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Section 206C of Income Tax Act, 1961

August 31, 2022

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This article is written by Pragya Agrahari of Amity Law School, Lucknow. This article provides a detailed analysis of Section 206C of Income Tax Act, 1961 which talks about ‘Tax Collection at Source (TCS)’. It covers various aspects of TCS as to who can collect it, what goods are covered under it, and what will happen if one fails to collect it.

It has been published by Rachit Garg.

Table of Contents

Introduction

In India, the concept of ‘income tax’ was introduced by Sir James Wilson in 1860 in order to meet the losses faced by the government in the backdrop of the Mutiny of 1857. And then various acts have been passed specifically dealing with income taxes. After independence, the Government of India appointed various committees in order to simplify the provisions related to income tax and, in consultation with the then Ministry of Law, passed the Income Tax Act, 1961.

The Income Tax Act, 1961, governs the taxes collected from the earnings of individuals and companies. The government enacted this Act in order to levy, administer, collect, or recover the income taxes applicable on various goods and services. It came into force on 1st April 1962 and applies to the whole of India.

Section 206C of the Income-tax Act talks about ‘Tax Collected at Source (TCS).’ This Section was not there initially as a part of the Income-tax Act. It was later added following the Finance Act, 1988, as a consequence of Section 44AC, which talks about provisions to compute gains and profits from the business of specified goods. Later, Section 44AC was also omitted by another Act i.e. the Finance Act, 1992. After that, various amendments have taken place in order to further widen the scope of TCS by adding more transactions and adapting itself to the present requirements of the country.

What is Tax Collected at Source (TCS) tax

TCS under Section 206C of the Income Tax Act, 1961 is an extra amount that a seller shall pay to the government from the amount they gained from a buyer at the time of sale. In simple terms, the seller collects tax from the buyer on behalf of the government at the time of the sale. This tax is applicable to only some of the goods mentioned in the table under Section 206C. It is collected right at the time of debiting of the amount from the buyer’s account or the payment of the amount by the buyer, either in cash, cheque or draft after the sale of these specified goods takes place, hence, it is named as a tax collected ‘at source’. The percentage of tax to be collected is also mentioned under the Act. Generally, TCS is collected from the buyer in order to prevent the evasion of taxes by the government.

Constitutional validity of Section 206C

In the case of Union of India v. A. Sanyasi Rao (1996), the Supreme Court of India examined the validity of Sections 44AC and 206C of the Income Tax Act, 1961. It was contended by the petitioners that these provisions are ultra vires, beyond legislative competence, and violative of Article 14 and Article 19(1)(g) of the Constitution. It was held by the Court that these sections are perfectly valid and there is no constitutional infirmity in them if they are read with the reliefs provided in Sections 28 to 43C of the Act. The competency of Parliament in enacting these sections was also upheld by the Court as it will come under Schedule VII, List 1 Entry 82 of the Constitution, which mentions “taxes on income other than agricultural income.” It was stated that the new provisions were only akin to other statutory provisions that obliged people to pay ‘advance tax’.

Nature of ‘goods’ covered and rate of TCS

The following table discusses the nature of the goods covered for the collection of TCS and the percentage of tax to be imposed on such goods and services by the seller on the buyer.

The nature of the goods and services	The percentage of tax to be collected
Liquor of alcoholic nature made for human consumption	1%
Tendu leaves	5%
Timber obtained by forest lease	2.5%
Timber obtained by other modes	2.5%
Forest produce (except timber and tendu leaves)	2.5%
Scrap	1%
Minerals (coal, lignite, or iron ore)	1%
Licence and lease for the parking lot, toll plaza, mining, and quarrying (Sub-section 1C)	2%
Motor car value of which exceeds 10 lakhs (Sub-section 1F)	1%
Amount of remittance out of India under the Liberalised Remittance Scheme of the RBI (Sub-section 1G)	5% (1.5% for education)
Overseas tour program package (Sub-section 1G)	5%
Sale of goods of aggregate value exceeding 50 lakhs except exported goods outside India or goods under Sub-section 1 or 1F or 1G (Sub-section 1H)	0.1%

Tendu leaves

In the case of North Koel Kendu Leaves v. Union of India (1997), which involves the traders in tendu leaves who have filed a petition to obtain a declaration stating that Section 206C was not applicable to them, the Patna High Court analysed whether these traders can be exempted from the application of Section 206C. It was observed that the traders carry out the process of preservation of leaves by drying them, sprinkling water on them, sorting them, and then screening out the damaged leaves so that they can be used as bidi leaves. It was held that the activities carried out by the traders would only constitute ‘preservation’ and not ‘processing of goods’. Hence, traders will not be exempted from the application of Section 206C.

