Introduction:

Under Section 206C of the Income Tax Act, individuals are responsible for remitting indirect tax, whether they use services or purchase goods. These indirect taxes include TCS (Tax Collected at Source), TDS (Tax Deduction at Source), and GST (Goods and Services Tax). The seller collects the tax under section 206c and remits it to the government.

Explore this comprehensive guide covering everything you need to know about Section 206C of the Income Tax Act. 

Section 206C:

Section 206C of the Income Tax Act pertains to the collection of a specified percentage of tax from buyers on gains and profits derived from various products, including alcohol, scrap, forest goods, and more. This tax is collected at the point of payment, and subsequently, the seller remits the Tax Collected at Source to the government.

Section 206C of the Income Tax Act deals with ‘Tax collected at source (TCS)’. Originally absent from the Taxes Act, the section was later added after the Finance Act, 1988, resulting in Section 44AC, which prescribed the procedures for computing profits and gains from trade in specified items and , later in the Finance Act, 1992 after the Section 44AC was repealed However, a number of amendments have extended the scope of the TCS to include new services and to suit the present needs of the country.

TCS:

TCS, as per Section206C of the Income Tax Act, 1961, constitutes an additional levy that sellers must remit to the government based on the proceeds received from a buyer at the time of sale. Essentially, the seller acts as a tax collector on behalf of the government during the sale transaction.

This tax is applicable only to specific goods outlined in the Section 206C table. It is collected immediately upon debiting the buyer’s account or upon payment, whether in cash, cheque, or draft, following the sale of these designated goods, thus earning its designation as a tax collected ‘at source.’ The Act specifies the percentage of tax to be collected. Primarily, TCS serves to deter tax evasion by ensuring government revenue.

Applicability of the  Section 206C:

• Section206C applies to the transactions outlined below:
• TCS is applicable to the sale of overseas tour packages when the package cost exceeds Rs. 7 lakhs. The TCS rate stands at 5% of the tour package cost.
• TCS is levied on the sale of any goods or services facilitated by an e-commerce operator when the consideration for such transactions surpasses Rs. 50 lakhs within a financial year. The applicable TCS rate stands at 1% of the sale consideration.
• TCS in respect of goods sold is applicable when sales consideration exceeds Rs. 50 lakh during the financial year, with the TCS rate fixed at 0.1% in the sales concept.

Limits under Section 206C:

• As per Section 206C of the Income-tax Act, the vendors turned over Rs. 10 crore is required in the previous year in order to collect tax on a particular payment. Tax collected at source (TCS) has to be collected when the income exceeds Rs. 50 lakhs during the financial year, when received.
• Individuals operating as retailers or Hindu Undivided Families (HUFs) must meet the income limit mentioned in Section 44AB. According to this provision, persons or HUFs earning more than Rs. 50 lakhs from an employee or more than Rs. 5 crore from a business is required to verify their financial records. These restrictions apply only under specific circumstances: If the fees are less than 5% of the total fees. Where receipts are less than 5% of total receipts.
• To facilitate transactions exceeding Rs. 50 lakh in a fiscal year, the seller must deduct TCS from the buyer at a rate of 0.075%. Subsequently, the seller is obliged to remit this deducted amount to the government by the 7th of the subsequent month following the tax collection.
• Section 206C extends its application to a range of entities including companies, companies, local authorities, corporations and similar entities. However, if the customer represents a central/state government, consular, diplomatic, high-level government, or trade agent, the vendor is exempt from the TCS deduction.

Goods and Services Falling under Section 206C:

• Section 206C mandates that sellers collect taxes from buyers. Below is a list of items with their TCS value under Section 206C of the Income Tax Act, which sellers are obliged to collect from customers
• Timber from reclaimed forests is subject to a TCS rate of 2.50%.
• Tendu leaves are subject to a TCS rate of 5%.
• The TCS rate for forest products excluding tendu leaves or trees is 2.50%.
• Scrap is subject to 1% TCS rate.
• Toll plazas, mining operations, parking lots, and quarrying sites are all subject to a TCS rate of 2%.
• A TCS rate of 1% applies to vehicles priced above Rs. 10 lakh.
• Minerals such as lignite, iron ore, or coal have a TCS concentration of 1%.
• Timber sourced from locations other than leased forests is subject to a TCS rate of 2.50%.
• Alcohol intended for consumption is subject to a TCS rate of 1%.

Seller under the Section 206C:

• Section 206C defines ‘seller’ for the purposes of this Act, encompassing:
• state government
• Company
• Local authorities
• Central Government
• Co-operative societies,
• A “seller” as defined under Section 206C includes corporations or authorities established under central, state, or provincial laws
• An individual or Hindu undivided family whose accounts fall under tax auditing as per Section 44AB.

Buyer  under the Section 206C:

• Section 206C defines a ‘purchaser’ for the purposes of the Act as any person entitled to acquire particular goods by sale, auction, tender, or otherwise Such persons are deemed to be purchasers, and are defined in more detail below here.
• Central Government
• A buyer who purchases goods in a retail sale for personal consumption
• public sector company
• Embassy, High Commission, legation, commission, or consulate of a foreign state or club are exempt.
• A buyer who purchases goods in a retail sale for personal consumption is exempt.
• In the case of Union of India the Supreme Court of India ruled that the term ‘buyer’ under Section 206C pertains solely to individuals who have obtained the right to receive specific goods through their payments. It does not encompass those merely authorized or permitted to engage in such trade activities.

Exemptions:

• Tax collection under Section 206C does not apply in the following circumstances:
• Buyers are exempt from TCS obligations if they acquire goods for processing, manufacturing, or production purposes, rather than engaging in trading activities with those goods.
• Transactions on electricity and renewable energy are not subject to the provisions under section 206c.
• Tax deduction under Section 206C is exempted if the purchased goods are intended for personal consumption.

Amendments to Section 206C:

• The Finance Act 2020 introduced a new tax rate and a new subsection (1H) to Section 206C. Here are the key points of this amendment.
• This applies to traders whose gross turnover exceeds Rs. 10 crores in the previous year.
• The seller is not required to deduct TCS if the buyer has already deducted TDS.
• In cases of non-compliance during ITR filing, the rates under Section 206C will be doubled to 5%.
• Sellers should deduct TCS at a rate of 1% if the value of goods sold exceeds Rs. 50 lakh.
• Section 206C does not apply to the export and import of goods.
• Only businesses with a turnover of Rs. 5 crore will be required to undergo income tax audits.

TCS Certificate:

• If you collect TCS on goods from your customers, you have to file quarterly TCS returns and issue TCS certificates to the customers. The certificate obtained on proper filing of TCS documents is Form 27D.
• A TCS certificate includes the following details:
• The TCS certificate includes the PANs of both buyers and sellers.
• Specify the tax rate on the TCS certificate.
• The TCS certificate contains the names of both buyers and sellers.
• The TCS certificate provides the total amount of tax collected by the seller.

Penalties:

• Failure to comply with the provisions of section 206C may result in the attraction of penalties and interest. If the person responsible for collecting the TCS fails to collect or deposit the tax, a penalty equal to the amount of the tax not collected or withheld may be imposed plus interest on the remaining amount.
• If the person responsible for submitting the TCS quarterly report fails to do so, a penalty of Rs. 200 per day for the duration of the delay. However, the penalty amount cannot exceed the total amount of TCS that was to be collected or withheld.

Conclusion:

Section 206C of the Income Tax Act is an important provision prescribing tax at source (TCS) in respect of specific transactions. This system enables tax spread and compliance with tax laws. It is important that companies understand how section 206C will apply to ensure compliance and reduce the risk of penalties or legal repercussions.