Section 206C of Income Tax: Tax Collected at Source (TCS)

Under Section 206C of the Income Tax Act, you must pay indirect taxes when you buy goods or use services. These taxes include TCS (Tax Collected at Source), TDS (Tax Deducted at Source), and GST (Goods and Services Tax). The seller collects the tax under Section 206C and then submits it to the government.

Want to know more? Here’s a simple guide covering everything you need about Section 206C of the Income Tax Act. Let’s dive in!

What is Section 206C?

Section 206C of the Income Tax Act deals with the Tax Collected at Source (TCS) on profits and gains from the sale of certain goods like alcohol, forest products, scrap, and minerals. If a vendor’s sales to a single buyer exceed ₹50 lakhs in a financial year, they’re required to collect this tax under Sec 206C. These rules apply to sellers with a turnover of more than ₹10 crores in the relevant fiscal year.

Rate For Goods And Services Covered Under Section 206C

Section 206C of the Income Tax Act requires sellers to collect tax on specific goods and services from buyers. Here’s a simplified breakdown of the goods and the corresponding Tax Collected at Source (TCS) rates under Section 206C:

• Timber from a leased forest: 2.5%
• Alcohol for human consumption: 1%
• Tendu leaves: 5%
• Timber from non-leased sources: 2.5%
• Forest produce other than tendu leaves or timber: 2.5%
• Minerals like lignite, iron ore, or coal: 1%
• Scrap: 1%
• Vehicles priced above ₹10 lakh: 1%
• Toll plaza, mining, parking lot, quarrying: 2%

However, Section 206C provides an exemption. If a resident buys goods to produce other items (in a trading context), they aren’t required to pay tax under this section.

Understanding the Applicability of Section 206C 

Under Section 206C of the Income Tax Act, sellers are required to collect tax at a specified rate from buyers on the purchase value of certain goods. This rule, known as TCS (Tax Collected at Source), applies to sellers whose turnover exceeded ₹10 crore in the previous financial year.

The goods that fall under the purview of Sec 206C include alcoholic beverages, tendu leaves, timber from forest leases, scrap materials, minerals like coal, lignite, iron ore, and other forest products. The tax rates vary depending on the type of goods and the period in which they are sold.

Sellers are responsible for collecting this tax when they debit the buyer’s account or receive payment—whichever happens first. On the other hand, buyers must provide a declaration in Form No. 27C for each sale to the seller if they want to claim an exemption.

It’s important to note that TCS under Section 206C is not required if the goods are being used for manufacturing, processing, or power generation as long as they are not meant for trading purposes.

Threshold Limits Under Section 206C of the Income Tax Act

Under Section 206C of the Income Tax Act, if you’re a seller with a turnover exceeding ₹10 crore in the previous year, you must collect tax at source (TCS) on certain payments. Specifically, when you receive payments above ₹50 lakh in a financial year, you must collect TCS at the time of receiving the payment.

This rule under Sec 206C of the Income Tax Act also applies to companies, firms, local authorities, and cooperative societies. However, if the buyer is a Central or State Government representative, a consulate, embassy, high commission, or trade representative, you don’t need to deduct TCS.

Even individual sellers or HUFs (Hindu Undivided Families) with a turnover above the limits specified under Section 44AB fall under the scope of Section 206C. Essentially, if you’re earning more than ₹50 lakh from a profession or over ₹5 crore from a business, your books of accounts need to be audited. This audit requirement applies only if your cash payments or receipts are below 5% of the total.

When the payment exceeds ₹50 lakh in a fiscal year, the seller is required to collect TCS at a rate of 0.075% from the buyer. The collected TCS must be deposited with the government by the 7th of the following month.

Exemptions Under Section 206C of the Income Tax Act

The collection of tax under Sec 206C is exempt in these cases:

1. Personal Use: TCS is not required if the goods are purchased for personal consumption.
2. Manufacturing and Processing: Buyers who purchase goods for manufacturing, processing, or production are not subject to TCS if they don’t intend to trade those goods.
3. Electricity and Renewable Energy: Transactions involving electricity and renewable energy are not covered under the provisions of Section 206C.

Penalties and Consequences for Non-Compliance with Section 206C

Under Section 206C of the Income Tax Act, vendors are required to collect tax at the source (TCS) and deposit it with the Indian government. Here’s what you need to know about the penalties and consequences for non-compliance:

• Interest Penalty: If TCS is not collected, a penalty interest of 1% is charged per month, or part of a month, until the tax is collected and deposited.
• Severe Consequences: Failure to pay TCS can lead to serious repercussions, including imprisonment for up to 7 years under Section 276BB of the Income Tax Act. Additionally, a penalty equal to the amount of TCS not collected may be levied under Section 271CA.

Key Amendments to Section 206C: Finance Act 2020

The Finance Act 2020 introduced important updates to Section 206C of the Income Tax Act. Here’s a breakdown:

1. Tax Collection at Source (TCS): Sellers must collect TCS at a 1% rate on the sale of goods if the transaction value exceeds Rs. 50 lakh.
2. Applicability: This rule applies only to sellers whose gross turnover was more than Rs. 10 crore in the previous financial year.
3. Exclusions: Export and import transactions are not covered under Section 206C.
4. TDS Deduction: If the buyer has already deducted tax deducted from Source (TDS), the seller is not required to collect TCS.
5. Audit Requirement: Only businesses with a turnover exceeding Rs. 5 crore need to undergo an income tax audit.
6. Non-compliance Penalty: If not compliant when filing Income Tax Returns (ITR), the TCS rate under Sec 206C of the Income Tax Act could be doubled or set at 5%.

Forms Under Section 206C of the Income Tax Act

When you’re dealing with taxes under Section 206C of the Income Tax Act, there are specific forms you need to file. Here’s a breakdown of the key forms to keep in mind:

1. Form 27EQ: This is a quarterly statement where you detail any Tax Collected at Source (TCS) deductions. All deductors are required to file this form, even if no tax was collected.
2. Form 27C: Buyers must submit this form as a declaration to the seller when making a payment. The seller then submits this form when depositing the TCS.
3. Form 13: If buyers want to benefit from TCS at a lower rate, they must submit this form to the seller.
4. Form 3CA: This form is for taxpayers who earn income from a business or profession and whose accounts must be audited.
5. Form 3CB: This one is for taxpayers in business or profession who do not require an audit of their accounts.
6. Form 3CD: Auditors use this form to declare the audit process as required under Section 44AB.
7. Form 3CE: Non-resident Indians (NRIs) and foreign companies must file this form.

Conclusion

Section 206C of the Income Tax Act applies to transactions involving various goods, such as alcoholic liquor, forest produce, scrap, and minerals. It’s crucial for sellers to comply with TCS provisions under Sec 206C to avoid penalties and ensure smooth business operations. Unlike Tax Deducted at Source (TDS), which is deducted at the time of payment, TCS under Sec 206C is collected at the point of sale.

In essence, Section 206C helps create a structured approach to tax collection on specific transactions, contributing to the overall revenue under the Income Tax Act. Understanding and adhering to Section 206C is vital for every seller involved in such transactions.

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