Scrap

‘Scrap’ is defined under Explanation (b) to Section 206C as waste and the scrap from the leftover part of the materials after manufacturing or mechanical work, which was unusable due to tearing, cutting, or breaking.

In the case of Chandmal Sancheti v. Assessee (2016), the Income Tax Appellate Tribunal, Jaipur, emphasised two conditions that should be fulfilled to treat any material as ‘scrap’. These conditions are:

It should be formed from manufacturing or mechanical work, and
It should be unusable.

In this case, where the assessee neither carried out the manufacturing nor performed any mechanical work on the material by himself, it was said that the assessee could not be treated as a dealer in the scrap. Since he is merely a reseller of the scrap or acts as an intermediary between the original seller and buyer, the provisions of Section 206C cannot be applied to the assessee.

In another case of the Commissioner of Income-tax (TDS) v. Priya Blue Industries Ltd. (2015), the Gujarat High Court held that the materials obtained from the ship-breaking activity, that were still in usable form, will not be covered in the definition of ‘scrap’ under explanation (b) of Section 206C(1).

Section 206C (1C): Parking lot, toll plaza, mining or quarrying

This Section was added by the Finance Act, 2004. According to this provision, any person who grants a licence or lease, enters into a contract or transfers any rights associated with the use of a parking lot, toll plaza, mine, or quarry to another person for the conduct of business should collect a TCS from that person according to the percentage specified. There is only one exception that the licensee or lessee should not be a public sector company. It was also specified that the mining and quarrying should not be related to mineral oil, which can include natural gas and petroleum.

Section 206C (1F): Motor vehicle

According to this provision, the seller, after getting the amount from the sale of a motor vehicle, the value of which exceeds 10 lakh rupees, should collect TCS at the rate of 1% from the buyer at the time of sale. It applies to each sale in a year and not to the aggregate value of sales in a year.

Section 206C (1G): Foreign remittances and overseas tour package

This Section was added by the Finance Act, 2020 which came into effect on 1st October, 2020. A foreign remittance refers to the money that is sent or transferred overseas to another person. This provision talks about TCS applicable to two types of transactions:

Foreign remittances

An authorised dealer (AD) should collect TCS at the rate of 5% from a buyer after getting an amount for remittance outside India under the Liberalised Remittance Scheme of the Reserve Bank of India (RBI). But AD should not collect TCS if the amount or aggregate amount of such remittance is less than 7 lakh rupees in a financial year. Moreover, the lower rates of TCS, that is, 1.5% will apply if the amount remitted is a loan from any financial institution for the purpose of pursuing education.

The Liberalised Remittance Scheme (LRS)

This Scheme was introduced by the Reserve Bank of India in 2004. It deals with the management of foreign exchange transactions under the Foreign Exchange Management Act, 1999 (FEMA). Under this Scheme, authorised dealers (AD) can freely allow remittances by resident individuals up to the limit of $2,50,000 during a financial year for certain specified purposes. The resident individuals also include minors. These purposes can include the following-

Business trips,
Education abroad,
Medical treatment,
Maintenance of close relatives,
Private visits (except Bhutan and Nepal),
Foreign employment,
Gift or donation,
Emigration, etc.

Overseas tour programme package

‘Overseas tour programme package’ refers to a tour package that offers a visit to another country with expenses that include hotel charges, travel charges, or any other expenditure during the visit. A seller should collect TCS from a buyer of such an overseas tour package immediately after getting the amount from the buyer, at the rate of 5%. But the threshold of 7 lakhs does not apply for an overseas tour package.

TCS will not be applicable in the case of the following two conditions-

If the person making a payment is liable to deduct tax at source (TDS) under the Act and has deducted this amount.
If the buyer is the Central or state government, or an embassy, legation, High Commission, commission, consulate, foreign trade representation, local authority, or another person as specified by the Central Government.

