International students, foreign travelers, and NRIs – brace for impact! Starting October 1st, 5% TCS will be applicable to foreign remittances & fund transfers under the Liberalized Remittance Scheme (LRS) of the RBI. LRS is a provision under which you are allowed to send $250K outside India in any financial year.

Tax will be applicable on the amount exceeding INR 7 lakh. But the tax on foreign tour packages will be applicable for any amount (no threshold of INR 7 lakh). And for education-related remittances like loans, etc, tax will be only 0.5%.

This provision was introduced as a new sub-section (1G) in Section 206C of the Finance Act, 2020.

What is TCS

Tax Collected at Source (TCS) is an income tax collected by the seller of specified goods, from the buyer. It is a concept where a person selling specific items is liable to collect tax from a buyer at a prescribed rate and deposit the same with the Government.

Let’s take an example to understand the concept of TCS:

Ram purchases jewelry from Yash worth INR 7,00,000. Ram will now be liable to pay INR 7,07,000 to Yash. (Since TCS @1% is added to it)

What is LRS?

Liberalized Remittance Scheme aka LRS is a provision under which you are allowed to send $250K outside India in any financial year. These majorly include expenses related to:

• traveling
• medical treatment
• Studying
• Gifts
• Donations
• maintenance of close relatives
• investment in shares and debt instruments
• buying immovable properties abroad.

Individuals can also open, maintain, and hold foreign currency accounts with banks outside India for carrying out transactions permitted under the scheme. However, LRS does not allow the buying and selling of foreign exchange abroad, or purchase of lottery tickets or sweepstakes, proscribed magazines, and so on.

Money cannot be remitted to countries identified by the Financial Action Task Force as “non-cooperative countries and territories”.

No TCS Will be Applicable if:

• The amount transfered is less than INR 7 lakh and is NOT for buying a tour package.
• Tax is already deducted at source under any other provision of the Income Tax Act (eg. royalty, professional fees, rent transfered overseas to NRI landlord).
• Central and state governments, local authorities, and foreign diplomatic remitters are exempt.
• GST will not be applicable to the TCS amount.

Non-disclosure of PAN or Aadhaar

If PAN and Aadhaar are not provided, the TCS rate increases.

• The rate would be 5% for education-related (eg. education loan as defined in Section 80E) transfers
• The rate would be 10% for any other remittance

How Will TCS on Foreign Remittances Work?

The TCS will be collected

• at the time of the receipt of the amount or
• at the time of debiting the amount payable (whichever is earlier)

An additional surcharge and health & education cess are levied if the buyer is a non-resident person or a foreign company. The sum paid as TCS will be allowed as a credit while furnishing return of income. You can get your monthly TDS reduced if it is a salaried individual. Also, you can adjust it against your advance tax payment when the next instance falls due. The sum can also be collected as a refund, provided there is no tax liability. This is designed to get people who send money abroad to file tax returns. Therefore, if a person does not file his return, the government would get to keep this 5% amount.

An authorized dealer (dealing in foreign exchange or foreign security) or overseas tour operators shall collect the TCS.

Calculation of TCS on Foreign Remittances/Transfers

Case 1: If a sum of INR 10 lakh is transferred under LRS in a financial year, a TCS at 5% will be applicable on INR 3 lakh (INR 10 lakh minus INR 7 lakh). The tax collected will be INR 15,000.

Case 2: If a sum of INR 10 lakh is transferred for the purchase of an overseas tour package, you have to make a payment of INR 10,15,000 (INR 10 lakh plus 5% of INR 3 lakh). (since there is no such relaxation of the INR 7 lakh threshold to buy overseas tour packages)

Why This Rule?

There have been instances of misuse of the window provided under LRS. People send more than the permissible limit to foreign countries as remittances.

According to a statement by the Government-

• A survey of 5,026 samples of foreign remittances took place
• 1,087 did not file any return
• In F.Y. 2018-19, $14B was sent out using LRS
• Compared this to figures of F.Y. 2009-10, less than $1B was sent out using LRS
• No returns were filed for around 24% of the amount sent by these 5,026 remitters

Here is an example. Your local Kirana store owner does not file taxes. But every year he goes on a fancy international trip. Therefore, a provision to collect tax on such transfers was introduced. This will help the department identify those transferring money in excess of the specified limit but not furnishing return of income.

The  Impact

Indian students and tourists going abroad and Indian investors investing in stocks, bonds, and property abroad will be impacted. It increases up-front costs of international travel and remittances to dependents overseas. Example, parents sending money to children studying abroad. This might also reduce disposable cashflows. One will also have to wait for a year, or more, to get their tax refund.

