The scrapping of a key provision for tax collected at source (TCS) on sale of goods will provide a major relief to foreign investors, particularly in high value cross border transactions.

Sub-section (1H) of Section 206C, which was introduced in 2020 to provide for TCS on sale of goods and deepen the tax net, will not apply from April 1. Section 206C along with the provisions of tax deduction at source (TDS) under Section 194Q have been instrumental in ensuring tax compliance in commercial transactions.

Section 194Q requires buyers to deduct TDS at 0.1 per cent on payments exceeding ₹50 lakh for the purchase of goods, while Section 206C (1H) requires sellers to collect TCS at the same rate on the same transactions.

While TDS is deducted by the buyer with the seller claiming credit, TCS requires the seller to collect tax from the buyer, even when the buyer has no taxable income on the purchase transaction. What’s more, the Income Tax Act does not define the term “goods” under both these sections and the term came to be applied to sale of shares and securities as well.

“The scrapping of the TCS provision on sale of goods will provide a major relief to foreign investors,” said Amit Singhania, Partner, Areete Law Offices.

Cross border transactions

Currently, this provision is applicable on cross border transactions involving sale of shares of Indian companies by Indian resident to foreign investors (buyers), he said. With its removal, the transaction cost of foreign companies intending to buy shares of Indian entities from a resident will reduce by 0.1 per cent of gross consideration.

“While TCS should not apply if the buyer has deducted tax on the transaction, it became difficult for the seller to check whether the buyer had ensured compliance of its TDS obligation. The Budget proposal aims to facilitate ease of doing business and reduce the compliance burden on taxpayers,” said Himanshu Parekh, Partner -Tax, KPMG India.

For the seller, collecting TCS meant additional compliance in terms of depositing the tax, filing of TCS return and issuing certificates, verification of its turnover with audited financial statements of prior year to determine applicability of TCS, said Tejas Desai, Partner, EY India. For the buyer, this meant having to shell out additional cash and having to reclaim the same back from the Government, if they did not have other taxable income during the year.

Since foreign buyers often do not have an Indian presence or Indian-sourced income or return filing obligations, they could not claim credit for the TCS, leading to a lapse of the tax collected by the seller, said Binoy Parikh, Executive Director, Katalyst Advisors.

To be clear, buyers with a turnover exceeding ₹10 crore will still be required to deduct TDS under Section 194Q at 0.1 per cent on payments above ₹50 lakh made to resident sellers, except when the acquirer is a foreign buyer not having a permanent establishment in India.

“The combined effect of the removal of 206C(1H) and the exception under 194Q will help streamline cross-border share acquisitions by mitigating compliance burdens and reducing friction in fund flows for foreign buyers,” said Parikh.

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