Analysis of TCS provisions regarding Sale of Goods and Provisions of Service effective from 01-06-2016

TCS provisions have been made applicable to all the goods and services wef 01-06-2016. While the provisions are intended to frame a system of reporting high value transactions to curb black money, the law framed by the parliament in this regard is plagued by number of doubts and issues which can clog the very implementation of provisions. The author has made a humble attempt to consolidate the issues involved in this taxation as under:

Relevant TCS provisions

As per Section 206C(1D) amended wef  01-06-2016,

Every person, being a seller, who receives any amount in cash as consideration for sale of bullion or jewellery or any other goods (other than bullion or jewellery or providing any service, shall, at the time of receipt of such amount in cash, collect from the buyer, a sum equal to one per cent of sale consideration as income-tax, if such consideration,—

(i)                for bullion, exceeds two hundred thousand rupees; or

(ii)             for jewellery, exceeds five hundred thousand rupees;or

(iii)           for any goods, other than those referred to in clauses (i) and (ii), or any service, exceeds two hundred thousand rupees

Provided that no tax shall be collected at source under this sub-section on any amount on which tax has been deducted by the payer under Chapter XVII-B

(1E)   Nothing contained in sub-section (1D) in relation to sale of any goods (other than bullion or jewellery) or providing any service shall apply to such class of buyers who fulfil such conditions, as may be prescribed

Explanation.—For the purposes of this section-

(aa) buyer" with respect to—

(i)                 sub-section (1) means a person who obtains in any sale, by way of auction, tender or any other mode, goods of the nature specified in the Table in sub-section (1) or the right to receive any such goods but does not include,—

(A)   a public sector company, the Central Government, a State Government, and an embassy, a High Commission, legation, commission, consulate and the trade representation, of a foreign State and a club; or

(B)   a buyer in the retail sale of such goods purchased by him for personal consumption;

(ii)               sub-section (1D) or sub-section (1F) means a person who obtains in any sale, goods of the nature specified in the said sub-section;

(c )    seller" means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or co-operative society and also includes an individual or a Hindu undivided family whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which the goods of the nature specified in the Table in sub-section (1) or sub-section (1D)] are sold or services referred to in sub-section (1D) are provided

Analysis

Persons who are required to collect TCS as “Seller” are:

a)     Central Government,

b)     a State Government or

c)      any local authority or

d)    corporation or authority established by or under a Central, State or Provincial Act, or

e)      any company or

f)      firm or

g)    co-operative society and also includes

h)    An individual or a Hindu undivided family whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year

Persons not covered:

a)     Individual carrying on business whose  turnover u/s 44AB(a) is less than or equal to One crore for immediately preceding financial year or

b)    Individual carrying on profession whose turnover u/s 44AB(b)

i)       For the purpose of Financial year 2016-17, whose gross receipts is less than or equal to 25 lacs for immediately preceding financial year 2015-16

ii) For Financial Year 2017-18 and onwards, whose gross receipts is less than or equal to 50 lacs for immediately preceding financial year 2016-17 and onwards

c)     HUF carrying on business whose  turnover u/s 44AB(a) is less than or equal to One crore for immediately preceding financial year or

d)    HUF carrying on profession whose turnover u/s 44AB(b)

i)       For the purpose of Financial year 2016-17, whose gross receipts is less than or equal to 25 lacs for immediately preceding financial year 2015-16

ii) For Financial Year 2017-18 and onwards, whose gross receipts is less than or equal to 50 lacs for immediately preceding financial year 2016-17 and onwards

e)     AOP, whether incorporated or not

f)      Body of Individuals, whether incorporated or not

g)    Society registered under Societies registration Act. Wholly for charitable or religious purposes even if carrying on business which is incidental to the objects of the Society

h)    Trust,  not being section 25 company, Wholly for charitable or religious purposes even if carrying on business which is incidental to the objects of the trust

i)       Association or Institution entitled to exemption u/s 10.

j)       Club

Scope of Transactions Covered

As per S.206C(ID) TCS is applicable to Seller who receives any amount in cash as consideration for :

a)     Sale of Goods or

b)    Provision of Service

Issues Involved:

