Section 194Q – An Interceptor to TCS under Section 206C (1H):

We all know that through the Finance Act, 2020, a new clause (1H) has been inserted to Section 206C for collection of tax at source in order to bring-in certain transactions in respect of sale of goods under the purview tax collection at source (for brevity ‘TCS’). Under the amended provisions through Finance Act 2020, any seller who has made domestic sales, being sale of goods, to any person in any previous year in excess of INR 50 lakhs is liable to collect tax at the rate of 0.1 percent from the buyer on such amount exceeding INR 50 lakhs[1].

Now, through the Finance Act, 2021, a new Section 194Q has been inserted in similar lines with section 206C (1H). Under the new provisions, a buyer who is responsible for making any payment to any resident in respect of purchase of goods in a previous year in excess of INR 50 lakhs is required to deduct tax at source at the rate of 0.1 percent on value exceeding INR 50lakhs.

Read more: All About Section 194Q, Higher Rates of Tax and Issues Thereof

Introduction:

One of the objectives for implementation of GST in India is to ensure seamless flow of credit among business to shift the entire tax burden to ultimate consumers of the supply. In line with this objective, Section 16(1) of the CT Act[1] facilities input tax credit (‘ITC’/’Credit’) availment by a registered taxable person on all inward supply of goods or services that are used in the course or furtherance of his business. However, Section 17(5) blocks credit availment on certain inward supply of goods and services specified thereunder. Clause (h) of section 17(5) provides blocks credit on goods lost, stolen, destroyed, written off or disposed by way of gifts. The presence of this clause in section 17(5) coupled with the Revenue’s perception on the meaning of the term ‘gift’ let the taxpayers into defense. They are forced to forego credit on certain expenditure to avoid potential litigation. These expenditures include expenses incurred towards incentives and promotional schemes, promotional gift articles, dairies, pens etc., to promote brand name and expenses towards Corporate Social Responsibility (‘CSR’) Activities. In the humble opinion of the paper writers, credit is available on this expenditure and are not covered by section 17(5)(h). An attempt is made in this article to bring out the reasons why credit can be claimed on these expenditures.

Read more: Blocked Credit on Free of Cost Supplies - The Gloomy Picture and a Glimmer of Hope

In this edition, we bring you an article on the second part on the prevention of abusive strategy of thin capitalisation, which deals with various issues. The next article is on the eligibility of credit with respect to supplies which are made as part of promotion schemes and discharge of CSR obligations. I hope that you will have good time reading this edition and please do share your feedback. I will also urge clients to mail us topics or issues on which you want us to deliberate in our future editions, so that we can contribute to the same.

Key Topics:

GST

• BLOCKED CREDIT ON FREE OF COST SUPPLIES— THE GLOOMY PICTURE AND A GLIMMER OF HOPE

INCOME TAX

• THIN CAPITALIZATION - RESTRICTION OF INTEREST UNDER SECTION 94B – NEXT LITIGATION SAGA – PART II

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Introduction:

At the time of introduction of negative list-based taxation under service tax law[1] effective from 01.07.2012, only selected services provided by Government are subject to service tax and the rest are covered under the negative list. With effect from 01.04.2016, the negative list contained in section 66D was amended to exclude all services provided by Government from negative list and to bring them under levy. Further, these services were subjected to reverse charge requiring the recipient to pay tax.

Since then, applicability of service tax over royalty paid by mining companies to State Governments towards mineral rights has been a subject matter of debate.  The industry is of the view that royalty payable on mineral rights itself is in the nature of tax and service tax cannot be levied on such tax amount. The matter was examined by Rajasthan High Court in Udaipur Chambers of Commerce and Industry[2] and ruled the issue in favor of Revenue. The same has been challenged before the Supreme Court[3] which is pending for disposal.

Read more: Comprehensive Analysis of Service Tax & GST Implications on Mining Rights