Detailed analysis with a practical approach on TCS on Sales of Goods- section 206C(1H)
Since morning of the 1st day of October, 2020 we have received so many calls from clients and friends making queries on different aspects of section 206C(1H) of the income Tax Act. Some of such important queries and probable answers of the same are discussed in this article for esteemed readers.
1. What does the sub-section say?
The text of the section 206C (1H) is as under:-
(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.
2. When from the provision is made applicable?
Provisions of section 206C (1H) of the Income Tax Act is made applicable w.e.f. 01/10/2020.
3. Who is liable to collect tax at source?
Seller of goods. 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 are liable to collect tax under section 206C(1H).
However, Central Government may, by notification in the Official Gazette, specify such person(s), who subject to such conditions as may be specified therein will not be liable to collect Tax at source under this provision.
4. At what rate the tax will be collected?
Tax at source will be collected at following rates:-
a) If the person is providing his PAN/ Aadhaar card number- (0.075% up to 31/03/2021, 0.1% from 01/04/2021)
b) If the person is not providing his PAN/ Aadhaar card number- (1%)
5. From whom tax will be collected?
Tax is liable to be collected from buyers (other than some specified buyers) of goods (other than some specified goods) from whom the seller receives any amount as sale consideration subject to the following conditions:-
a) The value or aggregate value of the sales of any goods (other than specifically excluded goods) exceeds Rs. 50 lakh in any financial year.
b) The sale consideration received is above Rs. 50 lakhs.
Say, a seller has made following transaction with a buyer;
a) Goods sold on 01/03/2020 – 47,70,000
b) Goods sold on 12/09/2020 – 30,00,000
c) Amount received on 15/09/2020 – 10,00,000
d) Amount received on 01/10/2020 – 67,70,000
As it appears to the author that the literal interpretation of the sub-section may be that though the tax is to be collected on receipt of the sales considerations, but such tax will be collected only after crossing of the sales value above Rs. 50 lakhs in the Financial Year. Accordingly no tax is to be collected in the above case, being the value of the sales during the year is below Rs. 50 lakhs.
However, the press release dated 30/09/2020 issued by CBDT contains “It may be noted that this TCS applies only in cases where receipt of sale consideration exceeds Rs. 50 lakh in a financial year. As the threshold is based on the yearly receipt, it may be noted that only for the purpose of calculation of this threshold of Rs. 50 lakh, the receipt from the beginning of the financial year i.e. from 1st April, 2020 shall be taken into account”.
Thus as per the said press release TCS will be applicable in the above case on Rs. 27,70,000/- (67,70,000 +10,00,000 – 50,00,000).
As section 271CA does not levy any penalty for excess collection of tax at source and as the buyer will get the credit of such TCS against his income tax liability, it may be a wise step to follow the press release literally.
6. Whether the provisions of section 206C (1H) will be applicable if the buyer is liable to deduct tax at source under this Act?
As per the second proviso to the sub-section, 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.
It is to be kept in mind that if the buyer does not deduct tax ta source, seller, in the applicable case will be liable to collect tax at source.
7. Who are the buyers excluded from this provision?
As per the definition of the term “buyer” provided in the sub-section, following persons (purchasers) are excluded from this provision;
i. the Central Government,
ii. a State Government,
iii. an embassy,
iv. a High Commission,
vii. consulate and the trade representation of a foreign State,
viii. a local authority as defined in the Explanation to clause (20) of section 10,
ix. a person importing goods into India,
x. 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;
Thus tax is not liable to be collected under this sub-section on sales of goods to aforesaid persons.
8. Which goods/sales/receipts have been kept outside the scope of section 206C(1H)?
Tax collection under this sub-section is required in the following case of following goods/ sales/ receipts:-
A. Goods exported out-side India.
B. Goods covered in section 206C (1). Following goods are covered in section 206C (1):
a) Alcoholic Liquor for human consumption
b) Tendu leaves
c) Timber obtained under a forest lease
d) Timber obtained by any mode other than under a forest lease
e) Any other forest produce not being timber or tendu leaves
g) Minerals, being coal or lignite or iron ore
C. Motor Vehicle of the value exceeding ten lakh rupees which is otherwise covered in section 206C (1F).
D. Transaction covered in section 206C (1G). However prima facie no transaction of sales of goods is covered by the said sub-section.
