Section 206C of the Income Tax Act requires certain eligible sellers to deduct Tax Collected at Source (TCS) from certain buyers buying the goods. The Indian government constantly amends taxation policies to ensure that high-value transactions come under the provisions of any of the sections included in the Income Tax Act. It sets a minimum and maximum threshold limit for transactions to ensure that eligible individuals and entities pay taxes if the threshold limit is breached, and the government can monitor transactions for effective regulatory and taxation compliance. A similar situation is the case with sellers selling goods that accumulate high value in a financial year. To ensure the sale of goods comes under the taxation laws, the government introduced section 206C in the Income Tax Act.
If you are a seller and have a thriving business selling goods that earn you a high annual income, you may be required to deduct TCS when selling to certain buyers. This blog will help you understand all the provisions of section 206C and section 206C (1H) of the Income Tax Act and how you can use the learnings for better taxation compliance.
What is the section 206C tax collected at source (TCS)?
Section 206C of the Income Tax Act requires sellers to deduct Tax Collected at Source (TCS) from the amount of money they get from selling goods to certain sellers. Section 206C was introduced in the Income Tax Act 1961 through the Finance Bill 2020 and now mandates that sellers deduct TCS, especially if the total sale of goods by a seller exceeds Rs. 50,00,000 in a financial year. However, the threshold limit of Rs. 50 lakh is for an individual buyer. This means that the seller falls under the provisions of section 206C of the Income Tax Act only if the seller receives an aggregate sum exceeding Rs. 50 lakh from a single seller.
As far as the total turnover of a seller is concerned, the provisions of section 206C (1H) apply. Under section 206C (1H) of the Income Tax Act, a seller is required to collect TCS if the annual turnover exceeds Rs. 10 crore. The seller must collect and deposit the TCS amount with the government before the due date.
Also read: 234C of Income Tax Act
Classification of sellers for TCS
Although section 206C of the Income Tax Act requires sellers to collect TCS from the amount of sale to certain buyers, section 206C has classified the sellers for clear eligibility. Listed below is the classification of sellers required to collect TCS under section 206C of the Income Tax Act:
- A company registered under the Companies Act 2013
- Central government
- Statutory authority or corporation
- State government
- Local authority
- Co-operative society
- Partnership firms
- Any individual or Hindu Undivided Family (HUF) subject to a tax audit for a specific financial year.
Classification of buyers for TCS
Under section 206C of the Income Tax Act, the above-listed sellers are liable to deduct and deposit TCS with the Indian government from the amount they get from the sale of goods to certain buyers. Buyers are specified under section 206C of the Income Tax Act as those who buy goods from eligible sellers through retailers, wholesalers, or online platforms. However, some buyers are exempted from the provisions of section 206C of the Income Tax Act. These are:
- Public sector companies
- Embassy of High Commission
- Central government
- State government
- Trade representation and consulate of a foreign nation
- Clubs such as sports clubs or social clubs
- A buyer who purchases goods from the seller to use them in producing or manufacturing a thing or article to generate power. Such a buyer needs to give the declaration in writing under section 197C.
Also read: Income tax slab
When will a higher rate of TCS apply?
Section 206C of the Income Tax Act specifies the nature of goods and the TCS rate that applies to each type of transaction. However, sub-section 206CCAA mandates that the sellers must collect TCS at a higher rate from the buyer if the following conditions are fulfilled:
- If the buyer has failed to file an income tax return for the last two years before the year in which the seller collected the TCS.
- If the total amount of TCS and TDS has exceeded Rs. 50,000 in every one of the last two financial years.
- The due date for filing the income tax return has expired.
Goods come under the TCS provision, and the rate of tax applied
Here are the goods that come under the TCS provision with the applicable TCS rate:
| Sections | Types of goods/transactions | Tax rate |
| 206C(1) | Sale of the following goods: | |
| Alcoholic liquor for human consumption | 1% | |
| Tendu leaves | 5% | |
| Timber obtained under a forest lease | 2.5% | |
| Timber obtained by any mode other than under a forest lease | 2.5% | |
| Any other forest produce not being timber or tendu leaves | 2.5% | |
| Scrap | 1% | |
| Minerals like lignite, coal, and iron ore | 1% | |
| 206C(1C) | Permit or lease/licence of the following: | |
| Toll plaza | 2% | |
| Parking lot | 2% | |
| Mining and quarrying | 2% | |
| 206C(1F) | Motor vehicle (if the sale consideration exceeds Rs. 10 lakh) | 1% |
| 206C(1G)(a) | Remittance outside India under the Liberalised Remittance Scheme of RBI | 5% |
| 206C(1G)(b) | TCS on the sale of overseas tour package | 5% |
| 206C(1H) | TCS on sale of any goods excluding goods on which TCS is applicable as per section 206C (1), 206C (1F), and 206C (1G) | 0.1% (for sales exceeding Rs. 50 lakh if annual turnover exceeds Rs. 10 crore) |
Limits under Section 206C of the Income Tax Act
Section 206C of the Income Tax Act mandates the collection of tax at source (TCS) on certain specified goods. The limits for TCS are defined based on the type of goods sold and the value of the transaction.
