Latest provisions of tax collection in the Finance Act 2020

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From October 1, TCS will apply to specific categories of foreign remittances. Till date, Tax Collection at Source (TCS) was only applicable to selected transactions involving prescribed goods and services whereas Tax Deduction at Source (TDS) applied to numerous transactions. 

The Finance Act 2000 has now brought in three new provisions of TCS that would be applicable from October 1, 2020: 

  • 5% TCS would apply on amounts exceeding Rs 7lakh in a financial year for foreign remittances under the Liberalized Remittance Scheme (LRS) of Reserve Bank of India. Restricted TCS of 0.5% would apply in the case of remittances towards loans for education. 
  • 5% TCS applies to the purchase of an overseas tour package, irrespective of its value. 
  • TCS at 0.1% on the sale of goods for over RS 50lakh in a year. Inflated rates of TCS have been prescribed for non- PAN / Aadhaar cases. This announcement came out of nowhere, and so it is important to understand every corner of the new provision. 

LRS permits capital account transactions such as making investments abroad, purchase of property, extending loans to NRIs, etc., as well as current account transactions for business trips, donation, gifts, medical treatment, private or employment visits, maintenance of close relatives, etc. Wire transfer for the purchasing of articles on international E-commerce websites through credit cards is also included in this scheme. New TCS provisions will apply to all foreign remittances allowed under LRS of RBI. No threshold limit has been prescribed for foreign tour operators to collect TCS. 

The Ceiling limit of Rs 7lakh for foreign remittances is only a threshold for the collection of tax by the authorized banker. This is independent of the LRS under which the resident individuals are allowed to freely make foreign remittance up to $250000 per financial year. If the threshold on Rs 7lakh is crossed, bankers would be liable to collect 5% TCS and deposit it with the government. The incidence of this new TCS is on the remitter. While filing ITR, the overall transfer value would shoot up to 5%, in addition to remittance costs such as bank charges and currency spreads. 

TCS credit is available for set-off against the total tax liability of the remitter for the respective financial year. The new Annual Information Statement (Form 26AS) contains details of tax collected TCS during FY. The remitter should that he/she obtain a TCS certificate from an authorized dealer banker and claim such TCS paid in the ITR or nil tax liability. 

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