Section 206C of the Income Tax Act provides for the collection of tax at source (TCS) on the business of trading in alcohol, liquor, forest produce, scrap, etc. In order to widen and deepen the tax net, two new sub-sections (1G) and (1H) to section 206C has been inserted by the Finance Act 2020 with effect from 1st October 2020.

1. Bare Provisions – In this backdrop, let us check bare provisions of newly introduced sub-section (1H), (1-I) and (1-J) to section 206C made applicable from 1st October, 2020. Bare provisions are reproduced below-

(1H) Every person, being a seller, who receives any amount as consideration for sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub-section (1F) or sub-section (1G) shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 0.1 per cent. of the sale consideration exceeding fifty lakh rupees as income-tax:

Provided that if the buyer has not provided the Permanent Account Number or the Aadhaar number to the seller, then the provisions of clause (ii) of sub-section (1) of section 206CC shall be read as if for the words “five per cent.”, the words “one per cent.” had been substituted:

Provided further that the provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount.

Explanation.–For the purposes of this sub-section,–

(a) “buyer” means a person who purchases any goods, but does not include,–

(A) the Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or

(B) a local authority as defined in the Explanation to clause (20) of section 10; or

(C) a person importing goods into India or any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein;

(b) “seller” means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out, not being a person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.’;

 (1-I) If any difficulty arises in giving effect to the provisions of subsection (1G) or sub-section (1H), the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

 (1J) Every guideline issued by the Board under sub-section (1-I) shall be laid before each House of Parliament, and shall be binding on the Income-tax authorities and on the person liable to collect the sum.

2. Provision in Brief: Provisions of section 206C(1H) can be summed up as under:

Who to Collect TCS Whom to Collect TCS from Time of collection of TCS Rate of TCS
  • TCS to be collected by seller
  • Seller means a person whose total sales, gross receipts or turnover from the business carried on by him exceed Rs.10 crore during the financial year immediately preceding the financial year in which the sale of goods is carried out, not being a person as the Central Govt. may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
TCS to be collected from such buyers to whom value or aggregate value of goods sold exceeds fifty lakh rupees in a previous year. TCS is to be collected at the time of actual receipt of consideration by the seller.
  • If PAN or Aadhaar No. is provided by buyer – 0.1% of the sale consideration exceeding fifty lakh rupees
  • In otherwise case – 1% of the sale consideration exceeding fifty lakh rupees
Exempted Transactions: TCS u/s. 206C(1H) is not to be collected on following transactions:

  • Sale of services either in India or outside India;
  • Export of goods out of India;
  • Sale of goods covered by section 206C(1) and/or 206C(1F) and/or 206C(1G);
  • If the buyer is liable to deduct TDS and has deducted TDS under any provision of the Act on the goods purchased by him from the seller;
  • Sale of goods by such person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein;
  • Sale of goods to any of the following:

– Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or

– a local authority as defined in the Explanation to clause (20) of section 10; or

– any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.

Tips and Traps:

  • For the purpose of calculating threshold of Rs. 10 crores total sales, gross receipts or turnover from the business is to be taken into consideration i.e. sale of goods and services both shall be considered for calculating threshold of Rs.10 crores.
  • Threshold of Rs.10 crores is to be checked for the previous year immediately preceding the previous year in which sales is carried out irrespective of the previous year in which consideration for sale of goods is actually received.
  • For the purpose of calculating threshold of Rs. 50 Lakhs only sale of goods is to be taken into consideration.
  • These thresholds are to be checked for each previous year separately.

3. Illustrations: For better understanding let us take a look on the following illustrative transactions assuming no sale is made on credit:

Sl. No. Seller Buyer Total Turnover of Seller Aggregate value of Sales TCS u/s. 206C (1H) Remarks
FY 19-20 FY 20-21 Upto 30.9.20 After 30.9.20  
1. A B 13 crores 8 crores 25 lakh 65 lakh 4,000 0.1% on 40 lakh (being excess of Rs. 50 lakhs)
2. A B 10 crores 13 crores 25 lakh 65 lakh NA Since turnover in FY 19-20 does not exceed Rs. 10 crores
3. A B 13 crores 15 crores 60 lakh 55 lakh 5,500 On Rs.55 lakh being turnover and receipt after 30.9.20
4. A State Govt. 13 crores 15 crores 60 lakh 55 lakh NA Since section 206C (1H) is not applicable if buyer is State Govt.
5. A

