The Finance Act, 2020 brought a major change to the scope of Tax Collected at Source (TCS) by introducing sub-section (1H) in Section 206C of the Income Tax Act, 1961. This provision, effective from 1 October 2020, is aimed at widening the tax net by covering high-value transactions involving the sale of goods. It applies when the consideration from a single buyer exceeds ₹50 lakh in a financial year and the seller’s turnover in the preceding year exceeds ₹10 crore.
The new framework has created several compliance obligations for sellers, clarified specific exemptions, and triggered a variety of practical challenges. This blog explains the statutory provisions, exclusions, illustrations, and key interpretative issues, enabling businesses to understand the scope and impact of the law.
Statutory Provisions
Applicability
The provision applies when any seller receives consideration from the sale of goods, and the buyer’s total purchase value from that seller during the year exceeds ₹50 lakh. The seller must have had sales, gross receipts, or turnover from business exceeding ₹10 crore in the preceding financial year.
Threshold Limits
- Seller condition: Turnover in the preceding year must exceed ₹10 crore.
- Buyer condition: Aggregate consideration during the year must exceed ₹50 lakh.
Rate of TCS
- Standard rate: 0.1% of the sale consideration exceeding ₹50 lakh.
- COVID relief (until 31 March 2021): Reduced by 25% to 0.075%.
- Without PAN/Aadhaar: 1% rate applies; no reduced rate benefit.
Liability to Collect
The seller’s liability arises on receipt of consideration — not at the time of raising the invoice.
Compliance Procedures (Rule 37CA)
- Deposit the collected tax by the 7th of the month following collection.
- File quarterly returns in Form 27EQ.
- Issue Form 27D certificate within 15 days of filing the return.
Certificate for Lower Withholding
Section 206C(9) permits lower withholding certificates for sub-sections (1) & (1C), but not for 1H. Hence, no relief for buyers under this provision.
Non-applicability
TCS under sub-section (1H) does not apply in the following cases:
- Transactions where the buyer is liable for TDS and has deducted it.
- Import or export of goods.
- Goods already covered by other TCS provisions (e.g., tendu leaves, scrap, motor vehicles above ₹10 lakh, overseas tour packages).
- Buyers who are government bodies, embassies, high commissions, consulates, local authorities, or other notified persons.
Further exclusions under CBDT Circular No. 17 of 2020 (29 September 2020):
- Securities and commodities traded through recognised stock exchanges.
- Trades settled through recognised clearing corporations, including those in IFSCs.
- Transactions in electricity, renewable energy certificates, and energy saving certificates traded via recognised power exchanges.
Illustration
Example scenario:
- Seller A — Turnover ₹15 crore; sells goods worth ₹90 lakh to Buyer A and ₹45 lakh to Buyer B.
- Seller B — Turnover ₹2 crore; sells goods worth ₹80 lakh.
- Seller C — Turnover ₹100 crore; sells goods worth ₹30 lakh.
Application of TCS:
- Buyer A: TCS on ₹40 lakh (₹90 lakh – ₹50 lakh threshold).
- Buyer B: No TCS (purchase below threshold).
- Sellers B and C: No TCS as turnover condition not met.
Practical Issues Under Consideration
Definition of Goods
Not defined in the Income Tax Act — drawn from the Sale of Goods Act, 1930: all movable property except money and securities, including actionable claims, growing crops, and items attached to land. Jewellery is included; immovable property is excluded.
TCS on Trade Receivables (as on 30 September 2020)
Effective from 1 October 2020. Receipts after this date attract TCS, even if the sale occurred earlier.
TCS on GST Amount
TCS is on the gross amount received, inclusive of GST.
Advance Consideration
- Received before 1 October 2020: No TCS.
- Received after 1 October 2020: TCS applies, even if sale is not recognised in that FY.
Consideration in Kind
TCS applies to non-cash consideration or adjustments against liabilities.
Sales Returns
No adjustment allowed — TCS applies at the time of receipt, irrespective of subsequent returns.
Threshold Calculation
₹50 lakh threshold is calculated from 1 April 2020, though provision applies from 1 October 2020.
Invoice Disclosure
Not mandatory to show TCS in invoices, but advisable for tracking.
Tax Credit Mismatch
May occur due to timing differences in accounting versus Form 26AS updates.
TCS on Bad Debts Recovered
Applies at the time of recovery.
Goods Sold to SEZ/EOU
TCS applies — deemed exports remain within India.
Composite Contracts
No TCS if TDS is deducted on the full value; applies on goods component if TDS is not deducted.
Sale of Software
If TDS is deducted under Section 194J, no TCS; otherwise, applicability depends on classification as goods.
Sale of Fixed Assets
TCS applies to both stock-in-trade and capital goods.
Refundable Advances
Not subject to TCS.
Motor Vehicles Sold to Dealers
If individual vehicle value < ₹10 lakh but total annual sales > ₹50 lakh, TCS applies.
Fuel to Non-resident Airlines
Specifically exempted by CBDT Circular No. 17 of 2020.
Final Thoughts
Section 206C(1H) adds an important layer of compliance for high-value sales. While its intent is to expand the tax base, it requires businesses to track receipts carefully, adjust systems for threshold monitoring, and maintain robust documentation. The broad definition of goods, inclusion of indirect taxes in the computation, and applicability to deemed exports mean sellers must be alert to avoid errors.
The first year of implementation has seen numerous clarifications from CBDT, but practical challenges remain — particularly in handling returns, mixed contracts, and advance receipts. Businesses should review sales structures, train teams on TCS triggers, and reconcile Form 26AS with books to prevent mismatches.
A proactive compliance approach will help sellers avoid penalties and ensure smooth operation under the widened TCS regime.
