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TDS/TCS Clarifications from 1st October

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:

Section 194O : TDS on E-Commerce Sales
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Section 194O : TDS on E-Commerce Sales
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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:

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:

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:

Section 194-0, and sub-section (I H) of Section 206C, of the Act, will NOT apply to:

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:


Source: Income Tax Archives

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