Tour & travel agents can also suffer if people switch to self-bookings instead of buying packages to avoid TCS. On the other hand people might also shift from international travel to domestic travel. This will give a boost to the domestic tourism industry.

Final Verdict

The Union Finance Ministry is extending the scope of both tax-deducted at source (TDS) and tax collected at source (TCS). They would now have a better idea of transactions in the Indian economy. Also, they will be able to tally the spending patterns with the reported taxable income.

Startups in India are on their way to conquer the world. The 1.3 billion ‘youth-centric population’ serves as a huge market to execute revolutionary ideas. We see innovation and new ideas popping up at every corner in the country.

The startup ecosystem has seen a boom in recent years. By the end of 2019, India had a total of 80,000 startups, which together raised USD 10bn. This puts India’s venture capital activity just behind America and China. In spite of billions of dollars pouring into the entrepreneurial ecosystem every year, there are startups that have ‘bootstrapped’ their journey. They start out with a little capital, a handful of talented people and build something truly amazing.

ESOPs are a type of employee benefit plan which intends to encourage employees to acquire stocks or ownership in the company. The ESOPs buyback trend started back in 2018 when Flipkart announced a 100% buyback options of vested ESOPs. Since then, companies such as Oyo, Unacademy, Meesho, CarDekho, Razorpay, Swiggy, Byju’s, and Zerodha have rewarded their employees via stock buyback or secondary transactions. It is a great way to retain talent and incentivize financially.

What is ESOPs Buyback?

• A company allots ESOPs to its employees with certain terms and conditions attached to it. (Employees based certain prerequisites such as vesting periods, performance, etc.)

• For companies listed on the stock market, employees can sell their ESOPs at the prevailing market price once their lock-in period is over. For unlisted companies, employees can sell vested ESOPs back to the employer (buyback).

• Any amount that the employees receive through these ESOPs sales becomes part of their income. It is also subjected to taxes as per prevailing income tax rates.

When it comes to a buyback of shares of an unlisted company, the provisions under sections 10(34A) and 115QA of the Income Tax Act shall intervene. As per section 10(34A), any income arising to a shareholder (including ESOP-shares) on account of buyback of unlisted shares by the company shall be exempt in the hands of such shareholders. Further, as per section 115QA, the tax @ 20% shall be paid by the unlisted company on the buyback of its shares.

Tip

When it comes to a buyback of shares of an unlisted company, the provisions under sections 10(34A) and 115QA of the Income Tax Act shall intervene. As per section 10(34A), any income arising to a shareholder (including ESOP-shares) on account of buyback of unlisted shares by the company shall be exempt in the hands of such shareholders. Further, as per section 115QA, the tax @ 20% shall be paid by the unlisted company on the buyback of its shares.

Stock Broker Champions – Zerodha

Zerodha had allocated an ESOPs pool worth INR 200 cr. to 850 employees in September 2019. A few days ago it announced a buyback worth INR 65cr. from 700 employees. A buyback at INR 700 per share – which is more than 4 times the book value (INR 170 cr.).

The customer base of Zerodha has increased significantly in the past few months. The stock market is most active now since 2007. First-time investors have turned towards trading due to market volatility in the COVID-19 lockdown.

We just provided liquidity to everyone on the team through an ESOP buyback. My most satisfying day as CEO of @zerodhaonline.

— Nithin Kamath (@Nithin0dha) September 15, 2020

The stock-broking entity has bootstrapped its journey with zero external funding. Hence, it has never been ascribed a valuation. But after this buyback worth INR 65 cr., the company has claimed a unicorn valuation worth INR 7,000 crore (roughly USD 1 bn)!

Zerodha has built a massively successful business in the last 10 years. It has also funded other budding startups like – Smallcase, Finception, Digio, Streak, Quicko, and many more. With ESOPs it has managed to keep employees’ stake and retain senior talent. And there is definitely a delicate sense of pride when you are a part of business success.

The Gigantic Deals

Reliance Industries Limited had announced a hot streak of 14 new investors in its JIO Platforms between April to July. The fastest ever in India. The company raised a sum INR 1,52,318 crore by selling a 33% stake in JIO Platforms. So, how much tax did Reliance Industries or JIO Platforms end up paying? Let’s have a look at The Reliance Tax Saving Plan.

source: Bloomberg

JIO’s total equity as of March 2020 comprised of

• Equity share capital at INR 4,961 crore
• Other equity at INR 1,77,064 crore
• Total INR 1,82,025 crore

‘Other equity’ means OCPS (Optionally Convertible Preference Shares) issued to RIL. But, the stake sales were ‘not’ structured as a transfer of shares from RIL. In other words, OCPS held by RIL in JIO was not converted to equity shares for the investors. Also, dilution of earlier shareholders (except RIL) did not happen when shares were issued to new investors.

