The mechanism of tax collection at source was introduced in the Finance Act, 1988 in order to facilitate the assessment and recovery of income tax from persons who were engaged in the business of taking contracts for sale alcoholic liquor, scrap, timber and other forest produce. Section 44AC to compute income from such business and section 206C which requires seller to collect tax were introduced in this regard.
The Finance Bill, 2020 amended section 206C by inserting new sub section 1(H) which requires a seller receiving consideration exceeding Rs. 50 lakhs for sale of goods to collect tax at time of receipt of consideration.
What is the new TCS levy about?
- Seller who receives consideration of value or aggregate of value exceeding Rs 50 Lakhs in a financial year from a buyer.
- Applicable for sale of any goods other than exported goods or sale of goods on which TCS is collected currently u/s. 206C(1).
- Buyer can be any person other specified buyers.
- Seller means any person whose total sales, turnover or gross receipts from business exceeds Rs. 10 Crore in the previous financial year.
- The seller is not liable to collect tax at source if the buyer is required to deduct tax at source under the TDS provisions.
- Tax has to be collected at 0.1% and 5% if the buyer fails to intimate PAN/Aadhar on excess consideration received on or after 01.10.2020.
Note: The Ministry of Finance has issued a press release dated 13.05.2020, reducing the TDS and TCS rates by 25%. Thus TCS u/s 206(1H) is required to be collected at 0.075% instead of 0.1%. However if the buyer fails to intimate PAN/Aadhar to the seller, then rate shall be 5% and there is no reduction in TCS rate in such cases.
Practical Issues and Frequently Asked Questions:-
What are the sale transactions that attract TCS u/s. 206C(1H)?
All kinds of sale of goods are covered under the ambit of 206C(1H).
The CGST, Act defines Goods as “every kind of movable property other than money & securities but includes actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”.
|Type of Transaction||Explanation|
|Agriculture goods, income from which is exempt from income tax||Agricultural products are included in definition of Goods. However TCS is not applicable if the sales are from agricultural activity and entire income is exempt u/s. 10(1).|
|Goods like Tea, Coffee, Rubber in the nature of partial business income and partial agricultural income||Rule 7A(Rubber), Rule 7B(Coffee) and Rule 8(Tea) requires that income from sale shall treated as if it were business income and computed as per applicable provisions. Therefore TCS applicability is to be determined on basis of total turnover as the rules requires only portion of profit from such activities to be treated as agricultural income and not on the basis of total turnover.|
|Goods manufactured and sold according to the requirement or specification of the buyer||Raw materials used in manufacture of goods are:-|
A. Purchased from third party – It is a contract for sale, hence TCS is applicable to the job worker who is the seller in this case.
B. Purchased from buyer – It’s a contract for work which attracts TDS under section 194C. Since TDS is applicable, TCS provisions shall not apply.
|Goods sold by a commission agent or on consignment basis. Will it be included in the turnover of the agent for threshold limit of Rs. 10 Crore?||If the sale is on principal to principal basis between the owner and the agent, then such sale will included in the turnover of the agent. Where the agent does not act as a principal, but only for commission, then such sale will be included in the turnover of the principal. The CBDT vide circular 452 dated 17-03-1986 clarified that for the purpose of determining turnover for applicability of Section 44AB.|
1. Sale made by Kachha arhatia i.e. an agent who does not act as a principal, only commission earned shall form part of turnover and not the sale on behalf of principal.
2. Sale made by Pacca arhatia i.e. an agent who acts as a principal, the total sales/turnover made by the agent shall be taken into consideration.
|Sale of goods to Special Economic Unit or SEZ Developer||Sale of goods to SEZ unit/developer is treated as an export for the purposes of the SEZ Act, 2005 and CGST Act. However in case of 206C (1H), it is mentioned that “Goods exported out of India” is not subject to Tax collection by the seller. Therefore in absence of CBDT clarification, it is to assumed that TCS is applicable on sale of goods to SEZ unit/developer.|
What is definition of the terms total sales, turnover or gross receipts from business?
Turnover, sales and gross receipts have not been defined anywhere in the Income Tax, Act. However these terms have been defined in various acts or guidance notes issued in this regard.
• Guidance note on Terms used in Financial Statements
The aggregate amount which sales are effected services rendered by an enterprise. The terms gross turnover and net turnover (or gross sales and net sales) are sometimes used to distinguish the sales aggregate before and after deduction of and discounts.
• Section 2(91) Companies Act, 2013
“turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.
• Guidance Note on Tax Audit under Section 44AB of the Income Tax Act, 1961
The term turnover shall be interpreted to mean the aggregate amount for which sales are effected or services rendered by an enterprise. Para’s 5.11 to 5.19 of the Guidance Note, specifies items which are to included or excluded from turnover/gross receipts.
Whether TCS is to be collected on GST portion of Sale consideration received from the buyer?
