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By Rachit S Thakar, Advocate | Nov 30, 2020

The provisions relating to TCS were introduced under the Income Tax Act, 1961 to collect tax in advance from the persons who are engaged in business of trading in alcoholic liquor, scrap, Forest Product etc. and buy such goods under a contract. As per TCS provisions, a seller is required to collect tax from the buyer in respect of certain transactions and deposit it to the credit of Central Government. The tax so collected and deposited through this mechanism is called

“Tax Collected at Source” or “Collection of Tax at Source”

. The tax shall be collected at the specified rate, from the total value of transaction, inclusive of GST.

The Central Government, vide CBDT circular no. 17/2020 dated 29th September, 2020 and press release dated 30th September, 2020, has introduced a new provision for collecting TCS for the sale of goods and depositing the same to the Government with effect from 1st October, 2020. These provisions are given in Section 206C (1H) of the Income Tax Act.

According to the new provision of TCS, if purchaser’s turnover exceeds Rs. 10 crores in the previous financial year i.e. the year ended 31st March 2020, then the seller has to collect and deposit TCS on the receipts from sale of goods from such purchaser from whom he has received more than Rs. 50 Lakhs as sale consideration during the current Financial year. The TCS is payable on the amount of receipt which is greater than 50 Lakhs and received after 1st October 2020. The rate of TCS is 0.1%

Payments received here, refers only to payments received in connection with “sale” of goods. This is receipt based on TCS; hence even if the payment is received in advance for supply of Goods, the TCS provisions are applicable.

Furthermore, according to the first proviso, Tax shall be collected at a higher rate of 1% instead of 0.1%, in case the buyer fails to provide a valid PAN and Aadhaar number.

The second proviso to section 206C(1H) simply states that both the provisions of TDS and TCS shall not apply to the transaction simultaneously. Normally in case of sale of goods, there is no applicability of TDS. It is important to note that in order to make this proviso applicable, the buyer must be liable to deduct tax at source and has actually deducted tax at source on the transaction. Both conditions have to be satisfied.

The explanation to the provision only defines the term “buyer” and the “seller”.
The term buyer shall mean a person who purchases any goods but does not include the Central Government, the State Government, an Embassy, High Commission, Legation, Commission, Consulate, Trade Representative of a foreign state; or any Local Authority as defined in explanation to the clause 20 of section 10 of the Income Tax Act. Further it does not include any person importing goods into India or any other person as Central Government may, by notification in the Official Gazette specify for this purpose, subject to such conditions as may be specified therein.

The term seller is defined to mean any person which means it covers an individual, firm, company, etc. and the quantum of total sales or turnover or gross receipt of such person is exceeding Rs.10 crore. Thus, in computing the limit of Rs.10 crore, all the segments of the seller have to be considered, be it sale of goods or provision of services, though tax is required to be collected only in the case of sale of goods to the buyer. Further seller also does not include any person as Central Government may, by notification in the Official Gazette specify for this purpose, subject to such conditions as may be specified therein.

This provision of TCS on Sale of Goods under section 206C(1H) has wider ramification because till now TCS was applicable only on certain items. But covering all the goods within the purview of TCS, almost all the business entities are under the umbrella of TCS.

Some questions pertaining to TCS provisions include:

Does it apply to supply of services as well?

The provision that has been brought at this time is only in relation to “sale of goods” and services have been kept away from this provision. Therefore, this provision is not applicable to the payment of consideration received in relation to supply of services.

Also, inter-branch transfers, or stock transfers are not “sale of goods” hence no TCS liability arises.

Furthermore, all the shares are defined as goods under the Sale of Goods Act 1930, though CBDT has clarified that provisions of this section shall not be applicable in relation to transactions in securities and commodities which are traded through recognized stock exchange or cleared and settled by recognized clearing corporation both domestically and internationally.

Does TCS apply to Job work or works contract?

A contract for job-work or a works contract come under the purview of TDS provisions, under section 194C. Hence, TCS provisions under section 261C(1H) shall not apply here.

Does TCS apply to sale of land, building, flats etc.?

Land, buildings, flats are immovable properties and are not “good”. Therefore provisions under this section shall not apply to sale of immovable properties.

Development rights, leasehold rights or any other rights related to immovable properties are also held as immovable properties. Thus, TCS provision shall not apply to transfer or TDRs and leasehold rights.

Does TCS apply to sale of jewellery?

Jewellery entails goods and hence comes within the purview of this section. Prior to 1st April 2017, TCS on sale of jewellery was covered under section 206C(1D). This section is now omitted.

Does TCS apply on sale of goods with installation charges?

In case of sale of goods with installation charges, it amounts to sale of goods even if the value of goods and installation charges are indicated separately on the invoice.

This section shall apply if the conditions specified in this section are satisfied. The position will remain the same if there is no bifurcation of value of goods and installation charges in the invoice and the same is raised as consolidated amount.

If the sale of goods and installation charges are independent activity, then the provisions of this section shall apply only to the sale of goods. The receipt from installation charges will amount to sale of services hence not applicable here.

Does TCS apply on interest due to delayed payment?

When the invoice is raised for sale of goods and buyer delays the payment, thus prompting the seller charges interest for such delay. The interest actually represents the price of goods rather than interest for money borrowed. The definition of interest under section 2(28) of the act only includes interest on money borrowed. Although under GST law the interest paid on delayed payment of invoices/consideration is not with respect to money borrowed but for non-payment of value of goods/consideration within the stipulated period. Since such an interest represents the value of goods, TCS shall be applicable on interest of delay in payment of invoices.

How will this Levy Affect The Automobile Sector?

Although TCS is applicable to automobiles sector for selling of a Motor vehicle above Rs. 10 lakhs to the customer under section 206C(1F) but it is not applicable from the manufacturer to the distributor, dealer or sub-dealer hence this sector is not free from this new TCS provision.

Is There Any Relaxation In This Rate In The Corona Period?

Due to the corona outbreak, there is a 25 percent discount on this rate till 31 March 2021 and the effective rate will be 0.075% up to this date. This TCS is to be deposited on receipt of payment and the last date for deposit of the same will be the 7th day after the end of the month. If your buyer who comes under this TCS does not have a PAN number / Aadhaar number, which is hardly any buyer you have, then this rate of tax will be 1% percent and there is no relaxation of it.

Critical Analysis

If the purpose of this provision is to keep a vigilant eye on the taxpayers, there is no pertinent need for this provision as nearly all buyers who make purchases above Rs.50 Lakhs and then pay the amount of this purchase are all registered under GST. Second, it will be applied on all points such as manufacturer to distributors, distributors to dealer and dealers to sub-dealers. There are many sectors that will be badly affected by this, such as automobile Sector. There are many more reservations with respect to this provision and only time will tell if it has achieved its intended purpose.