TCS Under Section 206C(1H) of the Income Tax Act: A Complete Guide for Businesses in India

Introduction

The concept of Tax Collected at Source (TCS) has always been a critical part of the Indian taxation system. Section 206C(1H) of the Income Tax Act, introduced as part of the Finance Act, 2020, has brought significant changes for businesses. Designed to widen the tax base and improve compliance, this provision mandates the collection of TCS on specific transactions.

In this blog, we will delve into the specifics of Section 206C(1H, explore its scope, applicability, and challenges, and provide actionable insights for businesses to ensure compliance.

1. What is TCS Under Section 206C(1H)?

TCS, or Tax Collected at Source, refers to the tax that a seller collects from the buyer at the time of sale. Section 206C(1H) was introduced to extend this concept to specific transactions involving the sale of goods exceeding a prescribed threshold.

Effective from October 1, 2020, Section 206C(1H) requires sellers to collect TCS on the amount received from buyers if the total sale value exceeds ₹50 lakhs in a financial year.

This provision ensures better tracking of high-value transactions and minimizes tax evasion.

2. Applicability of Section 206C(1H)

The following points highlight the applicability of Section 206C(1H):

• Seller: The provision applies to sellers whose total turnover exceeds ₹10 crores in the preceding financial year.
• Buyer: Any entity purchasing goods valued at over ₹50 lakhs in a financial year from the seller.
• Transaction Type: Applicable only to the sale of goods, not services.

The applicability is determined on a per buyer basis, ensuring that sellers track transactions individually.

3. Key Conditions and Threshold Limits

Section 206C(1H) comes with specific conditions, including:

1. Turnover Limit for Sellers: The seller’s turnover in the previous financial year must exceed ₹10 crores.
2. Transaction Value: TCS applies only if the buyer’s total purchase value crosses ₹50 lakhs.
3. Receipts-Based Collection: TCS is collected on the actual amount received, not the invoice amount.
4. Non-Applicability: The provision does not apply to exports, imports, or sales of goods subject to TDS.

4. Transactions Covered Under Section 206C(1H)

TCS under Section 206C(1H) applies to:

• All goods sold domestically (except exempt items like petrol, alcohol, etc.).
• Transactions between related and unrelated parties.
• Receipts received after October 1, 2020, irrespective of when the sale occurred.

5. TCS Rate Under Section 206C(1H)

The rate of TCS under Section 206C(1H) is as follows:

• 0.1% of the sale consideration exceeding ₹50 lakhs (if PAN/Aadhaar is provided).
• 1% if the buyer does not provide PAN or Aadhaar.

6. Exceptions and Exemptions

Certain transactions are exempt from Section 206C(1H), including:

1. Export of Goods: TCS does not apply to export transactions.
2. Transactions Covered by TDS: If the sale is already subject to TDS under another section, 206C(1H) will not apply.
3. Non-Applicability to Services: Only goods are covered under this section.

7. TCS Compliance: Payment, Filing, and Reporting

To comply with Section 206C(1H), businesses need to follow these steps:

1. Collection and Deposit of TCS:

• TCS must be collected at the time of receipt.
• The amount collected should be deposited to the government by the 7th of the following month.

1. Filing of TCS Returns:

• Sellers must file quarterly TCS returns in Form 27EQ.

1. Issuance of TCS Certificates:

• A TCS certificate must be issued to the buyer in Form 27D.

8. Challenges Faced by Businesses

Some challenges include:

• Tracking and segregating receipts from multiple buyers.
• Ensuring accurate calculations, especially when payments are delayed.
• Handling non-compliant buyers who do not provide PAN/Aadhaar.

9. Practical Examples of TCS under Section 206C(1H)

Example 1:

• Seller’s turnover in FY 2023-24: ₹12 crores.
• Buyer A purchases goods worth ₹60 lakhs.
• TCS applicability: ₹10 lakhs (₹60 lakhs – ₹50 lakhs threshold).
• TCS amount: 0.1% of ₹10 lakhs = ₹1,000.

10. Steps to Ensure Compliance

1. Maintain Detailed Records: Track buyer-wise receipts.
2. Automation Tools: Use ERP systems or accounting software to simplify calculations.
3. Timely Deposits: Ensure TCS is deposited within the stipulated time.
4. Training and Awareness: Educate the finance team on TCS provisions.

11. Consequences of Non-Compliance

Failure to comply with Section 206C(1H) can result in:

• Interest on Late Deposit: 1% per month or part of the month.
• Penalties: Equivalent to the TCS amount not collected or deposited.

12. FAQs on TCS Under Section 206C(1H)

Q1: Does TCS apply to advances received?

Yes. TCS is collected on advances as well as final payments.

Q2: Is TCS applicable to B2C transactions?

No. TCS applies only to B2B transactions exceeding the threshold.

13. Conclusion

Section 206C(1H) has introduced a new dimension to tax compliance in India. While it has added responsibilities for businesses, it also promotes greater transparency in financial transactions. By understanding the provisions, leveraging technology, and adhering to compliance requirements, businesses can ensure smooth operations without any tax-related hurdles.