Buried in the Finance Bill -- the document that lists changes in tax laws - this year is a proposal that might hit businesses, especially exporters, hard. Budget 2020 proposes a seller should collect 0.1 per cent as tax collected at source (TCS) from a buyer on sale of goods worth more than Rs 50 lakh in a year, if the sellers own sales exceeds Rs 10 crore during the year. If the buyer does not have a PAN or an Aadhaar, then the rate of TCS would be 1 per cent.
Tax experts say this is an extremely harsh and retrograde provision which has been introduced without much thinking. This will impact many MSMEs, but exporters will bear the brunt because most of their sellers are not tax resident of India and hence do not have a PAN or Aadhaar.
FULL COVERAGE:Union Budget 2020
This means exporters will either have to pay the 1 per cent TCS from their own pocket or sell goods at a higher margin making them less competitive.
The move would also increase compliance burden as well as block working capital of many businesses.
"Introduction of this provision does not seem to have been thought through in the zeal of the government to plug tax leakage and improve collections," says Daksha Baxi, head, international taxation, Cyril Amarchand Mangaldas.
She elaborates: "In case of seller is an exporter, the buyer then invariably is a non- resident. Such non-residents are usually not subject to tax in India unless it falls under various other provisions of the IT Act for being taxed in India. Therefore, the absurdity of this new TCS provision is that it makes Indian exports at least 1 per cent more expensive. Or the exporter would have to bear this cost, reducing their profit margin since no buyer who is not taxable in India would like to bear this cost."
But exporters are not the only one to be impacted by this provision. Ved Jain, a Delhi-based chartered accountant, says, the provision will have far reaching implications on all big corporates, PSUs and Exporters. "Just imagine the magnitude of deduction on Indian Oil which has a turnover of more than Rs 5 lakh crore. This will further block working capital of the buyer, which will include MSMEs. This will increase the compliance burden tremendously," says Jain
However, Baxi says that there is a provision that the government would specify persons, who would be exempt from this provision. It is hoped that exporters would be exempt and so would large corporations, who either buy from MSMEs or sell to businesses.