Budget 2022 is round the corner, and will again be presented by the finance minister amidst a challenging environment on account of the Covid-19 pandemic. One of the key objectives of the government in the recent past has been to broaden the tax net, and in pursuance of this objective the government has introduced provisions around tax deduction at source (TDS) and tax collection at source (TCS) on purchase and sale of goods. The introduction of these provisions has, however, created challenges and unintended consequences for taxpayers; one of the key expectations from the Budget is around rationalisation of these provisions, especially in respect of TDS on securities.
In terms of the legislative framework, Budget 2020 had introduced TCS on sale of goods at the rate of 0.1% with effect from October 1, 2020. This was followed by introduction of TDS on purchase of goods at the rate of 0.1% with effect from July 1, 2021, vide Budget 2021. To the extent there is an overlap, the TDS provisions prevail.
While the provisions deal with TDS and TCS on goods, they do not define what constitutes ‘goods’ for the purpose of these provisions. Accordingly, one of the major issues is whether TDS and TCS provisions apply to transactions of trading in securities.
It is pertinent to note that securities have an altogether different connotation than goods, and a separate tax treatment is typically provided for securities vis-à-vis goods. Even in general parlance as well as under laws such as the Central Goods and Services Tax Act, 2017 and the Securities Contracts (Regulation) Act, 1956, securities are not considered as goods and are dealt with separately.
The issue became fairly complex when the Central Board of Direct Taxes (CBDT) issued circulars and clarified that TDS and TCS on goods will not apply to transactions in securities which are traded through recognised stock exchanges or cleared and settled by recognised clearing corporations. This clarification gives the impression that ‘securities’ are ‘goods’, and that off-market sale of shares and securities (i.e. transactions not carried out through recognised stock exchange or recognised clearing corporation) would be liable for TDS and TCS.
In case securities are regarded as being under the ambit of TDS and TCS provisions, it would produce undesirable results and lead to several practical and operational challenges which will adversely impact businesses.
It will be appreciated that shares and other securities are generally regulated, and transactions in securities typically get tracked and reported. Accordingly, it is relatively easy for tax authorities to track these transactions, as and when required. Considering the intent with which the TDS and TCS provisions on goods are introduced, extending the applicability of TDS and TCS to regulated securities transactions may not be worthwhile.
It is accordingly expected that the upcoming Budget will clarify that provisions relating to TDS and TCS on goods do not apply to transactions in securities. To ensure that there are no practical challenges, it is expected that such clarifications be made effective from the date from which the TDS and TCS provisions are introduced.
Independent of the above, the TDS and TCS provisions on goods are required to clarify various aspects in relation to the benefit of lower withholding tax certificate, treatment of GST for turnover threshold, whether TCS provisions will be triggered where TDS is erroneously not applied, clarity around high-sea sales and deemed exports, requirement of compliance by non-residents, etc. It is also worthwhile to note that with the availability of a comprehensive GST database, the need for tracking transactions of purchase and sale using TDS and TCS provisions may not be worthwhile.
To conclude, rationalisation of complex TDS and TCS provisions will be welcomed by the business community, remove uncertainties, will ease compliance and be considered as one of the steps towards ease of doing business in India.