 65 lakhs –
for Rs. 20 lakhs, both sale and receipt of consideration were pre-October,
2020; for Rs. 45 lakhs, both sale and receipt of consideration were
post-October, 2020. Though TCS provisions will be applicable on the receipt of
sale consideration of Rs. 45 lakhs post-October, for determining the threshold
criterion, receipt of sale consideration of Rs. 20 lakhs will be considered.
(II) Mr. A sells goods to Mr. B and receives an
aggregate consideration of Rs. 75 lakhs. The sale and receipt of the entire
consideration take place post-1st October, 2020. Here, without any
doubt, the TCS provisions will be applicable and Mr. A will be under an
obligation to collect tax on Rs. 25 lakhs (Rs. 75 lakhs minus Rs. 50 lakhs).
Before we analyse further, it is important to take note of paragraph 4.4.2(ii)
of the Circular which states as under: Since sub-section (1H) of section
206C of the Act applies on receipt of sale consideration, the provision of this
sub-section shall not apply on any sale consideration received before 1st
October, 2020. Consequently, it would apply on all sale consideration
(including advance received for sale) received on or after 1st
October, 2020 even if the sale was carried out before 1st October,
2020.
(III) Mr. A had sold certain goods to Mr. B in F.Y.
2019-20 for a consideration of Rs. 80 lakhs. Of this, Rs. 10 lakhs was received
in F.Y. 2019-20. Of the balance Rs. 70 lakhs, further Rs. 5 lakhs was received
in July, 2020 and Rs. 65 lakhs was received post-October, 2020.
In view of the
above paragraph of the Circular, the seller would be required to make TCS on
the receipt of Rs. 15 lakhs of consideration received in the month of October,
2020 (Rs. 65 lakhs minus Rs. 50 lakhs), even though the sales were effected in
F.Y. 2019-20.
The Circular
categorically states that TCS would be applicable on all sale considerations,
even if the sale was carried out before 1st October, 2020. This is
not sufficiently asserted in the provisions of section 206C (1H) which states –
Every person, being a seller, who receives any amount as consideration for
sale of any goods of the value or aggregate value exceeding fifty lakh rupees
in any previous year…
In my humble view,
as mentioned above, this section is prospective in its application and takes
effect from 1st October, 2020. Though the trigger for applicability
of TCS provisions is ‘receipt of sale consideration’, it should not be made
applicable to such receipts for sales effected prior to 1st October,
2020.
Considering the
language used in the Circular, it will imply that all outstanding amounts due
to the seller for sales effected prior to 1st October, 2020 will now
be included in the ambit of the TCS provisions. This may span over a period of
the past one or two financial years, and the seller will be required to collect
TCS on receipts of such amounts. It may pose practical difficulties as the
buyers may be reluctant to remit additional amounts as they would not reflect
in the original invoices raised.
These practical
issues notwithstanding and referring to the arguments above, it will be unjust
to include receipts of consideration for sales affected prior to 1st
October, 2020 within the ambit of TCS.
There seems to be
an intention to apply the TCS provisions in respect of all sale considerations,
including advances, received on or after 1st October, 2020. However,
it’s ‘lost in translation’ as it further states advances received on or after 1st
October, 2020 including those for sales carried out before 1st
October, 2020. The only aspect clear from this paragraph is that the provisions
of TCS shall not apply on any sale consideration received before 1st
October, 2020.
Again, it is
important to note that the section does not use the word ‘advance’ and refers
to receipt of amount as ‘consideration for sale of goods’, or sale
consideration as used in common parlance. Further, neither has the term
‘consideration’ nor ‘sale consideration’ been defined in the sub-section, in
view of which the term will have to be understood in the context of its use in
common parlance. Any amount received as advance cannot partake the character of
‘sale consideration’ unless the corresponding sale against such sum of money
received is effected.
Thus, by merely
using a particular term in the Circular, which does not find place in the
section, its meaning cannot be imported in the section. Therefore, in my humble
view, TCS provisions will not be applicable on advances.
(IV) Mr. A,
dealing in a particular category of goods, sells them to Mr. B who uses them
further for his manufacturing / processing activity and is not the ultimate
consumer of such goods. Whether TCS would be collected by Mr. A in respect of
such goods?
To correlate,
section 206C(1A) excludes applicability of TCS on such sale transactions
covered u/s 206C(1) where the buyer uses the goods for further manufacturing or
production activities. At present, there is no such exclusion u/s 206C(1H).
