Section 206C of Income tax Act: All you need to Know

Introduction

Section 206C(Q) of the Income Tax Act outlines the rules for Tax Collection at Source (TCS) on the sale of certain goods and services. It mandates that sellers collect a percentage of tax from buyers at the time of sale, which can be later adjusted in the buyer’s tax return. This section helps streamline tax collection and ensures compliance with government regulations. In this blog, we will explore the key provisions of Section 206C(Q), eligibility criteria, and important deadlines for filing TCS.

What is section 206C of the Income Tax Act?

Section 206C of the Income Tax Act covers Tax Collected at Source (TCS). It means that sellers must collect a small amount of tax from buyers when they sell certain goods or services. This tax is collected during the sale and then paid to the government by the seller. Later, buyers can use this tax as a credit when they file their income tax returns, helping to reduce their overall tax amount.

TThe Income Tax Act has several rules for collecting taxes, and Tax Collected at Source (TCS) is one of them. Under Section 206C (1H), added in the 2020 Finance Bill, sellers must collect TCS from buyers if the total sales of goods go over INR 50,00,000 in a year. This tax is collected when certain goods and services are sold. However, buyers can claim the TCS back when they file their tax returns (ITR). In the 2023 Budget, the TCS rate for money sent abroad under the Liberalised Remittance Scheme (LRS) was increased from 5% to 20%.

The Income Tax Act’s classification of’seller for TCS

Section 206C Explanation (c) defines’seller’ for the purposes of this Act, which includes-

• The National Government,
• The state government, local governments, corporations, or authorities established by federal, state, or provincial legislation,
• The firm, the company, the cooperative societies,
• Individuals or Hindu undivided families whose accounts are subject to tax auditing under Section 44AB.

The Income Tax Act defines the term “buyer” for TCS

Section 206C clause defines “buyer” as any person who has the right to obtain the specified goods through any sale, tender, auction, or other mode. Except for the individuals listed below, each of these individuals is a buyer.

• Any company in the public sector, the Central Government, the State Government, an Embassy, High Commission, legation, commission, or consulate of a foreign state or club,
• Trade representation from a foreign state or club,
• A buyer who bought goods in a retail sale for personal consumption.

Eligibility Criteria under Section 206C of TCS

The following points outline the eligibility criteria under Section 206C of TCS.-:

• This provision applies only to sellers whose gross turnover exceeds Rs. 10 crore in the fiscal year before the sale is made.
• Exports and goods covered by Section 206C(1) for TCS on the sale of alcohol, tendu leaves, forest produce, and scrap; Section 206C(1F) for TCS on the sale of motor vehicles; and Section 206C(1G) for TCS on foreign remittance are not classified as goods.
• If the buyer is a Central or State Government, Embassy, High Commission, Legation, Consulate, Trade Representation of a Foreign State, or any local authority, the seller does not need to deduct TCS.
• If the buyer must deduct TDS on goods purchased from the seller under any other provision of the Income Tax Act and has done so, the seller does not need to collect TCS on those transactions.
• This provision does not apply to goods imported into India.

Who are exempted under section 206C

Under Section 206C of the Income Tax Act, there are certain exemptions where Tax Collected at Source (TCS) does not apply. Here’s a summary of the key exemptions:

1. Exempt Buyers

   • Individuals and HUFs: Buyers who do not have taxable income, such as those whose total income falls below the taxable threshold, may be exempt from TCS.
   • Government Departments: Any purchases made by the government are exempt from TCS.

2. Certain Sales

   • Export of Goods: TCS does not apply to sales where the goods are exported out of India.
   • Sales to Specified Persons: Certain categories of persons, such as a buyer who is a registered dealer and provides a declaration in the prescribed format, may be exempt from TCS.

3. Certain Transactions

   • Sale of Goods to Non-Residents: TCS is generally not applicable when the goods are sold to non-residents outside India.
   • Specified Transactions: Specific transactions may also be exempt from TCS, depending on the nature of the goods sold.

4. Lower or Nil TCS Certificate

   • Buyers can apply for a certificate from the income tax department to obtain a lower or nil TCS rate by demonstrating that their tax liability will be lower than the TCS being charged.

5. Threshold Limits

   • TCS is only applicable to sales above a certain threshold limit. If the total value of sales does not exceed this limit, TCS is not applicable.

Goods applicable and Tax Rate under section 206C TCS

Important Note: According to section 206C of the Income Tax Act, if a resident of India purchases goods for the purpose of manufacturing or producing other items rather than trading, such goods are exempt from tax. Within seven days of the sale’s completion, buyers must file a declaration and provide a copy to the commissioner of the Income Tax Department.

Due date for filing TCS Quarterly

Penalties For Non-Compliance for TCS Section 206C

Under Section 206C of the Income Tax Act, non-compliance with the Tax Collected at Source (TCS) provisions can lead to several penalties and consequences for sellers. Here’s a summary of the key penalties and repercussions associated with non-compliance:

1. Penalties for Non-Collection of TCS

• Financial Penalty: If a seller fails to collect TCS when required, they may face a penalty equal to the amount of TCS that should have been collected.
• Interest Charges: Sellers may also be charged interest on the amount of TCS that was not collected. The interest rate is typically 1% per month for the period of delay in collection.

2. Failure to Deposit TCS

• Interest on Delayed Payment: If TCS (Tax Collection at Source) is collected but not deposited with the government within the stipulated time frame, sellers will incur interest on the amount not deposited. This interest is usually charged at 1.5% per month.
• Penalty for Late Deposit: In addition to interest, a penalty may apply for late deposit of TCS, which can range from 10% to 50% of the TCS amount, depending on the duration of the delay.

3. Default in Filing TCS Returns

• Late Filing Fee: If sellers fail to file TCS returns on time, they may face a late filing fee under Section 234E, which amounts to ₹200 per day until they file the return, with a maximum penalty equal to the TCS amount payable.
• Loss of Credit for Buyers: Delays or errors in filing TCS returns can lead to buyers losing the credit for TCS collected, which may result in an increased tax liability for them.

4. General Consequences

• Legal Proceedings: Non-compliance can lead to legal actions by tax authorities, including assessments and audits, which may result in additional fines or legal complications.
• Reputational Damage: Businesses that fail to comply with TCS regulations may suffer reputational harm, which can affect relationships with customers, suppliers, and financial institutions.

5. Criminal Liability

In severe cases of willful default or fraudulent activity, authorities may initiate criminal proceedings against the seller, which could result in imprisonment and fines.

Conclusion

Section 206CQ of the Income Tax Act is important for collecting taxes directly from specific sales, especially when goods are sold. It requires sellers to collect Tax Collection at Source (TCS) when their total sales exceed INR 50,00,000. This rule helps ensure that everyone follows tax laws and helps the government collect more revenue. It’s important for both sellers and buyers to understand this section so they can manage their tax responsibilities properly and benefit from the credits they can claim when filing their tax returns.