OCTOBER 10, 2020

By Jigar Doshi & Sagar Shah

TAX Collected at Source or TCS is not a new concept in the Indian taxation scenario. It has been around for quite some time now; however, recently the Central Board of Direct Taxes or CBDT has widened the scope or net of TCS to include virtually all goods beyond the threshold prescribed. The Finance Act, 2020 inserted sub-section (1H) in Section 206C of the Income Tax Act, 1961 for collection of TCS. Section 206C already covers certain items on which TCS was stipulated, the newly inserted sub-section (1H) now covers all remaining goods and prescribes the following:

- A seller of goods is liable to collect TCS from buyer on sale of any goods;

- Turnover of seller is more than Rs. 10 Crores in preceding financial year;

- TCS to be collected if the Value/Aggregate Value received for Goods from a buyer is more than Rs. 50 Lakhs in a financial year;

- TCS to be collected on total Sale Value received;

- Rate of TCS is 0.1%, if PAN of buyer is available [1% if PAN not Available]

TCS was first introduced in 1995. The constitutional validity of the said section has also been challenged in the court of law.

In the case of Union of India Vs. Sanyasi Rao - 2002-TIOL-679-SC-IT-LB, the constitutional validity of Section 206C of the Income Tax Act, 1961 was upheld. The Supreme Court in the said case noted that the Section 206C was to enable the Government to collect tax dues from a person carrying on specific activities where it is difficult for the Government to trace the transactions. Therefore, to prevent tax evasion, the said Section has been brought into effect so that such transactions are taxed at the inception level itself. The section is only a machinery section and not a charging section.

The Supreme Court in the case of JCTO vs Spencer & Co. Ltd. held that a seller is a collector on behalf of the Government and the amount collected by him cannot be a part of his turnover. In the said case, the seller of foreign liquor was required to collect a sales tax at notified rate from the purchaser and pay over to the Government.

Thus, Courts have established that a supplier merely facilitates collection of TCS on behalf of the Government and the same is only a machinery provision.

Top 4 question on TCS from GST perspective

Although, TCS is an Income Tax levy, this article aims to focus on the impact of this landmark amendment from GST standpoint. TCS provisions are effective in GST as well as Income Tax laws, however, one needs to bear in mind that both are different from each other. This write-up only covers the impact of Income Tax TCS provisions from GST perspective and not the TCS prescribed for E-commerce operators under GST.

Since TCS is a widely applicable reform and affects all assesses whose turnover exceeds 10 crores, there were numerous questions with regards to the implementation of the same. We have listed below the top 4 questions which shall impact GST applicability and compliances:

1. Will TCS be calculated on GST and vice versa?

The CBDT provided a clarification to this effect. It was clarified that TCS shall be deducted on sale consideration including GST. Thus, TCS is to be deducted on total invoice value (Value of goods plus GST).

The CBIC had earlier clarified vide Circular No. 76/50/2018-GST dated 31 December 2018, that taxable value for the purposes of GST shall include the tax collected at source (TCS) amount collected under the provisions of the Income Tax Act since the value to be paid to the supplier by the buyer is inclusive of the said TCS. However, vide the 2019 corrigendum, the opposite was elucidated. It was clarified that TCS is an interim levy and does not have the character of tax. Hence, it shall not be includible for determining the value for the purpose of GST.

While the earlier clarification was for limited goods like scrap sale, tendu leaves etc., now that TCS is applicable to all goods beyond the threshold limit, the recent corrigendum comes as a respite to industry. The stand of inclusion of TCS while computing GST may not have been a justified decision as TCS is not a tax on seller, but a tax on buyer. Including the same in the turnover of seller for the purpose of computing GST would be bizarre. Section 15(2) of the CGST Act, 2017 deals with value of taxable supply and Section 15(2)(a) provides for an inclusion in respect of taxes, duties, cesses, fees, charges levied under any law other than the CGST Act, SGST Act, UTGST Act and GST (Compensation to States) Act if charged separately by the supplier. The said section provides for inclusion of taxes and duties charged separately by the supplier. However, TCS is not a levy charged by the supplier, but it is a levy on buyer collected by the supplier and paid to Revenue on behalf of the buyer. Further, the situation where TCS is collected on GST component and GST is also charged on TCS component would have resulted in double taxation.