For instance, TCS is applicable on the sale of items like alcohol, tendu leaves, timber, and scrap, among others. The seller is required to collect TCS at a specified percentage on the total sale value. If the amount received in a financial year exceeds ₹2.5 lakh (₹50,000 for certain categories such as an individual or Hindu Undivided Family), TCS must be collected.
Moreover, the buyer can claim credit for the TCS amount collected against their total tax liability while filing their income tax return. It is essential for sellers to provide a TCS certificate to buyers, detailing the amount collected and the buyer’s information. Failure to comply with these provisions may attract penalties and interest. The introduction of TCS under Section 206C aims to increase tax compliance and enhance revenue for the government by tracking high-value transactions.TCS certificate
The Indian government requires every seller to provide a TCS certificate to the buyer of goods after filing a quarterly return using Form 27EQ. The TCS certificate is issued as Form 27D and includes the following information:
- PAN card of the buyer and the seller
- Name of the buyer and the seller
- TAN of the TCS collector (seller)
- Rate of the applicable TCS
- Date of TCS collection
| Quarter ending | The due date for filing the TCS return using Form 27EQ | The due date for generating Form 27D |
| Quarter ending date- 30th June | 15th July | 30th July |
| Quarter ending date - 30th September | 15th October | 30th October |
| Quarter ending date - 31st December | 15th January | 30th January |
| Quarter ending date - 31st March | 15th May | 30th May |
Also read: 234C of Income Tax Act
TCS payments and returns
Here are all the rules and regulations the TCS collector must adhere to under section 206C of the Income Tax Act:
- If the TCS is collected by any government office through its officials, it must be deposited on the same day if it is paid by a book entry. If the TCS is to be paid through a challan, the due date is the 7th day after the end date of the month in which the TCS is collected.
- The seller who has collected TCS must use challan number 281 to deposit the TCS with the government. The due date is the 7th day after the month's end date in which the TCS is collected. However, if the TCS is collected in the month of March, the due date is 30th April.
- The seller is charged a penalty of an interest of 1% per month or part of the month if there is a failure to deduct and deposit TCS before the due date.
- Every TCS collector is required to submit TCS returns quarterly using Form 27EQ.
Also read: 234B of Income Tax Act
What are the cases of TCS exemption?
Here are the conditions that exempt sellers from deducting TCS:
- The buyer uses the goods that have been sold for personal consumption.
- The buyer purchases the goods from the seller for use in producing or manufacturing a thing or article to generate power and not for trading.
Who is responsible for collecting TCS under section 206C?
Under Section 206C of the Income Tax Act, the seller of specified goods is responsible for collecting Tax Collected at Source (TCS). This applies to sellers engaged in the sale of items like alcohol, tendu leaves, timber, and scrap. The seller must collect TCS at a prescribed percentage from the buyer at the time of sale, provided the sale amount exceeds the specified limits. The seller is also required to furnish a TCS certificate to the buyer, indicating the amount collected and other necessary details, ensuring transparency and compliance with tax regulations.
Penalties & consequences for non-compliance
Non-compliance with Section 206C can lead to significant penalties, including a fine of ₹10,000 or higher, depending on the violation. Additionally, failure to collect or deposit TCS may attract interest charges and result in the seller being held liable for the unpaid tax amount, impacting their financial standing.
List of forms to submit under section 206C
Under Section 206C of the Income Tax Act, several forms are required for compliance related to Tax Collected at Source (TCS). The key forms include:
- Form 27E: This form is submitted to the income tax department for the quarterly return of TCS collected by the seller. It must be filed electronically.
- Form 27A: A summary of TCS details, this form is submitted along with Form 27E, providing an overview of the TCS collected during the quarter.
- Form 26AS: This form provides a consolidated view of tax credits, including TCS, for taxpayers. It is generated by the income tax department and reflects the TCS collected on behalf of the buyer.
- TCS certificate: Sellers must issue a TCS certificate to buyers, detailing the amount of tax collected at source, which the buyers can use for claiming tax credits.
These forms ensure proper documentation and compliance with TCS regulations, facilitating transparency in tax collection.
How TDS is different from TCS?
Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are both taxes that are levied by the income government. TDS is deducted by the payer of income (employer, contractor) from the payment made to the payee (employee, service provider). It is applied to various types of income, such as salaries, interest, rent, professional fees, etc. The responsibility of deducting and depositing TDS lies with the payer.
On the other hand, TCS is collected by the seller from the buyer at the time of the sale of goods or services. It applies to specific buyers selling specific goods and services to certain sellers, such as scrap, minerals, timber, and certain other goods. The responsibility of deducting and depositing TCS lies with the seller.
Also read: Section 140A of Income Tax Act
Conclusion
Tax Collected at Source (TCS) is one of the most common types of taxes levied by the Indian government on sellers who are required to deduct the TCS from the amount they receive on the sale of certain goods to certain buyers. The rules and regulations for the eligible buyers, sellers, and goods are mentioned under section 206C of the Income Tax Act. The section specifies tax collection at source (TCS) for certain transactions and TCS rates, such as 1% on the sale of scrap, 2.5% on the sale of timber, and 1% on the sale of minerals. If you are a seller with an annual turnover exceeding Rs. 10 crore and aggregate sales exceeding Rs. 50 lakh from a single buyer, you must adhere to the provisions of section 206C to avoid an interest penalty of 1% per month.