The Tax Saving Plan of Reliance

Normally these partnerships would have led Reliance to pay huge capital gains tax. JIO was incorporated in November 2019. Therefore, the gains would have been categorized as short term capital gains. JIO had a plan of becoming net-debt free. And paying these taxes wouldn’t have helped at all.

Here is what Reliance did:

• Reliance invests nearly INR 1,80,000 cr. in Reliance Jio. This is transferred at the same value to Jio Platforms Ltd. (evidently at cost value).

• Jio Platforms pays for it with the help of a loan from Reliance Industries. This loan was structured as OCPS or Optionally Convertible Preference Shares. In other words, a loan that can be converted to equity.

• When companies invest in Jio Platforms, Jio Platforms pays back Reliance Industries and redeems the OCPS. This will not lead to any tax liability as it’s just paying back of the loan earlier taken.

Note 1: Reliance is not creating any tax liability by transferring shares to JIO Platforms according to this ITAT ruling. This ruling states that the transfer of shares to a 100% subsidiary is exempt from taxes.

Note 2: Also, according to Section 47A, ‘Reliance has to pay taxes if there’s a profit’ since ‘it is no longer a 100% subsidiary’ (after all the partnerships). But it appears that Reliance keeps reducing its stakes in Reliance Jio and still gets paid. Hence it is just getting back its investment. It doesn’t have to pay any taxes, too. The actual profit is basically sitting in the remaining 68% stake of Reliance on Jio Platforms. This leads to zero taxable profit in the transaction.

This is how Reliance got repaid a chunk (INR 1,29,046 crore) of its OCPS, thereby, reducing its net debt position. Also, JIO Platforms retained a large portion (INR 23,272 crore) of its funds for future purposes.

Sources: Thehindubusinessline, CapitalMind

Over the last decade, lots of e-commerce participants have popped up in the Indian market. Due to the ease of doing business online, low set up cost & easy connection to buyers more and more people are selling their goods & services on e-commerce platforms. A lot of these e-commerce participants are small traders who do not file their tax returns. These sellers are difficult to identify by the IT department. In the Union Budget 2020, the government introduced Section 194O. Section 194O covered TDS on e-commerce sales. This section is applicable from 1st October 2020.

What is section 194O?

Section 194O states that an e-commerce operator is required to deduct TDS on the facilitation of any sale by an e-commerce participant.

E-Commerce operators need to deduct TDS at the rate of 1% at the time of credit of the amount to e-commerce participants or at the time of payment for the sale of goods or services or both. The TDS would apply either at the time of credit to the e-commerce participants (or payment by any mode) or when the buyer is making the payment directly to e-commerce participants. 

Note: The TDS is applicable on the gross amount exclusive of GST.

TDS on E-Commerce Sales u/s 194O

Read our article here to learn more.

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TDS on E-Commerce Sales u/s 194O

Read our article here to learn more.

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Applicability of TDS on E-commerce Sales

1. When an e-commerce participant is a resident Individual or HUF: E-commerce operators are liable to deduct 1% TDS for resident individual and HUF e-commerce participants.

If PAN or Aadhaar are not provided then TDS is deducted at the rate of 5% as per Section 206AA.

Example: 

Raj is a registered e-commerce participant on Amazon India (an e-commerce operator). Raj has total sales of INR 6,10,000 on Amazon (exclusive of 18% GST). Amazon charges a 6% commission on the gross sales.

• Since Gross Sales exceeds Rs. 5,00,000 and Raj is a resident Individual, Amazon India should deduct TDS @ 1% on Gross Sales before making the payment.
• TDS = 1% of 6,10,000 = INR 6,100
• Commission = 6% of 6,10,000 = INR 36,600
• Payment to Raj = 6,10,000 – 36,600 – 6,100 = INR 5,67,300
• Amazon has to deposit TDS of INR 6,100 with the Income Tax Department
• If Raj has not provided PAN or Aadhaar, then TDS should be deducted at 5% irrespective of the gross sales amount

2. When an e-commerce participant is a non-resident: In the case of a non-resident e-commerce participant Section 194O is not applicable. For non-residents TDS is deducted under Section 195.

Exceptions for TDS on E-commerce Sales

1. E-commerce operators are not required to deduct TDS if the gross sale amount from the previous year has been less than INR 5,00,000; and if the E-commerce participant has provided their PAN or Aadhaar.
2. Non-resident e-commerce participants are not covered under section 194O.

This section will now allow the government to reach the smaller sellers in the market who are currently not filing their taxes. This will also increase tax revenue by reducing tax evasion. 

