Direct Tax Alert: CBDT issues guidelines on section 194-O and section 206C(1H) of the Income Tax Act, 1961

Finance Act, 2020 has, inter-alia, introduced the following new sections, with effect from 01 October 2020:

• Section 206C(1H) of the IT Act – Tax Collection at Source (TCS) @0.1%¹ on sale of goods, subject to fulfilment of certain conditions, by seller; and
• Section 194-O of the IT Act – Tax Withholding (TDS) @1%² from the payments made to e-commerce participants by any mode for the sale of goods or provision of services or both, facilitated through its digital or electronic facility or platform.

There were many challenges in the implementation of these provisions and hence, various stakeholders made representations to the Central Board of Direct Taxes (CBDT). Recently, the CBDT issued a Circular³ laying guidelines to remove difficulties. We, at BDO in India, have summarised this Circular and provided our comments thereon.

Re. Section 194-O of the Income-tax Act, 1961 (IT Act):

1. Applicability on transactions carried through various exchanges:

Section 194-O of the IT Act shall not be applicable in relation to:

• Transactions in securities and commodities which are traded through recognised stock exchanges or cleared and settled by the recognised clearing corporation⁴, including recognised stock exchanges⁵ or recognised clearing corporation located in International Financial Service Centre⁶;
• Transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the Central Electricity Regulatory Commission (CERC).

2. Applicability on payment gateway:

The payment gateway will not be required to withhold tax under section 194-O of the IT Act on a transaction, if the tax has been withheld by the e-commerce operator which facilitates sale of goods or services or both, under section 194-O of the IT Act, on the same transaction.

For instance, a buyer buys goods worth INR 100,000 on e-commerce website “XYZ”. He makes a payment of INR 100,000 through a digital platform of “ABC”. If “XYZ” has withheld tax under section 194-O of the IT Act on INR 100,000, “ABC” will not be required to withhold tax under section 194-O of the IT Act on the same transaction. To facilitate proper implementation, “ABC” may take an undertaking from “XYZ” regarding withholding of tax.

3. Applicability on insurance agent or insurance aggregator:

The insurance agents or insurance aggregators in many cases have no involvement in transactions between the insurance company and the buyer for subsequent years. Hence, it is provided that in years subsequent to the first year, if the insurance agent or insurance aggregator has no involvement in transactions between insurance company and the buyer of insurance policy, he would not be liable to withhold tax under section 194-O of the IT Act for those subsequent years. However, the insurance company shall be required to withhold tax on commission payment, if any, made to the insurance agent or insurance aggregator for those subsequent years under the relevant provision of the IT Act.

4. Calculation of the threshold for the fiscal year 2020-21:

It has been clarified that the threshold of INR 0.5mn for an individual/Hindu undivided family (being e-commerce participant who has furnished his PAN/Aadhaar) shall be counted from 01 April 2020. Hence, if the gross amount of sale or services or both facilitated during the previous year 2020-21 (including the period up to 30 September 2020) exceeds INR 0.5 mn, the provisions of section 194-O of the IT Act shall apply on any sum credited or paid on or after 01 October 2020. In other words, the sale or services facilitated during April 2020 to September 2020 needs to be included for computing the threshold of INR 0.5mn.

Re. Section 206C(1H) of the Income-tax Act, 1961 (IT Act):

1. Applicability on transactions carried through various exchanges:

Section 206C(1H) of the IT Act shall not be applicable in relation to:

• Transactions in securities and commodities which are traded through recognised stock exchanges or cleared and settled by the recognised clearing corporation⁷, including recognised stock exchanges⁸ or recognised clearing corporation located in International Financial Service Centre⁹;
• Transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the Central Electricity Regulatory Commission (CERC).

2. Calculation of the threshold for the fiscal year 2020-21:

As the threshold of INR 05mn is with respect to the previous year, the calculation of receipt of sale consideration for the purpose of section 206C(1H) of the IT Act shall be computed from 01 April 2020. Hence, if a person being seller has already received INR 05mn or more up to 30 September 2020 from a buyer, TCS shall apply on all receipt of sale consideration during the previous year, on or after 01 October 2020 till 31 March 2021, from such buyer.

3. Applicability on outstanding debtors as on 30 September 2020:

It is clarified that while the provisions of section 206C(1H) of the IT Act will not apply on sale consideration received before 01 October 2020, it would apply on all sale consideration (including advance received for sale) received on or after 01 October 2020 even if the sale was carried out before 01 October 2020.

4. Applicability to sale of motor vehicles:

It is clarified that:

• Receipt of sale consideration from a dealer of motor vehicle would be subjected to TCS under section 206C(1H) of the IT Act, if such sales are not subjected to TCS under section 206C (1F) of the IT Act.
• In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value of INR 01mn or less to a buyer would be subjected to TCS under section 206C (1H) of the IT Act, if the receipt of sale consideration for such vehicles during the previous year exceeds INR 5 mn during the previous year.
• In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value exceeding INR 01mn would not be subjected to TCS under section 206C(1H) of the IT Act if such sales are subjected to TCS under section 206C(1F) of the IT Act.

5. Adjustment for sale return, discount or indirect taxes:

It is clarified that no adjustment on account of sale return or discount or indirect taxes including GST is required to be made for collection of tax under section 206C(1H) of the IT Act since the collection is made with reference to receipt of amount of sale consideration.

6. Fuel supplied to non-resident airlines:

It is clarified that the provisions of section 206C(1H) of the IT Act shall not apply on the sale consideration received for fuel supplied to non-resident airlines at airports in India.

Further, a press release dated 30 September 2020 was issued by CBDT clarifying certain doubts raised on applicability of provisions of TCS on goods. This clarification is in line with the circular issued by CBDT as discussed above.

BDO Comments

With the issue of this Circular, while the CBDT, on industry request, has clarified some of the interpretational issues which provide much needed relief to taxpayers, there are still few other issues which remain unaddressed. One such issue being the definition of goods for the purpose of section 206C(1H) of the IT Act. The term ‘goods’ not being defined under the IT Act, and accordingly reference needs to be made to other laws. With different laws having different meanings, a clarification on this would have been welcomed. Further, while it is clarified that transactions through exchanges will not attract the vigour’s of section 206C(1H) of the IT Act, it is silent on the applicability to shares of an unlisted company.