TCS 206C(1H)

Master Brains - Update in Income Tax Law

Industry's take on TCS under section 206C(1H) of the Income Tax Act

The insertion of Section 206C(1H) to the Income Tax Act of 1961 vide Finance Act of 2020 extended the current TCS provision a step further.

What is 206C(1H)?

According to the section, a seller has to collect tax at source @ 0.1% of the sale consideration exceeding fifty lakh rupees if it receives any consideration from a buyer for the sale of goods exceeding INR 50 lakhs in any financial year.

Buyers should not forget to provide their Permanent Account Number or the Aadhaar number to the seller. Because as per the proviso to section 206C(1H), if the buyer has not provided the same to the seller, then the seller will be entitled to collect tax as per the following terms:

  • Twice the rate specified above or;
  • One per cent.; whichever is higher

No provision comes in force without certain conditions attached to it in order to achieve the intention of the legislation and to make the provision operative in practical circumstances. The conditions are as follows:

  • Certain types of goods were excluded from being a part of the provision. For example, scrap, forest products, alcohol or tendu leaves, foreign remittance, motor vehicles. (i.e., goods covered under sub-section (1), (1F) and (1G).
  • The seller must mandatorily fulfil a sales turnover of the business of INR 10 crores in the preceding financial year.
  • As per proviso to the aforesaid section, TCS is not applicable if the buyer has deducted tax at source under Income Tax Act for the same transaction of goods.
  • The above provision does not apply to goods being exported out of India.
  • The said section is also not applicable to certain persons i.e., the state government, central government, embassy, High Commission, legation, commission, consulate and the trade representation of a foreign State, local authority and persons importing goods into India.

What are the challenges being faced by the Industry?

  • If we analyse the applicability of the provision on Oil and Natural Gas Industry, we note that generally the quantum and turnovers in this industry is massive with very less profitability percentages. Profitability in the industry has taken a hit as TCS under this section is applicable given the turnover threshold is insignificant for this industry.
  • Agro-based Industries are also suffering from the introduction of this section as agricultural products are otherwise exempted from Income Tax. However, Section 206C(1H) brings them under the net of Income Tax. This industry can of course resort to filing a refund claim of the TCS paid which will, in turn, increase the compliances as they will then have to file TCS return for applying for the refund. As a result, there is a huge blockage of capital and a disparity between the records being maintained otherwise for Income Tax and the records which are to be specially maintained for TCS compliance. Thus, Income Tax is indirectly made applicable to the agro-based industry which includes agriculturists, fisheries, etc.
  • Further, in the North Eastern States, the income of members of the scheduled tribes residing in the scheduled areas, are unconditionally exempted from Income Tax. However, they are nowhere specifically excluded from the provisions of this section.

These were just some examples of the industries which have had the biggest hit on the introduction of this section. However, even other industries and organisations which are not specifically exempt from income tax elsewhere are also facing issues like huge expenditure in order to upgrade their SAPs, accounting softwares and to train the employees to comply with the new section.

Conclusion

This is not a criticism of the introduction of the provision. We understand the earnest intent of the introduction of TCS provisions - To bring un-organized sectors into the tax net. Such a move is appreciable as it would contribute to the betterment of the economy in long run. However, carving out of such special cases from the applicability of TCS, who are otherwise exempted from Income Tax, would be a welcome amendment by the industry.

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