Section 206C (1H): Sale of goods

This Section was also added by the Finance Act, 2020. Every seller should collect TCS at the rate of 0.1% from the buyer, on the sale of goods, whose value or aggregate value exceeds 50 lakh rupees in a year. But these goods do not include exported goods out of India or goods covered under sub-section (1), (1F), or (1G). Under Section 206CC, if the buyer, in the case of the sale of goods, fails to furnish his/her Permanent Account number to the seller, then the higher rate applicable on the amount will be 1% and not 5%. Moreover, this provision does not apply if the buyer is liable to deduct tax at source (TDS) under the Act and has already deducted this amount.

Classification of ‘seller’ under the Income Tax Act

The Explanation (c) to Section 206C defines ‘seller’ for the purposes of this Act, which includes-

The Central Government,
The state government,
Local authorities,
Corporation or authority formed under the central, state or provincial laws,
The company,
Firm,
Co-operative societies,
An individual or Hindu undivided family whose accounts come under tax auditing as per Section 44AB.

Classification of ‘buyer’ under the Income Tax Act

The Explanation (aa) to Section 206C clause defines ‘buyer’ for the purposes of this Act as any person who has the right to obtain the specified goods in any sale, auction, tender, or in any other mode. Any such person is a buyer, except the persons mentioned below-

Any public sector company,
The Central Government,
The State Government,
Embassy, High Commission, legation, commission, or consulate of a foreign state or club,
Representation of trade from a foreign state or club,
A buyer who purchased goods in a retail sale for his/her personal consumption.

In the case of Union of India v. Om Prakash S.S. and Company (2000), it was held by the Supreme Court of India that the ‘buyer’ under Section 206C would only mean a person who has acquired the right to receive certain goods by virtue of the payment he/she has made. It would not include those who are just allowed or permitted to carry on such businesses in that trade.

TCS payment

The TCS is to be paid by the seller to the government from the amount provided by the buyer in pursuance of the sale of such goods or services. The seller, after collection of TCS, is liable to deposit the same amount with the prescribed authority of the government. The buyer, later, can avail himself or herself of the credit for the amount he/she paid as a TCS.

Due date for TCS payment

Where the tax is collected by the government office:
1. Without production of Challan 281: on the same day of tax collection.
2. With the production of Challan 281: on or before the 7th day from the end of the month in which tax is collected.
Where the tax is collected by non-government persons: within one week from the last day of the month in which the tax is collected.

No TCS applicable after declaration

According to sub-section (1A), no TCS collection is made if the buyer furnishes a declaration in writing to the seller specifying that the specified goods were only used for manufacturing, processing or producing some articles or for the generation of power but not for the purposes of trade. This declaration is to be furnished to the seller at the time of sale in Form No. 27C. After furnishing such a declaration to the seller, the collector should deliver one copy of such a declaration to the Principal Chief Commissioner or Chief Commissioner or Commissioner before the 7th day of the next month.

Failure to make payment

In case of failure to collect taxes as a whole or any part of it or after collection, failure to deposit the same to the prescribed authority, the collector would be liable to unfavourable consequences as mentioned below:

Liability to pay simple interest

According to Section 206C(7), any person who fails to pay the taxes as per the provided provisions would attract a monthly simple interest at a rate of 1% on the amount payable by him/her. This interest is payable from the date on which such tax was collectible to the date on which such tax with simple interest was actually paid before filing the TCS return.

Liable for penalty

According to Section 271CA, if a person fails to collect the whole or part of the TCS amount, then the person is liable to pay a penalty of an amount equal to the tax that he/she failed to collect.

According to Section 271H, if a person fails to file the statement of TCS return within a stipulated time, then the Assessing Officer can direct him to pay such a penalty. This penalty varies from 10 thousand rupees to 1 lakh rupees. This penalty will also be imposed for incorrect filing of TCS returns.

Liable for prosecution

According to Section 276BB, if a person failed to pay the collected TCS to the credit of the Central Government, he/she would be punishable with rigorous imprisonment for a minimum term of 3 months, which can be extended to 7 years and with a fine.

TCS returns and certificates

All collectors within a specified time should issue a certificate containing information about TCS collected from the buyer. This certificate is provided under Form 27D of the Act, and it is issued within 15 days of filing the TCS return.

All collectors also need to file quarterly TCS returns as provided in Form 27EQ within the prescribed time. Failure to file a TCS return on time would attract a late fee of Rs. 200 per day.

