Applicability of GST on TCS

The CBIC has issued Circular No.76/50/2018-GST dated December 31, 2018 (‘Circular’) inter-alia clarifying that basis Section 15(2)(a) of the CGST Act, tax collected at source (‘TCS’) under the provisions of the Income Tax Act, 1961 (‘IT Act’) merits inclusion in the taxable value for discharging Goods and Services Tax (‘GST’).

Before proceeding to examine the correctness and sanctity of the said Circular, it is imperative to understand the concept of TCS.

Concept of TCS

Section 206C (1) of the IT Act mandates collection of an amount as income tax (‘TCS’) by every person selling specified goods to at the time of receipt of sale consideration from the buyer. It is pertinent to note that the seller pays TCS to the government on behalf of the buyer under Section 206C (3) and (4) of the IT Act. Thus, TCS is credited as advance tax in buyer’s account.

TCS is not a levy of tax but a collection mechanism

It is trite that a tax statute needs to inter-alia contain the elements of subject-matter of tax, the person who is liable to tax, the rate and measure of tax and a collection mechanism. In the absence of any such element, the levy itself fails. It is also relevant to note that each element of a tax statute is exclusive and independent of each other and for this reason, the terms ‘levy’ and ‘collection’ are understood distinctly. This is a well settled legal position duly supported by judicial precedents including the ones passed by the Supreme Court.

Essentially, TCS is in the form of advance tax deposited by the seller and credited to kitty of the government on behalf of the buyer. Thus, TCS is not a levy of tax but only a collection mechanism.

TCS is not a charge on the supply

Section 15(2)(a) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) stipulates that value of supply shall include any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, if charged by the supplier separately.

The dictionary meaning of the term ‘charge’ in the context of a supplier means a demand made as price of the goods. Notably, TCS being collected is not charged by the supplier in relation to goods. The Supreme Court has upheld that TCS does not change the nature of levy and remains to be a tax on buyer’s income (Refer Union of India v. Sanyasi Rao, 1996 SCC (3) 465).

Basis the above, we are of the view that TCS collected under the IT Act is not a levy of tax but a collection mechanism. Thus, it does not qualify as a charge by the supplier nor is subject to GST.

Being a clarification issued by CBIC, the authorities are likely to demand GST on TCS amount from July 1, 2017. Considering the above, the taxpayers may explore to challenge the Circular by way of Writ Petition in the High Court. Recently, the Circular has faced a challenge to its legality and the Kerala High Court stayed the application of the Circular [Refer PSN Automobiles Private Limited v. UOI, Writ Petition (C) No.680 / 2019] till the final disposal of the writ.