In life, it is evidenced that an action is initiated with a particular purpose, but with the passage of time, the purpose changes or is lost. This is so often witnessed under the Income-tax Act, 1961 (‘Act’). A particular section is inserted with a particular object, but slowly the section gets amended and the purpose seems to fade away. One particular section which exemplifies this trend is section 206C of the Act dealing with ‘tax collected at source’ (‘TCS’).
The purpose of the present article is to revisit the history of TCS and to test the recent amendments based on the original purpose with which the provisions were introduced.
TCS – basic nature
Tax deducted at source means deduction of tax from the payment made to a recipient of income. The receipt by the recipient is in the nature of income and therefore, tax is deducted therefrom. Whereas TCS is a case, where tax is recovered from a person making payment; such payment is an expenditure for the payer, still tax is collected from such person, on the assumption that such payment is linked to some income which the person will earn against which the credit of tax can be taken.
Section 206C of the Act was introduced by Finance Act, 1988. This section was inserted as a corollary to section 44AC. Section 44AC, as then introduced, taxed a trader, obtaining in any sale by way of auction, tender or any other mode, conducted by any other person the following goods:
Alcoholic liquor for human consumption
Timber obtained under a forest lease
Timber obtained by any mode other than under a forest lease
Any other forest produce not being timber.
Such tax was levied on an adhoc basis in the year of purchase itself at a specified percentage of the purchase price. Further, section 206C required the seller of such goods to collect tax from the trader at the time of sale itself at specified rate, the credit of which was given to the trader in the same year.
Thus, circumventing the basic principles of taxation, section 44AC levied tax at the time of purchase of goods, without waiting for such goods to be sold and income to accrue and such tax was levied at an ad-hoc percentage of the purchase price. The Explanatory Memorandum to Finance Bill, 1988, gave the rationale behind such insertion. It was stated that there was difficulty in assessing income of persons who take contracts for sale of liquor, forest produce, etc. These people constitute a separate entity or a benami entity for getting the contract. Once the contract was entered, these entities became untraceable and the assessment of income in the year of sale of such goods was getting difficult thereby leading to large scale tax evasion. Further, section 206C was introduced to mere facilitate collection of taxes in advance.
Thus, TCS and income tax was going hand in hand – i.e. section 44AC taxed such income in the hands of the buyer in the year of entering into contract and in the same year, TCS was happening.
The constitutional validity of both the sections were upheld by the Apex Court in case of UOI v. A. Sanyasi Rao [219 ITR 330 (SC)]. The Court gave some important findings in this regard, which is germane to our discussion. Court held that in order to prevent evasion of tax legitimately due on such ‘income’, section 44AC and section 206C were enacted. Section 206C was only to facilitate the collection of tax on income which is bound to arise or accrue, at the very inception itself or at an anterior stage. The Court even drew analogy between the advance tax provision and section 206C of the Act.
Interesting it is to note that section 44AC of the Act was obliterated in 3 years’ time by Finance Act, 1992 on the ground of administrative difficulty, though section 206C continued in the Statute book.
Section 206C was expanded to include even sale of scrap (Finance Act, 2003) and sale of minerals (Finance Act, 2012). The explanatory memorandum to Finance Act, 2012 again spelt out the same logic that trading of minerals remained largely unregulated resulting in non-reporting or under-reporting for taxation purpose.
It can be gathered from the above discussion that
TCS was linked to the income that was to accrue in future
It was in the nature of collection of tax in advance
Purpose being prevention of tax evasion.
One may also refer to Rule 37-I which provides for credit of TCS. As per the said Rule, credit for such tax is given for the assessment year in which the income is assessable to tax. Thus, it is beyond any realm of doubt that TCS is collected only where it is linked to any income.
There were three subsequent amendments which expanded the scope of the TCS provisions. The same are discussed hereunder:
Vide Finance (No. 2) Act, 2004, TCS provision was made applicable to grant of lease, licence or right in respect of any parking lot or toll plaza or a mine or a quarry for use of such places for the purposes of business by inserting sub-section (1C). Explanatory Memorandum to the said Finance Act stated that such extension was for the purpose of widening of tax base.