1.           Whether TCS applicable to full Sale Consideration or Consideration received in cash for Sale of Goods or Provisions of Service

The Principal issue involved is whether TCS is to be collected on:

a)      The amount of cash received only or

b)    The full amount of sale consideration where any amount is received in cash as consideration for Sale

Opinion:

Finance Minister’s Budget Speech (para 149 of the Budget Speech)

149. I also propose to collect tax at source at the rate of 1% on purchase of luxury cars exceeding value of Rs.ten lakh and purchase of goods and services in cash exceeding Rs.two lakh. For compliant tax payers with resources, this levy not only advances collection of tax when the expenditure is incurred, but it provides data to the tax authorities to identify the persons who incur such expenditure, but may be missing from the tax base. Farmers and notified class of persons will have an option of giving a form by which TCS will not be charged.

Memorandum Explaining the provisions of Finance Bill 2016

The existing provision of section 206C of the Act, inter alia, provides that the seller shall collect tax at source at specified rate from the buyer at the time of sale of specified items such as alcoholic liquor for human consumption, tendu leaves, scrap, mineral being coal or lignite or iron ore, bullion etc. in cash exceeding two lakh rupees.

In order to reduce the quantum of cash transaction in sale of any goods and services and for curbing the flow of unaccounted money in the trading system and to bring high value transactions within the tax net, it is proposed to amend the aforesaid section to provide that the seller shall collect the tax at the rate of one per cent from the purchaser on sale of motor vehicle of the value exceeding ten lakh rupees and sale in cash of any goods (other than bullion and jewellery), or providing of any services (other than payments on which tax is deducted at source under Chapter XVII-B) exceeding two lakh rupees.

It is also proposed to provide that the sub-section (1D) relating to TCS in relation to sale of any goods (other than bullion and jewellery) or services shall not apply to certain class of buyers who fulfil such conditions as may be prescribed.

This amendment will take effect from 1st June, 2016.

Section 206C(1D)

Every person, being a seller, who receives any amount in cash as consideration for sale of bullion or jewellery or any other goods (other than bullion or jewellery or providing any service, shall, at the time of receipt of such amount in cash, collect from the buyer, a sum equal to one per cent of sale consideration

Hence

a)     As per Memorandum explaining provision of Finance bill 2016, TCS @1% is applicable to sale in cash of any goods exceeding two lakh rupees.

b)    However as per express provisions of S.206C (1D), TCS is collected @ 1% of Sale Consideration for receipt of any amount in cash as consideration for sale of goods.

So, there appears to be a contradiction with in the provisions of law and memorandum explaining provisions of finance bill. While as per Memorandum explaining finance bill and FM’s Speech, TCS is applicable only on cash sale of goods for sum exceeding Rs. 2 lacs, the express provisions provide that even if a paltry amount against sale exceeding Rs. 2 lacs is received in cash, the entire sale consideration to be brought under TCS net and not to be restrained to the amount of cash receipt.

                  

2.           Whether TCS is applicable to sale or provision of services made before 01-06-2015

The point of taxation for TCS on sale of goods or provision of service is

“the time of receipt of such amount in cash” and not Sale of Goods

Hence ,If sale consideration amount is outstanding on 31-05-2016, and any amount is received there after in cash , the assessee is liable to pay tax on the amout recived after 31-05-2016 in respect of transactions executed before 31-05-2016. However, another incidental issue involved is :

a)     Whether only the amount received in cash after 31-05-2016 out of outstanding balance on 31-05-2016 shall be exigible to TCS or

b)    Whether the entire amount of consideration excluding the amount received before 01-06-2015  become exigible to TCS

Opinion

As per Section 206C(ID):

“Every person, being a seller, who receives any amount in cash as consideration for sale of bullion or jewellery or any other goods (other than bullion or jewellery or providing any service, shall, at the time of receipt of such amount in cash, collect from the buyer, a sum equal to one per cent of sale consideration as income-tax”

TCS to be collected on 1% of sale consideration and not amount in cash as consideration for sale of goods. Hence, TCS might apply on entire sum reducing the amount received before 01-06-2016.