2. Where will TCS be reflected in the E-invoice generated under GST?

E-invoicing, again a new procedural compliance, was launched by the CBIC on 1 October, 2020. One question pertaining to E-invoicing which is still unanswered is where TCS would be reflected on E-invoice generated on the portal.

Though, sample E-invoice has been released on public portal and has been enacted for taxpayers with turnover exceeding 500 crores, there has not been any clarification on which field would reflect TCS amount. An industry view is that the TCS amount could be reflected in 'Other Charges - Invoice Level' which is an optional field. The explanatory notes to this field mentions - This is other charges, if any, applicable on total invoice value. This field was added in the revised schema which was launched in July 2020. However, without any official communication from the GSTN, it is difficult to reach to a conclusion.

3. Where will TCS be reflected in E-way bill?

The next question which is imperative to be answered is whether and where TCS will be shown on E-way Bill.

E-way Bill requires total taxable value and total invoice value as mandatory fields. Invoice value in general practice includes taxable value and taxes applicable thereon. However, in case of TCS, it needs to be evaluated as to whether TCS can be included in invoice value as it has been clarified that TCS is only an interim levy and not a tax. To explain this better, let's take a numeric example:

Taxable value: 1000

GST @ 18%: 180

Total value: 1180

TCS @ 1% on total value: 11.8

Therefore would Invoice value be 1191.8 or 1180?

There are certain industry players who are reflecting TCS in other charges column and included it in invoice value. On the contrary, certain section of industry has taken a stand whereby TCS is not included in invoice value (on the premise that TCS is an interim levy and not a tax) and hence not disclosed in the E-Way Bill.

A noteworthy point here is that the invoice value on E-way bill (in case TCS is not included) may not match with the commercial invoice value (which would include TCS deduction). Consequently, the officers may question the difference. Also, in future, when E-way Bill gets auto-populated through E-invoicing portal, TCS could flow from there to E-way Bill automatically. However, one would just have to wait for some clarity from GSTN.

4. Where will TCS be reflected in GST returns?

The GSTR-3B does not have the requirement of reflecting invoice value. It only requires taxable value and tax amount. Hence, TCS on sale of goods may not affect the GSTR-3B in any manner.

However, for GSTR-1, invoice value is required to be declared. The question here is identical to the one raised above - Whether TCS should be included or not in the invoice value. This question will be answered once return for the month of October, 2020 is filed in November, 2020. One would have to look at whether the return gets validated with the difference to the extent of the TCS amount.

Conclusion

On a concluding note, it can be said that the Government has clarified the taxability part from GST perspective. However, there are some open points from procedural and compliance point of view which needs to be fixed. Clarity on these issues would help the industry while performing day to day compliances. Also, the TCS provisions are relatively new and once tested on the grounds, would lead to discovery of other practical issues around the provision.

TCS applicability and its interlinking with GST would result in an automatic data exchange between the Indirect tax and Direct tax departments. This would lead in reduced tax leakages on both fronts. A seller may have deducted TCS of a buyer who is unregistered under GST - Such cases may be picked up by the CBIC and necessary steps may be taken. Another problem which can be addressed with the provision is of fake and bogus billings which are expected to be curtailed with the help of E-invoicing and E-way bill system.

Vide steps like TCS, E-invoicing, E-way Bill, E-Governance, the Government has tightened the rope around tax evaders. For an economy as large as India, tax evasion has always been an unscrupulous devil. Nonetheless, the Government has been ardently taking measures to check circumventions and aims to achieve desired results over time.

[The authors are Jigar Doshi - Founding Partner and Sagar Shah - Associate Director at TMSL and the views are personal.]