section 206c(1h) of income tax act

The Government of India introduced a new section for tax collection at source or TCS on sale of goods. The new provisions of TCS under section 206C (1h) of the Income Tax Act came into effect from 1st October 2020. This section applies to those sellers of goods whose turnover in the preceding financial year exceed INR 10 Crores. Such sellers of goods have to collect tax at source in the current financial year on the payments received for sales above INR 50 lakhs in aggregate from a buyer of goods. The TCS under section 206C (1h) of Finance Act 2020 is to be collected at the time of receipt of the amount. Small sellers are not required to collect TCS on the sale of goods. The rate of TCS on sale of goods is 0.1%. The tax is to be calculated on the amount received above INR 50 lakhs.  

What is TCS on sale of goods under section 206C (1h)?

Let us understand this section in detail from the analysis given below: 

1. As per section 206C (1h) of the Income Tax Act, with effect from 1st October 2020, the seller of goods with turnover above INR 10 crores in the preceding financial year (year ending on 31st March 20XX) have to collect tax at the source on sale of goods. 

2. The TCS on sale of goods is to be collected if the amount received for total sales to a buyer in the current financial year exceeds INR 50 lakhs. 

• For the financial year 1st April 2020 to 31st March 2021:  Suppose a seller has a total turnover of INR 10 Crore in the preceding financial year, the year ended 31st March 2020. And the seller has received INR 50 Lakh from a buyer till 30th September 2020; then tax shall be collected on any amount received from 1st October 2020 onwards from such buyer. The TCS section is applicable from 1st October 2020, and INR 50 lakh for the current financial year (20-21) are already received till 30th September 2020. However, in this case, if the seller does not accept any payment after 30th  September 2020, then TCS is not required to be collected.  

3. The TCS on sale of goods is to be calculated on the amount above INR 50 Lakhs. 

4. The tax rate to be collected at source is 0.1% of the amount exceeding INR 50 Lakhs. Thus, if a seller receives INR 75 Lakhs for the sale of goods to a buyer in the current financial year, then TCS is to be calculated at the rate of 0.1% on 75lakh-50lakh=25 lakh. Hence, TCS will be 0.1% of 25 lakh = INR 2500 only. 

Note: The government relaxed the rate of TCS due to the Covid 19 pandemic, and the effective rate of TCS until 31st March 2021 was 0.75%.  

5. The seller must collect tax from the buyer and pay it to the government. 

6. The buyer who made purchases of more than INR 50 Lakhs from the seller has to pay the TCS on purchase of goods. 

7. As per section 206C, TCS on sale of goods is to be collected on the receipt basis and not based on the invoice date. Thus,  the amount of advance received from the buyer for the supply of goods in the future is also to be considered for calculating the threshold limit of INR 50 lakh, irrespective of the invoice date.
8. The TCS provisions are not applicable on payments received for the supply of services. But for calculating the total turnover limit of INR 10 Crores, both sales of goods and services are to be considered.

TCS rate on sale of goods 

TCS rate is 0.1% on the amount received above 50 lakhs from a buyer to sell goods in a financial year. Due to the global pandemic, a relaxation of 25% is given in the TCS rate. Hence, the effective rate of TCS till 31st March 2021 is 0.75%. 

How to calculate TCS on sale of goods? 

To calculate TCS on sale of goods, you have to follow the procedure given below: 

1. First, you have to check the total turnover Limit of INR 10 Crore of the last financial year to determine whether TCS is applicable or not. Thus, for the financial year 1st April 2020 to 31st March 2021, you have to see the year's total turnover ended 31st March 2020. Similarly, for the financial year 1st April 2021 to 31st March 2022, you must know the year's total turnover ended 31st March 2021. 

2. If the total turnover of the last financial year exceeds 10 Crore, then TCS is applicable. Now see if the aggregate amount received from a buyer on the sale of goods in the current year; if the amount received is more than INR 50 lakh from such buyer, then collect tax on the amount above INR 50 lakh. For example, if the amount received in the current year is 60 lakhs, then collect TCS on 10 lakhs (60-50) at the rate of 0.1%. 

