Finance Bill's new tax collection norms may make exports expensive, says an expert

The vessel M.V. Tiger Mango which berthed at New Mangalore Port for shipment BCCL
  • Finance minister Nirmala Sitharama introduced the Finance Bill 2020 during this year’s budget announcements.
  • It proposes tax collection at source (TCS) at the rate of 0.1%. The lack of an Aadhaar card or PAN card would mean paying 1% TCS — a ten-fold increase.
  • Ved Jain, former ICAI President, feels that this will have an adverse impact on the ease of doing business in India by increasing the tax compliance burden for big corporates, public sector undertakings and exporters.
Finance minister Nirmala Sitharaman introduced a new tax collection law in this year’s Union Budget to widen the scope of tax collection at source (TCS). However, not having an Aadhaar Card or a PAN Card could result in a 10-fold increase in the tax rate.

The Finance Bill 2020 proposes a new tax subsection (1H), under 206 C requires TCS at the rate of 0.1% if the turnover of a business exceeds ₹10 crore per annum — or if buyer’s sales consideration exceeds ₹50 lakh.

"The rate will be ten times, that is 1% if the buyer doesn’t have PAN/Aadhar. This will have far-reaching implications in all big corporates, public sector undertakings and exporters," said Ved Jain, former ICAI President.

The new provision widens the scope but increases the burden of TCS compliance and covers a large group of assessees.

The effect on companies — big and small
For big companies, even a rate of 0.1% can have far-ranging implications. "Just imagine the magnitude of deduction on Indian Oil which has a turnover of more than ₹5 lakh crore," said Jain.

Micro, small, and medium enterprises (MSMEs) don’t have turnovers that match up to Indian Oil. However, the new tax provision will increase working capital requirement and compliance.

"Just imagine the number of invoices and obligation to collect the extra amount of 0.1%," Jain explained.

"This will further block the working capital of the buyer, which includes MSMEs as well since the obligation is to collect on sales of over ₹50 lakhs in a year. It also increases the compliance burden tremendously," he added.

Exports get more expensive
Overseas buyers generally don’t have PAN cards and Aadhaar cards. They are also under no obligation to pay tax in India. However, the proposed tax law states that tax will have to collect from them as well, that too at the higher rate of 1%.

"This will be extra cost to the exporter as an overseas buyer will not pay this amount since he is not required to pay tax in India," said Jain.

According to Jain, the new tax law is only wearing a "garb of widening and deepening the tax base," when in actuality, it’s deteriorating the ease of doing business with Indian firms.

See also:
What is dividend distribution tax and what has changed with DDT in budget 2020

There are serious flaws in Budget 2020's ESOP gift for startups

'Vivad Se Vishwas' - Union Budget’s new scheme seeks to reduce tax litigations

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