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Shripal Lakdawala (Partner)
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Janak Thakkar (Director)
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Rahul Khaitan (Manager), Deloitte India


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Applicability of TCS on sale of securities and consequential impact on deals-additional cost?

Print Document  09 DEC 2020

Background

Considering the population of India, the most effective and efficient way for the government to collect taxes seems to be through Tax Deducted at Source ("TDS") and Tax Collected at Source ("TCS"). TCS is the tax payable by a seller, which he collects from the buyer at the time of sale and deposits with the government. With a view to widen and deepen the tax net, the government has introduced TCS @ 0.1% (exclusive of surcharge and cess, if applicable) on sale of goods which is effective from October 1,2020. The rate increases to 1% (exclusive of surcharge and cess, if applicable) where the buyer does not provide the Permanent Account Number ("PAN") to the seller. Further, there are certain exceptions to non-applicability of TCS, which include the following:

• Import and export of goods;

• Transactions where sale consideration does not exceed INR 5 million;

• Transactions where buyer is liable to deduct TDS and has deducted such tax at source; and

• Transactions where seller's total sales, gross receipts or turnover from the business carried on does not exceed INR 100 million in the last financial year.

A flow chart has been prepared for easier understanding:

Flowers in Chania

Note: the aforesaid TCS rates does not consider the reduction on account of COVID.

TCS on sale of securities

It is important to understand whether securities (i.e. listed as well as unlisted) can be considered as "goods" and consequentially whether TCS is applicable on sale of securities?

The Income Tax Act, 1961 ("Act") does not define the term "goods" and certain sections under the Act envisage different treatment for "goods" and 'securities". For instance;

• For the purpose of section 194H, "goods" and 'securities" are treated differently.

• Section 145A provides for separate mechanism for valuation of inventory in the nature of goods vis-à-vis securities.

The term "goods" has different connotation under different laws and interpretation may be drawn from multiple laws. For e.g. under Goods and Service Tax law, stocks and shares are excluded from the definition of goods but are specifically included in the definition of "goods" under the Sale of Goods Act, 1930. The Central Goods and Services Tax Act, 2017 ("CGST Act") defines "goods" to mean every kind of movable property other than money and securities.

Clarification issued by Central Board of Direct Taxes ("CBDT")

A reference is made to the clarifications issued by CBDT vide its Circular No. 17 of 2020 dated September 29,2020. It states that transaction in securities which are traded through recognised stock exchanges or cleared and settled through recognised clearing corporations, including stock exchanges, shall not be covered within the ambit of TCS provisions.

Considering the above clarification, it may be argued that the intention is to cover unlisted securities as goods and collect TCS on sale of unlisted securities. It would be prudent if CBDT provides specific clarification on applicability of TCS liability on consideration received towards sale of unlisted securities.

In a scenario where unlisted securities are considered as goods, other aspects to be considered/scenarios that may arise (assuming that the prescribed limits as discussed above are satisfied), are discussed below.

Particulars

Whether TCS applicable?

Remarks

Where the transaction is between resident buyer and resident seller

Yes

Not applicable

Where the transaction is between non-resident buyer and resident seller

Yes

Not applicable

Where the transaction is between resident buyer and non-resident seller

Yes/No

TCS does not apply if buyer has an obligation under section 195 of the Act and has deducted tax

Where the transaction is between non-resident buyer and non-resident seller

Yes/No

Further points to be considered for some of the above-mentioned scenarios are as under:

Particulars

Specific remarks/considerations

Transaction between resident buyer and non-resident seller

• In a scenario whether TDS is not deducted (e.g. beneficial treaty situation) can an argument be taken that TCS may not be applicable since it is import of goods?

• TCS provisions may not apply in a scenario where Seller does not have any presence in India except for investment in shares (which is not considered as business activity) and in such a case he may not qualify turnover criteria.

Transaction between non-resident buyer and non-resident seller

• In a scenario whether TDS is not deducted (e.g. beneficial treaty situation) an argument can be taken that TCS may not be applicable since Seller does not have any presence in India except for investment in shares (which is not considered as business activity) and in such a case he may not qualify turnover criteria?

Transaction between non-resident buyer and resident seller

• In case of transaction between non-resident buyer and resident seller, can an argument be taken that TCS may not be applicable since it is export of goods?

There may be a scenario in which TCS is collected by the seller and the non-resident buyer may not have any income in the year in which the transaction takes place. In such a scenario, there will be additional compliance burden on the buyer i.e. filing of tax return to claim TCS credit, timing and cash flow issue. Also, if the buyer does not have a PAN, the TCS rate is higher.

Considering, the manner in which current provisions are introduced, there could be many other aspects where a clarification by CBDT on applicability of TCS may be helpful.

Some of the aspects where CBDT should consider providing clarifications are mentioned below:

Particulars

Additional points for consideration

Capital gains from sale of shares/securities of Indian company by non-resident exempt on account of treaty benefits

Please refer above discussions in the context of applicability of TCS provisions on unlisted securities/shares

Consideration for sale of securities received in kind-no monitory consideration involved

Considering, the fact that TCS provision is applicable on receipt of any amount as consideration for sale of any goods, whether TCS is applicable on receipt of sale consideration in kind?

Buyback of shares even though company buying the shares would be paying buy back tax

Whether buy back can be considered as sale for TCS purposes?

Redemption of preference shares or debentures by a company or capital reduction by a company

Whether amount received on redemption of preference shares/debentures or capital reduction by a company can be considered as amount received for sale of goods?

Primary issue of shares by a company

Whether amount received by the company on primary issue of shares/securities be considered akin to receipt of any amount as consideration for sale of any goods?

Indirect transfer of shares of Indian company

Can explanation 5 to section 9(1)(i)(with respect to indirect transfer) of the Indian tax laws be considered for applying TCS provisions and whether TCS provisions are applicable to shares of foreign company?

Way forward:

Considering, the open points with respect to applicability of TCS provisions (discussed above), it would be prudent if CBDT provides specific clarifications on these issues. The clarifications will make life easier for the seller and buyer in complying with TCS provisions and would also reduce the scope for litigation on these issues.

Till the time clarification is not provided by the CBDT, a better position may be that seller complies with TCS provisions and buyer claims TCS credit by filing tax return in India.

 

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Disclaimer: The views expressed in this article are personal. The publisher or the author disclaim all, and any liability and responsibility, to any person on any action taken on reliance of it

 


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