(Job Worker

B

(deducts TDS u/s. 194C)

13 crores 15 crores 60 lakh 55 lakh NA Since TDS is already deducted on this transaction
6. A

(Auto Dealer)

B 13 crores 15 crores Nil 70 lakh NA Since on this transaction TCS shall be collected u/s. 206C(1F)

4. Practical Aspects

4.1 Meaning of term ‘Goods’ used in section 206C(1H)

  • The term “goods” used in section 206C(1H) is not defined in the Income Tax Act which creates ambiguity on scope of the said TCS provision. It is also not clear whether the definition of goods needs to be interpreted as per the Sale of Goods Act, 1930 or the Central Goods and Services Tax Act, 2017 (CGST Act) or some other legislation. Whether the term “goods” includes shares, securities, money/foreign currency, electricity, actionable claims etc. within its scope is not clear since there are different inclusions and exclusions within scope of ‘goods’ under various laws. For instance, unlike CGST Act definition of goods under Sale of Goods Act, 1930 includes stock and shares. Similarly, unlike Sale of Goods Act, definition of goods under CGST Act includes actionable claims.
  •  CBDT should clarify the meaning of term “goods” for the purpose of TCS u/s. 206C(1H).

4.2 How and when to collect TCS from the buyer?

  • Practically, the seller will raise sale invoice including the amount of TCS. Thus, TCS will be accounted in the books of seller as a TCS liability as soon as he raises the invoice. However, liability to pay TCS u/s. 206C (1H) will arise only at the time of receipt of consideration from the buyer.
  • To understand the issue, let’s take help of following hypothetical transactions made between seller-S and buyer-B
Total Turnover of Seller Aggregate value of Sales to B TCS charged in Invoice
FY 19-20 FY 20-21 FY 21-22 Upto 30.9.20 After 30.9.20  
13 crores 8 crores 9 crores 25 lakh 65 lakh 4,000
Case -1 : If all the sales consideration is received in Dec.20 i.e. FY 2020-21 Remarks: Mr. S will collect TCS of Rs.4,000.

Due date to deposit TCS: 07/01/2021

Case -2 : If all the sales consideration is received in Nov.21 i.e. FY 2021-22 Remarks: Mr. S will collect TCS of Rs.4,000.

For the meaning of term ‘seller’ threshold of Rs.10 crores is to be checked for the previous year immediately preceding the previous year in which sales is carried out irrespective of the previous year in which consideration for sale of goods is received. Since in this case, sales were carried out in the financial year 2020-21, hence sales/gross receipts/turnover of the previous year 2019-20 is to be checked for the threshold of Rs.10 crores.

Due date to deposit TCS: 07/12/2021

Case -3 : If buyer ‘B’ becomes insolvent and seller ‘S’ treats the amount irrecoverable. Remarks: No TCS shall be collected by S

Liability to collect TCS arises only on receipt of sales consideration.

Case -4 : If after treating the amount as bad debts, seller recovers bad debts partially in Feb.23 i.e. FY 2022-23. Remarks: Mr. S will discharge TCS liability on such recovery of bad debts by grossing it up.

Due date to deposit TCS: 07/03/2023

4.3 GST component while calculatingtotal sales, gross receipts or turnover’

  • ‘Seller’ means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out. Now the issue arises whether GST component will also be considered while determining ‘sales’, ‘gross receipts’ or ‘turnover’.
  • Considering that the words ‘Sales’, ‘Turnover’ and ‘Gross receipts’ are commercial terms, they should be construed in accordance with the method of accounting regularly employed by the seller. Para 5.9 to Guidance Note on Tax Audit under section 44AB of the Income-tax Act, 1961, Revised 2014 edition published by Institute of Chartered Accountants of India reads as under:

“The term ‘turnover’ for the purposes of this clause may be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise. If sales tax and excise duty are included in the sale price, no adjustment in respect thereof should be made for considering the quantum of turnover. Trade discounts can be deducted from sales but not the commission allowed to third parties. If, however, the Excise duty and / or sales tax recovered are credited separately to Excise duty or Sales tax Account (being separate accounts) and payments to the authority are debited in the same account, they would not be included in the turnover. However, sales of scrap shown separately under the heading ‘miscellaneous income’ will have to be included in turnover.’’

