Covid-19: Delay Tax At Source Provisions, Professionals Urge The Government

Come Oct. 1, certain businesses will have to collect an additional tax from a buyer if the value of goods sold to it exceeds Rs 50 lakh in a year. This tax will come into play for those customers who buy goods from businesses having turnover or total sales above Rs 10 crore in the previous financial year.

The levy, however, will not apply on exports and sale of goods like alcoholic liquor, scrap, certain minerals, forest products and motor vehicles having value of Rs 10 lakh or more, along with certain items which are covered under other tax provisions.

With one week to go for this levy to be implemented, the Bombay Chartered Accountants Society has requested the Finance Ministry to delay it to April 2021 citing economic hardship caused due to Covid-19.

Levy Would Result In Multi-Level Tax, BCAS Says

The Finance Act, 2020 expanded the scope of this levy termed as tax collected at source. Businesses have to collect this tax from buyers at the rate of 0.1% and deposit it with the central government.

At the same time, the law allows a buyer of certain identified goods, licensee or lessee to approach the Income Tax Department to obtain a lower or nil tax collected at source rate. An assessing officer can grant this facility if she is satisfied that the income of such persons justifies reduced rates. This facility, however, is not available to buyers of goods worth more than Rs 50 lakh.

Against this background, the BCAS has highlighted the following pitfalls:

• Given the lack of an enabling provision, buyers who end up incurring losses will not be able to apply for a lower/ nil tax collected at source rate. They may face blockage of funds as significant amount of tax will be collected at source by the seller after Oct. 1 and they will have the opportunity to claim refunds of such amount from the tax department only at the end of a financial year.
• While the government’s intent is to widen the tax base, tax collected at source on business-to-business transactions would cause multi-level tax collection from entities who are already under the tax net.

To address these challenges, the BCAS has urged the government to allow buyers to apply for a nil or lower tax collected at source certificate, irrespective of the value of goods purchased by them. Tax professionals have also suggested excluding business-to-business transactions and work contracts involving integrated supply of goods and services from the scope of tax collected at source.

The BCAS has justified this recommendation by stating that the primary intention behind introducing collection of tax at source is to widen the taxpayer base and reduce leakages. Business-to-business transactions, on the other hand, generally take place between companies or registered businesses, which have proper registrations under goods and services tax or other allied laws.

Further, the CBDT and the GST department also interchange tax related data which reduces the probability of revenue leakage. Bringing business-to-business transactions under tax net would only result in multi-level taxation, the BCAS has said. Further, as tax collected at source applies only for goods, works contract which involve supply of both goods and services must be excluded from the levy, it has stated in its representation.

Levy Requires Clarity As Well, BCAS Says

Sellers which meet the prescribed turnover criteria will be required to collect tax at source on “any amount received as consideration” from the buyer if the aggregate value exceeds Rs 50 lakh.

The consideration paid for goods generally includes two components — actual price of the goods and the applicable goods and services tax. According to the BCAS, a question that may likely arise is, whether a seller should collect tax at source on the GST component as well, since the law does not clearly define the term “sale consideration”.

Illustratively, lets say a transaction has a sale consideration of Rs 57.75 lakh. Out of this, Rs 55 lakh is the price of goods and remaining Rs 2.75 lakh is the GST. As per the BCAS, tax collected at source should only be on Rs 55 lakh.