Collection of TCS on Overseas Travel Packages

Collection of TCS on Overseas Travel Packages (Rule 206C(1G)(a) applicability)

When corporate client not ready to pay us TDS amount @20 percent as per rule 206 C (1G) (a). But client we will deduct TDS on our payment Now Client is saying only 2 percent TDS will deduct on total payment. How CA will handle the situation where Client receiving overseas package payments from a corporate client (end-user).

• In case Client refuses to pay 20% TCS as per Rule 206C(1G)(a).
• Client offers to deduct 2% TDS (Tax Deducted at Source) instead.

This is indeed a complex tax scenario under Rule 206C(1G)(a) of the Income-tax Act, 1961, concerning the collection of Tax Collected at Source on overseas travel packages. How CA will handle this situation when client refuses to deduct the TCS while Client receiving overseas package payments from a corporate client.

Statutory Obligation on Rule 206C(1G)(a) applicability:

As per Rule 206C(1G)(a), you’re legally required to collect 20% TCS on the consideration received for overseas travel services from non-residents (including NRIs and foreign nationals).  Rule 206C(1G)(a): This rule mandates that any person providing services of international travel to a non-resident Indian (NRI) or a foreign national must collect Tax collected at source at 20% of the consideration received.  This is a non-negotiable statutory obligation.

Client’s Refusal to follow Rule 206C(1G)(a):

The client’s preference to deduct 2% TDS instead of 20% Tax collected at source may stem from a misunderstanding of tax laws. Tax collected at source and TDS serve different purposes—TDS is deducted on income payments (under Section 195 for non-residents), whereas TCS under Rule 206C(1G)(a) is a tax collected at the source for specific transactions, including overseas travel packages. Non-compliance Risk: If you fail to collect the 20% TCS, you may face penalties, interest, and possible scrutiny from tax authorities.

Immediate Steps to be taken by client:

Educate the Client: Politely explain that TCS is a statutory requirement and cannot be substituted by TDS. Highlight that TCS is imposed on the sale of overseas packages and collected upfront, while TDS is deducted on income payments. The 20% TCS is not a discretionary tax but a legal mandate. Share official documents or references to Rule 206C(1G)(a) to substantiate your position.

Indemnity Clause: If the client remains insistent, include an indemnity clause in your agreement. The clause should protect you from potential tax liabilities due to the client’s refusal to pay TCS. Here is a refined indemnity clause example:

Must update the Indemnity Clause in the client contract:

“The Client agrees to indemnify and hold harmless [Your Company Name] from any claims, demands, penalties, interest, losses, damages, costs, and expenses arising out of the Client’s failure to comply with Rule 206C(1G)(a) of the Income-tax Act, 1961, including the non-payment of the 20% TCS on overseas travel packages. Should any liabilities arise due to non-compliance, the Client will bear all associated costs, including additional taxes and penalties imposed by tax authorities.”

Chartered Accountants must obtain a Written Undertaking from clients:

• Ask the client to provide a written undertaking that indemnifies you and assumes responsibility for any consequences arising from the non-collection of 20% TCS. Politely explain to the client that TCS is a statutory requirement and cannot be waived or reduced. Emphasize that the 20% TCS rate is applicable on the overseas package as per Rule 206C(1G)(a).
• Chartered Accountants must Verify the client’s TDS deduction claim is legitimate and in line with Indian tax laws. & Chartered Accountants must ensure you maintain documentation supporting the transaction and client’s indemnity undertaking.
• Ensure the client provides the necessary documentation to support the TDS deduction, should they proceed with that course. Ask the client to reconsider their proposal and agree to pay the applicable Tax collected at source amount of 20%. If they’re still unwilling, you may need to explore alternative solutions.

CA must Review & Revise Contracts is a Long-term Solutions

• Review your agreements with clients and ensure tax responsibilities (TCS/TDS) are clearly defined.
• Add explicit clauses in your contracts stating the legal obligation to collect TCS and the potential tax consequences of non-compliance. Include the indemnity clause as a standard practice in case of future disputes.
• Since this issue involves potential penalties and statutory non-compliance, consulting a tax professional or legal advisor is essential. They can help you assess the tax implications, explore possible solutions, and ensure your business is protected against risks.

Final Thoughts on this Complex Situation

While the client may want to avoid the 20% Tax collected at source, it is crucial to clarify that this tax is mandated by law. If they insist on deducting 2% TDS, the indemnity clause becomes even more vital to shield you from legal and financial repercussions. Moreover, updating your agreements to handle similar cases in the future will provide long-term protection. You can consider including an indemnity clause in the agreement, which would protect your company from any potential tax liabilities arising from the client’s refusal to pay the applicable Tax collected at source amount. The clause could state that the client will indemnify your company against any tax demands, penalties, or interest that may arise due to their non-compliance with Tax collected at source provisions

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