9. Will TCS be applicable in the first year of business?
As per this sub-section duty to collect tax at source is on the 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. Therefore irrespective of the quantum of turnover of the current year, TCS will not be available in the following cases:-
a) If the current year is the first year of the business.
b) If the business turnover of the seller in the immediately preceding financial year was not exceeding Rs. 10 Crores.
10. Whether Tax will be collected even on the GST included in the bills?
The CBDT, vide Circular No. 17/2017 dated 29/09/2020 has clarified the issue that whether adjustment is required to be made for sales return, discount or indirect taxes including GST for the purpose of collection of tax under section 206(1H). It was clarified that no adjustment on account of sale return or discount or indirect taxes including GST is required to be made for collection of tax under sub-section (IH) of section 206C of the Act since the collection is made with reference to receipt of amount of sale consideration. Thus it is crystal clear that for the purpose of collection of tax at source the term sales consideration will be treated as inclusive of GST and therefore TCS will also be applicable on GST and other indirect taxes charged on sales of goods.
11. Whether the terms ‘sales value’ and ‘total sales, gross receipts or turnover’ are inclusive of GST & Excise?
Provisions of 206C (1H) are applicable if the total sales, gross receipts or turnover of a person exceeds Rs 10 Crores in the immediately preceding year and applicable in cases where sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees. Thus all the terms are very important.
It is true that GST laws do not include GST under the ambit of supply value, but unlike in GST laws no such definition of the aforesaid terms have been provided under the Income Tax Act. There are different views on the issue that whether the above will be inclusive of GST or not. Following three different views have been expressed by different experts on the issues:-
a) GST will not be included in determining the ‘sales value’ and ‘total sales’.
b) GST will be included in determining the ‘sales value’ and not while determining the value of ‘total sales’.
c) GST will be included in determining the ‘sales value’ and ‘total sales’.
In absence of any further clarification from the CBDT, in the opinion of the author it may be a safe decision to treat these terms as inclusive of indirect taxes.
12. Whether the terms ‘sales value’ and ‘total sales, gross receipts or turnover’ are inclusive of Supply of services?
Though no explanation or clarification has been provided on this issue, but in the opinion of the author it may be safe to interpret the issues as follows:-
a) The terms “total sales, gross receipts or turnover” are inclusive of the value of the supply of services. In the press release issued by the CBDT, the term “business turnover” has been used in place of the terms “total sales, gross receipts or turnover”
b) The term “’sales value” will not include services, but the value of the goods supplied in case of deemed services (as per GST Act) will be a part of this term.
13. Whether the provisions of section 206C(1H) will be applicable in case of works contracts?
In most of the cases of works contract, the recipient/buyer is under obligation to deduct tax under this Act and there will be no liability to collect tax at source. In other cases whether this provision of TCS will be applicable or not is an issue of debate. Whether the transfer of property in goods in execution of works contract will come under the ambit of the term ‘sale of goods’ under Income Tax Act is a question which may cause a great debate.
There is no penalty for collecting tax at source so the esteemed readers may choose a safer way.
In its landmark judgment in the case of State of Madras Vs. Gannon Dunkerley & Co. (Madras) Ltd. (1958) 09 STC 0353 (SC), the constitution bench held that on the true interpretation of the expression “sale of goods” there must be an agreement between the parties for the sale of the very goods in which eventually property passes. In a building contract, the agreement between the parties is that the contractor should construct the building according to the specifications contained in the agreement, and in consideration therefor receive payment as provided therein, and in such an agreement there is neither a contract to sell the materials: used in the construction, nor does property pass therein as moveables.
14. Whether the provisions will be applicable on the amount received against supply made prior to 01/10/2020?
Circular No. 17/2017 dated 29/09/2020 issued by CBDT, contains that since the threshold of Rs. 50 lakh is with respect to the previous year, calculation of receipt of sale consideration for triggering TCS under section 206C (1H) shall be computed from 1st April, 2020. Hence, if a person being seller has already received Rs. 50 lakh or more up to 30th September 2020 from a buyer, the TCS under sub-section (1 H) of section 206C shall apply on all receipt of sale consideration during the previous year, on or after 1st October 2020, from such buyer.
