There is a lot of confusion regarding TDS/TCS clarifications released by the CBDT. The new TDS/TCS norms are going to impact the Indian businesses, e-commerce operators, and foreign travelers. Below are the clarifications with respect to Section 194O and Section 206C of the Finance Act, 2020.
TDS/TCS Clarifications on Foreign Remittances
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.
E-commerce Sellers to Receive Tax Cut by 1% TDS
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.
Applicability of TDS on E-commerce Sales:
- 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.
- 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.
Prior to Section 194-0, e-commerce operators did not deduct any tax while making payments to the designated seller. The whole amount was paid out. This meant that the seller was individually required (expected) to file his/her income tax returns. However, this was not the case. Many small and medium business sellers did not file their ITRs, hence escaping tax liabilities.
According to the CBDT, on any e-commerce transaction, section 194-0 will apply twice:
- once on main commerce operator, who is facilitating sale of goods or provision of services or both and
- once on payment gateway, who also happen to qualify as e-commerce operator for facilitating service.
In order to remove this difficulty of double taxation, the payment gateway will NOT be required to deduct tax u/s 194O of the Act on a transaction if the tax has been deducted by the e-commerce operator u/s 194-0 of the Act, on the same transaction.
TDS/TCS Clarifications for Insurance Aggregators
The CBDT also clarified that if an insurance agent or aggregator is not involved in transactions between the insurer and buyer, he would not be liable to deduct tax under section 194O for those subsequent years. However, the insurance company is required to deduct tax on commission payment (if any) made to the insurance agent of aggregator for those subsequent years.
Sale of Motor Vehicle:
The provisions of sub-section (1 F) of section 206C of the Act applies to the sale of motor vehicles for values exceeding INR 10 lakh.
Sub-section (1H) of section 206C of the Act exclude from its applicability goods covered under sub-section (IF).
It may be noted that the scope of sub-sections (IH) and (IF) are different. While sub-section (1 F) is based on single sale of motor vehicle, sub-section (1 H) is for receipt above INR 50 lakh during the previous year against aggregate sale of good. While sub-section (1F) is for sale to consumer only and not to dealers, sub-section (1H) is for all sale above the threshold.
The TDS/TCS clarifications:
- Receipt of sale consideration from a dealer would be subjected to TCS under sub-section (I H) of the Act, if such sales are not subjected to TCS under sub-section (1 F) of section 206C of the Act.
- In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value of ₹10 lakh or less to a buyer would be subjected to TCS under sub-section (1 H) of section 206C of the Act, if the receipt of sale consideration for such vehicles during the previous year exceeds INR 50 lakh during the previous year.
- In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value exceeding ₹10 lakh would not be subjected to TCS under sub-section (lH) of section 206C of the Act if such sales are subjected to TCS under sub-section (IF) of section 206C of the Act.
Adjustment for Sale Return, Discount, or Indirect Taxes
The income tax department clarified 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 (IH) of section 206C of the Act since the collection is made with reference to receipt of amount of sale consideration.
The Threshold F.Y. 2020-21
Since Section 194O and 206C has come into effect from 1st October (and not 1st April), the following TDS/TCS clarifications were also released:
- The threshold for an individual/HUF (being an e-commerce participant who has furnished his PAN and AAdhaar) is INR 5 lakh with respect to the previous year. The calculation of sale or service or both for triggering deductions under Section 194O will be counted from 1st April 2020. Also, if the amount exceeds INR 5 lakh, the provision of Section 194O will apply on any sum credited or paid on or after 1st October 2020.
- The provision of sub-section (1H) of Section 206C of the Act will not apply on any sale consideration received before 1st October 2020.
- 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 (1 H) of section 206C shall be computed from 1st April 2020.
Section 194-0, and sub-section (I H) of Section 206C, of the Act, will NOT apply to:
- Transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporation located in International Financial Service. **
- Transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC (aka Central Electricity Regulatory Commission)
- Sale consideration received for fuel supplied to non-resident airlines at airports in India.
Under the new rules, companies are required to file returns by the following month's 10th day.
These TDS/TCS clarifications with respect to 1st October were released on 29th September. But these changes were already announced 6 months back.
It is clear that the Department is trying to aim to collect a pretty penny from the winners of the pandemic and growing digital economy. The 1% TDS would become 1.8% of net revenue. This would impact the MSMEs who rely on e-commerce platforms. They help MSMEs save heavily on marketing, logistics, and delivery costs. Also keeping in mind MSMEs' already low margins, the 1% TDS would mean blocking a quarter of their income with the taxman.
Furthermore, the department 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.
The question is whether this additional burden of compliances is worth it?
- “recognized clearing corporation” shall have the meaning assigned to it in clause (i) of the Explanation to clause (23EE) of section 10 of the Act
- “recognized stock exchange” shall have the meaning assigned to it in clause (ii) of the Explanation 1 to sub-section (5) of section 43 of the Act; and
- “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.
Source: Income Tax Archives