The Circular makes
reference to transactions for sale of motor car, covering receipts from all
kinds of transactions of sale of motor car, under the TCS provisions, either
under sub-section (1H) or sub-section (1F), both sub-sections being mutually
exhaustive.
GOODS & SERVICES
TAX IMPLICATION
Another important
aspect that requires consideration is whether TCS is required to be collected
on the consideration inclusive of GST, or otherwise. The term sale
consideration has not been defined in the sub-section. It will mean the price
paid for purchase of goods. The question to be considered is whether it can be
said that GST is a part of the consideration? There are contrary views on this
issue as well. Based on certain judicial precedents, a view which prevails is
that GST is includible in the consideration and therefore TCS should be made on
the amount of consideration inclusive of GST.
Paragraph 4.6 of
the Circular clarifies that no adjustment on account of sale return or discount
or indirect taxes including GST is required to be made for collection of tax
under sub-section (1H) of section 206C of the Act since the collection is made
with reference to the receipt of the amount of sale consideration.
Let us evaluate
each of the items covered under this paragraph:
i. Sales
return:
a. Sales
returns post receipt of amount of sale consideration by the seller: In this case, the receipt will not
be net of sale return and the seller would have collected TCS on the same, as
it has been received. Assuming the sales return takes place in the subsequent
month, by when the seller has paid the amount of tax collected to the credit of
the government, the buyer will claim credit of the same while furnishing his
income tax return.
b. Sales returns before receipt of amount of sale
consideration by the seller: In this case, under
the terms of contract, the buyer will pay the amount net of sales return, and
thus the amount of consideration received will be subjected to TCS.
ii. Discounts: The
discounts will be factored in the invoice, and / or the amount of sale
consideration received by the seller from the buyer will be net of such
discounts. As TCS is to be made on the amount received, no adjustment would be
required.
iii. GST: The Circular
states that no adjustment is required to be made on account of GST. It brings
little clarity on this aspect. In my view, GST should not be included for the
purpose of TCS though a conservative and practical approach adopted may be that
TCS is to be made inclusive of GST.
In case the
component of TCS is charged in the invoice, whether GST would be applicable on
the TCS component?
GST applies on the
consideration for supply of goods or services, whereas TCS is a collection of
the income tax component.
The Central Board
of Indirect Taxes (CBIC) Corrigendum to Circular No. 76/50/2018-GST dated 31st
December, 2018 issued vide F. No. CBEC-20/16/04/2018-GST has clarified
that for the purpose of determining value of supply under GST, TCS will not be
includible since it is in the nature of an interim levy. Therefore, if the TCS
component is reflected in the invoice, there will be no GST applicable on the
TCS component.
RESULTANT PRACTICAL
ASPECTS
The tax collected
by the seller shall be paid to the account of the Government by the 7th
of the month subsequent to the month in which the consideration was received.
No separate TAN is
required for TCS under this sub-section. The seller has to furnish TCS return
in Form 27EQ on a quarterly basis. The CBDT has amended the IT Rules in line
with the above changes to the TCS provisions.
The existing Rules
require the assessee to file quarterly TCS returns in Form 27EQ. Under the
amended Rules, the assessee (seller) is required to report the amount on which
TCS is not collected from the buyer. An annexure for party-wise break-up of TCS
is also provided in the form.
Due dates of
filing of Form 27EQ are:
|
Quarter
|
Due
date (normally)
|
|
April – June
|
15th July
|
|
July – September
|
15th October
|
|
October – December
|
15th January
|
|
January – March
|
15th May
|
CONCLUSION
As we cope with the implications of this newly-inserted sub-section, it
will be interesting to have a sneak peek into the history of these provisions.
The TCS provisions were first inserted by the Finance Act, 1988. The rationale
behind introducing these provisions was the fact that there was difficulty in
assessing the income of persons undertaking contracts for sale of liquor, etc.
Over the years, there have been several other sub-sections added to section
206C on the pretext of widening the tax base or to track high-value
transactions, the latest amendment being this insertion of sub-section 1H. From
1988 to 2020, both tax administration and tax compliance have undergone a sea
change. Considering the ‘E-mode’ of operations, several tests and checks are in
place to ensure minimal evasion of taxes and non-reporting of transactions.
Against this
backdrop, one wonders about the necessity of such provisions which are most
likely to increase the hassles of businessmen.
‘Lord Atkin once
said that an impartial administration of the law is like oxygen in the air:
people know and care little about it till it is withdrawn.’’
– Fali S. Nariman, Before Memory
Fades:
An Autobiography