15. Whether the provisions will be applicable on the amount received prior to 01/10/2020?
As per Circular No. 17/2017 dated 29/09/2020 issued by CBDT, the provisions of section 206C (1H) shall not apply on any sale consideration received before 1st October 2020. Consequently it would apply on all sale consideration (including advance received for sale) received on or after 1st October 2020 even if the sale was carried out before 1st October 2020.
16. Whether the provisions of section 206C(1H) will also be applicable in case of security transaction?
As per Circular No. 17/2017 dated 29/09/2020 issued by CBDT, the provisions of section 206C (1H) shall not be applicable in relation to,-
(i) transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporation located in International Financial Service Centre;
(ii) transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC.
17. Whether all motor vehicles are excluded from the applicability of section 206C (1H)?
Circular No. 17/2017 dated 29/09/2020 issued by CBDT contains;
(i) Receipt of sale consideration from a dealer would be subjected to TCS under section 206(1H), if such sales are not subjected to TCS under section 206C (1F).
(ii) In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value of ten lakh rupees or less to a buyer would be subjected to TCS under section 206C (1H), if the receipt of sale consideration for such vehicles during the previous year exceeds Rs. 50 lakh during the previous year.
(iii) In case of sale to consumer, receipt of sale consideration for sale of motor vehicle of the value exceeding Rs. 10 lakh would not be subjected to TCS under section 206C (1H) if such sales are subjected to TCS under section 206C (1F).
18. Whether GST to be charged by the seller on the amount of sale including TCS?
TCS is not a tax but a mode of interim levy and collection of Income Tax on the ‘Income’ of the buyer. Therefore, GST is not to be charged/levied on the TCS amount. Corrigendum to CBEC Circular No. 76/50/2018-GST issued on 07-03-2019 may also be referred to.
19. Whether provisions of section 206C(1H) will be applicable in FY 2020-21, if in the FY 2019-20, turnover from business was Rs. 8 crores and sale proceed of House property was Rs. 3 Crores?
Being selling of house property is not in course of business hence the turnover from business will remain below 10 Crores and thus there will be no applicability of this provision during FY 2020-21.
20. Whether stock transfer to distinct person will be treated as sale for the purpose of section 206C(1H)?
Unlike under GST laws, Income tax laws treat all the branches of a firm as single entity and there cannot be any sale purchase unless there are two persons/entity.
21. Whether TCS will be applicable on all the receipts of sales consideration after 01/10/2020?
No. It will be applicable only on the cases which are covered under this provisions. Let us understand it through the following illustration assuming that the seller had a business turnover for more than Rs 10 Crore in FY 2019-2020:-
|Sl.||Sales to ‘A’ (01/04/20 to 30/09/20)||Sales to ‘A’ (01/10/20 to the date of receipts||Amount received After 01/10/20||TCS u/s. 206C(1H)||Remarks|
|1.||40,00,000||9,90,000||45,00,000||Nil||Sales remained below Rs. 50 lakh.|
|2.||43,00,000||8,00,000||51,00,000||75||51 lakh- 50 lakh * .075%|
|3.||60,00,000||0||20,00,000||750||60 lakh- 50 lakh * .075%|
( 4 lakh agt prev balance)
|150||Please refer Q. no. 5 above.|
( 4 lakh as advance)
|150||Please refer Q. no. 5 above.|
|150||0.075% of 52 lakh- 50 lakh.|
22. What will be the procedural obligations on the seller due to sec 206C(1H):
Some of the basic compliances that a business entity has to execute are as follows:
Provisions of section 206(1C) has a lot of ambiguity. A circular and a press release has been issued but still there are so many answered questions in the mind of the tax payers which needs proper redressal. Undoubtedly the drafting of this sub-section could have been better. In this background a humble attempt has been made for exclusively academic purposes to make the issues clear as far as possible. While doing so the author has interpreted the different provisions of law and there may be different views on any of the issues discussed above.
Disclaimer:- The above expressed views are purely the personal views of the author which are shared for academic purposes. The possibility of other views on the subject matter cannot be ruled out. Esteemed readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, notifications, circulars, clarifications etc before acting on the basis of the above write up. The author is not responsible in anyway.