TCS provision would apply on all sale consideration (including advance received for sale) received on or after 01- 10-2020 even if the sale was carried out before 01-10-2020.
With effect from 01-10-2020, the Finance Act, 2020 inserted Sub-Section (1H) in Section 206C. This provision is applicable to assessee having turnover of more than 10 Crore in the preceding year and requires a seller to collect tax at source from the amount received as consideration for the sale of goods if it exceeds Rs. 50 lakhs in any previous year. There has been a lot of hues and cry around the implementation of the new provisions of TCS on Sale of goods u/s 206(1H). The ambiguities and confusion surrounding the provisions have led to the issuance of various clarifications vide Circular No. 17/2020 dated 29th Sep 2020 by CBDT and Professionals and Tax Practitioners have added their own clarifications based on judgment and practicality while advising their clients. In this article, I have made an attempt to consolidate the areas of decision making and have tried to approach the issue through a different perspective.
At para 4.4.2(ii) of Circular 17/2020, CBDT has clarified that “this provision applies on receipt of sale consideration, thus the provision of this subsection shall not apply on any sale consideration received before 01-10-2020. Consequently, it would apply to all sale consideration (including advance received for sale) received on or after 01-10-2020 even if the sale was carried out before 01-10-2020”. Though the clarification has been given in respect of another issue, the language of the CBDT’s circular indicates that the tax should be collected when the consideration received during the previous year exceeds the threshold limit. Even otherwise, as per the provisions of law, it is undisputed that the provision of TCS applies on receipt of sale consideration and not Sales ‘per se’ however for administrative convenience, the management of the Company or business owners have to take a call for adherence to any one of the following methodology for the smooth implementation of TCS provisions.
- 1.Do not pass any entry at the time of Sales on account of the TCS component and Pay TCS at the time of collection.
- At the time of Sales: Do not pass any accounting entry at the time of Sales on account of the TCS component. You may mention a Note in Sales Invoice that “The Customer shall be required to pay an additional amount of 0.10% (0.075% if the payment is made in FY 2020-21) over and above the Sale Consideration at the time of payment to fulfil the requirement of the provisions of Section 206(1H)” Alternatively, an additional field in Invoice may be given stating “Amount with TCS” but no accounting entry to be passed for the same.
- At the time of receipt of Sales consideration: A common monthly debit note may be raised for all total Sale consideration received in the name of Customer at the end of the month. The Accounting Software at this point may ask whether the Sale consideration received is inclusive of TCS or exclusive of TCS. Where the assessee selects that Sale consideration is inclusive of TCS, the debit note should be raised by grossing up of the net amount received.
- For outstanding Debtors as of 1.10.2020: No accounting entry needs to be passed.
- Reflection in Quarterly TCS returns: The TCS returns may be prepared and filed as per the dates of Debit Notes raised crediting the TCS payable account which should be paid at the end of seven days of next month.
- Use Cases: In this case, a consolidated entry is passed for each customer whose payment has exceeded the threshold limit of Rs. 50 lakhs which is as per law. This is the best methodology where there are fewer customers with ongoing business who can be trained to voluntarily pay an additional amount of 0.10% at the time of each payment. This method is also apt where the business transactions with the customer are maintained like a current account without any actual one-to-one correlation between Invoice and Payment so payment may be considered as inclusive of TCS and a simple year-end account contra confirmation exercise may be carried out to discuss any mismatch.
- 2.Pass accounting Entry at the time of Sale on account of TCS but treat it as a parked account and pay TCS at the time of collection only.
- At the time of Sales: Charge the amount of TCS on Invoice value after GST and mention the total Invoice Amount with TCS separately. In the accounting, debit the customer at the time of Sale and credit the TCS component to separate parked accounts called “TCS to be collected”. This account only acts as a “storage of memory” as a separate variable for a seller because otherwise, we might have to remember the amount to be collected on account of TCS from customers in a separate Spreadsheets and remind them at periodic intervals.
- At the time of receipt of Sales consideration: After recording the Payment of Sale consideration in the customer’s account, a corresponding entry needs to be passed debiting the “TCS to be collected account” and crediting the same to “TCS Payable”
- For outstanding Debtors as of 1.10.2020: A debit Note needs to be raised for all outstanding payment subject to the applicable threshold on 01.10.2020 and credited to “TCS to be collected”
- Reflection in Quarterly TCS returns: The TCS returns may be prepared and filed as per the amount credited to TCS Payable account and not when the amount is credited to TCS to be collected. In fact, ideally “TCS to be collected” is just a control account which may be reversed as on 31st March each year by crediting Debtors account and re-entered on 1st April every year which shall present a fairer view of the affairs of the business. Similarly, reversal entry may be passed in case of Bad debts and so the seller does not end up paying the TCS from his pockets in case of bad debts.
- Use Case: This method should be adopted by businesses wherein the payment is mostly received on Bill to Bill basis and there are many customers whose accounting Department releases payments only on basis of outstanding dues ledgers and at the same time, the seller does not wish to make payment to the credit of the Government without receiving his own payment from the customer.
- 3.Pass accounting Entry at the time of Sale on account of TCS and pay TCS at the time of credit to TCS account during the Sale itself.
- At the time of Sales: Charge the amount of TCS on Invoice value after GST and mention the total Invoice Amount with TCS separately. In the accounting, debit the customer at the time of Sale and credit the TCS component to TCS Component.
- At the time of receipt of Sales consideration: No additional entry.
- For outstanding Debtors as of 1.10.2020: A debit Note needs to be raised for all outstanding payment subject to the applicable threshold on 01.10.2020 and credited to “TCS Component”
- Reflection in Quarterly TCS returns: The TCS returns may be prepared and filed as per the amount credited to the TCS Component account.
- Use Case: This method should be followed only for administrative convenience when Method 1 and 2 are not feasible or that method disturbs the ease of doing business “more”. Imagine a scenario where the seller has sold goods of Rs. 1 Cr and passed the entry on account of TCS and the outstanding balance as of 31st March is Rs. 40 lakhs and the buyer makes this payment in the next year wherein as per law no TCS is collectible on this payment but the seller would have already deposited the TCS to the credit of the Government giving rise to anomalies. However, this method may be required to be followed because of the peculiar nature of the Accounting Package used by the business owners or some rigidness in the ERP system where following the earlier stated method may lead to a discrepancy in some other modules of ERP.
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