TDS/TCS Clarifications from 1st October

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

The newly inserted 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.

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.
[sc name="read-more" link="" title="Section 194O : TDS on E-Commerce Sales" ][/sc]

The need:

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.

Payment gateway:

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.

Concluding Lines

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?

Refer here:


  • “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

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Scrip-Wise Reporting for Shares Eligible for Grandfathering

Section 112A, The Grandfathering Rule, Long Term Capital Gains, and tons of Scrip-Wise reporting. There has been a lot of confusion around this. It’s chaos for the Traders. Investors are facing hardships to gather and provide data. On 26th September, Income Tax India released a notification regarding Scrip-Wise reporting of capital gains. Yes, there is ‘some’ relief. But the question remains - is it enough?

The Press Release for Scrip-Wise Reporting

The IT Department released a notification saying that the Scrip-Wise reporting is NOT required in the ITR Forms for A.Y. 2020-21 for shares/units which are NOT eligible for Grandfathering (under Long Term Capital Gains) i.e. Short Term Capital Gains, Intraday, and F&O.  

What is the Grandfathering Rule in Long Term Capital Gains?

Do your grandfathers need to be involved? No!

What is Section 112A?

Before diving into this rule, we need to talk about Section 112A.

Under Budget 2018, the exemption under Section 10(38) was removed. And a new Section 112A (applicable from AY 2019-20) was introduced with a 10% tax on LTCG in excess of INR 1 lakh in the case of equity shares and equity mutual funds on which STT is paid.


  • You invest INR 3 lakh in stocks or equity funds in March 2018
  • You sell the investment for INR 3.50 lakh in March 2019
  • LTCG= INR 50k
  • Since LTCG up to INR 1 lakh is exempt, your INR 50k will not be taxed.

Section 10(38)'s removal?

Under Section 10(38) profit on the sale of listed equity shares, equity-oriented mutual funds & units of business trust held for more than a year was exempt from income tax.

This Section was introduced in the Finance Act of 2004 based on the Kelkar Committee report. The motto was to attract investments from Foreign Institutional Investors. Also, since investors paid STT, it provided relief from double taxation to such investors.

But many taxpayers misused the exemption leading to loss of revenue and tax evasion due to abusive practices.

The Grandfathering Rule

Many investors invest in equity markets with an intention to earn tax-free profits in the form of Long Term Capital Gains. Under Section 112A, CBDT introduced the grandfathering rule to ensure that gains up to 31st January 2018 are not taxed. For equity shares and equity mutual funds purchased on or before 31st January 2018 and sold after a year, the Cost of Acquisition would be:

  • Fair Market Value as on 31st Jan 2018 or the Actual Selling Price whichever is lower
  • Step 1 or Actual Purchase Price whichever is higher

Long Term Capital Gain = Sales Value – Cost of Acquisition (as per grandfathering rule) – Transfer Expenses

Tax Liability = 10% (LTCG – INR 1 lac)

A Simple Example:

  Case I Case II
Purchase Date January 1st, 2018 February 10th, 2018
Purchase Value 2,00,000 2,00,000
Sell Date January 10th, 2020 January 10th, 2020
Sale Value 3,50,000 3,50,000
Grandfathering Rule Applicable? Yes No
Actual Cost* 2,40,000** 2,00,000
LTCG=Sale Value-Actual Cost 1,10,000 1,50,000
Exempt Up to INR 1 lakh Up to INR 1 lakh
Tax Liability 1,10,000-1,00,000=10,000 * 10% = 1,000 1,50,000-1,00,000=50,000 * 10% = 5,000

*Note: Actual Cost is the Cost of Acquisition to calculate capital gains 

**Calculation of Actual Cost using FMV (Case I)

  Condition Amount (INR) Qualifying Amount
Step 1: Higher of:

Value in Step 1
Purchase Value
Lower of: 3,50,000 or 2,40,000 2,40,000
Step 2: Higher of:

Value in Step 1
Purchase Value
Higher of: 2,40,000 or 2,00,000 2,40,000
  Actual Cost   2,40,000

Note: indexation benefit is not available to stock and equity fund investors.

Reasons for Scrip-Wise Reporting

The grandfathering is allowed by comparing different values such as cost, sale price, and market price for each share/unit (as on January 31st, 2018). In this process, there is a need to capture the scrip-wise details for computing capital gains of these shares/units.

  • Lack of understanding of the provisions - The taxpayer may not claim or wrongly claim the benefit of grandfathering.
  • The correctness of the claim - If the calculation is not entered scrip-wise and is taken as an aggregate, the IT department will not be able to cross verify the details.
  • Avoid further audits and scrutiny - The IT Department can electronically verify the scrip-wise details provided by the taxpayers. The details are matched with the data available from reports filed by stock exchanges, brokerages, etc.
  • The intent - Providing scrip-wise details will help the taxpayer compute the Long Term Capital Gains on share and units accurately.

Challenges Faced by Traders and Taxpayers.

While filing capital gains with ITR 2 and ITR 3, individuals have to provide the following details of share sales as on January 31st, 2018:

  • ISIN (aka International Securities Identification Number)
  • Name of the share/unit
  • Number of shares
  • Sales-price per share/Unit
  • Cost of Acquisition
  • FMV as on 31/01/2018
  • Expenditure related to transfer

Also, most brokers don’t provide with FMV of the shares. Moreover, taxpayers need to fill up these details for each item individually. They have to mechanically and accurately file the data. Boy, this can be a hassle in cases where the data is large and the time and data involved are exceptionally huge.

Can’t there be a better way?

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5% TCS on Foreign Remittances from October 1, 2020

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.

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Startups and ESOPs Buyback

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.
[sc name="tip" 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." ][/sc]

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.

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.

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Reliance Tax Saving Plan

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.

Shareholding Shares Held (in cr.) Value (in cr.) Stake (%)
Reliance Industries 18,055.7 180,557 67.05
Facebook Inc. 2,407.4 43,574 9.99
Google 1,863.9 33,737 7.73
Silver Lake 277.8 5,656 1.15
Silver Lake (additional) 223.3 4,547 0.93
Vista 558.2 11,367 2.32
General Atlantic 324.1 6,598 1.34
KKR 558.2 11,367 0.93
Mubadala 446.6 9,094 1.85
ADIA 279.1 5,684 1.16
TPG 223.3 4,547 0.93
L Catterton 93.0 1,895 0.39
The Public Investment Fund 558.2 11,367 2.32
Intel Capital 93.0 1,895 0.39
Qualcomm 35.9 730 0.15

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

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