Yes, TCS has to be collected on sale consideration inclusive of GST portion as the CBDT has clarified the same by Circular 17/2020 dated 29.09.2020.
Does the Turnover, Sales or Gross Receipts include GST to determine whether the seller has crossed limit Rs. 10 Crore respectively?
There is no clarification issued by the Central Board of Direct taxes relating to this issue in the Circular No 17/2020. However as per the Guidance Note on Tax Audit published by the ICAI.
• If Sale Price includes Sales Tax and Excise Duty, no adjustment shall be made from the Turnover.
• If separate accounts are maintained for collection and payment of Sales Tax and Excise Duty, they shall not be included in the turnover (commonly known as exclusive method).
Therefore the above interpretation can be applied to GST as follows
A. Sale price in inclusive of GST – no adjustment to Turnover.
B. Sale price exclusive GST and separate account maintained – GST not to be included in Turnover.
C. Sale price exclusive GST and separate account not maintained – GST to be included in Turnover.
|Turnover in previous FY||Applicability of 206C(1H)|
|Rs. 9.5 Crore, sale price inclusive of GST Rs. 1.5 Crore||Not Applicable since T/O is within the limit|
Turnover Includes GST as it is included in the sale price. ( Rs. 9.5 Cr)
|Rs. 8.5 Crore, sale price exclusive of GST Rs. 1.75 Crore. Separate account maintained for GST||Not Applicable since T/O is within the limit|
Turnover doesn’t include GST as separate account is maintained (Rs. 8.5 Cr)
|Rs. 8 Crore, sale price exclusive of GST Rs. 0.96 Crore. Separate account not maintained for GST||Not Applicable since T/O is within the limit|
Turnover includes GST as separate account is not maintained ( 8 Cr + 0.96 Cr = Rs. 8.96 Cr)
|Rs. 10.5 Crore, sale price inclusive of GST Rs. 2 Crore.||Applicable since T/O is above limit|
Turnover includes GST as it is included in the sale price (Rs. 10.5 Crore)
|Rs. 8 Crore, sale price exclusive of GST Rs. 2.24 Crore. Separate account maintained for GST.||Applicable since T/O is above limit|
Turnover doesn’t include GST separate account is maintained
|Rs. 9 Crore, sale price exclusive of GST Rs. 1.08 Crore. Separate account not maintained for GST.||Applicable since T/O is above limit|
Turnover includes GST as separate account is not maintained ( 9.00 Cr + 1.08 Cr = Rs. 10.08 Cr)
|Where seller is a composition dealer as per the GST Act?||Composition Dealers cannot collect GST from their customers. Therefore the question of including GST in turnover does not arise and 206C(1H) shall be applicable only if Turnover exceeds the limit.|
Whether gross receipts from services to be included in Turnover limit of Rs. 10 Crore during the preceding Financial Year?
Yes, gross receipts from services should also be considered while calculating the threshold limit of Rs. 10 Crore. Section 206C(1H) mentions “Total Sales, Turnover, Gross Receipts from the business shall be considered” which includes services also.
Whether sales consideration received prior to 1st October, 2020 to be considered in the limit of Rs. 50 Lakhs?
• CBDT has issued Circular No 17/2020 clarifying that TCS is not applicable for the sale consideration received prior to 01.10.2020. Since the threshold limit of Rs. Fifty Lakhs is for the financial year, sales consideration received from 01.04.2020 shall be considered and if the seller has already Rs. 50 Lakhs up to 30.09.2020, TCS shall be collected on sale consideration received on or after 01.10.2020
• The Circular has also clarified that TCS is applicable for consideration received in respect of Sales made prior to 01.10.2020
Whether TCS is required to be collected even if the sale consideration received pertains to prior financial years?
• In case of TCS being currently collected on sale of goods like alcoholic liquor etc (u/s. 206C(1)), the tax is collected at the time of debit of payment in books of buyer or receipt of payment whichever is earlier. This condition is missing in 206C(1H).
• Thus, TCS is collected on amount of consideration exceeding Rs 50 Lakhs, irrespective of whether the sale consideration pertains to current year or previous years. TCS is collected based on payment activity and not on purchase activity. This means that, if a buyer follows accrual system of accounting, his payment would have been debited in earlier where TCS will be collected and the credit thereof is postponed to the year of receipt by the seller rather than year in which purchase is made.
Whether TCS is to be collected on receipt of advance for sale of goods?
Yes, TCS is required to be collected even on advances received on or after 01.10.2020. CBDT has clarified the same in the Circular 17/2020. Where the sale transaction gets cancelled, the buyer can still claim the credit of TCS against his income tax payable for that financial year.
What will happen in case of sales returns or cash discount results in threshold limit not exceeded?
CBDT Circular 17/2020 has clarified that, sales returns or discounts should not be adjusted from sale consideration to determine whether limit of Rs. 50 lakhs has been exceeded or not.