Due date for filing TCS returns

Quarter	Due date
1st April – 30th June	15th July
1st July – 30th September	15th October
1st October – 30th December	15th January
1st January – 30th March	15th May

Processing of TCS statements

Section 206CB specifies the processing of statements made by the collector, for the collection of TCS or for any correction. The Central Board of Direct Taxes (CBDT) has the power to make provisions for centralised processing of TCS statements in order to expedite the process of determining the amount payable or the refund due to the collector.

The whole process of processing of statements are as follows:

The amount collectible will be computed after making adjustments related to any arithmetic error or an incorrect claim.
The interest will be computed on the basis of the amount collectable.
The fee will be computed according to the provisions provided in Section 23AE.
The amount payable or the amount of refund due to the collector will be determined after making adjustments for such fees and interest against the amount paid.
An intimation of the amount payable or the amount of refund due to him should be sent to the collector before the expiration of one year from the end of the year in which this statement was filed.
The amount of refund due to the collector should be granted to him.

Essential conditions for TCS

Tax collection account number (Section 206CA)

This Section was added by the Finance Act, 2002. The person collecting the tax is required to apply for the tax collection account number, which shall be allotted by the Assessing Officer. After the allotment, the person collecting the tax needs to quote such a number in all challans, certificates, returns, or other documents related to such transactions.

Permanent account number (Section 206CC)

This provision was inserted by the Finance Act, 2017. The collectee (person paying the amount) is required to furnish his/her Permanent Account Number (PAN) to the collector (person collecting the tax) every time while paying the amount on which TCS is applicable. Both parties should quote such a number on all documents used in such transactions. Without furnishing a PAN, no declaration is deemed valid under Sub-section (1A) and no certificate will be issued under Sub-section (9).

Moreover, if the collectee fails to furnish such a number, the TCS will be collected at higher rates as mentioned below-

Twice the rates specified in the provisions, or
At a rate of 5%.

Amendments to Section 206C of Income Tax Act

Acts	Amendments in Section 206C
The Finance Act, 2003	‘Scrap’ was defined and the TCS rates of 10% for scrap and liquor were specified.
The Finance Act, 2004	The provision of TCS collection on licence or lease of a parking lot, toll plaza, mining or quarrying was introduced.
The Finance Act, 2012	The provision of TCS collection at a rate of 1% on specified minerals and a sub-section (1D) dealing with TCS on the sale of jewellery or bullion was inserted.
The Finance Act, 2016	Sub-section (1F) dealing with TCS collection at a rate of 1% on the motor vehicle was inserted.
The Finance Act, 2017	Sb-section (1D) and sub-section (1E), which deal with TCS on the sale of bullion of a value exceeding 2 lakh rupees or jewellery of a value exceeding 5 lakh rupees, were omitted.
The Finance Act, 2020	Sub-section (1G) dealing with TCS collection at a rate of 5% on foreign remittances and overseas tour packages, and sub-section (1H) dealing with TCS collection at a rate of 0.1% on the sale of goods was inserted.

Difference between TCS and TDS

Both, TCS and TDS, are incurred at the source of the income, but they are the antithesis of each other.

In the case of M/S Eid Mohammadnizamuddin v. Income Tax Officer, Jaipur (2020), the Income Tax Appellate Tribunal, Jaipur, held that there is no substantive or material difference between the provisions of TCS and TDS. It was observed that, “The object behind the deduction/ collection of TDS/ TCS is the same, i.e., to ensure the advance recovery of the taxes from the concerned payer/seller to be credited to the account of the concerned recipient/buyer.”

Grounds of difference	TCS	TDS
Meaning	It stands for Tax Collection at Source.	It stands for Tax Deducted at Source.
Definition	It is the tax that is collected by the payee on the payment made by an individual.	It is the tax that is deducted by the payer from the payment made by him/her.
By whom	TCS is collected by the seller from the buyer at the time of the sale of certain specified goods or services.	TDS is deducted by a company or individual who is paying if the payment exceeds a certain amount.
Nature of transactions	It is applicable to the sale of timber, tendu leaves, scrap, minerals, forest produce, motor cars, parking lots, tolls, foreign remittances, etc.	It is applicable to interests, salaries, commissions, brokerage, rents, fees, etc.
Scope of applicability	It is applicable to only specified goods and transactions.	It is applicable only if the payments exceed a certain amount.
Responsibility	It is the responsibility of a seller to collect TCS and deposit the same with the prescribed government authorities.	It is the responsibility of a payer to deduct TDS at the time of paying the amount and deposit the same with the government.
Example	Car seller X sells a motor car of value 12 lakhs to Y, by charging an extra amount of TCS at a rate of 1% (i.e., Rs. 12000).	A company X pays a salary to an employee Y by deducting TDS on the salary.

