Today we will discuss the new rule on TCS ON SALE OF GOODS. In Finance Act, 2020 amended Section 206C (sub-section 1H) of the Income Tax Act with a revised set of conditions. Section 206C (sub-section 1H) of the Income Tax Act declares certain suppliers are liable to collect TCS at 0.075% on the amount exceeding INR 50 Lakh billed to a buyer for the sale of goods during the financial year.
In this article, we will discuss the conditions of the amendment and provide a detailed analysis with examples so that you get a better understanding of the impact of the amendment in your business. Finance Act, 2020 has come into effect from 1st October 2020.
Provision of TCS on sale of goods
According to the note issued by the Finance Ministry about the applicability of TCS (Tax Collected at Source) provisions: –
- Seller of goods shall collect tax @ 0.1 per cent (0.075% up to 31.03.2021) if the receipt of sale consideration from a buyer exceeds INR 50 lakh in the financial year.
- To reduce the compliance burden, a seller would be required to collect tax only if his turnover exceeds INR 10 crore in the last financial year.
- The export of goods has also been exempted from the applicability of these provisions.
These are the only conditions of the new Act. Now, in order to get a better glimpse, check out the illustrated example below:
Let us consider a seller has received INR 1 crore before 1st October 2020 from a particular buyer and receives INR 5 lakh after 1st October 2020. In this case, he would be required to collect tax on INR 5 lakh only and not on INR 1.05 crore – INR 50 lakh = INR 55 lakh. Note that INR 50 lakh is the threshold. Here, in this illustration, the seller has to collect tax on receipt of INR 5 lakh after 1st October 2020 because the receipts from 1st April 2020 is INR 1.05 crore, which exceeded the specified threshold of INR 50 lakh.
Is TCS is an expense for my business?
Note that TCS is not an additional tax but it is like an advance income tax / TDS for which the buyer would get the credit against his actual income tax liability and if the amount of TCS is more than his tax liability, the buyer would be entitled for refund of the excess amount along with interest.
Now, let us consider another example considering multiple sellers and each buyer. Here, if a buyer makes payment of INR 1 crore each to 10 different sellers, the total tax collected shall be only INR 50,000 (INR 37,500 this year). Each seller will collect INR 3,750 this year because INR 3,750 is 0.1% of (INR 1 crore – INR 50 lakh)
Now, let us incorporate a net profit of 8% on sales in order to understand the impact on tax liability. Considering a net profit of 8% on sales, the buyer’s business income in respect of payment of INR 10 crore product purchase will be something around INR 87 lakh. In the new taxation regime, the income-tax liability on the income of INR 87 lakh for an individual would be around INR 27 lakh. Thus, the amount of Tax Collected at Source (TCS) INR 50,000 (INR 37,500 this year) would be a miniscule part of his actual tax liability and would be easily adjusted against his tax liability. However, in a super rare case, if his tax liability is less than even INR 50,000 (INR 37,500 this year), he shall be entitled for refund of excess TCS with interest.
Who will collect the TCS?
Note that every seller will not have to collect TCS. This is applicable to only those sellers whose business turnover exceeds INR 10 crore. And there is some restrictions about goods as well. If the other conditions satisfy, a TCS should be collected for all goods except these:
- If goods are exported from India to any country outside India.
- If the buyer is liable to deduct TDS (Tax Deducted at Source) under the Income Tax Act.
- If the goods sold are already covered under subsections (1), (1C), (1F) and (1G) of section 206C of the Income Tax Act.
Note – While calculating turnover of previous year both goods and service will be included.
Frequently asked Questions on TCS?
- Whether TCS is applicable on service bill also?
No, TCS is applicable only on sale of goods - Whether to deduct TCS on GST amount or not?
Yes, TCS will be deducted on the GST amount also. As in provision it is clear TCS to be deducted on payment made. - Is TCS applicable on bill made before 01st October while payment received after that?
Yes, TCS will be applicable on payment received on or after 01st October. - Is TCS applicable on bill made after 01st October while payment received before that?
No, TCS will be applicable on payment received on or after 01st October.