Let us calculate TCS on sale of goods with example: 

Let us calculate TCS on sale of goods with an example for the financial year 2020-21, assuming that in all the cases given below, the turnover in the last financial year (ended on 31st March 2020) was above INR 10 crores: 

Also Read: New GST Returns - Forms, Invoices, ITC, Filing System Explained

TCS invoice format under GST

There is no standardised format for TCS invoice. TCS as per section 206C(1h) is to be calculated on the total value received from the buyer for sale of goods. Therefore, no adjustments are to be made for GST, returns and discounts. Given below is an example of a TCS invoice format under GST and TCS calculation in GST invoice:  

E-invoicing under GST 

From 1st April 2021, electronic invoicing or e-invoicing is applicable for all companies with a turnover of more than 50 Crores. The businesses generate e-invoice on their software with all the details of the value of supply, buyer’s information, etc. and upload it on the GST portal of the government. The e-invoices are mandatory for B2B transactions. These e-invoices are authenticated through GSTN in the portal, and an invoice reference number (IRN) is generated. 

E-invoicing under GST does not apply to the following: 

1. Special Economic Zone (SEZ) units; 

2. Insurance, banking and financial institutions, non-banking financial institutions; 

3. Goods transport agency; 

4. Sale of movie tickets; 

5. Passenger transport service. 

TCS under section 206C(1h) and its impact on e-invoicing under GST 

Section 206C(1h) does not prescribe any separate rules and format for TCS in e-invoices under GST. The TCS is to be collected on a receipt basis and not based on the invoice date. TCS is collected on the amount of advance received, and the date of supply and invoice is not relevant. Even if TCS is not shown in the invoice, there will be no impact on the e-invoice. To generate the Invoice Reference Number (IRN) of the e-invoices on the GST portal, the amount of tax collected at the source is shown in the other charges column. The invoice value is reported, including the TCS amount. Therefore, there is no impact on e-invoicing under GST of TCS on the sale of goods. The invoice value, including the TCS, is automatically updated in GSTR-1 as well.  

Non-applicability of TCS under section 206C(1h)

TCS is not applicable in the following cases:

1. The total turnover of the seller of goods is below 10 Crores in the last financial year.

2. If the buyer is Central/State government, local authority, embassy, high commission, legation, consulate and trade representation of a foreign state.

3. Import of goods to India.

4. Export of goods.

5. Sale of goods covered under section 206C(1)- TCS on sale of alcohol, tendu leaves, forest produce and scrap; 206C(1F)- TCS on sale of motor vehicles and 206C(1G)- TCS on foreign remittance.

6. If the buyer is required to deduct TDS on goods purchased from the seller.

Due date of depositing tax collected at source (TCS) from buyers 

 The seller of goods is responsible for collecting TCS from the buyer and paying it to the government. The TCS is to be paid till the 7th of the following month, in which the payment is received from the buyer. For example, if seller X is obligated to collect TCS from buyer Y as per section 206C(1h) and received Rs. 20 lakhs from Y in October, then TCS collected on it shall be deposited till 7th November.  

How does e invoicing help in curbing tax evasion?

E-invoicing is also a step taken by the government to prevent tax evasion, issue of fake GST invoices, and claim the unlawful input tax credit. E-invoicing helps in curbing tax evasion to the tax authorities in the following ways:

1. It reduces the scope of manipulation in invoices as the e invoice gets generated before carrying out a transaction.
2. The e-invoices are to be generated through the GST portal and authenticated by GSTN; therefore, it reduces the chances of generating fake GST invoices.
3. E-invoicing is mandatory for B2B transactions of companies with a turnover above 50 crore rupees. Therefore, matching the input tax credit with output tax details makes it easier to track fake input tax credit claims.

Also Read: How to Generate, Print, and customize GST invoice In Your Tally ERP9

Conclusion: 

Tax collection at source on sale of goods is applicable on all transactions, from manufacturers to distributors, distributors to dealers, dealers to sub-dealers and traders. TCS under section 206C(1h) does not impact small sellers as only the sellers with turnover exceeding 10 Crores in the last year are required to collect tax at source. Also, the rate of TCS on sale of goods is only 0.1% which does not create a significant burden on the sellers. Hence, the sellers covered in section 206C(1h) shall collect TCS and comply with the provisions of this section.