Is charging TCS on Invoice for Sale of Goods u/s 206C(1H) correct? Or non-compliance of statue? What will be the effect of overriding section 194Q or Section 206CB?

Section 206C(1H) has been made effective from October 1, 2020 which states that TCS @0.1% (0.075% for Fy 2019-20) shall be collected by a Seller having turnover exceeding Rs. 10 Crores, from a buyer on receipt of sale consideration exceeding Rs.50 lacs in any previous year.

To comply the provision of this section, the sellers are finding difficulties for how to keep records of consideration received from customers. To avoid this difficulty, it is observed that the some of the sellers are charging/collecting TCS on invoices raised to eligible customer with the view that the income tax dept is concerned with only TCS collection on consideration received for sale of goods and deposit there off.

However, the charging/collecting TCS on Invoice may results into following difficulties to the sellers:

1. Goods sold on Credit

This is the normal trade practice in the industry to sold goods on credit e.g. 30 days. If the goods sold on credit of 30 days with charging of [email protected] 0.075% on 3rd March 2021 may cause less amount collection of TCS by the seller as realization of the same would be in 2nd April 2021 and effective rate of TCS on day of collection of consideration is 0.1% as section requires to collect TCS on consideration. This may result in Penalty/Interest charged by the dept on less collection of TCS by 0.025%. Also, this may examine on case to case basis for eligible customers as requirement of Sales Turnover of 10 Cr and receipt of sale consideration from buyer needs to be examined in the previous year 2021-22.

2. Goods sold on before October 1, 2020 but realized on or after October 1, 2020

There is additional requirement that the TCS shall also be collected on consideration received on or after 1 October 2020 against sale of goods occurred before 1 October 2020 for which seller has to issue debit note to collect the same as this may not be charged on the sale invoices.

3. Reciprocal & overriding Section 194Q over Section 206C(1H) introduced by the Budget 2021-22 on Purchase of Goods W.E.F. July 1, 2021

Section 194Q states that TDS @0.1% shall be deducted by a Buyer having turnover exceeding Rs. 10 Crores, from a seller on payment of consideration exceeding Rs.50 lacs in any previous year. Also, If the section 194Q and Section 206C(1H) both are applicable then section 194Q will be applicable.

If the seller is charging the TCS on invoices in the month of June-2021 and due to transportation or any other reasons, buyer booked the invoice in books on or after July 1, 2021 and assuming buyer fulfilling the requirements of section 194Q then Buyer will deduct TDS under this question and seller may not able to realize the TCS and therefore, may raise disputes between the Buyer & Seller.

Also, there are many other issues may arise apart from mentioned above which needs to be examined case to case basis.

4. New Section 206CCA introduced by the Budget 2021-22

The Budget 2021-22 has introduced new section 206CCA in which higher rates for collection of TCS has been prescribed for persons who are not filing income tax returns. To comply with this provision of this section, sellers would require additional documents from the buyer such as ITR acknowledgment. At the time of generation of invoice, additional documents may not readily provided by the buyer and as the seller may charge TCS not in complying with provisions of this section which may lead disputes with the buyer/income tax departments.

5. Non-realization of Trade Receivable and it is resulting of loss of TCS deposit out of own pocket by charging of TCS on Invoice

Seller has to issue credit note in case of non-realization of receivables to reverse the TCS however, there are practical difficulties to issue credit note e.g. disputes between buyer & seller for undeterminable period, after reversal of TCS unable to revise TCS return etc.

6. Goods replaced under warranty scheme.

If the goods have been replaced by issuing another invoice by the Seller then it may happen that the TCS has been deposited twice however, consideration received only one time. This can be resolved through timely issue of credit note otherwise it will be a loss to seller.

7. Advance received by the Seller

As the section 206C(1H) requires to deposit TCS at the time of receipt of consideration and if the seller is collecting & depositing TCS on the invoice then it is delaying the TCS collection & depositing of the same to the govt and Seller may require to deposit interest on late deposit of TCS. To avoid interest, seller is required to deposit TCS on receipts of advances & adjust the TCS through charging on the invoices from its customer in case of continuing follows of charging TCS on Invoice.

8. Goods returns by customer due to any reason or Customer issue debit note on account of quality issues.

Seller has to issue credit note in case of goods returns/debit note raise by customers otherwise it will be loss to seller for TCS deposit out of its own pockets.

9. Blockage of working capital in case of delay in payment

As the seller is depositing the TCS on issue of invoice basis and If customer delays in the payment then seller fund has been blocked in TCS as the same is not received by the seller. This will lead to seller of extra interest cost i.e. which seller borrowed fund or at the rate at which seller invested their funds. If he follows consideration received policy then he had to deposit on account of actual consideration received.

Apart from above issues, there are many cases which are untouched in the above list and has a negative impact on sellers if the TCS has been charged on the Invoices.

Therefore, it is highly advisable to collect TCS on collection basis through issue of Debit note instead on charging the same on invoice so that hardships can be avoided by the seller.


DISCLAIMER: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of author. The author does not accept any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon. 

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February 2021