TCS on sale of goods applicable from 1 October 2020: Compliances and practical challenges

last updated on 2 November 2020 | reading time approx. 3 minutes

With a view to widen the tax-net, the Indian government (vide the Finance Act, 2020) has extended the scope of Tax Collected at Source (“TCS”) provided under Section 206C of the Income-tax Act, 1961. As per the extended scope, tax is required to be collected at source on foreign remittances under the Liberalized Remittance Scheme, sale of overseas tour package and on sale of goods by specified seller (exceeding a specified limit). Such extended scope is applicable from 1 October 2020.

Below we have provided a brief overview of the scope of the TCS on sale of goods. We have also highlighted few practical challenges that may be faced by the taxpayers while undertaking the TCS compliance.

Brief overview of TCS on sale of goods - Section 206(1H) of the Income-tax Act, 1961

Scope (in brief)

Seller who receives any amount as consideration for sale of any goods aggregating to 5 million Indian Rupee (INR) or more in a financial year from a buyer, at the time of receipt of such amount is required to collect tax at source (TCS) at the rate 0.1 per cent on the sale consideration exceeding INR 5 million as income-tax.

In the buyer fails to provide PAN/Aadhar, TCS shall be collected at the rate of 1 per cent.

Seller who is required to collect TCS on sale of goods

Every seller whose total sales, gross receipts or turnover from his business exceeds INR 100 million in the immediately preceding Financial Year.

Specific exclusion

TCS on sale of goods under section 206(1H) shall not apply :

• where buyer is required to withhold taxes and such buyer has done withholding of required amount.
• on export of goods;
• on goods that are specifically covered under sub-section (1), (1F) or (1G) of section 206, i.e.:
  • Alcoholic liquor for human consumption,
  • Tendu leaves,
  • Timber or any other forest produce,
  • Scrap,
  • Minerals, being coal, or lignite or iron ore,
  • Motor Vehicle,
  • Overseas tour package.
TCS is not to be collected when the sale is made to the Central or State Government or Embassy/High-commission, Consulate or Trade Representative/Local Authority.

TCS is also not applicable when sale is made to a person who is importing any goods into India.

Compliance requirement

• Due date for payment of TCS collected:  7th of the following month for each month
• Quarterly Statement: Due date to file the TCS return and issue certificate:

(Please use a desktop PC or tablet for an ideal display of the table.)

Important note on TCS rate and compliance till 31 March 2021 (Covid-19 relief measures)

Government of India vide press release dated 13 May 2020 has announced reduction in TCS rates by 25 per cent of the existing rates. New reduced rates are applicable till 31 March 2021. Accordingly, lower rate of TCS at the rate of 0.075 per cent shall be applied instead of 0.1 per cent till 31 March 2021. There appears to be a typographical error in the press release which provide reduced rate of 0.75 per cent instead of 0.075 per cent.

Our comments

The extended scope of TCS was a part of the Union Budget 2020 presented in the Indian Parliament in February 2020 and was intended to be made applicable from 1 April 2020. On account of various re­pre­sen­tations received from the industry, the applicability of the provisions was deferred to 1 October 2020 in order to provide sufficient time to the industry to prepare for the necessary compliance. The government has also made necessary changes in the language of the new provision to clarify that import and export transactions are outside the purview of TCS provision.

Having said the above, there are still some open areas that require clarification. For instance, the issue whether TCS is to be applied on total invoice value including or excluding GST; the impact on TCS on partial recovery of invoice, i.e. whether TCS will be assumed to be included in the part amount received against any invoices. Whether TCS will also apply on sales made on or before 30 September 2020, although sales consideration has been received on or after 1 October 2020 etc. would require deliberation.

Apart from above, the taxpayer will be required to make necessary changes in the invoice/receipt vouchers to facilitate the TCS collection. Changes in the ERP/accounting software package and standard operating procedure may also be considered to keep a check on threshold, receipt, etc.