3.           Whether TCS is applicable where both sale of goods and provision of service is involved i.e. in the case of works contract

As per Section 206C(ID), TCS is applicable on sale of goods or provision of service. However, where both sale of goods and provision of service is involved, an issue arises that whether  TCS provisions u/s 206C(ID) shall become applicable.

Opinion

As per Article 366(29A), transfer of property in goods in case of works contract is deemed as sale. Further as per Section 66E(b) and 66E(h), service portion is declared service in case of works contract. Hence TCS shall become applicable to works contract also. However the matter needs clarification by legislature.

4    Whether 1% TCS to be collected on the amount of Vat and Excise Duty Charged.

Opinion

The word sale consideration is not defined under Income Tax Law but as per Section 145A,
“…….the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation

………..”

Hence TCS to be charged on full amount of sale consideration. Taxes, Duties, Cess or fee can not be segregated. The word  “Sale Consideration” can not be equated with “Gross Turnover” u/s 44AB , where in refundable taxes are required to be excluded.

4.           Whether TCS is applicable to amount of advance received in cash:

The Definition of buyer under Explanation to Section 206C, specifically  includes “right to receive” for the purposes of 206C(1), however for 206C(1D), it is missing. So, when advance is paid by the buyer towards right to receive the goods, whether TCS provisions can be applied

Opinion:

The matter requires clarification. If such a version is adopted, the assesses might resort to the policy of receiving entire sum as advance in cash. There by defeating the purpose of introducing the provisions.

5.           Whether TCS is applicable where payment is made through bearer cheque.

Opinion: Since TCS is applicable only to receipt of cash as consideration for sale, TCS provisions u/s 206C(1D) shall not apply where payment is received through bearer cheque

6.           Whether TCS is applicable where goods are exchanged under Barter System [say Jewellery is exchanged for bullion]

Opinion: Since TCS is applicable only to receipt of cash as consideration for sale, TCS provisions u/s 206C(1D) shall not apply where payment is received through exchange of goods.

7.           Whether TCS provisions under section 206C(1D) also cover the goods or services covered by other provisions.

As per Section 206C(1) for alcoholic liquor for human consumption, tendu leaves, timber, forest products, scrap, coal, lignite or iron ore,

and as per S.206C(1C), for parking lot, toll plaza and mining and quarrying,  TCS is applicable at the time of debit of amount to the account of  buyer or receipt of amount in cash or cheque or draft or any other mode, which ever is earlier.

At the same time 206C(1D) is applicable to receipt of any amount in cash as consideration for sale of goods or provision of service.

The issue that arises is that whether 206C(ID) can result in Duplication of levy in respect of goods or services covered by other provisions.

Opinion

One may follow the Latin Maxim Generalia Specialibus Non Derogant i.e. the provisions of a general statute must yield to those of a special one. But the matter should have been clarified by the legislature instead of leaving the taxpayer to the mercy of tax officials.

8.           Whether TCS is applicable where buyer or seller or both are non residents

Opinion: Section 206C does not put any embargo upon transactions with non residents.

But in case of import of goods, where seller is non resident, the provisions of the Act can not be extended beyond India. Further, it the seller who is liable to collect tax and not the resident buyer.

In case of export of goods, where buyer is non resident, enforcing deposit of tax on behalf of buyer who has no income chargeable to tax in India can not be sustained in the Court of law, because TCS is tax collected  and paid on behalf of buyer. Further as per Section 9, where operations of non resident are confined to procurement of goods in India, no Income can be deemed to have accrued or arisen in India.

9.           Whether TCS is applicable to transactions between two residents where Sale of Goods is in Course of Import i.e. High Sea Sales.

Opinion

High Sea Sales take place before the goods cross the Custom Frontiers of India. Although the Income Tax Act does not extend beyond India and the word “India” is defined u/s 2(25A) as

India" means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976), and the air space above its territory and territorial waters

                        However Section 206C(ID) does not place any embargo upon such transactions and hence shall be covered by TCS

Conclusion: Section 206C(ID) as introduced by Finance Act 2016 and to be implemented from 01-06-2016 requires clarification on number of issues discussed here in above. The better sense of wisdom demands that issues which can pest the large number of tax payers be resolved before  launching the avalanche of enigma.