Introduction –

As per Income Tax Act, 1961, certain persons are required to collect tax from their buyer at specified rate on specified transactions. In order to widen and deepen the tax net, it is proposed to amend section 206C to levy TCS on sale of goods above specified limit.  In this article we will understand detailed provision & some practical aspects related to this provision.

Section 206C (1H) – TCS on sale of Goods

Applicability – Section is applicable from 1st Oct 2020 only after satisfying both of the following conditions-

  1. Turnover or gross receipts or total sales from the business carried on by seller exceeds ten crore rupees during the financial year immediately preceding the financial year.
  2. Seller receives sale consideration more than Rs 50 Lakh from buyer during previous year.

For example – A ltd sells goods of Rs 110 Lakh to B ltd & of Rs 70 lakh to C ltd. Amount received as below-

In FY 20-21 – Rs 45 Lakh from B ltd & Rs 70 Lakh from C ltd.

In FY 21-22 – Balance amount of B ltd i.e. Rs 65 Lakh

Turnover of A ltd is Rs 11 Cr in FY 19-20 & Rs 9 Cr in FY 20-21

Financial Year Turnover Amount received TCS applicable or Not Reason
FY 19-20 Rs 11 Cr Nil No question of TCS
FY 20-21 Rs 9 Cr From B Ltd – Rs 45 Lakh No Though turnover is more than Rs 10 Cr. TCS is not applicable since amount received is less than Rs 50 Lakh
From C Ltd – Rs 70 Lakh Yes Both the conditions are satisfied. So TCS is applicable
FY 21-22 From B ltd – Rs 65 Lakh No Since turnover is less than Rs 10 Cr. TCS is not applicable.

Non applicability – This section is not applicable –

  1. If buyer is any one of the following –
  2. Central Government, a State Government, an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State.
  3. a local authority as defined in the Explanation to clause (20) of section 10
  4. a person importing goods into India
  5. any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein
  6. on following goods –
  7. Goods exported out of India
  8. Goods covered under sub-section (1) i.e. Alcoholic liquor for human consumption, Tendu leaves, Timber, Any other forest produce not being timber or tendu leaves, Scrap, Minerals being coal or lignite or iron ore.
  9. Goods covered under sub section (1F) i.e. Motor vehicle whose value exceeds Ten Lakh Rupees or sub section (1G) i.e. overseas tour program, amount remitted under LRS.
  10. If buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount.

Rate

  1. TCS is to be collected at rate of 0.1% on sale consideration received from a buyer in excess of Rs 50 lakh.
  2. If buyer does not furnish PAN or Aadhaar no. then TCS is to be collected at 1%.

Please note that TCS rate is been reduced to 0.075% (PAN or Aadhaar available) & 0.75% (absence of PAN or Aadhaar No.) for period from 01.10.2020 to 31.3.2021.

Some practical aspects –

Transitional period

  1. Whether TCS is applicable on amount received after 1.10.2020 against trade receivable as on 30.09.2020?
  • As per provision TCS is applicable if consideration is received more than 50 lakh in any previous year. However it is not clear whether the consideration should be related to sale of goods on or after 1.10.2020. But as per bare reading of provision, TCS is to be applicable if amount is received more than 50 Lakh. However another view can be taken.
  1. ABC ltd receives advance amount Rs 30 lakh before 1.10.2020 & Rs 40 lakh after 1.10.2020. However, ABC ltd supplies the goods on 15.12.2020. Whether TCS is applicable or not?
  • Consideration received prior to 1.10.2020 will not be subjected to TCS under section 206C (1H) of the Act. However, since threshold of Rs 50 lakh is with respect to the previous year. So for calculation of threshold, consideration received prior to 1.10.2020 should be included. Hence TCS is applicable on Rs 20 lakh (70 Lakh- 50 lakh).

Point of taxation & raising invoice

  1. Whether TCS is to be shown separately in invoice? What will be due date of TCS payment?
  • Unlike other provision of section, liability of TCS triggers at the time of consideration received. So TCS is to be paid on or before 7th of next month of consideration received.
  • Seller may raise an invoice including the amount of TCS, account in the books as a TCS liability even though liability does not arise till the time the amount is collected.

Inclusive of taxes

  1. Whether TCS is to be calculated on GST or any tax portion?
  • As per section 145A irrespective of the treatment in books of accounts, the value of sales will include the amount of any taxes recovered. Hence the TCS is to be calculated including tax portion.

Deemed Receipt

  1. Whether TCS is applicable on security deposit, performance guarantee or EMD?
  • TCS is not applicable. However if such amounts are later adjusted towards sale consideration, the seller will have to remit TCS. Even though it is not a receipt in technical language but is a part of the sale consideration deemed to have been received. Such deemed receipts are not stated in the section.
  1. What will be the treatment of TCS in case of settlement of debts?
  • Many a times, it is a business practice to sell and buy in settlement of debts. Such settlement of debts, may not be a receipt, but a deemed receipt of sale consideration.

Cancellation of sales

  1. 1. How the impact of sales return, credit note, and debit note would be considered in collecting TCS?
  • If such sales return is before the receipt of any consideration, then the impact thereof will be included in the amount of consideration and accordingly TCS is to be applicable on revised consideration.
  • If amount of consideration is already received & TCS collected & paid, then seller can count sales return while calculating TCS for next period and can pay accordingly. This is simple if the sales & sales returns are in the same financial year. But it may be complicated if the financial year is different. However second view can be taken as – return only primary amount & not adjust TCS. Considering as such TCS amount is already credited as prepaid taxes and will appear in Form 26AS and the buyer can take credit of that.

Grossing up

  1. How to calculate TCS in case of the advance money?
  • In case of advance money, the seller is mandated to remit the portion of GST to the GST authorities. He is also required to remit TCS as per section. Difficulty arises in calculation of the amount required to be remitted, as the seller needs to calculate GST first and then calculate TCS, both on grossing up basis requiring tedious calculations.

Difference in books, 26AS & turnover for TCS liability

  1. What will be impact of mismatch between books, 26AS, turnover considered for TCS calculation?
  • As per provision, TCS liability arises at the time receipt. This may lead to timing difference between year of purchase made by buyer & TCS credit appearing in form 26AS. To match the amount one need to reconcile the difference. This also may lead to selecting the cases for scrutiny on the basis of mismatches.
  • There will be yearend cases of sales for which amount not received. For such amount TCS may apply in next year. So more reconciliation part of TCS liability with turnover will arise. Solution for this might be charging TCS on Sales basis rather than receipt basis. However by doing this blockage of Working Capital will arise.

Treatment of bad debts recover

  1. Whether TCS is applicable on bad debts recover?
  • Bad debts recovered is nothing but the amount received from buyer belatedly and the only nexus between the seller and the buyer is on account of sale of goods. The amount received is only for the sale consideration with timing differences and cannot become anything else in the hands of the seller. So we need to treat it same as consideration received & apply TCS on it.

Third Party payment

  1. Whether TCS is applicable on payment made by third party or government?
  • In some cases, the sale proceeds are partly paid by the Government as a release of subsidy, or the costs are funded by third-party payments.  All such transactions also amount to receipts on behalf of a buyer and hence the seller will be under obligation to remit TCS.

Conclusion

Introduction of TCS will certainly increase the compliance cost of the companies and will be contrary to the ease of doing business. Also there are lots of unclear legal requirements, on which the Board will have to take note of. The Board may issue further guidelines/FAQs to remove the difficulties.

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