From the day 1, implementation of the Goods and Services Tax [GST] [it was launched on July 1, 2017] has been plagued by several anomalies.
The GST Council – the all powerful body to decide the tax architecture and rates on various items – deserves to be complimented for showing much needed resilience in attending to the anomalies as and when brought to its attention by various stakeholders. However, instead of taking a proactive stance, anticipating problems and nipping them in the bud, most of its actions have been in reactive mode. As a result, it continues to grapple with unending problems.
Two such contentious issues are (i) including the TCS [tax collected at source] amount – levied under the provisions of the Income-Tax Act [1961] – in the value of goods for the purpose of determining the GST liability; (ii) requiring e-commerce companies to deduct tax at the rate of 1% central GST [CGST] plus 1% state GST [SGST] before making the payment to the vendor/supplier for proceeds of sale. Both the provisions are seriously flawed.
Under the I-T Act, TCS is levied @1 per cent on purchase of certain items such as motor vehicles above Rs 1000,000/- jewellery exceeding Rs 500,000/- and bullion over Rs 200,000/- and a host of other items at different rates. This tax was contemplated by the Central Board of Direct Taxes [CBDT] – policy making body on direct taxes in the finance ministry – as an interim levy on the possible “income” arising from the sale of goods by the buyer adjustable against the final income-tax liability of the latter.
Thought-through as a measure to curb tax evasion, the intent behind this levy was to leave a trail that the agencies could use to cross-check the IT returns filed by persons with high spends and make them pay up in case they under-declare income or don’t file. The intent may be fine but there is no valid basis to involve the supplier in a matter which is strictly between the IT department and the assesses. Yet, doing so unnecessarily creates documentation hassles for the suppliers.
The inclusion of TCS in the value of goods for the purpose of determining the GST liability tantamount to collecting indirect tax [read: GST] on an amount which is in the nature of ‘income tax’. This defies logic and therefore, untenable. The Central Board of Indirect Taxes and Customs [CBIC] has addressed this anomaly by recently issuing a circular to exclude the TCS amount from the value of goods for levying GST.
However, there is an urgent need to do away with TCS itself which is arbitrary and has no link whatsoever with the tax liability of the buyer [in some cases, he/she may not even be liable to pay tax and will have to go through the hassles of claiming refund]. As regards, curbing tax evasion, nothing prevents the agencies from collecting details of all high value transactions from suppliers for cross-checking.
The requirement for owners of market-place in e-commerce to deduct tax @1% for CGST and SGST each before making the payment to the supplier/vendor for proceeds of sale made on the platform [effective from October 1, 2018] is also prompted by the need to ensure that there is no under-reporting of transactions/turnover and in turn, evasion of income tax. Here again, there can’t be any disagreement over the intent. But, the method chosen is untenable.
There is no valid justification to involve e-commerce company in a matter which is strictly between IT department and the assesses. Besides, levy of the tax leads to additional compliance requirements for the owner of market-place as well as the vendor. The small traders [annual turnover < Rs 4 million] who are exempt from GST, will be forced to register. Furthermore, they will face erosion in their thin margins due to the cost of working capital needed to finance the amount blocked under TCS.
The collection of such tax at an arbitrary rate [read: @1% CGST/SGST each] has no connection whatsoever to the actual tax liability of the vendor. For the same reason, a similar tax levied by Karnataka government was struck down by the court.
In a case involving Karnataka commercial tax department versus Larsen and Toubro, the Karnataka High Court had struck down a provision in the Karnataka Sales Tax Act [1957] that required government agencies to deduct a certain percentage of tax before making payments to a private contractor handling government projects. It ruled that tax authorities cannot claim tax at source without quantifying the liability of the dealer [contractor].
The Supreme Court [SC] too has barred excess deduction of tax at source by tax authorities.
In the view of the above, the GST should consider withdrawing the tax collected at source [TCS] on the sale made by vendors on the e-commerce platform. As regards, the need to prevent under-reporting, let us not forget that one of the strong reasons for bringing GST is to curb evasion by capturing all sales – including those made on e-portals. Since, the GST is levied on value addition at each stage in the supply chain with a proviso for credit in respect of tax paid on purchase of inputs, it is incumbent for every entity to be part of GST network [GSTN] or else he won’t get input tax credit.
If, with an intent to evade payment of tax, a manufacturer/dealer decides not to be a part of the supply chain, still, the transactions done by him will be detected by the authorities as his purchase/sales will be reflected in the returns filed by others with whom he deals. The requirement to generate an e-way bill which allows electronic tracking of goods movement is another safeguard.
To promote ease of doing business, the GST Council should withdraw both the TCSs – one on buyers of high value items and the other on sellers on e-commerce market-place.