Synopsis: The Income Tax Department expands the scope of Tax Collected at Source (TCS) provisions by introducing three new provisions, effective 1 October 2020.
From 1 October 2020, a new Tax Collected at Source (TCS) regime comes into effect, as notified by the Income Tax Department. The Finance Act, 2020 adds section 194-O to the Income Tax Act, 1961 to incorporate the new provisions.
New Tax Collected at Source (TCS) Provisions
There are 3 new TCS provisions, effective from 1 October 2020. They are explained below:
#1 TCS on Foreign Remittances
Under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI), foreign remittance amount exceeding Rs. 7 lakh in a Financial Year (FY) attracts 5% TCS. However, foreign remittances for paying education loan attracts a restricted TCS of 0.5% in a Financial Year.
Foreign remittances under the LRS-RBI scheme includes both personal and business transactions such as foreign investments, NRI loans, property purchase, business trips, employment visits, donation, medical treatment, maintenance of family members, and gifts.
The LRS-RBI scheme caps the foreign remittances at $250,000 per FY. eCommerce purchases on international platforms using credit cards finds a mention in the new Tax Collected at Source provision.
After the crossing of the Rs. 7 lakh foreign remittance threshold, the banker applies and collects the TCS, and credits it with the government.
#2 TCS on Overseas Tour Packages
Irrespective of the amount of overseas tour package, a 5% TCS is applicable. There is no maximum threshold.
#3 TCS on Sale of Goods
A 0.1% TCS is applicable to sales of goods above Rs. 50 lakh in a year.
However, to ease the burden on sellers, the new Tax Collected at Source provision is applicable to those sellers whose turnover exceeds Rs. 10 crores in the last financial year. For example, if the seller is eligible to collect TCS, and has received Rs. 2 crores before 1 October 2020 and Rs. 10 lakh after the mentioned date, the TCS would be collected on only Rs. 2 crore + Rs. 10 lakh = Rs. 2.10 crore – Rs. 50 lakh (minimum threshold value) = Rs. 1.6 crore.
The 0.1% TCS provision is not applicable to export of goods.
Clarification on New TCS Provisions
Taxpayers took to social media to raise doubts about the new TCS provisions after the announcement by Finance Minister, Nirmala Sitharaman. The Ministry of Finance took cognisance of the doubts and released clarifications.
EY and SAP India conducted a survey in September 2020 of 110 corporate businesses to measure their readiness in implementing the new TCS regime. The survey found that 85% of the respondents stated that their current taxation framework is not equipped to comply with the new TCS regime. The survey measured corporate readiness in term of validations, compliances, and account reconciliations.