Budget Provisions relating to Amendments in TDS/TCS Provisions

1. Interplay Between Section 44AB Turnover Limit and Individual/HUF TDS Obligations

In the budget, it is proposed to increase the turnover limit for Tax Audit under section 44AB of the Income Tax Act, 1961 for business assessees to Rs. 5 crore from existing Rs. 1 crore, subject to compliance of certain conditions. On such amendment, the TDS deduction provisions effective on Individuals and HUF under existing some of the Sections 194A, 194C, 194H, 194I and 194J would have got relief as they will not be liable to get their accounts audited and hence, exempted from the provisions of TDS deduction.

To continue their deduction of tax, it has been proposed in the Finance Bill that the TDS provisions would be applicable to Individuals and HUF, whose turnover from business exceeds Rs. 1 crore or gross receipts from profession exceeds Rs. 50 lakhs. The relaxation for non-deduction of TDS under the enumerated Sections shall only be available to such Individuals and HUF whose turnover from business does not exceed Rs. 1 crore or gross receipts from profession does not exceed Rs. 50 lakhs effective from 1st April, 2020.

The quoting and authentication of PAN/Aadhaar is mandatory for certain prescribed transactions and also mentioning them correctly in the Returns. To ensure proper compliances of the law, the relevant penalty provisions are amended to punish such non-compliers.

2. Master Summary of Proposed TDS/TCS Amendments (Effective 1st April, 2020)

These amendments for TDS/TCS deductions that are proposed to take effect from 1st April, 2020, have been summarised in tabulated form as under:

Note: The provisions of TCS are not applicable in a case where remitter/buyer has deducted TDS under any provisions of the Income Tax Act, 1961.

3. Detailed Analysis of TDS Provisions Effective 1st April, 2020

Section 192: TDS on Salary – Deferral of Perquisite Tax on ESOPs for Start-ups

There has been a long outstanding demand of the trade to allow deduction of tax on perquisites granted by way of Employee Stock Ownership Plan (ESOP’s) in the year in which the shares are sold as at the time of exercising the option, the employees were not getting actual cash making it difficult for them to pay additional tax. It is now addressed to some extent by allowing this to eligible start-ups referred in Section 80-IAC.

For TDS on ESOPs given by such Start-ups, it is now proposed that from the financial year commencing on or after 1st April, 2021, they shall deduct or pay as the case may be tax within 14 days:

1. After the expiry of forty-eight months from the end of the relevant assessment year; or
2. From the date of the sale of such specified security or sweat equity share by the assessee; or
3. From the date of the assessee ceasing to be the employee of the person;

whichever is the earliest, on the basis of rates in force for the financial year in which the said specified security or sweat equity share is allotted or transferred by eligible start-up referred to in Section 80-IAC.

This is a welcome move by the Government as now the employees will not have to shell out tax on exercising the said option, but now it has given the time to them to pay the taxes on these perquisites. The Government should make this applicable to all types of companies.

Section 194: TDS on Dividends

Presently, the Domestic Company declaring the dividend pays the Dividend Distribution Tax and the dividend received by the recipient does not have to pay any additional tax, exceptionally where recipient’s dividend income exceeds Rs. 10 lakhs. Since the income received by the recipient exempted under section 10(34) stands withdrawn and proposed to tax dividend in the hands of the recipient effective from 1st April, 2020, there was no liability for deduction of TDS under the old regime.

Section 194 has been made effective and accordingly, payment of dividend by body-corporate to resident recipients shall be liable for tax deduction at the rate of 10% for sums paid by any mode, with a non-requirement of deduction of TDS if such aggregated dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed Rs. 5,000. The exemption is given to the LIC, GIC and their wholly owned subsidiaries; they shall not be liable for TDS. The proposed amendment will now make dividend recipients pay tax at the applicable rates on such income.

Section 194A: TDS on Interest by Co-operative Societies

The amendment proposed in Section 194A is to withdraw the TDS deduction exemption given to the interest paid/credited by certain co-operative society (other than a co-operative bank) to a member or to income credited or paid by a co-operative society to any other co-operative society. Accordingly, it is proposed to amend sub-section (3) and insert a proviso to provide that a co-operative society referred to in clause (v) or clause (viia) of said sub-section (3) shall be liable to deduct income-tax in accordance with the provisions of sub-section (1), if:

1. The total sales, gross receipts or turnover of the co-operative society exceeds fifty crore rupees during the financial year immediately preceding the financial year in which the interest referred to in sub-section (1) is credited or paid; and
2. The amount of interest, or the aggregate of the amount of such interest, credited or paid, or is likely to be credited or paid, during the financial year is more than fifty thousand rupees in case of payee being a senior citizen and forty thousand rupees, in any other case.

