Important Update > As per the Union Budget 2025, the provision for Tax Collected at Source (TCS) on the sale of goods under Section 206C(1H) has been abolished, effective April 1, 2025. Previously, this TCS rule applied to transactions where the total value of goods sold to a single buyer surpassed Rs 50 lakh.

Understanding the New TCS Provision Under Section 206C(1H)

Effective from October 1, 2020, the Finance Act 2020 introduced provisions for Tax Collected at Source (TCS) on the sale of goods under the Income Tax Act. These regulations could also influence the e-invoicing requirements within the Goods and Services Tax (GST) framework. This article provides a comprehensive overview of these provisions.

Under the Finance Act 2020, Section 206C(1H) was added to the Income Tax Act, obligating certain sellers to collect tax at source. This mandates sellers with a turnover exceeding Rs 10 crore to collect tax from buyers if the amount received from a single buyer in a financial year surpasses Rs 50 lakh. The tax collection is triggered at the point of receiving the payment.

Key Considerations:

• This rule applies exclusively to sellers whose gross turnover exceeded Rs. 10 crore in the financial year immediately preceding the sales period.
• Certain goods are excluded, such as exports and items already covered under other TCS sections like 206C(1) (alcohol, tendu leaves, timber, forest produce, scrap, and minerals), 206C(1F) (motor vehicles), and 206C(1G) (foreign remittances).
• TCS collection is not mandatory when the buyer is a Central or State Government entity, an Embassy, High Commission, Legation, Consulate, Trade Representation of a Foreign State, or any local authority.
• If the buyer has already deducted TDS as per other Income Tax Act provisions on the purchased goods, the seller is exempt from collecting TCS on those same transactions.
• The provision does not extend to the import of goods into India.

Applicability of Section 206C(1H)

Section 206C(1H) TCS provisions are applicable to sellers who achieved a turnover exceeding Rs 10 crore in the preceding financial year. They must collect TCS if they receive aggregate payments over Rs 50 lakh from a single buyer within a financial year. The collection is made at the time of receiving the payment and only applies to the amount surpassing the Rs 50 lakh threshold.

Definition of Buyer as per Section 206C(1H)

Under Section 206C(1H), a buyer is defined as an individual or entity purchasing goods valued over Rs 50 lakh from a seller who is obligated to collect TCS under this section. However, certain buyers are excluded from this definition:

• Exports,
• Imports,
• Goods already covered by Section 206C(1), such as sales of alcohol, tendu leaves, timber, forest produce, scrap, and specific minerals (coal, lignite, or iron ore);
• Goods under Section 206C(1F), relating to the sale of motor vehicles;
• Goods subject to Section 206C(1G), concerning foreign remittances;
• Government entities, including Central/State Governments, Embassies, High Commissions, Legations, Consulates, Trade Representations of Foreign States, or any local authorities.

Definition of Seller as per Section 206C(1H)

For the purpose of Section 206C(1H), a seller is defined as a person whose total sales, gross receipts, or business turnover exceeded Rs 10 crore in the financial year immediately preceding the current one.

TCS Rate Under Section 206C(1H)

Sellers are required to collect tax at source at a rate of 0.1% on the portion of consideration received that exceeds Rs 50 lakh from a single buyer within a financial year. Should the buyer fail to provide their Permanent Account Number (PAN) or Aadhaar, the TCS rate increases to 1%.

Compliance Requirements for Section 206C(1H)

Adherence to Section 206C(1H) mandates specific compliance requirements:

• Sellers must possess a Permanent Account Number (PAN) and a Tax Deduction and Collection Account Number (TAN) to collect and remit TCS under Section 206C(1H).
• TCS must be collected when payment is received from the buyer and deposited with the government by the 7th day of the subsequent month.
• A quarterly TCS return, Form 27EQ, is required to be filed according to the TCS due dates. A certificate must be issued within 15 days of filing this quarterly return.

