TCS on sale of goods – Analysis on section 206C(1H)

Section 206C(1H) – TCS on sales of goods – Introduced by Finance Act 2020

Background (Erstwhile provisions)

Tax collected at source (TCS) is the tax payable by a seller which he collects from the buyer at the time of sale. Section 206C of the Income-tax act governs the goods on which the seller has to collect tax from the purchasers.

Goods covered under TCS provisions and rates applicable to them

The erstwhile provisions are not applicable if buyer is:-

1. Public sector company

2. Central govt., state govt.

3. Club

4. Embassies, High Commission, consulate or trade representative of a foreign state.

5. A buyer who buys the above goods for his personal consumption.

To expand the tax collection mechanism of S. 206C and deepen the tax net, a new sub section (1H) has been introduced by finance act 2020 to provide TCS on sale of goods over annual threshold limit of Rs. 50 Lakhs.

New TCS Provisions on sale on Goods Section 206C(1H)

Applicable w.e.f 1 October 2020

“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”

In simple words, in case the sales consideration from ‘sales of goods’ exceeds Rs. 50 lakhs during the Financial year then the  ‘seller’ is required to collect TCS @1 % on amount exceeding Rs. 50 lakhs. That means if total ‘sales of goods’ during the year is Rs. 60 Lakhs then in that case TCS is to be collected on amount exceeding Rs. 50 lakhs only, i.e. TCS @0.1% is to be collected on Rs. 10 Lakh (60 Lakh – 50 Lakh).

To be collected at the time of receipt or accrual?

As per the interpretation of terms used in above section ‘at the time of receipt’ makes it clear that the TCS is to be collected at the time when actual payment is received by the seller. If Mr. A has total sales of Rs. 80 Lakh during the FY 2020-21 out of which Rs. 50 Lakh are cash sales and balance Rs. 30 Lakh are credit sales, then in that case Mr. A is not required to collect any TCS. As 50 lakhs threshold is provided in section therefore that threshold will be exhausted by the cash sales of Rs. 50 Lakhs and for remaining Rs. 30 Lakh, TCS is to be collected at the time of actual receipt.

Interpretation of term seller

Now, let suppose that Rs. 30 lakh is received in next FY 2021-22 and total sales (all cash) during that FY is Rs. 2 Crores. Therefore, the total receipts during FY 2021-22 is Rs. 2.30 Crore. Now you guys may be thinking that Mr. A is required to collect TCS on 1.80 crore (2.30 cr – 50 Lakhs threshold). But Mr. A is not required to collect any TCS in FY 2021-22. Why ? explained below.

As per the explanation used under this section seller means a person whose total sales, gross receipts or turnover from the business exceeds Rs. 10 Crore during the financial year immediately preceding the financial year in which the sale of goods is carried on. Since, in above example the turnover during the preceding FY (i.e. FY 2020-21) is Rs. 80 lakhs only therefore TCS provisions not applicable for FY 2021-22. TCS provision will not be applicable to newly incorporated sellers as they are not fulfilling the criteria of sales exceeding Rs. 10 cr during the previous FY.

In addition, for calculating the threshold of Rs. 10 Crore the total turnover is to be taken into consideration, however while calculating the threshold of Rs. 50 Lakhs only sale of goods is to be taken into consideration.

Whether sales consideration includes GST component?

No clarification has been provided by CBDT in this regard.

GST component is included while calculating the limit of section 44AB i.e. Tax Audit. Same interpretation is to be followed while calculating the threshold limit under this section i.e. GST component will included in sales. For eg, if Mr. A has turnover of Rs. 9cr (exclusive of GST) in FY 2021-22 and collected GST of Rs. 1.08cr, in that case total turnover for the purpose of this section is Rs. 10.08cr. Same conclusion applicable for calculating Rs. 50 lakhs threshold.

Whether TCS will be collected on GST portion?

Indirect taxes like GST forms integral part of the consideration and therefore TCS is collectible on sales price inclusive of GST and other indirect taxes.

A clarification in this regard is expected from CBDT. Till then the conservative view is to collect TCS on GST component as well.

Treatment of sales return?

Sales return is to be adjusted(reduced) while calculating the threshold under the provisions of this section. However, in case of sales return in subsequent years it may lead to some practical challenges that need to be clarified by CBDT.

PAN/Adhar not furnished by buyer

If the buyer has not provided the Permanent Account Number or the Aadhaar number to the seller, in that case seller is required to collect TCS @ 1%.

Provisions of this section is not applicable 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.

It may be inferred that if the buyer is required to deduct tax source on any of his other transactions (e.g. 194C / 194H) as per business requirements, the seller need not collect tax at source on sales to those specified buyers.

In case the buyers falls in below categories then in that case seller is not required to comply with the provisions of section 206C(1H)

(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;

In case the person is importing goods from outside India in that case seller is person outside India. Therefore, due to specific exclusion given in case of imports person resident outside India is not required to comply with provisions of this section.

As per the literal reading of definition of buyer it is quite clear that TCS is applicable on all B2B and B2C transactions. This may led to collection of TCS at multiple levels. However, the erstwhile provisions of TCS were only applicable on B2B transactions.