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Finance Bill 2020 introduced TCS on sales under section 206C (1H) which mandates that w.e.f from 01/10/2020 a seller receiving an amount as consideration for the sale of any goods of the value or aggregate of such value exceeding Rs.50 Lacs in any previous year to collect tax from the buyer a sum equal to 0.1% (Now 0.075%) of the sale consideration exceeding Rs. 50 Lacs as Income Tax. The collection required to be made at the time of receipt amount of consideration

Finance Bill 2021 has proposed TDS @0.1% on payment for Purchase under section 194Q for the buyers who purchase goods of the value or aggregate of such value exceeding Rs. 50 Lacs in any Previous year. According to us both, the above section will not increase Net revenue from Direct Taxes as the Tax paid can be adjusted against the Total Tax Payable by the Assessee. Although a welcome provision to cover the maximum Business transactions under the Tax net, the practical difficulties for an Industry should be looked into and the feasible solution should be worked out. This article brings out the practical difficulties as well as a probable solution to those difficulties by looking at the Small and Medium Enterprise. Large Industries will have to work on the customization of ERP/Accounting Software whereas the SME Industries have to depend on the manual calculation on Excel or take their in-house customization of Software. Let us look at both sections simultaneously.

Section 206C (1H): Relevant provisions - Main part of section 206C(1H)

Every person, being a seller, who receives any amount as consideration for the sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub-section (1F) or sub-section (1G) shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 0.10 per cent of the sale consideration exceeding fifty lakh rupees as income-tax.

Relevant provisions - Clause (b) of explanation to Section 206C(1H)

"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

For calculating the threshold limit for applicability or the base amount following receipts to be excluded

1. Goods exported out of India;
2. Goods covered under other provisions of TCS (i.e. Scrap Sales)
3. No tax to be collected on sale on which buyer has deducted tax at source under any other provisions of the Act.
4. Provisions not applicable on Central/State Government, local authorities etc. being seller or buyer.
5. No TCS to be paid on import of goods

Practical difficulties of implementing 206C(1H) and 194Q

Section 194Q: These amendments will take effect from 1st July 2021

Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 percent of such sum exceeding fifty lakh rupees as income-tax.

Explanation.- For the purposes of this sub-section, “buyer” 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 purchase 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.

2. Where any sum referred to in sub-section (1) is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

3. If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

4. Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income tax authorities and the person liable to deduct tax.

 

The provisions of this section shall not apply to a transaction on which :

a. tax is deductible under any of the provisions of this Act; and
b. tax is collectable under the provisions of section 206C other than a transaction to which subsection (1H) of section 206C applies.’.

Explanatory Memorandum for Section 194Q

Tax Deduction at Source (TDS) on purchase of goods Chapter XVIIB of the Act relates to the deduction of tax at source. The provisions of this chapter provide for TDS on various payments at rates contained therein. It is proposed to provide for TDS by the person responsible for paying any sum to any resident for the purchase of goods. The rate of TDS is kept very low at 0.1%.

To ensure that compliance burden is only on those who can comply with it, it is proposed that the tax is only required to be deducted by those people (i.e. buyer) 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 purchase of goods is carried out. The Central Government is proposed to be empowered by notification in the Official Gazette to exempt a person from the obligation under this section on fulfilment of conditions as may be specified in that notification.

Tax is required to be deducted by such person if the purchase of goods by him from the seller is of the value or aggregate of such value exceeding fifty lakh rupees in the previous year. It is also proposed to provide that the provisions of this section shall not apply to,-

 

(i) a transaction on which tax is deductible under any provision of the Act; and

(ii) a transaction, on which tax is collectable under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.

This means, if on a transaction a TDS or tax collection at source (TCS) is required to be carried out under any other provision, then it would not be subjected to TDS under this section. There is one exception to this general rule. If on a transaction, TCS is required under sub-section (1H) of section 206C as well as TDS under this section, then on that transaction only TDS under this section shall be carried out.

After Reading the Plain Text of both the above sections the following are some of the pain points of many organizations.

I. Related to section 206 (1H): (Assuming that buyer and Seller in Compliance of Threshold)

a) What in case there are multiple locations of the Buyer: In this case, we need to keep track manually (because section applies on PAN based and not Location based) on some sheet and once the Limit of Rs. 50 Lacs is over, the TCS will be recovered by way of Debit Note
on Collection exceeding Rs. 50 Lacs.

b) What in case there are Advances from multiple locations of Buyer: Same as above

c) What in case there are Sales to one buyer from Multiple Location of Seller: Again here we need to keep a track on a sheet for all the supplies made from multiple locations of Seller to one buyer.

d) What in case there are Advances received from one buyer for Multiple Location of Seller for various Product Lines: Same as explained in Point No. 3

e) What in case the sales to Buyer is from Multiple Location of Seller to Multiple Location of Buyer: In this case, Buyer and Seller need to have a meeting/ understand how the process will flow else there will be a chance of errors in the collection of TCS.

f) Lastly tracking of TCS collected on Advances to offset against the Sales done in the same financial year and in the next financial year is a task in itself.

II. Related to Section 194Q

a. What in case Buyer has crossed Threshold under section 194Q and Seller has crossed threshold under section 206C (1H).: In my opinion, in that case Buyer will have to apply 194Q and 206C (1H) will not apply.

b. What in case Buyer has bought from the seller for multiple location and the seller is not below the threshold of 206C (1H): In that case, the buyer will have to prepare tracking sheet and once the amount goes beyond Rs. 50 Lacs, the buyer will have to pay TDS.

c. What in case the seller has multiple location and buyer has one location and Seller has crossed the threshold of Section 206C (1H): In my opinion In that case Section 194Q will apply.

d. What in case Seller has multiple Location and buyer has also multiple locations: In that case, both will have to keep tracking and in case both have crossed threshold under 206C 1H and 194Q respectively, section 194Q will apply.

III. General Questions for MSME

Most MSMEs do not have such softwares where it will track threshold as well as collection or payment beyond a particular limit, it will be difficult to comply with the TDS or TCS requirement. Some of the Sellers have already started charging TCS irrespective of whether the buyer has bought more than 50 Lacs or not. In such cased since 194Q prevails over Section 206 C(1H), the buyer will also deduct TDS and Seller will also collect TCS. This will lead to Tax collection twice, one by way of TCS and one by way of TDS.

Conclusion

Although the purpose and motive are welcome as it will help in tracking transactions that are not routed through the channel of GST as well as it will help in curb the transaction where the Transaction is moved out of books of account, the care to be taken that there should be no hardship to genuine taxpayers. The major transactions are covered in 206C (1H ) and those which are not tracked by Section 206 C (1H) will be covered by Section 194 Q which will be applicable from 01/07/2021. Proper Training or guidance note from various authorities will help Industries to account for transactions in a proper manner as both the section will work simultaneously and there will be permutation and combination of transaction based on Threshold applicable to various Buyers and Sellers and changes that they will have to carry out in their present system. There are certain provisions for disallowance of expenses and a higher rate of TCS/TDS are not considered above while explaining the provisions.

Disclaimer: Compiled from various Books and resources. The above is compiled from various books. Although due care is taken, it is prepared for general knowledge purpose and not for specific use. The readers are advised to take proper note of the same and advised to take specific advice before acting on the same. One should not act upon the information contained in this newsletter without obtaining specific professional advice. Further, no representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this newsletter.

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