Section 194C: TDS on Contractors – Expanding Definition of ‘Work’ to Raw Materials

Section 194C proposes to expand the scope of deduction of TDS on certain contracts by amending the definition of “Work” to include the cost of material in the contract price for deduction of TDS under this Section.

Clause (iv) of the Explanation of the said section defines “work”. Sub-clause (e) of this definition includes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer within the definition. At present it excludes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

The amendment is proposed to the definition of “work” defined under section 194C to provide that in contract manufacturing, the cost of the raw material used shall be included within the purview of “work” if purchased from an associate/related party. The reason given for this is that some assessees are using the escape clause of the section by getting the contract manufacturers to procure the raw material supplied through its related parties, associates and the tax is being deducted at lower amount.

Section 194J: TDS on Fees for Professional or Technical Services – Reduction to 2%

The amendment in Section 194J has been proposed to reduce the rate of deduction of tax at source on fees paid for technical services at a concessional rate of 2% instead of 10%. Presently, there are lot of litigations at various forums of Appeals for treating the sums as contract or professional fees, due to difference of opinion of the Deductor and the Tax Officer, treating the assessee as Assessee in default. Such assessees will now get relaxation due to amendment of this provision of deduction of TDS at the rate of 2% on fees for technical services. The TDS rate in other than technical fees under section 194J would remain the same at the rate of 10%.

However, it seems that the proposed amendment may open another Pandora’s box for litigation for the payments made by the Deductor being classified as fees for technical services (2%) and Assessing Officer considering it as Professional Services (10%). It is better that the services to be included in technical fees be properly clarified in the Finance Act or Rules for better purpose of this amendment.

Section 194K: TDS on Income in Respect of Units of Mutual Funds

The said provisions were omitted by Finance Act, 2016 and now the same is proposed to be reintroduced. TDS at the rate of 10% at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, by any person responsible for paying to a resident any income, is required to be deducted in respect of:

• Units of a Mutual Fund specified under section 10(23D); or
• Units from the Administrator of the specified undertaking; or
• Units from the specified company;

provided the income paid does not exceed Rs. 5,000 in the financial year. It is also clarified subsequently that the intention of the Government is to deduct TDS only on the income declared on the units of the Mutual Funds and not on the Capital Gains on sale.

Section 194O: Comprehensive TDS Mechanism on e-Commerce Transactions

The aforesaid Section is proposed in the Finance Bill, 2020 to widen and deepen the tax net by bringing participants of e-commerce within the tax net. A new levy of TDS at the rate of one per cent (1%) is to be deducted on the gross amount of such sales or service or both at the time of payment thereof to such participant by any mode, whichever is earlier:

• TDS is to be paid by e-commerce operator for sale of goods or provision of service facilitated by it through its digital or electronic facility or platform.
• E-commerce operator is required to deduct tax at the time of credit of amount of sale or service or both to the account of e-commerce participant.
• Any payment made by a purchaser of goods or recipient of services directly to an e-commerce participant shall be deemed to be amount credited or paid by the e-commerce operator to the e-commerce participant and shall be included in the gross amount of such sales or services for the purpose of deduction of income-tax.
• Exemption for Individual / HUF: The sum credited or paid to an e-commerce participant (being an individual or HUF) by the e-commerce operator shall not be subjected to provision of this section, if the gross amount of sales or services or both of such individual or HUF, through e-commerce operator, during the previous year does not exceed Rs. 5 lakhs and such e-commerce participant has furnished his PAN/Aadhaar to the e-commerce operator.
• Exclusivity: A transaction in which tax has been deducted by the e-commerce operator under this section or which is not liable to deduction under the exemption then there shall not be further liability on that transaction for TDS under any other provision of Chapter XVII-B of the Act.

If the TDS is liable for deduction under any other Section then it is not required to be deducted. This exemption will not apply to any amount received or receivable by an e-commerce operator for hosting advertisements or providing any other services which are not in connection with the sale of goods or services referred to in sub-section (1). The consequential amendments are also being proposed in Section 197 (for lower TDS), in Section 204 (to define person responsible for paying any sum) and in Section 206AA (to provide for tax deduction at 5% in non-PAN/Aadhaar cases).

