Plugging the new TDS/TCS provisions proposed by the Finance Bill, 2021
The Union Budget 2021 was tabled on 1 February 2021 by the Hon'ble Finance Minister Nirmala Sitharaman.
Laying a vision for AtmaNirbharBharat, the Hon'ble Finance Minister has rested the budget proposals on six pillars – health and wellbeing, physical and financial capital and infrastructure, inclusive development for aspirational India, reinvigorating human capital, innovation and R&D, and minimum government -maximum governance. With an aim to provide the impetus for growth revival, the Budget has largely focused on aspects of key areas such as healthcare improvement, infrastructure boost, supports for the MSMEs, skill development, etc.
On the direct tax landscape, various proposals such as setting up the Dispute Resolution Committee, relief to senior citizens, further measures to facilitate faceless tax processes, pre-filling of returns, etc., have been added to simplify the tax administration, ease compliance, and reduce litigation. Furthermore, in line with the overall objectives as envisioned in the pillars, measures for attracting foreign investment to the infrastructure sector, affordable housing/rental housing, tax incentives to International Finance Service Centres, and start-ups have been announced. Furthermore, to increase the tax base and plug non-filers, several measures have been announced. The overview and details of the amended/ new provisions of the Tax Deduction at Source (TDS)/Tax Collection at Source (TCS) proposed in the Income-tax Act, 1961 (ITA) by the Finance Bill 2021 are -
Insertion of the new provision for tax deduction on the purchase of goods – Section 194Q
- A new provision for withholding tax has been proposed wherein any person while making payment to a resident for purchase of goods having a value exceeding INR 5 million in the previous year is required to withhold taxes at the rate of 0.1%.
- The provisions of the proposed section shall trigger only in cases where buyer's total sales, gross receipts or turnover from the business carried on by him exceed INR 100 million during the financial year immediately preceding the financial year in which the purchase of goods is carried out.
- The above provisions would not be applicable in cases where payment is already subject to a tax deduction or tax collection under other provisions of the ITA (except TCS provisions applicable on sale of goods w.e.f. 1 October 2020).
- In the Memorandum to Finance Bill 2021, it has been stated that if on a transaction TCS is required on a sale of goods under 206C(1H) of ITA as well as TDS under this section, then only TDS under this section shall be applicable for that transaction
- If the buyer fails to furnish Permanent Account Number (PAN), then in such a case, the rate of 5% would be applicable instead of 0.1%.
- This amendment is proposed to be effective from 1 July 2021.
Higher rate of TDS/TCS on non-filer of tax returns – Section 206AB and Section 206CCA
- The existing provisions provide for higher rates of tax deduction and collection for non-furnishing of PAN. In order to ensure filing of return of income by persons who have suffered a reasonable amount of TDS/TCS, penal TDS/TCS rates have been introduced.
- As per these provisions, any person making a payment or receiving any sum from a specified person will be required to deduct/collect taxes at a rate twice the rate of tax deduction/collection at source or 5%, whichever is higher.
- Specified person means any person who has not filed the return of income for the last two years preceding the financial year in which tax is required to be deducted/ collected, and the tax deducted/collected is INR 50,000 or more in each of the two preceding years.
- These provisions are not applicable to a non-resident not having a permanent establishment in India. Further, these provisions are not applicable when income is required to be deducted for payments in the nature of salary income, lottery or crossword puzzles, winnings from race-horses, investment in securitization trust, and cash withdrawals in excess of a specified limit.
- This amendment is proposed to be effective from 1 July 2021.
Exemption to business trusts and other notified persons from withholding tax on dividends
- Section 194 of the ITA provides for deduction of tax at source on payment of dividends to a resident. There is an exception provided to this rule to companies engaged in the business of life and general insurance subject to certain conditions.
- It is proposed to amend the provisions to extend the exemption to dividend credited or paid to business trusts by special purpose vehicles or the dividend paid to any other person as may be notified.
- The amendment is proposed to be effective from 1 April 2020.
Rationalization of the provision concerning withholding on payment made to Foreign Institutional Investors (FIIs)
- Under the existing provisions of the ITA, payments to FIIs (other than interest on Rupee Denominated Bonds and Government Securities) attracts WHT at a flat rate of 20% without grant of any Treaty Benefits resulting in FIIs having to file refund claims under the ITA.
- With effect from the financial year 2021-22, FIIs will be eligible to claim treaty benefits to lower the WHT, if applicable, subject to the FIIs furnishing a Tax Residency Certificate to the payer.
- This amendment will take effect from 1 April 2021.
Rationalization of provisions of Equalization Levy
- Equalization levy on e-commerce supply or services was introduced in Finance Act, 2020, whereby income from such transaction was charged to tax and an exemption was provided for income received after 1 April 2021.
- The above brought about an anomaly in the taxability of such transactions.
- In order to remove the anomaly, it is now proposed that exemption from e-commerce supply or services shall be applicable for income received on or after 1 April 2020.
- Furthermore, it has been clarified that transactions that are subject to tax as royalty or fees for technical services will not be covered within the scope of the Equalization Levy.
The above amendments proposed in the Finance Bill 2021, leave no room for non-compliance for the taxpayer. Even the transaction (i.e., purchase of goods), which was earlier out of the ambit of withholding tax provisions, is now within the range of TDS. Also, with the insertion of section 206AB and 206CCA relating to higher TDS/TCS for non-filers of the tax return, the revenue authorities want to take complete control so that the taxpayer base widens and more individuals are tax compliant. These amendments would help the revenue authorities to keep an effective audit trail of the transaction. The other amendments relating to Equalization Levy and FIIs are a welcome move to remove anomaly and undue hardship.