Penalties for Non-Compliance with Section 206C(1H)

Failure to comply with Section 206C(1H) TCS requirements can result in the following penalties:

• Not collecting TCS: A penalty equivalent to the uncollected TCS amount may be imposed.
• Not depositing collected TCS: Sellers failing to deposit collected TCS with the government face a penalty equal to the amount that should have been remitted.
• Late TCS payment: Delayed remittance of TCS to the government attracts an interest charge of 1% per month.
• Delayed return filing: Missing the deadline for quarterly Form 27EQ submission may lead to a penalty of ₹100 per day.

Exemptions to Section 206C(1H)

The government has specified certain persons and transactions that are exempt from the provisions of Section 206C(1H). TCS requirements under this section do not apply in the following situations:

• When goods are exported from India,
• For goods already covered under Section 206C(1), such as sales of alcohol, tendu leaves, timber, forest produce, scrap, and specific minerals (coal, lignite, or iron ore);
• For goods covered under Section 206C(1F), pertaining to the sale of motor vehicles;
• For goods falling under Section 206C(1G), related to foreign remittances;
• When the buyer is a Central or State Government entity, an Embassy, High Commission, Legation, Consulate, Trade Representation of a Foreign State, or any local authority.
• When a person is importing goods into India,
• For any other person explicitly notified by the Central Government in the Official Gazette.

TCS Calculation and Effective Dates

This provision became effective on October 1, 2020. Sellers are obligated to collect tax at source at a rate of 0.1% on payment receipts exceeding Rs 50 lakh from a single buyer within a financial year. The Rs 50 lakh threshold applies to the entire financial year. Therefore, all sale considerations received from a buyer between April 1 and March 31 of a financial year are included in this limit calculation.

For instance, if seller 'X' receives Rs 45 lakh from buyer 'Y' between April and September, and then an additional Rs 10 lakh on October 10, TCS will apply. It will be collected on Rs 5 lakh (Rs 55 lakh total minus the Rs 50 lakh threshold) at the 0.1% rate.

Format of a TCS Invoice

If a supplier chooses to include TCS on the invoice, the calculation would typically be as follows:

• Value of Goods: Rs 1,00,00,000
• GST @ 18%: Rs 18,00,000
• Subtotal: Rs 1,18,00,000
• TCS calculated (0.1% on Rs 50,00,000, assuming excess over Rs 50 lakh): Rs 5,000
• Total Invoice Value: Rs 1,18,05,000 (Rs 1,18,00,000 + Rs 5,000)

Due Date for Depositing TCS

The seller of goods is responsible for both collecting TCS from the buyer and remitting it to the government. The collected TCS must be paid by the 7th day of the month following the collection. For instance, if Rs 70 lakh was received from a buyer on August 30, 2024, resulting in Rs 2,000 TCS under Section 206C(1H), this liability must be deposited by September 7, 2024.

Impact of New TCS Provision on E-Invoicing

E-invoicing is being progressively implemented across India as a government initiative to curb tax evasion by mandating B2B invoice reporting on a central portal. Initially, e-invoicing became applicable to companies with over Rs 50 crore turnover from April 1, 2021. This was extended to businesses exceeding Rs 20 crore in annual turnover in any previous year from 2017-18 to 2021-22. Subsequently, the mandate included businesses with over Rs 10 crore turnover from October 1, 2022, and later to those with more than Rs 5 crore turnover from August 1, 2023.

Currently, e-invoicing provisions do not contain a separate section for TCS under Section 206C(1H). When generating the Invoice Reference Number (IRN), any TCS amount included in the invoice value should be categorized under 'other charges'. Consequently, the reported invoice value will automatically incorporate TCS, and this amount will be reflected in GSTR-1.

Since this new TCS provision applies on a receipt basis rather than a sale basis, sellers must collect TCS on advances received that are later adjusted against an invoice. Therefore, it is advisable to collect TCS at the time of receipt rather than at the time of invoice issuance. If TCS is not explicitly included in the invoice, there will be no impact on e-invoicing.