Tax collection at source: Ready for the new regime?

Updated: Sep 29, 2020 12:04 AM

Comparison of various tax filings at the click of a button will be the new normal

Based on a recent survey by EY-SAP, 80% of the respondents consider technical nuances of new TCS provisions and updating systems and processes as the biggest challenges.Based on a recent survey by EY-SAP, 80% of the respondents consider technical nuances of new TCS provisions and updating systems and processes as the biggest challenges.

By Ashish K Jain
‘Data is the new oil’ may well sound like a cliché, but the amount of importance Indian tax administration is attaching to data collection is unparalleled. With a slew of measures taken in the recent times by the authorities towards e-administration powered by exchange of information between GST and income-tax authorities, the authorities have been gearing up for a future-ready tax administration, where common tax data pool, prefilled tax returns, comparison of various tax filings at click of a button would be the ‘new normal’.

Come October 1, India Inc finds itself in the middle of one such measure called the Tax Collection at Source (TCS). The Finance Act, 2020, substantially expanded the scope of TCS provisions to include sale of goods, sale of overseas tour programme package and overseas remittance of funds under the Liberalised Remittance Scheme of RBI.

Specifically impacting India Inc is the inclusion of sale of goods, which a massive number of manufacturing and trading organisations need to consider given the low monetary thresholds for the applicability of the provision. The nominal TCS rate of 0.1% (reduced to 0.075% till March 2021) and wide applicability (on B2B as well as B2C transactions) underscores the government’s focus on data collection.

Companies are bracing themselves to comply with new provisions that entail collection of taxes at a transactional level, followed by a host of compliances on a monthly, quarterly and annual basis. Based on a recent survey by EY-SAP, 80% of the respondents consider technical nuances of new TCS provisions and updating systems and processes as the biggest challenges.

The statistics are quite relatable since there are several technical nuances on the applicability of these provisions in case of sale of shares, securities, foreign currency, computer software products, electricity, actionable claims and interpretational issues around computation of sale consideration, transitional provisions and so on. While the pandemic has severely hit profit margins of many taxpayers, their ability to approach the tax authorities for obtaining a Lower Collection Certificate hasn’t been enabled yet in the law.

The new TCS regime entails updating accounting packages and IT systems to ensure appropriate TCS levy on invoices/debit notes/collection. One of the biggest dilemma organisations are facing is whether to apply TCS on invoice or on receipt basis—while TCS on receipt basis is contemplated under the law, this is likely to add to the need for robust reconciliations given how the financial systems today are wedded to the concept of accrual.

Undertaking periodic TCS liability, ensuring accuracy and efficiency in compliances, being prepared with reconciliations and maintaining audit-ready back-ups is a humongous exercise, especially for large entities having innumerable transactions on a single day. It is not surprising that many organisations are viewing this as an opportunity to introduce technology and data analytics in tax compliance, as merely excel sheets will not suffice in the long term. The EY-SAP survey also revealed that almost 65% of respondents recognise a need for a digital intervention to automate their TCS compliance and reporting life cycle, to keep pace with the government’s increasing use of data analytics and intelligent automation.

While industry bodies have made representations for further pushing the expanded TCS regime considering that it also coincides with the e-invoicing timeline, there is no indication of the same. One does, however, hope that regulators provide more clarity on the nature of reconciliations expected to be maintained by taxpayers and eventually garner support from India Inc in collecting data at source to identify gaps in compliances and combat tax evaders.

The author is partner, Tax Technology and Transformation, EY India. Views are personal

(Manoj Rathi, tax director with EY India, contributed to this article.)

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