FAQs

Income Tax Return Filing can be intimidating if you are new, it need not be. To make the whole process easier for you we’ve made a list of mistakes for you to avoid while Filing your ITR

1. Filing for incorrect Assessment Year/ITR Form
2. Mismatched/Incorrect Personal Information
3. Incorrect Bank Details for Tax Refund
4. Not disclosing all Income Sources
5. Mismatch in TDS declared vs. Form 26AS
6. Failure to verify ITR- V on time
7. Delay in Payment of Self Assesment Tax

Filing for incorrect Assessment Year/ITR Form

While filing your Taxes, you need to choose the Assessment year and ITR Form.

You could E-file your taxes on the Income Tax website, where you’re supposed to start with choosing the Assessment Year (A.Y.) and ITR Form.

Assessment Year starts in April and ends in March next year- which occurs after the Financial Year. You need to file ITR not in the year in which you earn the income but after the end of that year i.e, in the assessment year. 

Similarly, you need to select an ITR form depending on your income sources. Usually,

• ITR-1 is for Income from Salary
• ITR- 2 is for Capital Gains – sale of equity shares, mutual funds, house property, etc. and for NRIs
• ITR-3 is for business / professional income like trading, proprietor, etc.
• ITR-4 is filed by taxpayers opting for presumptive taxation scheme.

Check which ITR Form to file?

Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.

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Check which ITR Form to file?

Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.

Explore

Or here’s another way: you can entirely skip all the confusion and just upload Form 16, investment statements, and let Quicko choose the correct ITR form & file taxes online.

Mismatched/Incorrect Personal Information

Make sure the following details match in your PAN, Aadhaar and Income Tax database:

• Name
• Date of Birth
• Address
• Email id
• Phone

Mismatch in such details is likely to give you an error while filing your ITR.

It is mandatory to link your PAN with Aadhaar before you file your Income Tax Return.

Link your PAN with Aadhaar

Here's how you can link your PAN with Aadhaar

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Link your PAN with Aadhaar

Here's how you can link your PAN with Aadhaar

Read More

Incorrect Bank Details for Tax Refund

If you are eligible to get a tax refund, make sure you enter these bank account details correctly:

• Bank name
• Account number
• IFSC code

Remember, the Income Tax Department may have the information of your bank account transactions using the AIR (Annual Information Report) filed by banks. So, do not forget to report all your bank accounts.

You will get your Income Tax Refund in your primary bank account. Choose the one which you use more frequently, so you don’t miss out on saving, splurging & investing it.

Quicko verifies your Bank Account, so your refund reaches you.

Track your Income Tax Refund

Enter PAN and Select the Assessment Year to check your Income Tax Refund Status

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Track your Income Tax Refund

Enter PAN and Select the Assessment Year to check your Income Tax Refund Status

Explore

Not disclosing all Income Sources

All of us earn income from various sources like salary, rent, capital gains, bank interest, dividends and more.

Eg: You received interest on your tax refund. Now the interest is taxable under the head ‘Income From Other Sources’.

So, it’s not uncommon to miss out on reporting all Income Sources. That, however, could get you a notice from the Income Tax Department. Use your Form 26AS to report all your incomes.

Mismatch in TDS declared vs. Form 26AS

You should check Form 26AS for details of your tax credits and high-value transactions. It includes details such as:

• Tax Deducted at Source (TDS)
• Tax Collected at Source (TCS)
• Advance Taxes
• Self Assessment Taxes
• Income Tax Refunds
• High-value transactions like Shares, Mutual Funds, etc.

A mismatch between the TDS reported in your tax return and Form 26AS will result in an notice u/s 143(1)(a) from the Income Tax Department. If you end up getting one, here’s how to respond to it.

Failure to verify ITR- V on time

ITR- V is the verification document sent to you by the Income Tax Department once you’ve e-filed your ITR. You need to verify your ITR within 120 days of filing your return

You can e-verify your ITR using different methods to e-verify your ITR like

• Net Banking,
• Aadhaar OTP
• Demat Account
• Bank ATM
• Sending physical copy to CPC Bangalore

Keep in mind, the ITD will not process your ITR or issue your tax refund unless you e-verify your return.

Delay in Payment of Self Assesment Tax

Financial year ends on the 31st of March. If you have any unpaid tax liability, interest is re-calculated every month. So the more you delay in paying taxes, this penalty is likely to increase.

Ready to file your tax return?

We’re excited to share some updates about Quicko!
 
This season, we’re proudly serving millions of customers with our partners – Zerodha, ICICI Direct, IDFC First Bank, Kotak Securities, Scripbox, Sqrrl & many more!  

Here’s a quick walk-through, now let’s get started!

💬Have Questions? Ask Away!

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Shoot your questions regarding taxes on our AMA thread.

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Have any questions ?

Shoot your questions regarding taxes on our AMA thread.

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