Conclusion

The rationale behind the collection of TCS under Section 206C is to prevent the huge evasion of taxes by individuals. The government adopted such a measure as they were suspicious about the reliability of the buyer to pay taxes on time. Hence, TCS works as a tool to levy income taxes on some specified goods and transactions.

Section 206C is an exhaustive provision covering every aspect of ‘tax collection at source’ (TCS). It specified the goods to which TCS was applicable, the rates at which TCS must be collected, the procedure by which the TCS should be collected, and the consequences if the person failed to do so. Moreover, various finance acts have time-to-time made various amendments to Section 206C in order to expand its scope to cover more transactions under TCS or to bring more clarity to its procedure.

Although so many disputes arose at the time of its inception about its constitutional validity and arbitrariness in its various provisions, this section, in the end, has succeeded in fulfilling its objectives which were desired by the legislators at the time of its addition through the Finance Act, 1988.

Frequently Asked Questions

What is TCS under Goods and Services Tax?

It is provided under Section 52 of the Central Goods and Services Act, 2017. Under this provision, any electronic commerce operator should collect TCS at a maximum rate of 1% on the net value of supplies of goods and services, provided by the suppliers.

Whether the TCS amount collected from the buyer is refundable?

The TCS amount, which is paid by the seller from the amount provided by the buyer in consideration of the sale, can be refunded back to the buyer if the buyer has filed TCS returns. The TCS paid can be adjusted with the buyer’s tax liability or other tax payments. And if after filing the returns, the taxpayers have paid too much in taxes, they can request a refund for overpayment of taxes paid.

What is the difference between Section 194Q and 206C (1H) of the Income Tax Act, 1961?

Section 194Q	Section 206C(1H)
Under Section 194Q, a buyer who is responsible for paying an amount to the seller for the purchase of goods, is liable to deduct TDS at a rate of 0.1% of such amount.	Under Section 206C(1H), a seller who receives an amount from the buyer after the sale of goods is liable to collect TCS at the rate of 0.1% of such amount.
It is only applicable if the purchase of goods exceeds 50 lakh rupees.	It is only applicable if the sale of goods exceeds 50 lakh rupees.
The buyer is responsible for deducting the tax.	The seller is responsible for collecting the tax.

Can TCS and TDS be applicable at the same time on the sale/purchase of goods?

No, they can’t be applicable at the same time in the case of ‘sale/purchase of goods’. In this case, TDS will be applicable under Section 194Q and TCS will be applicable under Section 206C(1H). But it was clearly mentioned in sub-section 5(b) of Section 194Q that if TDS is applicable on the transactions, the TCS under Section 206C(1H) will not be applicable.

In what cases, the seller is exempted from collecting TCS?

Collection of TCS is exempted in the following two cases-

If the buyer purchases goods for his/her personal use, or
If the buyer purchases goods for the purposes of manufacturing, processing or production of articles or things and not for the purposes of carrying out trade in such goods.

Will TCS apply to the sale of jewellery which is of value above 5 lakhs?

No, TCS will not apply to the sale of jewellery of a value exceeding 5 lakh rupees. Prior to the Amendment made by the Finance Act, 2017, TCS on such sales was applicable under Section 206C(1D). But now, as the sub-section was omitted by the Finance Act, 2017, the applicability of TCS will not be valid.

How much extra rate will be applicable if the buyer fails to furnish PAN to the seller?

According to the provision of Section 206C(1H), if the buyer fails to furnish PAN to the seller as required by Section 206CC, he/she would be liable for a 1% higher rate on the amount collected as TCS.

Which type of motor vehicles are covered under Section 206C(1F)?

Any type of motor vehicle including luxury cars, is covered under Section 206C(1F) for the collection of TCS at the rate of 1%.

Who is responsible to collect TCS under Section 206C(1H)?

Any seller whose turnover for the preceding year is above 10 crore rupees, is responsible to collect TCS from the buyer in consideration of the sale of goods exceeding the value or aggregate value of 50 lakh rupees in a year.

References

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