To widen the tax revenue the Finance Minister, Nirmala Sitharaman, announced during the annual budget of 2020-21 an extension to the scope of Tax Collected at Source (TCS). Under the new provisions of the clause 206C(1H) of Income-tax Act (1961):
- The seller is required to collect TCS from the buyer if the seller’s annual turnover exceeds INR 100 million (US$1.36 million) in the preceding financial year (FY 2019-20 for the current financial FY 2020-21)
- TCS is collected from the buyer of goods in a financial year when total consideration for the sale of any good or aggregate of any value (excluding goods exported) received from the buyer during the financial year (FY 2020-21) exceeds INR 5 million (US$70,000)
- TCS rate is fixed at 0.1% on the sale consideration1 value exceeding INR 5 million for an individual buyer in the financial year
- TCS will be refunded to the buyer after filing of income tax return and completion of assessment by tax authorities.
Although announced in April 2020, the TCS was not immediately implemented. After various representations from the industry, and in order to provide sufficient time for smooth compliance, TCS was deferred by six months to 1 October 2020. To provide further relief to the industry in the wake of COVID-19, the Finance Ministry temporarily reduced TCS to 0.075% until 31 March 2021, after which the rate will be restored to 0.1%.2
The implementation of TCS is intended to bring transparency to the trade by keeping track of all business to business (B2B) sales exceeding INR 5 million in a financial year. But an unintended consequence of this policy may be the blockage of working capital, as well as an increased compliance burden for trade. This will impact various industries, including gold. This blog discusses the impact of TCS on bullion dealers and the resultant impact on other participants in the gold supply chain.
Impact on bullion dealers
The implementation of TCS will not only impact the working capital of the gold industry across the value chain but will also have a dire impact on bullion dealers in the trade. They operate on a very narrow profit margin of ~0.05%, and despite this they will have to pay 0.1% for each transaction above INR 5 million (~1 kg based on domestic gold prices).3 The TCS paid for each transaction will also far exceed the Income Tax paid on profit margins at 0.015% (Table 1). The refund on TCS will be available only after the filing of income tax and completion of assessments by income tax authorities, which could take a minimum of 18 months. This will block crucial working capital of bullion dealers and increase the compliance burden for the industry.