  • Although the said Guidance Note has been issued by ICAI with respect to section 44AB of the Income Tax Act, it is also relevant for section 206C(1H) due to same terminologies used in section 44AB and section 206C(1H).
  • In my opinion unless the CBDT clarifies its stand on this matter, it would be appropriate to ignore the amount of GST while calculating the total sales, gross receipts or turnover subject to such GST is credited in separate account and payments to the authority are debited in the same account.
  • CBDT should clarify whether the GST and other indirect taxes will be included while calculating the total sales, gross receipts or turnover or meaning of these terms will be construed according to the method of accounting followed by the seller.

4.4 Value on which TCS to be levied

  • Sub-section (1), (1C), (1G) of section 206C (1) of Income Tax Act states that tax shall be collected on the “value being debited as payable by the buyer to the seller.” Thus, TCS shall be collected on the amount including GST in case of these sub-sections to section 206C.
  • However, in case of sub-section (1F) and (1H) of section 206C it is stated that TCS shall be collected on the amount of sale consideration. However, the word consideration is not defined in the Act. A conservative view is to collect TCS on GST component as well. As far as applicability of GST on TCS portion is concerned, it was clarified vide Corrigendum to Circular No. 76/50/2018-GST dated 7.3.2019 (Circular was issued on 31.12.2018) that GST would not be required to be collected on the value of TCS. Therefore, TCS shall be collected on the value including GST but GST shall be charged on the value excluding TCS.
  • If such is the correct reading, threshold of Rs.50 lakhs will also be checked including GST component. CBDT should clarify whether the word consideration includes GST and other indirect taxes or not.

4.5 Applicability of TCS on Advance receipt and cancellation of Agreement to sell after advance receipt

  • Liability to collect TCS u/s. 206C(1H) arises when seller receives any amount as consideration for sale of any goods. In my opinion any payment received from buyer before completion of sale is against ‘agreement to sell’ and not against ‘sale of goods’. Such advance can only be appropriated against sale of goods on completion of sale. Therefore, liability to collect TCS should arise at the time of appropriation of advance against sale of goods and not at the time of receipt of advance.
  • However, a conservative view is to collect and pay TCS on such advance receipts as well. Practical difficulties arise where TCS is remitted on advance receipt and subsequently, the contract is cancelled and the amount becomes refundable. Seller will have two options at the time of such refund:
Sl. No. Amount of Refund to Buyer Consequences
1. Entire amount including TCS Seller has to revise his TCS return and amount already paid vide that challan has to be adjusted with any other TCS liability. Problem will be there when seller will not be having any other TCS liability to adjust the challan amount.
2. Primary sale consideration excluding TCS No revision in TCS return shall be required. However, form 26AS of the buyer will reflect TCS on such transaction which was never turned into purchases.
  • Similar difficulty may arise, when sales is completed and TCS is discharged after receipt of consideration and subsequently, sales return arises.
  • CBDT should clarify whether liability to collect TCS arises at the time of receipt of advance or at the time of appropriation of advance against sale of goods after completion of sale. Further, it should also be clarified whether seller shall refund amount pertaining to sale of goods only or refund the whole amount and subsequently revise the TCS return and how the seller shall receive back such amount?

4.6 Applicability of TCS on receipt in kind or book adjustment

  • In certain cases, it is possible that a person buys and sells to the same party and settlement is made on net basis.
  • For example, if Mr. A buys coal of Rs.20 lakhs from Mr. B and sells sponge iron of Rs.60 lakhs to Mr. B. thereafter, Mr. B make payment of Rs.40 lakhs in final settlement. In my opinion, receipt in kind is also a receipt and TCS shall be applicable on Rs. 10 lakhs (60 lakhs – 50 lakhs).
  • Let’s take another example. Mr. A sells goods to Mr.B of Rs. 60 lakhs and there is opening liability of Rs.60 lakhs either because of loan taken from Mr. B or goods purchased from Mr. B in earlier years. Now opening liability is adjusted against said sale and no transaction in money is made against the said sale. In my opinion, such settlement of debts is also a receipt and TCS shall be applicable on Rs. 10 lakhs (60 lakhs – 50 lakhs).
  • In such cases, another question arises whether date of sale or date of book adjustment shall be considered as date of receipt for the purpose of section 206C(1H).
  • CBDT should clarify whether consideration received in kind or through book adjustment is also a receipt for the purpose of section 206C(1H) or not. If yes, which date shall be considered as date of receipt for the purpose of TCS?