4. Provisions Relating to Collection of Tax at Source (TCS) Effective 1st April, 2020

Section 206C of the Act provides for the collection of tax at source (TCS) on business of trading in alcohol, liquor, forest produce, scrap etc. Sub-section (1) provides that every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount, collect from the buyer a sum equal to specified percentage as income-tax.

The basic intention of the Government seems to plug the loophole of unaccounted money in foreign travel. Since the foreign remittances are already available on record through Form 15CA/15CB for making foreign remittances, they can easily be reconciled with the income disclosed in the Return of Income filed. The introduction of this Section will create hardship to genuine remitters on account of education and medical purposes.

Clause (1G) of Section 206C: TCS on LRS and Overseas Tour Packages

• Authorised Dealers under LRS: An authorised dealer receiving an amount or an aggregate of amounts of Rs. 7 lakhs or more in a Financial Year for remittance out of India under the Liberalised Remittance Scheme (LRS) of RBI, shall be liable to collect TCS if he receives a sum in excess of said amount from a buyer at 5% (and 10% in non-PAN/Aadhaar cases).
• Overseas Tour Program Package: A seller of an overseas tour program package who receives any amount from any buyer shall be liable to collect TCS at the rate of 5% (and 10% in non-PAN/Aadhaar cases).
• Exclusions: The above TCS provision shall not apply if the buyer is liable to deduct tax at source under any other provision of the Act and has deducted such amount. Central, State and certain other authorities are exempted.

Clause (1H) of Section 206C: TCS on Sale of Goods over Specified Limit

It is also proposed to amend Section 206C to levy TCS on sale of goods above specified limit, provided following conditions are satisfied:

1. Sale consideration received from a buyer in a previous year in excess of Rs. 50 lakhs, and seller whose gross receipts, total sales or turnover from business exceeds 10 crores during the preceding financial year.
2. A seller of goods to collect TCS at the rate of 0.1% (1% in non-PAN/Aadhaar cases).

However, the Central and State Government, an embassy, a High Commission, legation, commission, consulate, the trade representation of a foreign state, a local authority or any other person notified by Central Government shall be exempted. Furthermore, if the seller is liable to collect TCS under other provisions of Section 206C or the buyer is liable to deduct TDS under any provision and has deducted such amount, they shall be exempted.

Critical View: Since all the dealers proposed to be covered are already liable for GST, the details and information are readily available; this information could be directly taken from CBIC and unwarranted compliance provisions could have been avoided.

5. Other Amendments to TDS Provisions with Effective Dates

• Section 194LBA: Concessional deduction of tax at 5% on distributed income paid to non-residents (not being a company) by business trusts is increased to 10% (Effective AY 2021-22).
• Section 194LC: Concessional TDS rate of 5% on interest paid to non-residents extended to 01.07.2023 (from 01.07.2020). TDS rate reduced to 4% on interest payments against long-term bonds and RDB listed on recognized stock exchanges in any IFSC. Concessional rate of 5% also extended to interest payable to FII/QFI in respect of investments made in municipal debt securities (Effective AY 2021-22).
• Section 194N: For TDS @ 2% by banks on cash withdrawals exceeding Rs. 1 crore, the Central Government may notify exempt persons in consultation with RBI.
• Section 195: For non-resident interest payments by Government/public sector banks/public financial institutions, TDS is amended to be deducted at the time of crediting the interest in the books of account (earlier actual payment). Exemption for Section 115-O dividend is deleted (Effective AY 2021-22).
• Section 196A: Revives applicability of TDS on income in respect of units of Mutual Funds and substitutes “of the Unit Trust of India” with “from the specified company” (Effective AY 2021-22).
• Section 196C & Section 196D: Amended to remove exclusion provided to dividend under Section 115-O and include payments by any mode (Effective AY 2021-22).
• Section 201: Extra time provided for passing an Order treating a person as an assessee in default when a correction statement is filed (aimed at prevention of fraud).
• Section 204: Clause (v) expanded to include non-residents, their authorized persons, or agents in India under Section 163 to establish accountability for non-deduction or short-deduction.

6. Procedural Changes Relating to Filing of TDS Returns

1. Enhanced 194A Reporting: In TDS Returns, deductors will now be required to report all payments made under Section 194A wherein tax has been deducted, not deducted due to submission of declarations (Form 15G/15H), or payments below the statutory threshold exemption limits.
2. Online Certificates for Non-Residents: Introduction of online filing of application by persons making payments to non-residents seeking determination of appropriate tax to be deducted at source.