It can be deduced that the purpose took a minor diversion. Earlier, the purpose was to prevent evasion of tax; the Apex Court had upheld that constitutional validity of TCS provisions only on the ground that the same is in the nature of collection of tax in advance in cases where the income was going untaxed. But, vide this amendment, the purpose of TCS was diverted to widening of tax base. Though, thankfully, the collection of tax was still related to income which was to accrue in future, as the TCS provision was to apply only where such places like parking lot etc. was for the purpose of business.
The second amendment was made by Finance Act, 2012 by inserting sub-section (1D). By this amendment, cash consideration received on sale of bullion or jewellery was subjected to TCS provisions. Again the Explanatory Memorandum, gave the same rationale i.e. widening of tax base. It also stated that the action was to reduce the quantum of cash transaction and for curbing the flow of unaccounted money in the trading system of bullion and jewellery.
Pertinent to note, the Explanatory Memorandum stated that “This would be irrespective of the fact whether buyer is a manufacturer, trader or purchase is for personal use.” Further, the term buyer, was defined separately for the purpose of this sub-section to include all buyers.
Thus, even if one agrees that the purpose behind this insertion was to prevent tax evasion, how does one justify applying this provision to purchase of goods for personal use. If the purchase is for personal use, how does one justify linking of TCS to the income that may accrue or arise in future, which is fundamental principle based on which the validity of the provision is upheld.
If this was not enough, the Finance Act, 2016 expanded the scope of sub-section (1D), to included cash consideration received on sale of all types of goods or provision of all types of services where such consideration exceeded ₹ 2 lakhs. Again there was no exemption for purchase of goods for personal consumption and again same logic was provided by Explanatory Memorandum to Finance Bill 2016.
Vide same Finance Act, sub-section (1F) was introduced which required a seller of motor car to collect TCS on sale of motor case for a consideration more than ₹ 10 lakh. This insertion was to widen the base by bringing high value transactions within the tax net. Again, no exemption was provided for purchase of goods for personal consumption.
Interestingly, sub-section (1D) dealing with cash consideration on sale of goods etc. was removed from the statute book on insertion of section 269ST by Finance Act, 2017, which was the right way to deal with cash transactions.
Amendment by Finance Act, 2020
The onslaught of the Legislature is yet to be subdued. Vide Finance Act, 2020, the Legislature has covered the following transactions within the TCS net:
Receipt of an amount, or an aggregate of amounts, of ₹7 lakh or more in a financial year by an authorised dealer for remittance out of India from a buyer under the Liberalised Remittance Scheme of RBI [Sub-section (1G)]
Receipt of an amount from a buyer from a seller of an overseas tour program package [Sub-section (1G)]
Receipt by a seller of any amount as consideration for sale of any goods of the value or aggregate of such value exceeding ₹ 50 lakh in any previous year.
The Memorandum in this regard is maintaining a stoic silence in as much as the only reason given behind this insertion is widening and deepening of tax base. Thus, the move for introducing TCS on these transactions is bereft of any reason.
In so far as the first case is concerned, there is absolutely no link between the tax collected and income which the remitter may earn. Say a person wants to transfer a sum of money from his account in India to his account outside India or where the person wants to transfer a sum of money to his son studying abroad. Such payment has no rational connection with the income of the remitter rather it’s an expense. Even where a person makes payment for overseas tour package which is likely to be a personal expenses, such payment is not likely to lead to any income. Infact the remittance may be out of the tax paid income of the person. Thus, in such case, imposing TCS is absurd and illogical.
Further, there are chances that the AO may deny credit of TCS, on the ground that no income linked to such TCS is offered to tax; as per Rule 37-I, TCS credit is given in the year in which the income is assessed to tax.
The third insertion may also lead to complication in the sense that, the goods may be purchased by a person for personal consumption or something which may not lead to income in future.
Thus, the principles based on which the section was original inserted and the constitutional validity has been upheld are not adhered to while expanding the section. This section was originally enacted for prevention of tax evasion, however then the section was used for widening of tax base and for curbing cash transaction. Further, the section was for advance collection of tax in respect of a transaction which had a link with some income or an income which would have arisen in future. However, subsequently, the section was amended to cover transaction having no nexus with income chargeable to tax. Though the purpose may be laudable, but the means to achieve such purpose are not correct or apt. The later amendments are a completely misfit and that there are other ways to deal with such issues. As a result, the later amendments, which are miles away from the main purpose behind enacting the TCS provisions and which are undoubtedly misfit here, are in my opinion, vulnerable and stand at the peril of being unconstitutional.