4.7 Applicability of Provisions in Transitional period

  • Section 206C(1H) has been made applicable from 1st October, 2020 and the provision gets triggered when any amount is received as consideration for sale of goods. Let’s try to understand the difficulties with the help of the following examples:
Sl. No. Date of completion of sale Date of receipt of sale consideration Remarks
1. Before 1.10.2020 Before 1.10.2020 No TCS is to be collected since section 206C(1H) is made applicable from 1st October, 2020
2. On or after 1.10.2020 On or after 1.10.2020 TCS to be collected at prescribed rate subject to threshold limit
3. Before 1.10.2020 On or after 1.10.2020 In my opinion, since sales were carried out in the period when provisions of section 206C(1H) were not applicable, therefore, this sub-section shall not get triggered on receipt of amount from debtors standing in books as on 30.9.2020.
4. On or after 1.10.2020 Before 1.10.2020 As also explained in para 4.5 supra, in my opinion advance payments cannot be considered as ‘consideration for sale of any goods’. Advance payments are payments received against ‘agreement to sell’ only. Section 206C(1H) will get triggered when such advance shall be appropriated against sale after completion of sale. Therefore, in this case TCS will be collected by the seller.
  • However, above are only my personal opinion and CBDT should clarify whether in transitional period, liability to collect TCS will arise-

i) When both sale of goods and receipt of consideration are made on or after 1st October, 2020; or

ii) When consideration is received on or after 1st October, 2020 despite sale was carried out before 1st October, 2020; or

 iii) When sale is carried out on or after 1st October, 2020 despite consideration received before 1st October, 2020.

4.8 Mis-Match of 26AS and Books of Buyer:

  • There may be instances where Buyer buys the goods in one financial year (say financial year 2021-22) and makes payment in next financial year (say financial year 2022-23). Since liability to collect TCS u/s. 206C(1H) arises on receipt basis hence seller will collect TCS in financial year 2022-23. This may lead to mismatch in the purchases showing in the books of account and that reflecting in Form 26AS of the buyer. In the instant case, purchases will debited in the books of account of the buyer in the financial year 2021-22 but the said purchases will reflect in form 26AS of the buyer in the financial year 2022-23. This may lead to litigation and disputes.
  • CBDT should clarify whether the TCS obligation on sale of goods u/s. 206C(1H) triggers strictly on receipt basis or receipt needs to be understood as per the method of accounting followed by the seller.

4.9 Applicability of TCS provisions on Adhoc Sale Consideration

Wherever the amount collected from the buyers is an ad hoc amount, the seller needs to gross it up and remit the TCS accordingly.

4.10 Applicability of TCS provisions to Newly incorporated Sellers

Provisions of section 206C(1H) shall not be applicable to newly incorporated sellers as they do not fulfil the criteria of sales, gross receipts or turnover exceeding Rs. 10 crores during the financial year immediately preceding the financial year in which the sale of goods is carried out.

5. Conclusion

Above issues are illustrative only and other issues may also arise after implementation of this provision. For removal of difficulty on implementation of this sub-section, CBDT has been empowered by section 206C(1-I) to issue guidelines with the approval of Central Government. Therefore, CBDT should issue guidelines for smooth implementation of sub-section (1H) to section 206C.

Although casting TCS obligation at the time of receipt of sales consideration is beneficial to the seller from cash flow perspective, practically it may lead to litigation and disputes. If point of taxation had been shifted from receipt basis to mercantile basis, it would have been easier to both, buyer and seller.

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Author Bio

Qualification: CA in Practice
Company: A K Agrawal & Co.
Location: Varanasi, Uttar Pradesh, IN
Member Since: 22 Sep 2020 | Total Posts: 1

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3 Comments

  1. Akhilesh Kumar says:

    Dear sir

    Please guide me if the supply is made to sister unit but different GSTN depending on states but having same pan, whether this 206(1H) applies ?

    1. Aadesh kumar Agrawal says:

      Concept of distinct person is in GST law and not in Income Tax. 2 units having same PAN shall be treated as 1 person in Income Tax, therefore, section 206C(1H) shall not apply in this case

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