6 minute read 31 Oct 2020
New and expanded Tax Collected at Source (TCS) regime

Are businesses prepared for the new and expanded Tax Collected at Source regime?

Rahul Patni
By Rahul Patni

EY India Digital Tax leader

Passionate about collaborating with clients in their tax transformation journeys. Active participant in professional groups & industry associations. Father of two. Love to experiment in the kitchen.

6 minute read 31 Oct 2020
Related topics Tax Tax compliance
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A recent survey conducted by EY and SAP reveals that 80% of the respondents consider technical nuances of the new Tax Collected at Source provisions and updating systems and processes as biggest challenges. 

As the world is grappling with measures to control the pandemic and its effect on every aspect of life, India Inc’s tax teams are busy preparing themselves for the evolving tax landscape. With an unprecedented pace of legislative change in the Goods and Services Tax (GST) as well as income-tax laws, ‘digital’ ways of working are fast becoming the new normal for the tax administration. Sharper focus maintained by regulatory authorities on data collection along with enhanced exchange of information between GST and income-tax authorities is setting the stage for comprehensive taxpayers profiling followed by intelligent tax assessments. 

One such measure introduced by the Finance Act, 2020, with an objective of collecting data to widen the tax net, is the expanded scope of Tax Collected Source (TCS) provisions. The measure now requires sellers of goods to collect TCS at 0.1% (lower rate of 0.075% until 31 March 2021) from buyers in all qualifying business-to-business (B2B) as well as business-to-consumer (B2C) transactions. Given the low monetary threshold of the regime, most manufacturing and trading organizations are charging TCS on sale of goods to their customers from 1 October 2020, bracing themselves for compliance and reporting activities on a monthly, quarterly and annual basis.

Based on a recent survey1 conducted by EY and SAP, 80% of the respondents consider technical nuances of the new TCS provisions and updating systems and processes as biggest challenges. The Central Board of Direct Taxes (CBDT) circular no 17/2020, issued on 29 September, has provided some welcome clarifications regarding non-applicability of TCS provisions in case of sale of specified securities, commodities and electricity. However, the circular has also included B2B and B2C sale of motor vehicles below INR10 lakh, which were specifically excluded from the scope of the earlier TCS provision covering sale of motor vehicles, thereby, taking Original Equipment Manufacturers (OEMs) by surprise. While COVID-19 has severely hit profit margins of many taxpayers, unlike other transactions covered in the TCS net, law still doesn’t provide such taxpayers an option to obtain a Lower Collection Certificate for TCS on purchase of goods.

While the tax rate of TCS is nominal, making changes in IT system, putting in place a robust framework for TCS compliance and reporting can be an arduous task. One of the biggest dilemmas business organizations are facing is whether to discharge TCS on accrual basis or on receipt basis. This is because legislators have deviated from the earlier TCS provisions which required compliance by sellers on earlier of receipt of consideration and accrual in the books, whereas the new TCS provisions, covering sale of goods, require the sellers to pay TCS on receipt of sale consideration. Therefore, organizations are busy updating their accounting packages and IT systems to ensure appropriate TCS levy on invoices, even though charging TCS on invoices is not specifically required by law. 

In doing so, organizations would be looking to set up a robust system to timely track collections from customers (including advances) for accurate liability determination. Likewise, maintaining a track of TCS collected by suppliers on the procurement side would be an added task while determining the total tax credit available for the year.

Undertaking the required validations, determining TCS liability, ensuring accurate and timely compliances, maintaining reconciliations and being audit-ready would be a humongous exercise, especially for large entities having high volume of transactions on a single day. Therefore, many organizations, unfazed by the nominal rate of TCS, are considering the need to introduce technology in TCS compliance. The recent EY-SAP survey also revealed that almost 65% of respondents recognized the need for digital intervention to automate their TCS compliance and reporting lifecycle, to keep pace with the government’s increasing use of data analytics and Intelligent Automation.

The need for maintaining reconciliations across General Ledgers financial statements, tax audit reporting as well as GST filings cannot be undermined considering regulators’ intent of widening and deepening the tax net. Thanks to the extensive use of technology by the tax administration, one can expect to receive notices to reconcile purchase and sales data as per Form 26AS, or TCS returns with financials statements and GST filings during assessments. Use of rule-based Artificial Intelligence and data analytics might make it effortless for authorities to point out inconsistencies in data collated from multiple sources. 

India Inc. now needs to be prepared to manage its working capital for this 0.1% tax, which some may argue, would increase the compliance burden. However, the justifying flipside would be the fact that only more than 1% people are paying taxes.

The article has been co-authored by Manoj Rathi, Tax Director with EY India.

How EY can help

Tax Collection at Source Module of DigiTDS

Tax Collected at Source automation solution enables businesses to gear up for the expanded TCS provisions regime by using technology.

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Summary

Ready or not, the tax authorities are rapidly going digital and India Inc. must adapt to keep pace with the changes taking place.

About this article

Rahul Patni
By Rahul Patni

EY India Digital Tax leader

Passionate about collaborating with clients in their tax transformation journeys. Active participant in professional groups & industry associations. Father of two. Love to experiment in the kitchen.

Related topics Tax Tax compliance
Upvote